Royal Bank of Canada
Annual Report 2023
2
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Royal Bank of Canada Annual Report 2023
Our Purpose
Helping clients thrive and
communities prosper
Guided by
our Vision
to be among the world’s most trusted
and successful financial institutions, and driven by our
Purpose, we aim to be:
In Canada:
the undisputed leader in financial services
In the United States:
the preferred partner to corporate, institutional and high
net worth clients and their businesses
In select global financial centres:
a leading financial services partner valued for our expertise
Connect with us
facebook.com/rbc
instagram.com/rbc
x.com/rbc
youtube.com/user/RBC
linkedin.com/company/rbc
tiktok.com/@rbc
For more information on how we
are leading with Purpose in creating
differentiated value for our clients,
communities, employees and
shareholders, please visit
RBC Stories.
We are guided by
our Values
:
Client First
Collaboration
Accountability
Diversity & Inclusion
Integrity
Royal Bank of Canada Annual Report 2023
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Table of contents
CEO Letter
6
Chair Letter
10
2023 Highlights
12
Management’s Discussion and Analysis
22
Enhanced Disclosure Task Force Recommendations Index
132
Reports and Consolidated Financial Statements
133
Ten-Year Statistical Review
235
Shareholder Information
236
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Royal Bank of Canada Annual Report 2023
Who we are
Royal Bank of Canada is a global financial
institution with a purpose-driven,
principles-led approach to delivering
leading performance. Our success comes
from the 94,000+ employees who leverage
their imaginations and insights to bring our
vision, values and strategy to life so we can
help our clients thrive and communities
prosper. As Canada’s biggest bank and
one of the largest in the world, based on
market capitalization, we have a diversified
business model with a focus on innovation
and providing exceptional experiences to
our 17+ million clients in Canada, the U.S.
and 27 other countries.
17+ million
clients
94,000+
employees
29
countries
Royal Bank of Canada Annual Report 2023
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5
Diversified business model with scale and market-leading franchises that provide a
full suite of products, advice and services for clients
Market-leading presence in Canada and an established multi-platform U.S. strategy with a
long runway for premium growth
Differentiated technology and innovation investments that go beyond banking
Premium ROE and disciplined expense management
Strong balance sheet and prudent risk management
Leading Canadian core deposit franchise that serves as a stable source of funding
Well-positioned for the evolving macro environment
Stability and guidance of senior leadership and Board
Why invest?
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Royal Bank of Canada Annual Report 2023
Dear fellow shareholders,
We are living through a period of historic transition.
Higher interest rates and the rising cost of living is hurting
affordability for people and families, contributing to greater
inequalities in our communities and putting fiscal spending
pressures on governments. A never-ending cycle of technology
disruption is having a dramatic effect on the world of work and
business models everywhere. Ongoing conflicts across the
globe and an increasingly volatile geopolitical landscape are
dividing our society and eroding trust.
At the same time, our world is not moving fast enough to
prepare humanity for the existential threat of climate change
and its impact on every aspect of our lives.
In times like these, we need to remember that historic
transitions can lead to extraordinary opportunities for
meaningful and positive change for people and communities
everywhere.
I write this letter as the steward of a bank that has stood
the test of time through periods of great change for over 150
years. Today, as our society navigates this changing world,
RBC’s role as a stabilizing force for our 17+ million clients and
the thousands of communities they call home matters more
than ever.
As a diverse collection of 94,000+ people in nearly 30
countries, RBC colleagues are guided and united by our
Purpose, and we share an important responsibility to help
enable short-term prosperity and long-term progress for
those we serve. To do that, we will continue to build our bank
in a way that lives up to our foundational role of keeping
our economy moving and balancing the needs of our four
key stakeholders — clients, employees, communities and
shareholders — through all credit and economic cycles.
In these challenging times, Team RBC remains steadfast
in our commitment to being a trusted advisor, helping
clients navigate risks and opportunities and make the best
decisions possible. Our incredible team will also continue
to bring that same dedication to building and growing
sustainable and inclusive communities.
I am grateful to work alongside our employees around the
globe. Together, we believe in the world-shaping power of
ideas. This report showcases the deep commitment our
people have to making our bank an anchor of stability and
a beacon of hope for the people, places and projects we
proudly support.
The story of 2023
As always, our year was defined by our focus on doing the
right thing by our clients and putting them first. This is a
principle that is core to our culture and something that
we strive for each and every day. It means listening to the
clients who put their trust in us, building products and
services to meet their needs and creating meaningful value
for today and tomorrow.
RBC’s ambition is to be among the world’s most trusted and
successful financial institutions. We ended the fiscal year
as a top 15 bank globally by market capitalization, including
top five in North America, and the highest valued bank on
a Price-to-Book Ratio among global banks.
(1)
We were also
honoured to once again be named the most valuable brand
in Canada, and the fourth most valuable financial services
brand in the world.
(2)
In 2023, we generated earnings of nearly $15 billion and a
Return on Equity of 14.2 per cent, while ending the year with
a strong CET1 ratio of 14.5 per cent — the highest in history.
We also returned nearly $7.4 billion in dividends, benefitting
common shareholders including pensioners and retail
investors across Canada, and outperformed our global peer
average in 5-year Total Shareholder Return.
Our financial performance backstops our Aa1 credit rating
— among the highest of banks in the world — and is a
testament to our diversified business model, scale, strong
balance sheet and prudent risk management.
We are well-positioned as we enter 2024, and I’m confident
that RBC can be a pillar of strength and stability for those we
serve through challenging times.
Dave McKay
President and CEO
A message from
(1)
Banks with over $850+ billion in loans
(2)
Kantar BrandZ
Royal Bank of Canada Annual Report 2023
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Today, as our society navigates
this changing world, RBC’s role
as a stabilizing force for our
17+ million clients and the
thousands of communities they
call home matters more than ever.
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Royal Bank of Canada Annual Report 2023
The geography of a premium global bank
Our Canadian franchises continue to be the bedrock of
our long-term, premium growth story and our position as a
global competitor.
We have the number one or two
market share in all key product
categories across Canadian
Banking — supported by the
largest retail network — and we’re
proud of the deep and trusted
client relationships that have
helped us get there.
We also continue to invest in digital experiences and advice
that clients truly value, earning industry recognition for it,
such as ranking highest in customer satisfaction for retail
banking advice by J.D. Power.
Our Canadian Banking business had a strong year for client
acquisition as we welcomed approximately 650,000 net
new clients, up more than 60 per cent year-over-year. In
our Canadian Wealth Management business, we hired 40
per cent more investment advisors than in 2022, resulting
in a record year for recruited assets and an enhanced
experience for our clients.
This year, we strengthened our commitment to our home
market with the once-in-a-generation deal to acquire HSBC
Canada. This is our largest proposed acquisition ever, and
it gives us a chance to take our combined client experience
to the next level by adding a complementary business in the
market we know best. I’m incredibly excited about how this
acquisition will further position RBC as the bank of choice
for newcomers to Canada and internationally-connected
Canadian clients.
This transaction will also be beneficial for Canadians and
our country’s economic success. Upon regulatory approval,
more of Canada’s financial sector will be in Canadian
hands, more dividends and capital will go to our clients and
shareholders in Canada, and as we are one of the largest
taxpayers in Canada, more revenues will stay in our home
country. As RBC donates a minimum of one per cent of our
pre-tax profits each year in Canada, more money will go to
the communities where we live and work.
In our second home market — the U.S. — we delivered solid
organic growth as our reputation for strength, stability and
trust continues to build with our corporate, institutional and
high net worth clients.
I’m proud of how we’re executing on our differentiated
strategy, which is underpinned by a set of strong client
franchises built up over several decades. We have a top-10
investment banking business in the U.S. alongside the 6th
largest wealth manager by assets under administration
in the country.
(3)
At City National Bank, our client-focused
commercial franchise continues to be a market leader
in entertainment banking, and we’re looking to keep
reinventing our core client and operational platform to
ensure long-term, sustainable success.
Looking ahead, we have a plan to integrate our U.S.
businesses more deeply and effectively, while also
broadening and enhancing our product capabilities to
deliver a holistic experience for clients. Some of the ways
we’ll drive greater impact in the U.S. include the expansion
of our wealth banking platform and a new corporate cash
management offering in Capital Markets.
Finally, in the U.K. and Europe, we aspire for market
presence and scale, as well as greater value creation for our
clients, and this ambition has grown with the addition of RBC
Brewin Dolphin. Following that successful acquisition, we’re
a top five wealth manager by assets under administration
in the U.K., Ireland and Channel Islands, and are focused
on continuing to leverage our global capabilities to deliver
leading advice and grow our standing in this important region.
The next chapter of our growth story
Looking ahead, we’re setting our sights on unlocking our
next phase of growth.
With client and investor expectations changing rapidly, it’s
clear to me that the banks that succeed in the future will
be the ones that take advantage of scale to deliver the best
value as efficiently as possible.
This is exactly the approach we’re taking as we reposition
the bank for the future — controlling what we can control,
making tough choices, and sharpening our focus to ensure
our people and investments are aligned with our highest
priorities across the bank.
One of those priorities is to double down on our core deposit
franchise — both on the consumer side and the business
side. We’ve spent years building this advantage and will
continue to prioritize this foundational element of banking
so that we’re well positioned to drive long-term growth
better than our peers.
But in a rapidly changing world, our size and scale must be
underpinned by our ability to deliver differentiated client
experiences. This is why we’re continually on the lookout
for the next great opportunity to deliver new insights and
innovations that will make banking smarter, simpler and
better for our clients.
We want to go beyond what people
expect from a bank and offer the
best and most personalized client
experiences possible.
We’ve been doing that by bringing extra value to clients
through partnerships with leading brands like Petro-Canada
‡
,
Rexall
‡
, WestJet
‡
and METRO Inc., and by expanding our
Avion Rewards™ loyalty program to all Canadians, no matter
where they bank. We were particularly proud to offer Avion
®
members an exclusive allocation of tickets to the iconic and
record-smashing Taylor Swift | The Eras Tour for its 2024
stops in Canada.
As we continue to redefine what a bank can do, we’re focused
on investing in technologies that can deliver data-backed
insights and advice to help clients build confidence and
make better decisions, including through our NOMI
®
suite of
capabilities and our AI-based Aiden
®
trading platform.
(3)
U.S. wealth advisory firms quarterly earnings releases (10-Q)
Royal Bank of Canada Annual Report 2023
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RBC has invested heavily in AI for many years and, together
with Borealis AI, we’re one of the leading voices on this
transformative technology across Canada and were ranked in
the top three for AI maturity across the global banking sector.
(4)
With the emergence of generative AI capabilities, we’re
exploring how to safely and securely tap into the full
potential of this technology to develop the best products
and services for our clients. We believe that combining
ideas and human creativity with real-time information and
data sets will open up endless possibilities for our bank, our
economy and our society.
Powering ideas for people and planet
As a trusted partner to clients and communities around the
world, RBC and our people are in a unique position to help
put ideas into action and make progress possible toward a
more inclusive, sustainable and prosperous future.
In 2023, we invested $172+ million globally through cash
donations and community investments because we know
our bank is only as strong as the collective wellbeing of the
communities where we live and work.
Amidst the unique mix of societal
challenges we’re seeing across the
world today, we need to sharpen
our focus on where we can make
the most positive difference.
That’s why this year we established the RBC Purpose
Framework —
Powering Ideas for People and Planet
,
an initiative that is designed to add structure to our
ESG approach around three clear societal ambitions:
accelerating the transition to a greener economy, equipping
people with the skills they need for a thriving future and
driving more equitable prosperity in our communities.
Since my earliest days as CEO, I have been focused on all
three of these areas, but one in particular — the challenge
and opportunity of Canada’s climate transition — has
dominated much of my thinking.
It’s an unquestionable fact that our world is at an urgent
moment in addressing climate change. We all see the
catastrophic impact of environmental crises, especially
this year, which was one of the worst on record for extreme
weather events that caused devastation and disruption to
people and businesses across the world.
Our continued success as a bank depends on our clients
succeeding commercially over the long term, including
through the transition to a low-carbon economy. The best way
RBC can help is by supporting clients in their decarbonization
efforts and helping them reach their ambitions.
Over the past year, we’ve made progress in a number of
areas — from advising on large renewable energy projects
to supporting clean tech innovators taking solutions to
the market. We’ve also continued to execute on our 2030
financed interim emissions reduction targets for the highest
emitting sectors in our loan portfolio: oil and gas, power
generation and automotive.
Moving forward, we’ll accelerate our climate strategy by
more clearly and actively sharing what we’re doing to help
get our clients and communities to net-zero faster. This
includes a market-leading framework that formalizes how
we assess our clients’ transition plans called the Client
Engagement Approach on Climate.
(5)
Starting with our energy
sector clients, this approach will guide how we’ll provide
financing and advice to support those clients that are
implementing transition plans.
We believe that progress on the collective journey to net-
zero requires the collaboration of many stakeholders across
Canada, and we’re committed to continued dialogue with
clients, investors, Indigenous leaders, researchers, students
and many other engaged groups.
This is happening alongside our work to convene decision-
making leaders in Canada across industry, government
and NGOs through the RBC Climate Action Institute. We’re
already making progress working with clients and leaders in
the agriculture and buildings sectors, and we’ll continue to
engage with these stakeholders to help them apply climate-
smart solutions across the country.
I am proud of the progress we’ve made to date, and you have
my commitment that we’ll continue our efforts to achieve
our goals.
Thank you
As we enter 2024, I’m more confident and excited than ever
about the future of RBC and our important role of helping
clients thrive and communities prosper.
As a pillar of strength in our society and the economies in
which we operate, we know this is our moment to help bring
greater leadership, stability and confidence to those we
proudly serve.
On behalf of everyone on Team RBC, I want to express my
heartfelt thanks to you for continuing to place your trust and
support in us.
I look forward to continuing to share our progress in the year
ahead.
Dave McKay
President and CEO
(4)
Evident AI Index, November 2023
(5)
The Client Engagement Approach on Climate is available at
rbc.com/climate
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Royal Bank of Canada Annual Report 2023
RBC has an extraordinary capacity to do good.
Helping its clients thrive and communities prosper is why
RBC exists, and how it excels. Millions of people benefit as a
result. The bank’s motivation to create meaningful value for
those it serves supports its efforts to maintain and extend its
leading market position in areas of strategic importance.
RBC’s solid financial results in
2023 reflect its purpose-driven
performance. It enters the new
fiscal year as one of the highest
valued banks globally.
The Board participates in strategic planning, receives regular
updates from management on business plans and helps
ensure the bank operates within the parameters of its risk
appetite, which helps deliver above-average, low-volatility
growth through economic cycles.
An important focus is talent management, given the
enduring advantage of enabling RBC’s 94,000+ employees
to perform at their highest level. The Board helps develop
the next generation of executives by overseeing succession
planning and advising on career pathways that hone
essential skills. We also closely monitor the bank’s ongoing
efforts to enhance executive representation of women,
Black, Indigenous and People of Colour. RBC has increased
the representation
(1)
of women in executive roles from 38
per cent in 2015 to 43 per cent in 2023, and Black, Indigenous
and People of Colour executives from 16 per cent to 24 per
cent over the same period. We continue to drive toward
our ambitious but attainable goals for new executive
appointments for women and Black, Indigenous and People
of Colour, which we have set at 50 per cent and 30 per cent,
respectively.
(2)
The Board looks to 2024 with confidence. Notably, pending
regulatory approval, the addition of HSBC Canada clients
and colleagues will help enhance the bank’s value
proposition, including commercial clients with international
needs and newcomers to Canada. The proposed acquisition
has been a priority focus during each regular Board meeting
in 2023 and will continue to be for the foreseeable future.
Still, as Dave notes in his letter, the world is both complex
and dynamic. The Board plays an important oversight role in
supporting the bank’s operational and financial resilience. To
better protect the bank’s clients, for instance, its businesses
and functions maintained their focus on identifying the
most critical services and where the most severe harm
could occur in a prolonged disruption. Additionally, the
bank continued to advance its risk management operating
model, approach and capabilities to withstand stress and
unexpected events. Ongoing efforts to build resilience help
sustain the public’s trust in RBC.
The Board recognizes RBC
operates in a wide universe of
stakeholders, many of whom the
bank shares common interests
with, such as a healthy and
sustainable environment.
Indeed, the bank is committing to support the transition to
a net-zero economy, which includes working closely with
clients to help them achieve their emissions reduction
objectives for the transition, an area of focus where the
Board believes RBC can make an impactful contribution in
advancing its own climate strategy. More broadly, in 2023,
Directors were presented with the RBC Purpose Framework
—
Powering Ideas for People and Planet
. Its aim is to create
clarity and structure around three societal ambitions where
RBC can have a meaningful impact. Building on existing
environmental, social and governance priorities, RBC wants
to help accelerate the transition to a greener economy,
equip people with skills for a thriving future and drive more
equitable prosperity in its communities.
For more than eight years, I have benefitted from the
exceptional talent of my Board colleagues, and their
unwavering commitment to do the right things, in the right
A message from
Jacynthe Côté
Chair of the Board
(1) Represents data for our businesses in Canada governed by the
Employment Equity Act. Based on self-identification
(2) Refer to page 15 of the 2023 Annual Report for additional information
Royal Bank of Canada Annual Report 2023
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11
way. The 2023 appointment of Barry Perry as Director
complements our skill set. I would like to express my
gratitude to David Denison, who served our Board with
great distinction. I am also indebted to Kathleen Taylor, who
I succeeded as Chair. Her leadership has helped create a
more diverse and dynamic Board. RBC is better for it.
As always, RBC’s continued success will remain linked to
serving our clients, understanding the expectations of our
stakeholders and contributing to the conditions that enable
all of us to thrive and prosper. Under Dave McKay and his
leadership team, I am confident the bank’s presence will be
purposeful and success sustainable for years to come.
Jacynthe Côté
Chair of the Board
For more than eight years,
I have benefitted from the
exceptional talent of my Board
colleagues, and their unwavering
commitment to do the right
things, in the right way.
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Royal Bank of Canada Annual Report 2023
Market-leading client franchises
#1 or #2 market share
in all key product categories across
Canadian Banking
9th largest global investment bank
(1)
,
#1 in Canada
,
#1 Canadian investment bank in the U.S.
(2)
#1 in market share for High Net Worth/Ultra High Net Worth
in Canada
Largest retail mutual fund company
in Canada based on assets
under management (AUM)
(3)
One of the largest Canadian bank-owned insurance
organizations
(4)
6th largest full-service wealth advisory firm in the U.S.
and top 5
largest wealth management firm in the U.K. as measured by assets
under administration (AUA)
(3)
RBC Global Asset Management
®
named
TopGun Investment Team
of the Year
for the 8th time
(5)
One of the
top 3 Greenwich
Quality Leaders
in Canadian
Institutional Investment
Management Service, for the 9th
consecutive year
(6)
Recognized as the
most valuable
Canadian brand
for the 5th
consecutive year, with YoY gains
in Purpose, Trust, Inclusion and
Sustainability measures
(7)
RBC Capital Markets
®
recognized
as the
Best Investment Bank
in Canada
(8)
Best Private Bank in Canada
(9)
and
Outstanding Global Private
Bank
(10)
in North America for 8th
consecutive year
RBC Dominion Securities
®
ranked
highest among Canadian
bank-owned investment
brokerage firms
for the 17th
consecutive year
(11)
Leveraged our industry-leading
Canadian mobile app
to deliver
value-added client insights.
3.9 million clients have activated
personalized plans through
MyAdvisor
®
Launched Canada’s new
First
Home Savings Account (FHSA)
in April 2023 to help Canadians
save tax free for their first home,
making it available through
multiple channels, including RBC
Direct Investing
®
, RBC InvestEase
®
and RBC in-branch advisors
2023 highlights across our balanced scorecard
At RBC, we are relentlessly focused on delivering exceptional client experiences
through our differentiated advice, products and services. Our investments in
technology and talent underpin how we create long-term value for clients and help
them realize their goals.
Clients
Customer Service Award Winner
among the big 5 retail banks –
Recognized in all 11 categories of
the 2023 Ipsos Financial Service
Excellence Awards for the 3rd
consecutive year
Best Retail Banking Advice
in the J.D. Power 2023 Canada
Retail Banking Advice Satisfaction
Study. Clients rated RBC #1 across
all study factors evaluated,
including quality, clarity, relevancy,
frequency and concern for needs
Royal Bank of Canada Annual Report 2023
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RBCx
™ supports 3,500+ tech and
innovation clients and in-house
ventures like Mydoh
®
(used by
140,000+ Canadians), Ownr
®
(trusted by 130,000+ Canadian
businesses), Houseful™ (formerly
OJO
®
, supporting millions
of Canadians in their home
ownership journey) and Dr. Bill
®
(serving 14,000 physicians
since 2020)
Best Treasury and Cash
Management Bank
in Canada,
Best Trade Finance Provider
in
Canada and
Best Bank in North
America and Canada for small
and medium-sized businesses
(12)
RBC is the Official Financial
Services Partner and an Official
Ticket Access Partner of
Taylor
Swift | The Eras Tour
when
it comes to Canada in 2024.
Through Avion Rewards™,
members had the opportunity to
access an exclusive allocation of
tickets. Avion Rewards expanded
access to all eligible Canadians
regardless of where they bank
with its newest membership tier,
Avion Rewards
™
Select
NOMI
®
Forecast
, which provides
clients with a seven-day view
into their future cashflow, was
recognized for Best Use of AI
for Customer Experience.
960,000+ clients have used
the feature since its launch in
September 2021
(13)
Launched
My Money Matters
™,
a financial wellbeing hub helping
Canadians navigate their personal
relationships with money
(1) Based on global investment banking fees (fiscal 2023),
Dealogic
(2) Based on market share (fiscal 2023), Dealogic
(3) Refer to the Glossary for definition on page 130
(4) On a total revenue basis
(5) Brendan Wood International, since 2013
(6) Coalition Greenwich
(7) Kantar BrandZ Most Valuable Global Brands
(8) Euromoney Awards for Excellence 2023
(9) Global Finance – Best Private Bank Awards 2023
(10) Private Banker International Global Wealth Awards
(11) Investment Executive Brokerage Report Card 2023
(12) Global Finance Magazine 2023
(13) The Digital Banker Digital CX Awards 2023
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Royal Bank of Canada Annual Report 2023
Employees
Our strength and success is rooted in the 94,000+ employees worldwide who
live our Purpose and Values. RBC is committed to an inclusive workplace culture
that engages, supports and empowers our employees to help clients thrive and
communities prosper.
Among
Canada’s Top 100 Employers
and
Best
Workplaces
in 2023
(1)(2)
One of Canada’s Best Diversity Employers
(2)
and a
Diversity Champion Talent Award
recipient
(3)
Ongoing learning is a cornerstone of how we
support our colleagues’ professional development
and career aspirations. Our global workforce
collectively invested
3 million hours
in building their
technical and business skills
(4)
Approximately $19+ billion
in competitive
compensation and benefits, including increased
employee matching to our defined-contribution
pension plan
Recognized as one of
Canada’s Top Employers for
Young People
(1)
2023 highlights across our balanced scorecard
93%
feel they contribute to
RBC’s success
2023 Employee Engagement Survey
found employees are highly engaged and feel
proud to be part of RBC
(11)
88%
are proud to be part
of RBC
87%
are willing to go above
and beyond
Royal Bank of Canada Annual Report 2023
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15
Women
represented:
49% of hires
(5)
54% of promotions
(6)
43% of new executive
appointments
(7)
, relative to
our goal of 50%
Black, Indigenous and People
of Colour (BIPOC)
represented:
61% of hires
(5)
45% of promotions
(6)
25% of new executive
appointments
(7)
, relative to our
goal of 30%
Continued our focus on Diversity & Inclusion
(1)
MediaCorp Canada Inc.
(2)
Great Place to Work Institute
(3)
Diversity Champion Talent Award for companies above 10,000 employees, LinkedIn
(4)
Learning hours encompass the cumulative time devoted to various learning initiatives during fiscal 2023
(5)
Hires includes new external hires and rehires globally excluding City National Bank and RBC Brewin Dolphin; based on self-identification; excludes summer interns, students and co-ops
(6)
Promotions are defined as an upward change in Global Grade. Excludes summer interns, students, co-ops, City National Bank and RBC Brewin Dolphin. Values represent data from our
global operations. Based on self-identification
(7)
A new executive appointment is the appointment of an internal employee or external hire as a first-time Vice President, Senior Vice President or Executive Vice President. Based on self-
identification. Per RBC’s Diversity & Inclusion Roadmap 2025, our goal is to achieve representation of 30% BIPOC executives and 50% women executives by 2025
(8)
Headcount under 30 globally, including City National Bank, BlueBay Asset Management and RBC Brewin Dolphin employees
(9)
Based on self-identification
(10) A group that is historically underrepresented may include those who self-identify as women; Black, Indigenous, and People of Colour (BIPOC); LGBTQ+ and/or persons with disabilities
(11)
Employee Engagement Survey conducted between April 26-May 10, 2023; participation rate was 74%
Global employee base
comprised of
18%
young people
(8)
Welcomed 1,900+
summer students
across the
globe, 59% were BIPOC
(9)
We continued to intentionally enhance programs for historically underrepresented groups
(10)
to drive more
equitable opportunities for promotion and development.
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Royal Bank of Canada Annual Report 2023
Communities
2023 highlights across our balanced scorecard
Through our global partnerships, donations and employee initiatives, RBC is committed
to powering ideas that drive positive impact in the communities where we live and work.
Our long-standing commitments to youth, climate, championing inclusion and financial
wellbeing are focused on building strong, resilient and more equitable communities.
RBC Charity Day for the Kids
donated US$5 million
to 63 youth charities around the globe. Since
launching in 2015, this initiative has raised
US$30+ million for 135+ organizations
Our
Employee Giving Campaign
raised $23.9 million,
supporting nearly 12,000 charities in 71 countries
around the world
Since 2017,
RBC Future Launch
®
has reached
6.9+ million Canadian youth and provided $393+
million in support through 900+ partner programs,
helping young people gain access to networking and
mentorship, support for mental wellbeing, upskilling
and gaining practical work experience
RBC Training Ground
hosted events for Indigenous
athletes with Olympic potential in advance of the
2023 North American Indigenous Games. Indigenous
athletes, coaches and team staff from Indigenous
Nations across the country gathered in Kjipuktuk
(Halifax, NS) to celebrate sport and culture
Through the
RBC Emerging Artists
program, our
investments in arts organizations have exceeded
$130 million, supporting 44,000+ artists since 2004
$172+ million given globally through donations and
community investments
, including nearly $
800,000
in humanitarian and relief support efforts in Türkiye,
Syria, Morocco, Libya, and the Middle East, as well
as climate disaster response efforts in Canada
(1)
Royal Bank of Canada Annual Report 2023
|
17
(1) Includes donations and community investments made by RBC or RBC Foundation
®
, employee volunteer grants and gifts in kind, as well as contributions to non-profits and
non-registered charities. Figure includes sponsorships
(2) Refer to page 107 of the 2023 Annual Report for additional information
Launched the
RBC Communities Together Fund
,
enabling RBC employees to help address pressing
needs in their region through team volunteer
events. In 2023, the fund supported
880+ volunteer
projects
, engaging
2,800+ employees
in 6
countries, mobilizing
$1.3+ million
in grants and
tracking
13,000+ volunteer hours
$5 billion
in support of our communities as one of
the largest taxpayers in Canada, and as a taxpayer
in other countries where we operate
(2)
One million employee volunteer hours
tracked in
myCommunity, RBC’s global employee volunteer
platform, since its introduction in 2016
RBC’s collaboration with McGill University has
275,000+ registrations for the
McGill Personal
Financial Essentials
course since its launch in
2019. Available to all Canadians without cost, the
program is a part of RBC’s effort to support financial
wellbeing, helping individuals build confidence,
establish financial security and reach their goals
In 2023,
RBC Race for the Kids™
raised $10.7+
million for 24 youth-focused charities in 26 cities
around the world. Since it began in New York in 2009,
the RBC Race for the Kids events series has hosted
400,000+ participants and raised $93.5+ million
18
|
Royal Bank of Canada Annual Report 2023
Launched the
RBC Climate
Action Institute
to bring together
economists, policy analysts and
business strategists to help research
and advance ideas that can contribute
to Canada’s climate progress
Partnering with EllisDon and Mattamy
Homes Limited, the RBC Climate
Action Institute launched the Climate
Smart Buildings Alliance to identify
and address key sectoral challenges
and barriers to decarbonization
through targeted projects that
advance industry best practices for
net-zero emissions
The Canadian Alliance for Net-Zero
Agri-food, led by RBC, Loblaw
‡
,
Maple Leaf
‡
Foods, McCain
‡
foods,
Nutrien
‡
and Boston Consulting
Group, launched two workstreams,
the Carbon Farming Initiative and
the National Biodigester Network
Initiative, to contribute to a circular,
net-zero agri-food system
Planet
2023 highlights across our balanced scorecard
RBC is working together with our clients to move faster toward net-zero. We’re doing
this by actively engaging clients to understand their transition plans, providing
financial tools and support for their emissions reduction efforts, and convening key
stakeholders to advance ideas that contribute to Canada’s climate progress.
Acted as co-lead placement agent for Svante Technologies
Inc.’s capital raise of US$318 million in a Series E financing
round to accelerate the manufacturing of their carbon
capture technology
Launched the
RBC Electric Vehicle (EV) Cost Calculator
and established exclusive relationships with two EV
manufacturers – VinFast
‡
and Lucid Motors – to contribute to
the expansion of the EV market across Canada
Supported electric truck manufacturer, Vicinity Motor Corp.,
with financing together with Export Development Canada
(EDC) to help them to scale and support their goal to produce
between 3,000 to 5,000 trucks per year by 2025
RBC Tech for Nature
™ supported 150 partners in clean tech,
agriculture, energy and nature-based climate solutions
through $21+ million in community investments, an increase
of 72% in 2023. Since 2019, RBC has invested $60+ million
of the $100 million commitment by 2025 to advance
innovative climate solutions and initiatives that build
resilience through nature
To learn more about RBC’s climate commitments
please visit
rbc.com/climate
Royal Bank of Canada Annual Report 2023
|
19
Committed
$48 million
in 2023
toward venture capital and
growth equity funds to support
climate innovation, bringing our
total funding to $140+ million
since 2022
Launched the new
RBC
Foundation Green Skills
Scholarship
, focused on
supporting students’ green
skills education in key sectors,
including buildings and
construction, agriculture and food
production, transportation, waste
management and recycling, or
renewable energy
Ranked 1st
among Canadian
banks and
7th
globally in
Sustainability-Linked loan
volumes by bookrunner
(1)
(1) Bloomberg
as at October 31, 2023
Expanded our sustainable
finance product suite for
businesses, including leveraging
EDC’s Sustainable Financing
Guarantee to increase our lending
support aimed at emissions
reduction activities and other
sustainable finance
Enhanced our solutions for
agriculture with a market-tested,
proof of concept for a digitally
enabled climate advisory tool
20
|
Royal Bank of Canada Annual Report 2023
Financial
performance
metrics
Medium-Term Objectives
(1)
Diluted EPS growth of 7%+
ROE of 16%+
Strong capital ratio (CET1)
Dividend payout ratio of 40%–50%
10%
16.4%
13.6%
45%
5%
16.0%
13.1%
47%
5-Year
3-Year
Total
shareholder
return
(2)
RBC
Global peer average
10%
14%
7%
5%
5-Year
3-Year
Earnings
7%
8%
net income (C$ billion)
Annualized Dividend
Increase of:
Five year
(4)
Ten year
(4)
$15.8
2022
2023
$14.9
Revenue by segment
(3)
(C$ billion)
$17.5
Wealth
Management
$5.7
Insurance
$11.1
Capital
Markets
$22.1
P&CB
Shareholders
2023 highlights across our balanced scorecard
RBC is driven by its vision, values and commitment to delivering
long-term results.
(1)
A medium-term (3-5 year) objective is considered to be achieved when the performance goal is met in either
a 3- or 5-year period. These objectives assume a normal business environment and our ability to achieve
them in a period may be adversely affected by the macroeconomic backdrop. Refer to the Glossary for
definition on page 130
(2)
Annualized TSR is calculated based on the TSX common share price appreciation plus reinvested dividend
income. Source: Bloomberg, as at October 31, 2023. Please refer to page 26
(3) Excludes Corporate Support
(4) Compound Annual Growth Rate
Royal Bank of Canada Annual Report 2023
|
21
(5) Refer to the Glossary for definition on page 131
(6) Refer to the Glossary for definition on page 130
(7)
Refer to the Glossary for definition on page 130
(8)
On November 6, 2023, Moody’s
‡
affirmed our long-term debt ratings and assessments, as well as affirmed our short-term debt ratings. Includes senior long-term debt issued prior to
September 23, 2018 and senior long-term debt issued on or after September 23, 2018 which is excluded from the Bail-in regime
14.2% return on common
equity
(5)
Approximately 650,000 net new
clients added in 2023
, further
strengthening our core deposit
franchise and underscoring our
commitment to supporting the
diverse banking needs of new
Canadians through our advice
and differentiated partnerships
$10.50
diluted earnings per
share (EPS)
14.5%
robust common equity
tier 1 (CET1) ratio
(6)
Prudent risk management
with 21 basis points of provision
for credit losses (PCL) on
impaired loans
Strong funding profile
Maintained long-term credit
rating of Aa1 by Moody’s
‡(8)
102% ratio of loans to deposits in
Canadian Banking
$5.34 dividends
declared
per share; dividend payout ratio
of 51%
(7)
$7.4
billion of profits returned
to our shareholders through
common share dividends
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, 2023, compared to the preceding fiscal year. This MD&A should be read in conjunction with our 2023 Annual Consolidated
Financial Statements and related notes and is dated November 29, 2023. All amounts are in Canadian dollars, unless otherwise specified, and are based
on financial statements presented in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting
Standards Board (IASB), unless otherwise noted.
Additional information about us, including our 2023
Annual Information Form, is available free of charge on our website at rbc.com/investorrelations, on
the Canadian Securities Administrators’ website, SEDAR+, at sedarplus.ca and on the EDGAR section of the United States (U.S.) Securities and Exchange
Commission’s (SEC) website at sec.gov.
Information contained in or otherwise accessible through the websites mentioned herein does not form part of this report. All references in this report to
websites are inactive textual references and are for your information only.
Table of contents
Caution regarding forward-looking
statements
22
Overview and outlook
23
Selected financial and other highlights
23
About Royal Bank of Canada
24
Vision and strategic goals
24
Economic, market and regulatory
review and outlook
24
Key corporate events of 2023
25
Defining and measuring success
through total shareholder returns
26
Financial performance
26
Overview
26
Impact of foreign currency translation
27
Total revenue
27
Provision for credit losses
29
Insurance policyholder benefits, claims
and acquisition expense
29
Non-interest expense
30
Income and other taxes
30
Client assets
31
Business segment results
32
Results by business segment
32
How we measure and report our
business segments
32
Key performance and non-GAAP
measures
33
Personal & Commercial Banking
37
Wealth Management
42
Insurance
49
Capital Markets
53
Corporate Support
57
Quarterly financial information
57
Fourth quarter performance
57
Quarterly results and trend analysis
58
Financial condition
60
Condensed balance sheets
60
Off-balance sheet arrangements
60
Risk management
63
Top and emerging risks
63
Overview
65
Enterprise risk management
66
Transactional/positional risk drivers
71
Credit risk
71
Market risk
81
Liquidity and funding risk
86
Insurance risk
100
Operational/regulatory compliance
risk drivers
100
Operational risk
100
Regulatory compliance risk
102
Strategic risk drivers
103
Strategic risk
103
Reputation risk
103
Legal and regulatory environment risk
104
Competitive risk
105
Macroeconomic risk drivers
105
Systemic risk
105
Overview of other risks
106
Capital management
109
Accounting and control matters
118
Critical accounting policies and
estimates
118
Controls and procedures
122
Related party transactions
122
Supplementary information
122
Glossary
130
Enhanced Disclosure Task Force
recommendations index
132
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 2023 Annual Report, in other filings with Canadian regulators or the SEC, in other reports to shareholders, and in other communications. In
addition, our representatives may communicate forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements
in this document include, but are not limited to, statements relating to our financial performance objectives, vision and strategic goals, the economic,
market, and regulatory review and outlook for Canadian, U.S., U.K., European and global economies, the regulatory environment in which we operate, the
implementation of IFRS 17 Insurance Contracts, the expected closing of the transaction involving HSBC Bank Canada, including plans for the combination of
our operations with HSBC Bank Canada and the financial, operational and capital impacts of the transaction, the expected closing of the transaction
involving the U.K. branch of RBC Investor Services Trust and the RBC Investor Services business in Jersey, the expected impact of the Federal Deposit
Insurance Corporation’s special assessment, the Strategic priorities and Outlook sections for each of our business segments, the risk environment including
our credit risk, market risk, liquidity and funding risk as well as the effectiveness of our risk monitoring, our climate- and sustainability-related beliefs, targets
and goals (including our net-zero and sustainable finance commitments) and related legal and regulatory developments, and includes statements made by
our President and Chief Executive Officer and other members of management. The forward-looking statements contained in this document represent the
views of management and are presented for the purpose of assisting the holders of our securities and financial analysts in understanding our financial
position and results of operations as at and for the periods ended on the dates presented, as well as our financial performance objectives, vision, strategic
goals and priorities and anticipated financial performance, and may not be appropriate for other purposes. Forward-looking statements are typically
identified by words such as “believe”, “expect”, “suggest”, “seek”, “foresee”, “forecast”, “schedule”, “anticipate”, “intend”, “estimate”, “goal”, “commit”,
“target”, “objective”, “plan”, “outlook”, “timeline” and “project” and similar expressions of future or conditional verbs such as “will”, “may”, “might”, “should”,
“could”, “can” or “would” or negative or grammatical variations thereof.
By their very nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties, both general and
specific in nature, which give rise to the possibility that our predictions, forecasts, projections, expectations or conclusions will not prove to be accurate,
that our assumptions may not be correct, that our financial performance, environmental & social or other objectives, vision and strategic goals will not be
achieved, and that our actual results may differ materially from such predictions, forecasts, projections, expectations or conclusions.
We caution readers not to place undue reliance on our forward-looking 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, but are not limited to: credit, market, liquidity and funding, insurance, operational, regulatory compliance (which could lead to
us being subject to various legal and regulatory proceedings, the potential outcome of which could include regulatory restrictions, penalties and fines), strategic,
reputation, legal and regulatory environment, competitive, model, systemic risks and other risks discussed in the risk sections of our 2023 Annual Report,
including business and economic conditions in the geographic regions in which we operate, Canadian housing and household indebtedness, information
technology, cyber and third-party risks, geopolitical uncertainty, environmental and social risk (including climate change), digital disruption and innovation,
privacy and data related risks, regulatory changes, culture and conduct risks, the effects of changes in government fiscal, monetary and other policies, tax risk
and transparency, and our ability to anticipate and successfully manage risks arising from all of the foregoing factors. Additional factors that could cause actual
results to differ materially from the expectations in such forward-looking statements can be found in the risk sections of our 2023 Annual Report, as may be
updated by subsequent quarterly reports.
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, as well as the inherent uncertainty of forward-looking statements. Material economic assumptions underlying the forward-looking
statements contained in this 2023 Annual Report are set out in the Economic, market and regulatory review and outlook section and for each business segment
under the Strategic priorities and Outlook headings, as such sections may be updated by subsequent quarterly reports. Except as required by law, we do not
undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by us or on our behalf.
Additional information about these and other factors can be found in the risk sections of this 2023 Annual Report, as may be updated by subsequent
quarterly reports.
22
Royal Bank of Canada: Annual Report 2023
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)
2023
2022
2023 vs. 2022
Increase (decrease)
Total revenue
$
56,129
$
48,985
$
7,144
14.6%
Provision for credit losses (PCL)
2,468
484
1,984
n.m.
Insurance policyholder benefits, claims and acquisition expense (PBCAE)
4,022
1,783
2,239
n.m.
Non-interest expense
31,173
26,609
4,564
17.2%
Income before income taxes
18,466
20,109
(1,643)
(8.2)%
Net income
$
14,866
$
15,807
$
(941)
(6.0)%
Net income – adjusted
(1)
16,083
15,998
85
0.5%
Segments – net income
Personal & Commercial Banking
$
8,266
$
8,370
$
(104)
(1.2)%
Wealth Management
(2)
2,427
3,210
(783)
(24.4)%
Insurance
803
857
(54)
(6.3)%
Capital Markets
(2)
4,139
3,368
771
22.9%
Corporate Support
(769)
2
(771)
n.m.
Net income
$
14,866
$
15,807
$
(941)
(6.0)%
Selected information
Earnings per share (EPS) – basic
$
10.51
$
11.08
$
(0.57)
(5.1)%
– diluted
10.50
11.06
(0.56)
(5.1)%
Earnings per share (EPS) – basic adjusted
(1)
11.39
11.21
0.18
1.6%
– diluted adjusted
(1)
11.38
11.19
0.19
1.7%
Return on common equity (ROE)
(3), (4)
14.2%
16.4%
n.m.
(220) bps
Return on common equity (ROE) adjusted
(1)
15.4%
16.6%
n.m.
(120) bps
Average common equity
(3)
$
102,800
$
94,700
$
8,100
8.6%
Net interest margin (NIM) – on average earning assets, net
(4)
1.50%
1.48%
n.m.
2 bps
PCL on loans as a % of average net loans and acceptances
0.29%
0.06%
n.m.
23 bps
PCL on performing loans as a % of average net loans and acceptances
0.08%
(0.04)%
n.m.
12 bps
PCL on impaired loans as a % of average net loans and acceptances
0.21%
0.10%
n.m.
11 bps
Gross impaired loans (GIL) as a % of loans and acceptances
0.42%
0.26%
n.m.
16 bps
Liquidity coverage ratio (LCR)
(4), (5)
131%
125%
n.m.
600 bps
Net stable funding ratio (NSFR)
(4), (5)
113%
112%
n.m.
100 bps
Capital, Leverage and Total loss absorbing capacity (TLAC) ratios
(4), (6)
Common Equity Tier 1 (CET1) ratio
14.5%
12.6%
n.m.
190 bps
Tier 1 capital ratio
15.7%
13.8%
n.m.
190 bps
Total capital ratio
17.6%
15.4%
n.m.
220 bps
Leverage ratio
4.3%
4.4%
n.m.
(10) bps
TLAC ratio
31.0%
26.4%
n.m.
460 bps
TLAC leverage ratio
8.5%
8.5%
n.m.
– bps
Selected balance sheet and other information
(7)
Total assets
$ 2,004,992
$ 1,917,219
$
87,773
4.6%
Securities, net of applicable allowance
409,730
318,223
91,507
28.8%
Loans, net of allowance for loan losses
852,773
819,965
32,808
4.0%
Derivative related assets
142,450
154,439
(11,989)
(7.8)%
Deposits
1,231,687
1,208,814
22,873
1.9%
Common equity
110,347
100,746
9,601
9.5%
Total risk-weighted assets (RWA)
(4), (6)
596,223
609,879
(13,656)
(2.2)%
Assets under management (AUM)
(4)
1,067,500
999,700
67,800
6.8%
Assets under administration (AUA)
(4), (8), (9)
4,338,000
5,653,600
(1,315,600)
(23.3)%
Common share information
Shares outstanding (000s) – average basic
1,391,020
1,403,654
(12,634)
(0.9)%
– average diluted
1,392,529
1,406,034
(13,505)
(1.0)%
– end of period
1,400,511
1,382,911
17,600
1.3%
Dividends declared per common share
$
5.34
$
4.96
$
0.38
7.7%
Dividend yield
(4)
4.3%
3.7%
n.m.
60 bps
Dividend payout ratio
(4)
51%
45%
n.m.
600 bps
Common share price (RY on TSX)
(10)
$
110.76
$
126.05
$
(15.29)
(12.1)%
Market capitalization (TSX)
(10)
155,121
174,316
(19,195)
(11.0)%
Business information
(number of)
Employees (full-time equivalent) (FTE)
91,398
91,427
(29)
(0.0)%
Bank branches
1,247
1,271
(24)
(1.9)%
Automated teller machines (ATMs)
4,341
4,368
(27)
(0.6)%
Period average US$ equivalent of C$1.00
(11)
$
0.741
$
0.774
$
(0.033)
(4.3)%
Period-end US$ equivalent of C$1.00
$
0.721
$
0.734
$
(0.013)
(1.8)%
(1)
This is a non-GAAP measure. For further details, including a reconciliation, refer to the Key performance and non-GAAP measures section. Amounts have been revised
from those previously presented to conform to our basis of presentation for this non-GAAP measure.
(2)
Amounts have been revised from those previously presented to conform to our new basis of segment presentation. For further details, refer to the About Royal Bank of
Canada section.
(3)
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period. This includes average common equity used in
the calculation of ROE. For further details, refer to the Key performance and non-GAAP measures section.
(4)
See Glossary for composition of this measure.
(5)
The LCR and NSFR are calculated in accordance with the Office of the Superintendent of Financial Institutions’ (OSFI) Liquidity Adequacy Requirements (LAR) guideline.
LCR is the average for the three months ended for each respective period. For further details, refer to the Liquidity and funding risk section.
(6)
Capital ratios and RWA are calculated using OSFI’s Capital Adequacy Requirements (CAR) guideline, the Leverage ratio is calculated using OSFI’s Leverage Requirements
(LR) guideline, and both the TLAC and TLAC leverage ratios are calculated using OSFI’s TLAC guideline. The results for the year ended October 31, 2023 reflect our
adoption of the revised CAR and LR guidelines that came into effect in Q2 2023 as part of OSFI’s implementation of the Basel III reforms. For further details, refer to the
Capital management section.
(7)
Represents year-end spot balances.
(8)
AUA includes $13 billion and $7 billion (2022 – $15 billion and $6 billion) of securitized residential mortgages and credit card loans, respectively.
(9)
Comparative amounts have been revised from those previously presented.
(10)
Based on TSX closing market price at period-end.
(11)
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 2023
23
About Royal Bank of Canada
Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading
performance. Our success comes from the 94,000+ employees who leverage their imaginations and insights to bring our vision,
values and strategy to life so we can help our clients thrive and communities prosper. As Canada’s biggest bank and one of the
largest in the world, based on market capitalization, we have a diversified business model with a focus on innovation and
providing exceptional experiences to our more than 17 million clients in Canada, the U.S. and 27 other countries. Learn more
at rbc.com.
Effective the first quarter of 2023, we simplified our reporting structure by eliminating the Investor & Treasury Services segment
and moving its former businesses to existing segments. We moved our Investor Services business to our Wealth Management
segment, and our Treasury Services and Transaction Banking businesses to our Capital Markets segment. Effective the fourth
quarter of 2023, we moved the Investor Services lending business from our Wealth Management segment to our Capital Markets
segment. From a reporting perspective, there were no changes to our Personal & Commercial Banking and Insurance segments.
Comparative results in this MD&A have been revised to conform to our new basis of segment presentation.
Our business segments are described below.
Personal &
Commercial Banking
Provides a broad suite of financial products and services to both individual and business clients
in Canada, the Caribbean and the U.S. Our commitment to building and maintaining deep and
meaningful relationships with our clients is underscored by the delivery of exceptional client
experiences, the breadth of our product suite, our depth of expertise, and the features of our
digital solutions.
Wealth
Management
Serves affluent, high net worth (HNW) and ultra-high net worth (UHNW) clients from our offices in
key financial centres mainly in Canada, the U.S., the United Kingdom (U.K.), Europe and Asia. We
offer a comprehensive suite of wealth, investment, trust, banking, credit and other advice-based
solutions. We also provide asset management products to institutional and individual clients
through our distribution channels and third-party distributors. We provide financial institutions,
asset managers and asset owners with asset services and investor services.
Insurance
Offers a comprehensive suite of advice and solutions for individual and business clients including
life, health, wealth, property & casualty, travel, group benefits, annuities, and reinsurance.
Capital Markets
Provides expertise in advisory & origination, sales & trading, lending & financing and transaction
banking to corporations, institutional clients, asset managers, private equity firms and
governments globally. We serve clients from 60 offices in 16 countries across North America, the
U.K. & Europe, Australia, Asia and other regions.
Vision and strategic goals
Our business strategies and actions are guided by our vision,
“To be among the world’s most trusted and successful financial
institutions.”
Our three strategic goals are:
•
In Canada, to be the undisputed leader in financial services;
•
In the U.S., to be the preferred partner to institutional, corporate, commercial and HNW clients and their businesses; and
•
In select global financial centres, to be a leading financial services partner valued for our expertise.
For our progress in 2023 against our business strategies and strategic goals, refer to the Business segment results section.
Economic, market and regulatory review and outlook – data as at November 29, 2023
The predictions and forecasts in this section are based on information and assumptions from sources we consider reliable. If this
information or these assumptions are not accurate, actual economic outcomes may differ materially from the outlook presented
in this section.
Economic and market review and outlook
GDP growth is slowing across most advanced economies as headwinds from higher interest rates continue to have a lagged
impact. Unemployment rates remain low across most economies. However, they have begun to marginally increase in Canada
and the United Kingdom (U.K.). The U.S. economy has remained resilient with strong GDP growth and a low unemployment rate.
However, credit conditions continue to tighten, the number of job openings are signaling a decline in hiring demand and the
excess of household savings accumulated during the pandemic has shrunk. U.S. GDP growth is expected to slow late in calendar
2023 with mild recessions expected in the first half of calendar 2024. Canadian GDP is expected to decline over the second half of
calendar 2023 and grow slowly in early calendar 2024. Inflation is still high but has been slowing in most advanced economies.
Interest rates have increased to levels that most central banks view as sufficient to slow economic growth and reduce
inflationary pressures over time. We expect central banks will not increase policy interest rates further and expect a shift to
reductions in interest rates from the Federal Reserve (Fed) and Bank of Canada (BoC) in the next calendar year. However,
interest rates are expected to remain significantly higher than pre-pandemic levels.
24
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Canada
Canadian GDP is expected to increase 1.0% in calendar 2023 following a 3.4% increase in calendar 2022. Output in early calendar
2023 was supported by strength in consumer spending and an unexpectedly strong rebound in housing market activity in the
spring. However, GDP declined slightly in the second calendar quarter of 2023 as consumer spending slowed. An additional
50 basis points of interest rate increases from the BoC over June and July 2023 helped to slow housing markets over the summer.
Per-capita GDP growth and consumer spending have been substantially softer, controlling for historically strong population
growth. Labour market conditions have also more recently shown signs of weakening. The unemployment rate has increased by
0.7% since April and the number of job openings has continued to decline. Inflation growth rates have moderated from peak
levels in calendar 2022 but remain above the top end of the BoC’s 1% to 3% inflation target range. GDP is expected to continue to
decline marginally over the second half of calendar 2023 before shifting back to a positive growth rate in calendar 2024. The
unemployment rate is expected to rise above 6% in the first half of calendar 2024. The BoC has increased the overnight rate by
475 basis points since March 2022, and as interest rate increases continue to slow consumer spending, we do not anticipate
additional increases. However, we do not expect a shift to interest rate decreases until the second half of calendar 2024.
U.S.
U.S. GDP is expected to increase 2.4% in calendar 2023 following a 1.9% increase in calendar 2022. U.S. GDP growth has been
exceptionally resilient in calendar 2023. Consumer spending has remained strong despite rising interest rates and employment
has continued to increase at a solid pace. However, the unemployment rate increased to 3.9% in October, wage growth is
showing signs of deceleration, and the number of job openings has declined. The Fed has increased the federal funds rate by
525 basis points since March 2022 and views the current level of interest rates as restrictive enough to slow GDP growth and
inflationary pressures over time. We expect the Fed will hold the target range steady before shifting to interest rate decreases
beginning in the second calendar quarter of 2024. We expect U.S. GDP growth softening in the fourth calendar quarter of 2023
followed by a marginal decline in the first half of calendar 2024.
Europe
Euro area GDP is expected to rise by 0.4% in calendar 2023 following a 3.4% increase in calendar 2022. The Euro area economy is
losing momentum. GDP declined 0.1% in the third calendar quarter of 2023 and we expect another 0.1% decline in the fourth
calendar quarter of 2023. Labour markets remain exceptionally firm but are expected to soften alongside weaker GDP growth.
Euro area inflation is still high but has begun to slow. The European Central Bank (ECB) is expected to hold the deposit rate
steady through calendar 2024 after a 25 basis point increase to 4% in September 2023. U.K. GDP is projected to rise by 0.4% in
calendar 2023 after a 4.3% increase in calendar 2022. In the U.K., GDP held steady in the third calendar quarter of 2023 as the
impact of the Bank of England’s (BOE) 515 basis points of cumulative rate increases since December 2021 begin to slow consumer
spending. Headline inflation remains elevated; however it is showing signs of moderating. The BOE is expected to hold the Bank
Rate at 5.25% through to the end of calendar 2024.
Financial markets
Bond yields have increased substantially in calendar 2023 as markets demand higher term premiums and expect central banks to
hold policy interest rates higher for longer. The spread between longer and shorter duration bond yields, which is a commonly
used recession indicator, increased since the second calendar quarter of 2023 but remains well below zero, as markets continue
to expect deterioration in economic growth. Equity markets have rebounded after declining earlier in the fall and are still above
levels at the end of calendar 2022. Global inflation pressures have shown signs of easing. However, underlying price pressures
are not expected to fully ease until there is a more pronounced slowdown in domestic demand and the economy.
Regulatory environment
We continue to monitor and prepare for regulatory developments and changes in a manner that seeks to ensure compliance with
new requirements, while mitigating adverse business or financial impacts. Such impacts could result from new or amended laws
or regulations and the expectations of those who enforce them. A high level summary of the key regulatory changes that have the
potential to increase or decrease our costs and the complexity of our operations is included in the Legal and regulatory
environment risk section of this 2023 Annual Report.
For a discussion on risk factors resulting from these and other developments which may affect our business and financial
results, refer to the risk sections of this 2023 Annual Report. For further details on our framework and activities to manage risks,
refer to the risk and Capital management sections of this 2023 Annual Report.
Key corporate events
HSBC Bank Canada
On November 29, 2022, we entered into an agreement to acquire 100% of the common shares of HSBC Bank Canada
(HSBC Canada) for an all-cash purchase price of $13.5 billion. HSBC Canada is a premier Canadian personal and commercial bank
focused on globally connected clients. We will also purchase all of the existing preferred shares and subordinated debt of HSBC
Canada held directly or indirectly by HSBC Holdings plc at par value.
The agreement includes a locked box mechanism under which HSBC Canada’s earnings from June 30, 2022 to the closing date
accrue to RBC and will be reflected in the acquired net assets on closing. Relatedly, we will pay an additional amount that
accrues from August 30, 2023 to the closing date, which is calculated based on the all-cash purchase price for the common
shares of HSBC Canada and the Canadian Overnight Repo Rate Average.
The transaction is expected to close in the first calendar quarter of 2024 and is subject to the satisfaction of customary
closing conditions, including regulatory approvals. For further details, refer to Note 6 of our 2023 Annual Consolidated Financial
Statements.
RBC Investor Services
On July 3, 2023, we completed the previously announced sale of the European asset servicing activities of RBC Investor Services
®
and its associated Malaysian centre of excellence (the partial sale of RBC Investor Services operations) to CACEIS, the asset
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
25
servicing banking group of Crédit Agricole S.A. and Banco Santander, S.A. As a result of the transaction, we recorded a pre-tax
gain on disposal of $69 million in Non-Interest income within the Wealth Management segment ($77 million after-tax).
The completion of the sale of the business of the U.K. branch of RBC Investor Services Trust and the RBC Investor Services
business in Jersey remains subject to customary closing conditions, including regulatory approvals. For further details, refer to
Note 6 of our 2023 Annual Consolidated Financial Statements.
Defining and measuring success through total shareholder returns
Our focus is to maximize total shareholder returns (TSR) through the achievement of top half performance compared to our
global peer group over the medium-term (3-5 years), which we believe reflects a longer-term view of strong and consistent
financial performance.
Maximizing TSR is aligned with our three strategic goals discussed earlier and we believe represents the most appropriate
measure of shareholder value creation. TSR is a concept used to compare the performance of our common shares over a period
of time, reflecting share price appreciation and dividends paid to common shareholders. The absolute size of TSR will vary
depending on market conditions, and the bank’s position reflects the market’s perception of our overall performance relative to
our peers over a period of time.
Financial performance objectives are used to measure our performance against our medium-term TSR objectives and are
used as goals as we execute against our strategic priorities. We review and revise these financial performance objectives as
economic, market and regulatory environments change.
The following table provides a summary of our 3-year and 5-year performance against our medium-term financial
performance objectives:
Financial performance compared to our medium-term objectives
Table 2
Medium-term objectives
(1)
3-year
(2)
5-year
(2)
Diluted EPS growth of 7% +
10%
5%
ROE of 16% +
16.4%
16.0%
Strong capital ratio (CET1)
(3)
13.6%
13.1%
Dividend payout ratio 40% – 50%
45%
47%
(1)
A medium-term (3-5 year) objective is considered to be achieved when the performance goal is met in either a 3- or 5-year period. These objectives assume a normal
business environment and our ability to achieve them in a period may be adversely affected by the macroeconomic backdrop.
(2)
Diluted EPS growth is calculated using a Compound Annual Growth Rate (CAGR). ROE, CET1 and dividend payout ratio are calculated using an average.
(3)
The CET1 ratio is calculated using OSFI’s CAR guideline. For further details on the CET1 ratio, refer to the Capital management section.
Our 3-year and 5-year medium-term financial performance objectives will remain unchanged in fiscal 2024.
We compare our TSR to that of a global peer group approved by our Board of Directors (the Board). The global peer group
consists of the following 9 financial institutions:
•
Canadian financial institutions:
Bank of Montreal, Canadian Imperial Bank of Commerce, Manulife Financial Corporation,
National Bank of Canada, The Bank of Nova Scotia, and Toronto-Dominion Bank.
•
U.S. banks:
JPMorgan Chase & Co. and Wells Fargo & Company.
•
International banks:
Westpac Banking Corporation.
Medium-term objectives – 3- and 5-year TSR vs. peer group average
Table 3
3-year TSR
(1)
5-year TSR
(1)
Royal Bank of Canada
10%
7%
Bottom half
Top half
Peer group average (excluding RBC)
14%
5%
(1)
The 3- and 5-year annualized TSR are calculated based on our common share price appreciation as per the TSX closing market price plus reinvested dividends for the
period October 31, 2020 to October 31, 2023 and October 31, 2018 to October 31, 2023.
Common share and dividend information
Table 4
For the year ended October 31
2023
2022
2021
2020
2019
Common share price (RY on TSX) – close, end of period
$
110.76
$ 126.05
$ 128.82
$
93.16
$ 106.24
Dividends paid per share
5.34
4.96
4.32
4.26
4.00
Increase (decrease) in share price
(12.1)%
(2.2)%
38.3%
(12.3)%
10.8%
Total shareholder return
(8.3)%
1.6%
43.8%
(8.4)%
15.2%
Financial performance
Overview
2023 vs. 2022
Net income of $14,866 million was down $941 million or 6% from last year. Diluted EPS of $10.50 was down $0.56 and ROE of 14.2%
was down 220 bps. Our CET1 ratio was 14.5%, up 190 bps from last year.
Adjusted net income of $16,083 million was up $85 million or 1%. Adjusted diluted EPS of $11.38 was up $0.19 and adjusted ROE
of 15.4% was down 120 bps.
26
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Our earnings were down from last year, primarily driven by the impact of the CRD and other tax related adjustments in the
current year, which is reported in Corporate Support. Our results also reflect lower earnings in Wealth Management, Personal &
Commercial Banking and Insurance. This was partially offset by higher results in Capital Markets. Results in the current year
reflect higher PCL, mainly driven by higher provisions on impaired loans and provisions taken on performing loans as compared
to releases of provisions on performing loans last year.
For further details on our business segment results and CET1 ratio, refer to the Business segment results and Capital
management sections, respectively.
Adjusted results
Adjusted results exclude specified items, consisting of impairment losses on our interest in an associated company, certain
deferred tax adjustments, the CRD and other tax related adjustments and HSBC Canada transaction and integration costs (net of
tax), as well as the after-tax impact of amortization of acquisition-related intangibles. Adjusted results are non-GAAP measures.
For further details, including a reconciliation, refer to the Key performance and non-GAAP measures section.
Impact of foreign currency translation
The following table reflects the estimated impact of foreign currency translation on key income statement items:
Table 5
(Millions of Canadian dollars, except per share amounts)
2023 vs. 2022
Increase (decrease):
Total revenue
$
936
PCL
29
Non-interest expense
607
Income taxes
9
Net income
291
Impact on EPS
Basic
$
0.21
Diluted
0.21
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)
2023
2022
U.S. dollar
0.741
0.774
British pound
0.599
0.618
Euro
0.689
0.727
(1)
Average amounts are calculated using month-end spot rates for the period.
Total revenue
Table 7
(Millions of Canadian dollars, except percentage amounts)
2023
2022
Interest and dividend income
$
86,991
$
40,771
Interest expense
61,862
18,054
Net interest income
$
25,129
$
22,717
NIM
1.50%
1.48%
Insurance premiums, investment and fee income
$
5,675
$
3,510
Trading revenue
2,392
926
Investment management and custodial fees
8,344
7,610
Mutual fund revenue
4,063
4,289
Securities brokerage commissions
1,463
1,481
Service charges
2,099
1,976
Underwriting and other advisory fees
2,005
2,058
Foreign exchange revenue, other than trading
1,292
1,038
Card service revenue
1,240
1,203
Credit fees
1,489
1,512
Net gains on investment securities
193
43
Income (loss) from joint ventures and associates
(219)
110
Other
964
512
Non-interest income
$
31,000
$
26,268
Total revenue
$
56,129
$
48,985
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
27
2023 vs. 2022
Total revenue increased $7,144 million or 15% from last year, mainly due to higher net interest income, Insurance premiums,
investment and fee income (insurance revenue), and trading revenue. Higher investment management and custodial fees, other
revenue and foreign exchange revenue, other than trading also contributed to the increase. These factors were partially offset by
income (loss) from joint ventures and associates and lower mutual fund revenue. The impact of foreign exchange translation
increased revenue by $936 million.
Net interest income increased $2,412 million or 11%, largely due to higher spreads in Canadian Banking and Wealth
Management and average volume growth in Canadian Banking. These factors were partially offset by lower revenue from
non-trading derivatives, which was offset in Other revenue, and lower fixed income trading revenue, both in Capital Markets.
NIM was up 2 bps, mainly due to the impact of the higher interest rate environment in Canadian Banking and Wealth
Management, partially offset by an unfavourable shift in deposit mix within Canadian Banking and higher funding costs in Capital
Markets.
Insurance revenue increased $2,165 million or 62%, primarily reflecting the change in fair value of investments backing
policyholder liabilities, higher group annuity sales, and business growth across most products, all of which are largely offset in
PBCAE.
Investment management and custodial fees increased $734 million or 10%, mainly reflecting the inclusion of RBC Brewin
Dolphin.
Trading revenue increased $1,466 million, mainly due to higher fixed income trading revenue across all regions. The prior
year also included the impact of loan underwriting markdowns.
Foreign exchange revenue, other than trading increased $254 million or 24%, primarily driven by foreign currency translation
gains associated with certain foreign currency denominated funding, which was offset by the impact of economic hedges in Other
revenue.
Mutual fund revenue decreased $226 million or 5%, largely due to lower average fee-based client assets, largely driven by
unfavourable market conditions in Wealth Management, and lower average mutual fund balances driving lower distribution fees
in Canadian Banking.
Income (loss) from joint ventures and associates decreased $329 million, mainly attributable to impairment losses on our
interest in an associated company in Wealth Management.
Other revenue increased $452 million or 88%, mainly attributable to gains from our non-trading portfolios, which were offset
in Net interest income, and changes in the fair value of the hedges related to our U.S. share-based compensation plans, which
was largely offset in Non-interest expense. Higher revenue from sweep deposits and a favourable impact from tax-related items
also contributed to the increase. These factors were partially offset by the impact of economic hedges.
Additional trading information
Table 8
(Millions of Canadian dollars)
2023
2022
Net interest income
(1)
$
1,510
$
2,024
Non-interest income
2,392
926
Total trading revenue
$
3,902
$
2,950
Total trading revenue by product
Interest rate and credit
$
2,528
$
1,147
Equities
604
951
Foreign exchange and commodities
770
852
Total trading revenue
$
3,902
$
2,950
(1)
Reflects net interest income arising from trading-related positions, including assets and liabilities that are classified or
designated at fair value through profit or loss (FVTPL).
2023 vs. 2022
Total trading revenue of $3,902 million, which is comprised of trading-related revenue recorded in Net interest income and
Non-interest income, increased $952 million or 32% from last year, mainly due to higher fixed income trading revenue across all
regions. The prior year also included the impact of loan underwriting markdowns.
28
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Provision for credit losses
(1)
Table 9
For the year ended
(Millions of Canadian dollars, except percentage amounts)
October 31
2023
October 31
2022
Personal & Commercial Banking
$
370
$
(281)
Wealth Management
(2)
153
20
Capital Markets
(2)
137
(20)
Corporate Support and other
(3)
–
–
PCL on performing loans
660
(281)
Personal & Commercial Banking
$
1,225
$
755
Wealth Management
(2)
175
13
Capital Markets
(2)
436
9
Corporate Support and other
–
1
PCL on impaired loans
(3)
1,836
778
PCL – Loans
2,496
497
PCL – Other
(4)
(28)
(13)
Total PCL
$
2,468
$
484
PCL on loans is comprised of:
Retail
$
295
$
(31)
Wholesale
365
(250)
PCL on performing loans
660
(281)
Retail
1,051
648
Wholesale
785
130
PCL on impaired loans
1,836
778
PCL – Loans
$
2,496
$
497
PCL on loans as a % of average net loans and acceptances
0.29%
0.06%
PCL on impaired loans as a % of average net loans and
acceptances
0.21%
0.10%
(1)
Information on loans represents loans, acceptance and commitments.
(2)
Amounts have been revised from those previously presented to conform to our new basis of segment presentation. For
further details, refer to the About Royal Bank of Canada section.
(3)
Includes PCL recorded in Corporate Support and Insurance.
(4)
PCL – Other includes amounts related to debt securities measured at fair value through other comprehensive income
(FVOCI) and amortized cost, accounts receivable, and financial and purchased guarantees.
2023 vs. 2022
Total PCL increased $1,984 million from last year, primarily reflecting higher provisions in Personal & Commercial Banking and
Capital Markets. The PCL on loans ratio increased 23 bps.
PCL on performing loans was $660 million compared to $(281) million last year, mainly reflecting provisions taken in the
current year in Personal & Commercial Banking attributable to unfavourable changes in credit quality and portfolio growth.
Higher provisions in Capital Markets driven by unfavourable changes to our macroeconomic forecast and credit quality outlook
also contributed to the increase.
PCL on impaired loans increased $1,058 million, primarily due to higher provisions in our Canadian Banking portfolios and
Capital Markets across most sectors.
Insurance policyholder benefits, claims and acquisition expense (PBCAE)
2023 vs. 2022
PBCAE of $4,022 million increased $2,239 million from last year, primarily reflecting the change in fair value of investments
backing policyholder liabilities, higher group annuity sales and business growth across most products, all of which are largely
offset in revenue. These factors were partially offset by improved claims experience.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
29
Non-interest expense
Table 10
(Millions of Canadian dollars, except percentage amounts)
2023
2022
Salaries
$
8,597
$
7,251
Variable compensation
7,607
7,127
Benefits and retention compensation
2,139
2,015
Share-based compensation
628
135
Human resources
18,971
16,528
Equipment
2,381
2,099
Occupancy
1,634
1,554
Communications
1,271
1,082
Professional fees
2,223
1,511
Amortization of other intangibles
1,487
1,369
Other
3,206
2,466
Non-interest expense
$
31,173
$
26,609
Efficiency ratio
(1)
55.5%
54.3%
Adjusted efficiency ratio
(2), (3)
58.2%
55.8%
(1)
Efficiency ratio is calculated as Non-interest expense divided by Total revenue.
(2)
This is a non-GAAP ratio. For further details, refer to the Key performance and non-GAAP measures section.
(3)
Effective Q2 2023, we revised the composition of this non-GAAP ratio. Comparative adjusted amounts have been revised
to conform with this presentation.
2023 vs. 2022
Non-interest expense increased $4,564 million or 17% from last year, mainly due to higher staff costs, the inclusion of RBC Brewin
Dolphin and related costs, the impact of foreign exchange translation and higher professional fees. The change in the fair value
of our U.S. share-based compensation plans, which was largely offset in Other revenue, as well as transaction and integration
costs relating to the planned acquisition of HSBC Canada also contributed to the increase.
Our efficiency ratio of 55.5% increased 120 bps from last year. Our adjusted efficiency ratio of 58.2% increased 240 bps from
55.8% last year.
Adjusted efficiency ratio is a non-GAAP ratio. For further details, including a reconciliation, refer to the Key performance and
non-GAAP measures section.
Income and other taxes
Table 11
(Millions of Canadian dollars, except percentage amounts)
2023
2022
Income taxes
$
3,600
$
4,302
Other taxes
Value added and sales taxes
597
508
Payroll taxes
990
871
Capital taxes
55
90
Property taxes
144
129
Insurance premium taxes
35
31
Business taxes
82
72
1,903
1,701
Total income and other taxes
$
5,503
$
6,003
Income before income taxes
$
18,466
$
20,109
Effective income tax rate
19.5%
21.4%
Effective total tax rate
(1)
27.0%
27.5%
Adjusted results
(2)
Adjusted income taxes
$
3,346
$
4,367
Adjusted income before income taxes
19,429
20,365
Adjusted effective income tax rate
17.2%
21.4%
(1)
Total income and other taxes as a percentage of income before income taxes and other taxes.
(2)
These are non-GAAP measures. For further details, including a reconciliation, refer to the Key performance and non-GAAP
measures section.
2023 vs. 2022
Income tax expense decreased $702 million or 16% from last year, primarily due to the impact of changes in earnings mix, certain
deferred tax adjustments and lower income before income taxes. These factors were partially offset by the impact of the CRD and
other tax related adjustments and the 1.5% increase in the Canadian corporate tax rate in the current year. Adjusted income tax
expense decreased $1,021 million or 23%.
30
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
The effective income tax rate of 19.5% decreased 190 bps, primarily due to the impact of changes in earnings mix and certain
deferred tax adjustments. These factors were partially offset by the impact of the CRD and other tax related adjustments noted
above and the 1.5% increase in the Canadian corporate tax rate in the current year. Adjusted effective income tax rate of 17.2%
decreased 420 bps.
Other taxes increased $202 million or 12% from last year, primarily due to higher payroll taxes driven by higher staff-related
costs and higher value added and sales taxes commensurate with increased purchase activity.
For further details on specified items, including a reconciliation, refer to the Key performance and non-GAAP measures section.
Client assets
Assets under administration
AUA are assets administered by us which are beneficially owned by our clients. We provide services that are administrative in
nature, including safekeeping, collecting investment income, settling purchase and sale transactions, and record keeping.
Underlying investment strategies within AUA are determined by our clients and generally do not impact the administrative fees
that we receive. Administrative fees can be impacted by factors such as asset valuation level changes from market movements,
types of services administered, transaction volumes, geography and client relationship pricing based on volumes or multiple
services.
Our Wealth Management business is the primary business segment that has AUA with approximately 92% of total AUA,
mainly in the Investor Services line of business with approximately 57% of AUA, as at October 31, 2023. The Personal &
Commercial Banking business has approximately 8% of total AUA.
2023 vs. 2022
AUA decreased $1,316 billion or 23% from last year, mainly due to the partial sale of RBC Investor Services operations, partially
offset by the favourable impact of market appreciation.
The following table summarizes AUA by geography and asset class:
AUA by geographic mix and asset class
Table 12
(Millions of Canadian dollars)
2023
2022
Canada
(1)
Money market
$
34,900
$
43,200
Fixed income
705,800
735,800
Equity
770,500
734,000
Multi-asset and other
1,045,800
1,006,300
Total Canada
2,557,000
2,519,300
U.S.
(1)
Money market
31,600
40,700
Fixed income
131,600
116,000
Equity
271,600
246,300
Multi-asset and other
326,500
304,300
Total U.S.
761,300
707,300
Other International
(1)
Money market
19,100
38,200
Fixed income
(2)
130,000
255,200
Equity
404,100
636,600
Multi-asset and other
(2)
466,500
1,497,000
Total International
(2)
1,019,700
2,427,000
Total AUA
(2)
$ 4,338,000
$ 5,653,600
(1)
Geographic information is based on the location from where our clients are serviced.
(2)
Comparative amounts have been revised from those previously presented.
Assets under management
AUM are assets managed by us which are beneficially owned by our clients. Management fees are paid by the investment funds
and other clients for the investment capabilities of an investment manager and can also cover administrative services.
Management fees may be calculated daily, monthly or quarterly as a percentage of the AUM, depending on the distribution
channel, product and investment strategies. In general, equity strategies carry a higher fee rate than fixed income or money
market strategies. Fees are also impacted by asset mix and relationship pricing for clients using multiple services. Higher risk
assets generally produce higher fees, while clients using multiple services can take advantage of synergies which reduce the fees
they are charged. Certain funds may have performance fee arrangements where fees are recorded when certain benchmarks or
performance targets are achieved. These factors could lead to differences in fees earned by product and therefore net return by
asset class may vary despite similar average AUM. Our Wealth Management segment is the primary business segment that has
AUM with approximately 99% of total AUM as at October 31, 2023.
2023 vs. 2022
AUM increased $68 billion or 7% from last year, mainly due to the impact of market appreciation and net sales.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
31
The following table presents the change in AUM for the year ended October 31, 2023:
Client assets – AUM
Table 13
2023
2022
(Millions of Canadian dollars)
Money market
Fixed income
Equity
Multi-asset
and other
Total
Total
AUM, beginning balance
$
37,800
$
197,800
$ 129,900
$ 634,200
$
999,700
$ 1,008,700
Institutional inflows
160,200
52,500
7,000
19,400
239,100
175,600
Institutional outflows
(159,400)
(42,300)
(10,000)
(14,300)
(226,000)
(180,000)
Personal flows, net
800
2,600
(2,100)
9,100
10,400
21,400
Total net flows
1,600
12,800
(5,100)
14,200
23,500
17,000
Market impact
800
3,200
4,600
19,300
27,900
(117,400)
Acquisition/dispositions
–
–
–
–
–
58,500
Foreign exchange
400
3,500
800
11,700
16,400
32,900
Total market, acquisition/dispositions
and foreign exchange impact
1,200
6,700
5,400
31,000
44,300
(26,000)
AUM, balance at end of year
$
40,600
$
217,300
$ 130,200
$ 679,400
$ 1,067,500
$
999,700
Business segment results
Results by business segments
Table 14
2023
2022
(Millions of Canadian dollars,
except percentage amounts)
Personal &
Commercial
Banking
Wealth
Management
Insurance
Capital
Markets
(1)
Corporate
Support
(1)
Total
Total
Net interest income
$
16,074
$
4,495
$
–
$
3,379
$
1,181
$
25,129
$
22,717
Non-interest income
6,046
13,049
5,675
7,672
(1,442)
31,000
26,268
Total revenue
22,120
17,544
5,675
11,051
(261)
56,129
48,985
PCL
1,579
328
–
561
–
2,468
484
PBCAE
–
–
4,022
–
–
4,022
1,783
Non-interest expense
9,215
14,128
653
6,509
668
31,173
26,609
Income before income taxes
11,326
3,088
1,000
3,981
(929)
18,466
20,109
Income taxes
3,060
661
197
(158)
(160)
3,600
4,302
Net income
$
8,266
$
2,427
$
803
$
4,139
$
(769)
$
14,866
$
15,807
ROE
(2)
27.8%
9.9%
37.3%
14.6%
n.m.
14.2%
16.4%
Average assets
$ 616,600
$
193,100
$ 23,500
$ 1,107,100
$ 62,600
$ 2,002,900
$ 1,886,900
(1)
Net interest income, Non-interest income, Total revenue, Income before income taxes, and Income taxes are presented in Capital Markets on a taxable equivalent basis
(teb). The teb adjustment is eliminated in the Corporate Support segment. For a further discussion, refer to the How we measure and report our business segments
section.
(2)
For further details, refer to the Key performance and non-GAAP measures section.
n.m. not meaningful
How we measure and report our business segments
Our management reporting framework is intended to measure the performance of each business segment as if it were a stand-
alone business and reflects the way that the business segment is managed. This approach is intended to ensure that our
business segments’ results include all applicable revenue and expenses associated with the conduct of their business and
depicts how management views those results.
Key methodologies
The following outlines the key methodologies and assumptions used in our management reporting framework. These are
periodically reviewed by management to ensure they remain valid. Effective the first quarter of 2023, we simplified our reporting
structure by eliminating the Investor & Treasury Services segment and moving its former businesses to existing segments.
Effective the fourth quarter of 2023, we moved the Investor Services lending business from our Wealth Management segment to
our Capital Markets segment. For further details, refer to the About Royal Bank of Canada section.
Expense and tax allocation
To ensure that our business segments’ results include expenses associated with the conduct of their business, we allocate costs
incurred or services provided by Technology & Operations and Functions, which are directly undertaken or provided on the
business segments’ behalf. For other costs not directly attributable to our business segments, including overhead costs and
other indirect expenses, we use our management reporting framework for allocating these costs to each business segment in a
manner that is intended to reflect the underlying benefits.
32
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Capital attribution
Our management reporting framework also determines the attribution of capital to our business segments in a manner that is
intended to consistently measure and align economic costs with the underlying benefits and risks associated with the activities
of each business segment. The amount of capital assigned to each business segment is referred to as attributed capital.
Unattributed capital and associated amounts are reported in Corporate Support. For further information, refer to the Capital
management section.
Funds transfer pricing
Funds transfer pricing refers to the pricing of intra-company borrowing or lending for management reporting purposes. We
employ a funds transfer pricing process to enable risk-adjusted management reporting of segment results. This process
determines the costs and revenue for intra-company borrowing and lending of funds after taking into consideration our interest
rate risk and liquidity risk management objectives, as well as applicable regulatory requirements.
Provisions for credit losses
PCL is recorded to recognize expected credit losses on all financial assets, except for financial assets classified or designated as
FVTPL and equity securities designated as FVOCI, which are not subject to impairment assessment. For details on our accounting
policy on Allowance for credit losses (ACL), refer to Note 2 of our 2023 Annual Consolidated Financial Statements.
PCL is included in the results of each business segment to fully reflect the appropriate expenses related to the conduct of
each business segment.
In addition to the key methodologies described above, the following components of our management reporting framework also
impact how our business segments are managed and reported:
•
Wealth Management results include disclosure in U.S. dollars, primarily for U.S. Wealth Management (including City
National) as we review and manage the results of this business largely in this currency.
•
Capital Markets results are reported on a teb basis, which grosses up total revenue from certain tax-advantaged sources
(Canadian taxable corporate dividends and the U.S. tax credit investment business) to their effective taxable equivalent
value with a corresponding offset recorded in the provision for income taxes. We record the elimination of the teb
adjustments in Corporate Support. We believe these adjustments are useful and reflect how Capital Markets manages its
business, since it enhances the comparability of revenue and related ratios across taxable revenue and our principal
tax-advantaged sources of revenue. The use of teb adjustments and measures may not be comparable to similar GAAP
measures or similarly adjusted amounts disclosed by other financial institutions.
•
Corporate Support results include all enterprise level activities that are undertaken for the benefit of the organization that
are not allocated to our four business segments, such as certain treasury and liquidity management activities, including
amounts associated with unattributed capital, and consolidation adjustments, including the elimination of the teb gross-up
amounts. In addition, we record gains (losses) on economic hedges of our U.S. Wealth Management (including City National)
share-based compensation plans, which are reflected in revenue, and related variability in share-based compensation
expense driven by changes in the fair value of liabilities relating to these plans in Corporate Support as we believe this
presentation more closely aligns with how we view business performance and manage the underlying risks.
Key performance and non-GAAP measures
Performance measures
We measure and evaluate the performance of our consolidated operations and each business segment using a number of
financial metrics, such as net income and ROE. Certain financial metrics, including ROE, do not have a standardized meaning
under generally accepted accounting principles (GAAP) and may not be comparable to similar measures disclosed by other
financial institutions.
Return on common equity
We use ROE, at both the consolidated and business segment levels, as a measure of return on total capital invested in our
business. Management views the business segment ROE measure as a useful measure for supporting investment and resource
allocation decisions because it adjusts for certain items that may affect comparability between business segments and certain
competitors.
Our consolidated ROE calculation is based on net income available to common shareholders divided by total average
common equity for the period. Business segment ROE calculations are based on net income available to common shareholders
divided by average attributed capital for the period. For each segment, average attributed capital includes the capital required to
underpin various risks as described in the Capital management section and amounts invested in goodwill and intangibles.
The attribution of capital involves the use of assumptions, judgments and methodologies that are regularly reviewed and
revised by management as deemed necessary. Changes to such assumptions, judgments and methodologies can have a material
effect on the business segment ROE information that we report. Other companies that disclose information on similar
attributions and related return measures may use different assumptions, judgments and methodologies.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
33
The following table provides a summary of our ROE calculations:
Calculation of ROE
Table 15
2023
2022
(Millions of Canadian dollars,
except percentage amounts)
Personal &
Commercial
Banking
Wealth
Management
Insurance
Capital
Markets
Corporate
Support
Total
Total
Net income available to common
shareholders
$
8,192
$
2,372
$
798
$
4,077
$
(816)
$
14,623
$
15,547
Total average common equity
(1), (2)
29,500
24,050
2,150
27,850
19,250
102,800
94,700
ROE
(3)
27.8%
9.9%
37.3%
14.6%
n.m.
14.2%
16.4%
(1)
Total average common equity represents 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
Non-GAAP measures
We believe that certain non-GAAP measures (including non-GAAP ratios) 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, 2023 with the results from last year. Non-GAAP
measures do not have a standardized meaning under GAAP and may not be comparable to similar measures disclosed by other
financial institutions.
The following discussion describes the non-GAAP measures we use in evaluating our operating results.
Adjusted results
We believe that providing adjusted results and certain measures excluding the impact of the specified items discussed below and
amortization of acquisition-related intangibles enhance comparability with prior periods and enables readers to better assess
trends in the underlying businesses. Specified items impacting our results for the current year are:
•
Impairment losses: reflects impairment losses on our interest in an associated company in the fourth quarter of 2023. For
further details, refer to Note 12 of our 2023 Annual Consolidated Financial Statements.
•
Certain deferred tax adjustments: reflects the recognition of deferred tax assets relating to realized losses in City National
associated with the intercompany sale of certain debt securities in the fourth quarter of 2023
•
CRD and other tax related adjustments: reflects the impact of the CRD and the 1.5% increase in the Canadian corporate tax
rate applicable to fiscal 2022, net of deferred tax adjustments, which were announced in the Government of Canada’s 2022
budget and enacted in the first quarter of 2023
•
Transaction and integration costs relating to our planned acquisition of HSBC Canada
Adjusted efficiency ratio
The adjusted efficiency ratio is a non-GAAP ratio and is calculated based on adjusted Non-interest expenses excluding specified
items and amortization of acquisition-related intangibles divided by total revenue excluding specified items and net of PBCAE,
both of which are non-GAAP measures. We believe that the adjusted efficiency ratio is a useful measure as the change in fair
value of investments backing policyholder liabilities can lead to volatility in revenue, which is largely offset within PBCAE, that
could obscure trends in underlying business performance and reduce comparability with prior periods.
34
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Consolidated results, reported and adjusted
The following table provides a reconciliation of adjusted results to our reported results and illustrates the calculation of adjusted
measures presented. The adjusted results and measures presented below are non-GAAP measures or ratios.
Table 16
(Millions of Canadian dollars, except per share, number of and percentage amounts)
2023
2022
(1)
Total revenue
$
56,129
$
48,985
PCL
2,468
484
Non-interest expense
31,173
26,609
Income before income taxes
18,466
20,109
Income taxes
3,600
4,302
Net income
$
14,866
$
15,807
Net income available to common shareholders
$
14,623
$
15,547
Average number of common shares (thousands)
1,391,020
1,403,654
Basic earnings per share (in dollars)
$
10.51
$
11.08
Average number of diluted common shares (thousands)
1,392,529
1,406,034
Diluted earnings per share (in dollars)
$
10.50
$
11.06
ROE
(2)
14.2%
16.4%
Effective income tax rate
19.5%
21.4%
Total adjusting items impacting net income (before-tax)
$
963
$
256
Specified item: HSBC Canada transaction and integration costs
(3)
380
–
Specified item: Impairment losses on our interest in an associated company
(4)
242
–
Amortization of acquisition-related intangibles
(5)
341
256
Total income taxes for adjusting items impacting net income
$
(254)
$
65
Specified item: CRD and other tax related adjustments
(3), (6)
(1,050)
–
Specified item: Certain deferred tax adjustments
(3)
578
–
Specified item: Impairment losses on our interest in an associated company
(4)
65
–
Specified item: HSBC Canada transaction and integration costs
(3)
78
–
Amortization of acquisition-related intangibles
(5)
75
65
Adjusted results
(7)
Income before income taxes – adjusted
19,429
20,365
Income taxes – adjusted
3,346
4,367
Net income – adjusted
$
16,083
$
15,998
Net income available to common shareholders – adjusted
$
15,840
$
15,738
Average number of common shares (thousands)
1,391,020
1,403,654
Basic earnings per share (in dollars) – adjusted
$
11.39
$
11.21
Average number of diluted common shares (thousands)
1,392,529
1,406,034
Diluted earnings per share (in dollars) – adjusted
$
11.38
$
11.19
ROE – adjusted
15.4%
16.6%
Adjusted effective income tax rate
17.2%
21.4%
Adjusted efficiency ratio
(8)
Total revenue
$
56,129
$
48,985
Less: PBCAE
4,022
1,783
Add specified item: Impairment losses on our interest in an associated company (before-tax)
(4)
242
–
Total revenue – adjusted
$
52,349
$
47,202
Non-interest expense
$
31,173
$
26,609
Less specified item: HSBC Canada transaction and integration costs (before-tax)
(3)
380
–
Less: Amortization of acquisition-related intangibles (before-tax)
(5)
341
256
Non-interest expense – adjusted
$
30,452
$
26,353
Efficiency ratio
55.5%
54.3%
Efficiency ratio – adjusted
58.2%
55.8%
(1)
There were no specified items for the year ended October 31, 2022.
(2)
ROE is based on actual balances of average common equity before rounding.
(3)
These amounts have been recognized in Corporate Support.
(4)
During the fourth quarter of 2023, we recognized impairment losses on our interest in an associated company. This amount has been recognized in Wealth Management.
(5)
Represents the impact of amortization of acquisition-related intangibles (excluding amortization of software), and any goodwill impairment.
(6)
The impact of the CRD and other tax related adjustments does not include $0.2 billion recognized in other comprehensive income.
(7)
Effective the second quarter of 2023, we included HSBC Canada transaction and integration costs and amortization of acquisition-related intangibles as adjusting items
for non-GAAP measures and non-GAAP ratios. Therefore, comparative adjusted results have been revised from those previously presented to conform to our basis of
presentation for this non-GAAP measure.
(8)
Effective the second quarter of 2023, we revised the composition of this non-GAAP ratio, which is calculated based on Non-interest expense adjusted divided by total
revenue adjusted. Therefore, comparative adjusted results have been revised from those previously presented to conform to our basis of presentation for this non-GAAP
ratio.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
35
Segment results, reported and adjusted
The following table provides a reconciliation of Wealth Management adjusted results to our reported results. The adjusted
results and measures presented below are non-GAAP measures or ratios.
Wealth Management
Table 17
2023
(1)
Item excluded
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
As reported
Specified item
(2)
Adjusted
Total revenue
$ 17,544
$
242
$ 17,786
PCL
328
–
328
Non-interest expense
14,128
–
14,128
Net income before income taxes
3,088
242
3,330
Net income
$
2,427
$
177
$
2,604
Net income available to common shareholders
2,372
177
2,549
Total average common equity
(3), (4)
24,050
24,050
Revenue by business
U.S. Wealth Management (including City National)
$
7,969
$
242
$
8,211
U.S. Wealth Management (including City National) (US$ millions)
5,908
175
6,083
Key ratios
ROE
(5)
9.9%
10.6%
Pre-tax margin
(6)
17.6%
18.7%
(1)
There were no specified items for the year ended October 31, 2022.
(2)
Impairment losses on our interest in an associated company.
(3)
Total average common equity represents rounded figures.
(4)
The amounts for the segments are referred to as attributed capital.
(5)
ROE is based on actual balances of average common equity before rounding.
(6)
Pre-tax margin is defined as Income before income taxes divided by Total revenue.
36
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Personal & Commercial Banking
Personal & Commercial Banking provides a broad suite of financial products and services to individual and business clients for
their day-to-day banking, investing and financing needs. We are focused on building deep and meaningful relationships with our
clients, underscored by the delivery of exceptional client experiences, the breadth of our product suite, our depth of expertise,
and the features of our digital solutions.
~15 million
#1 or #2
38,027
Number of Canadian Banking clients
Ranking in market share for all key
retail and business products
Employees
Revenue by business lines
We operate through two businesses – Canadian Banking and Caribbean & U.S.
Banking. Canadian Banking serves our home market in Canada. We have the
largest branch network, the most ATMs, and one of the largest mobile sales
forces across Canada along with market-leading digital capabilities. In
Caribbean & U.S. Banking, we offer a broad range of financial products and
services in targeted markets.
In Canada, we compete with other Schedule 1 banks, independent trust
companies, foreign banks, credit unions, caisses populaires, auto financing
companies, as well as emerging entrants to the financial services industry.
In the Caribbean, our competition includes banks, emerging digital banks, trust
companies and investment management companies serving retail and
corporate clients, as well as public institutions. In the U.S., we compete
primarily with other Canadian banking institutions that have U.S. operations.
68%
Personal Banking
27% Business Banking
5% Caribbean and U.S. Bankin
g
Total revenue
$22.1 billion
2023 Operating environment
›
In response to persistent inflation, the BoC continued tightening its monetary policy, raising the benchmark interest rate by
125 basis points in fiscal 2023; and by 475 basis points since the beginning of March 2022. As a result of these interest rate
increases, we continued to see NIM expansion. The combination of higher NIM and solid volumes drove strong growth in net
interest income.
›
The credit environment was impacted by slowing economic growth and rising interest rates, resulting in higher provisions on
performing and impaired loans.
›
For Canadian Banking, non-interest expense reflects investments in staff, mainly increased average FTE, marketing costs and
ongoing investments in technology.
›
Our results were also impacted by a higher effective tax rate reflecting the 1.5% increase in the Canadian corporate tax rate,
which was implemented at the beginning of the fiscal year.
›
As a result of interest rate increases, housing activity has slowed and household debt servicing costs have increased, driving a
decline in mortgage originations from prior year levels.
›
We experienced significant growth in term deposit products, reflecting client preference for low-risk products at higher yields,
driven by the BoC’s monetary policy. Despite this, volumes for personal and business demand deposits remained above
pre-pandemic levels.
›
We continued to see unfavourable market conditions in fiscal 2023, driving lower sales of mutual fund products, which was also
impacted by the client preference shift to term deposit products. We also continued to see a declining trend in overall trade
volume activity in our Direct Investing business.
›
Growth in cards volume was strong in fiscal 2023, reflecting strong acquisition levels. Purchase volumes were stable and reflect
an environment where clients are increasingly mindful of their spending habits.
›
Clients are increasingly demonstrating a preference for digital offerings, and we continue to invest in digital solutions to
improve the client experience and deliver personalized advice.
›
Our Caribbean Banking business was favourably impacted by increases in interest rates, driving strong net interest income
growth. As well, we saw higher fee-based income, reflecting higher client activity driven by the recovery of the travel industry
since the COVID-19 pandemic.
›
In the U.S., higher interest rates had a favourable impact on net interest income.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
37
Strategic priorities
OUR STRATEGY
PROGRESS IN 2023
PRIORITIES IN 2024
Accelerate our growth and
deepen relationships
Avion Rewards, the largest proprietary loyalty program
in Canada, was recognized as the International Loyalty
Program of the Year in Americas and Best Loyalty /
Benefits in a Financial Product at the 2023 International
Loyalty Awards; In 2023, Avion Rewards expanded
access to all Canadians regardless of where they bank
or shop, bringing unparalleled savings and flexibility
and making a fundamental shift in how the rewards
program delivers benefits
Announced a new loyalty partnership with METRO Inc.
with the launch of the no annual fee
moi
RBC
®
Visa
‡
credit card, which earns
Moi
‡
points on all purchases as
well as allows cardholders access to unique savings
and offers from Avion Rewards and its extensive
merchant partner network
Launched Canada’s new First Home Savings Account
(FHSA) in April 2023 to help Canadians save tax free for
their first home, making it available as quickly and
conveniently as possible through multiple channels,
including RBC Direct Investing, RBC InvestEase
®
and
RBC in-branch advisors
Acquired OJOHome Canada Ltd., which operates a
comprehensive real estate technology platform,
Houseful
TM
(formerly OJO), bolstered by artificial
intelligence (AI), to further streamline the home buying
journey for Canadians while supporting them at every
stage with intuitive, digitally-enabled and insights-
driven experiences
Continued to build world-class capabilities through the
RBC PayEdge
TM
platform, leveraging data to increase
strategic value through industry and client-specific
insights to offer superior working capital solutions to
our business clients
Maintained our focus on key high-growth and high-
value segments, such as youth and young adults,
newcomers, business owners, healthcare professionals,
retirees, and HNW clients
Drove significant new-to-RBC client acquisition from
newcomers and new partnerships, including ICICI Bank
Canada
Continue to build a suite of best-in-class value
propositions, digital experiences and Beyond Banking
Ventures to accelerate client acquisition, engaging
Canadians earlier, more often and in more compelling
ways
Focus on engaging key high-growth client segments and
empowering our advisors to build new and deeper
relationships with superior advice to drive industry-
leading volume growth
Establish additional key partnerships to continue to
add value for our clients
Enable unparalleled value for both consumers and
merchants through a best-in-class loyalty program
Transform sales, advice and
service, while digitizing to unlock
productivity
Enhanced NOMI
®
Forecast – RBC’s cutting-edge
capability that provides clients with a seven-day view
into their future cashflow – to include bill payments,
e-transfers, investment contributions and salary
payments; NOMI Forecast was awarded the Best Use of
AI for Customer Experience at The 2023 Digital Banker
Digital CX Awards
Received highest ranking in Customer Satisfaction with
Retail Banking Advice for a third consecutive year in the
J.D. Power 2023 Canada Retail Banking Advice
Satisfaction Study
Entered a strategic partnership with Conquest Planning
Inc. to bring a next-generation financial planning
platform to clients and financial advisors, using
powerful AI to identify effective financial strategies and
deliver world-class digital advice and planning for
clients to help them achieve their financial goals
Recognized as the best small and medium enterprise
(SME) bank in North America by Global Finance
Magazine, for the broad array of services offered to
businesses beyond traditional banking, including Ownr,
the online platform that has helped more than 55,000
entrepreneurs launch their businesses, and RBC Insight
Edge which enables companies to leverage aggregated
data to gain relevant insights into their markets and
attract new clients
Collaborated with the Canadian Chamber of Commerce
on the launch of SME Institute, a first-of-its kind,
one-stop service that provide SMEs the training,
support, and advice they need to adapt, grow and thrive
in a rapidly evolving economy
The first bank in Canada to launch Swift Go through the
RBC PayEdge
TM
platform, a new way to make fast,
secure, and cost-effective cross-border payments,
highlighting RBC’s ongoing commitment to innovations
in digital banking and payments
Provide flexibility by continuing to deliver anytime,
anywhere solutions to our clients across all channels
Lead in mobile capabilities and enable fulfillment of
servicing through digital channels with access to
advisors to help clients on their chosen path of
interaction
Continue to reimagine our branch network to meet the
evolving needs of our clients
Continuously upskill our expert advisor network to
deliver more personalized insights and address
complex advice needs for superior client experience
Leverage digital and agile to drive faster delivery of
products and services while improving productivity and
efficiency
Transform our Moneris joint venture to deliver greater
value to Canadian merchants, through integrated value
propositions, products and services
38
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
OUR STRATEGY
PROGRESS IN 2023
PRIORITIES IN 2024
Build sustainable communities
Launched the RBC Electric Vehicle (EV) Cost Calculator
and established exclusive relationships with two EV
manufacturers – VinFast and Lucid – to contribute to
the expansion of the EV market across Canada
Expanded our sustainable finance product suite for
businesses, including leveraging Export Development
Canada’s Sustainable Financing Guarantee to increase
our lending support aimed at carbon reduction and
sustainable finance
Continued to help clients reduce emissions through
new solutions, delivery of tailored advice through
dedicated teams, and developed industry-specific value
propositions, such as championing climate-smart
agriculture insights and incentives for Canadian
farmers
Launched RBC My Money Matters
TM
, a new digital
destination with comprehensive content, resources,
and tools to help Canadians take control of their
financial wellbeing and make thinking about money less
stressful
Continued to expand RBC’s Survivor Inclusion Initiative
to provide survivors of human trafficking with financial
literacy programming, basic banking services, and
access to specially trained financial advisors who have
undertaken trauma-informed sensitivity training
Continued to support the path to prosperity and growth
of Black entrepreneurs through inclusive financing,
community advocacy and sponsorship programs as
part of a five year $100-million commitment to
supporting Black entrepreneurs announced in 2020
Continue to focus on opportunities to support
Canadians and businesses in their transition to net
zero, including building upon our existing portfolio of
products, services and advice
Continue to focus on increasing employee awareness,
knowledge and engagement on climate initiatives to
better support clients on their sustainability journey
Continue to support the financial wellbeing of
Canadians by enabling individuals and small
businesses to build confidence, establish financial
security, and reach their goals through dedicated
products, services and ecosystem partnerships
Attract, grow and retain future-
ready talent
Provided numerous solutions to ensure employees
continued to be productive and engaged, including
targeted initiatives to develop and retain our best
talent, advancing return to premises strategy to
re-ignite connection and collaboration
Invested in future skills development, elevating
performance and fostering a culture of inclusive
leadership through programs, such as people manager
masterclasses, reskilling programs and learning series
Helped employees achieve their work and life goals and
supported health and wellbeing through initiatives,
such as the Make It Yours
TM
campaign, increased
vacation entitlement for select workforces, and
increased paternity leave benefits for employees in the
Caribbean
Strengthened our culture of inclusion and belonging by
driving growth and development of diverse talent
through targeted initiatives and programs, including:
Canadian Banking Women’s Forum, BIPOC Rotational
Program, and Indigenous People’s Development
Program
Elevate leadership capabilities to grow and develop
talent
Continue to strengthen our culture of inclusion and
belonging
Drive a high-performance culture that empowers and
enables people to deliver on our ambitious goals
In the Caribbean
Accelerated actions focused on enhancing the client
experience underpinned by programs across our
growth and transformation priorities, including product
development and digitization
Continue our Investing for Growth strategy by
expanding product offerings while progressing
initiatives to simplify and digitize our operational
processes to deliver an enhanced client and employee
experience
In the U.S.
Leveraged momentum from higher cross-border travel
after the COVID-19 pandemic to drive solid business
growth.
Continued focus on automation of processes and
controls, and development of digital tools to enhance
scalability, simplify processes and improve the client
experience
Further aligning products and channel experiences
through deeper integration with the Canadian franchise
to support market share growth while making it easier
to do banking in the U.S.
Continue digitization efforts, focusing on real estate
financing processes and client experience
Outlook
The lagged impact of higher interest rates is slowing economic growth in Canada. The Canadian unemployment rate is still low but has
increased 0.7% since April. Canadian GDP growth has slowed significantly to-date in calendar 2023. The Canadian housing market has
cooled after an unexpected strong rebound in the spring following an additional 50 basis points of interest rate increases from the BoC
over the summer. The U.S. economy has remained exceptionally resilient. However, excess pandemic savings and excess job openings
have been declining, the global growth backdrop is softening, credit conditions continue to tighten, and inflation growth has slowed. We
do not expect further interest rate increases from the Fed or the BoC with economic growth and inflation pressures expected to soften.
We expect the Fed to shift to interest rate decreases beginning in the second calendar quarter of 2024, with the BoC following with the
first cuts to the overnight rate expected in the second half of calendar 2024. In response to this economic environment, we will continue
to pursue industry-leading growth and deepen client relationships to meet the evolving needs of our clients.
The Caribbean region maintained its growth momentum during 2023, supported by tourism-related travel. Real GDP is projected to
continue to expand in 2024, but at a more normalized rate as economic recovery matures. Regionally, inflation rates decelerated during
2023 and are forecasted to normalize through 2024. Risks to the regional outlook remain tilted to the downside as the spillover effects of
global risks could weigh on growth prospects. In addition, the threat of weather-induced shocks, particularly hurricanes also pose a risk
to the Caribbean’s economic outlook. Our Investing for Growth strategy continues, with a refreshed focus on delivering exceptional client
value, enhancing operational efficiency and resilience, and developing engaged and empowered teams.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
39
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.
Personal & Commercial Banking
Table 18
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
2023
2022
Net interest income
$
16,074
$
14,019
Non-interest income
6,046
6,124
Total revenue
22,120
20,143
PCL on performing assets
371
(283)
PCL on impaired assets
1,208
746
PCL
1,579
463
Non-interest expense
9,215
8,437
Income before income taxes
11,326
11,243
Net income
$
8,266
$
8,370
Revenue by business
Canadian Banking
$
21,050
$
19,282
Personal Banking
15,018
13,957
Business Banking
6,032
5,325
Caribbean & U.S. Banking
1,070
861
Key ratios
ROE
27.8%
30.9%
NIM
2.74%
2.55%
Efficiency ratio
(1)
41.7%
41.9%
Operating leverage
(1)
0.6%
4.0%
Selected balance sheet information
Average total assets
$
616,600
$
575,900
Average total earning assets, net
585,900
548,900
Average loans and acceptances, net
593,000
553,300
Average deposits
597,500
552,100
Other information
AUA
(2), (3), (4)
$
336,800
$
340,300
Average AUA
(4)
350,800
356,300
AUM
(3)
5,900
5,600
Number of employees (FTE)
38,027
38,450
Credit information
PCL on impaired loans as a % of average net loans and acceptances
0.21%
0.14%
Other selected information – Canadian Banking
Net income
$
7,922
$
8,024
NIM
2.69%
2.54%
Efficiency ratio
40.4%
40.5%
Operating leverage
0.2%
3.8%
(1)
See Glossary for composition of this measure.
(2)
AUA includes securitized residential mortgages and credit card loans as at October 31, 2023 of $13 billion and $7 billion, respectively (October 31, 2022 – $15 billion and
$6 billion).
(3)
Represents year-end spot balances.
(4)
Comparative amounts have been revised from those previously presented.
Financial performance
2023 vs. 2022
Net income decreased $104 million or 1% from last year, primarily attributable to higher PCL, and higher expenses mainly
reflecting staff-related and marketing costs. These factors were partially offset by higher net interest income.
Total revenue increased $1,977 million or 10%, primarily due to higher net interest income, reflecting higher spreads and
average volume growth of 8% in deposits and 7% in loans in Canadian Banking.
NIM increased 19 bps, mainly due to the impact of the higher interest rate environment, partially offset by an unfavourable
shift in deposit mix.
PCL increased $1,116 million, mainly reflecting provisions taken on performing loans this year, largely in our Canadian
Banking portfolios, primarily driven by unfavourable changes in credit quality and portfolio growth as compared to releases last
year which reflected reduced uncertainty relating to the COVID-19 pandemic. Higher provisions on impaired loans, primarily in
our Canadian Banking retail portfolios, also contributed to the increase, resulting in an increase of 7 bps in the PCL on impaired
loans ratio.
Non-interest expense increased $778 million or 9%, mainly attributable to higher staff-related costs and higher marketing
costs.
Average loans and acceptances increased $40 billion or 7%, mainly driven by mortgage and business banking loan growth,
reflecting client activity.
Average deposits increased $45 billion or 8%, largely reflecting an increase in term deposits, partially offset by a decline in
demand deposits.
Business line review
In Canada, we operate through two business lines: Personal Banking and Business Banking.
40
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Personal Banking
Personal Banking offers a full range of products focused on meeting the needs of our individual Canadian clients at every stage
of their lives through a wide range of financing and investment products and services. This includes home equity financing,
personal lending, chequing and savings accounts, private banking, indirect lending (including auto financing), mutual funds and
self-directed brokerage accounts, GICs, credit cards, and payment products and solutions.
We rank #1 or #2 in market share for all key Personal Banking products in Canada supported by the largest retail banking
network in Canada, with 1,143 branches and 4,003 ATMs.
Financial performance
Total revenue increased $1,061 million or 8% compared to last year, primarily due to higher net interest income reflecting higher
spreads and average volume growth of 14% in deposits and 5% in loans.
Average residential mortgages increased 6% compared to last year, mainly due to strong mortgage origination in the first
half of the year.
Average deposits increased 14% from last year, largely reflecting an increase in term deposits, partially offset by a decline in
demand deposits.
Selected highlights
Table 19
(Millions of Canadian dollars, except number of)
2023
2022
Total revenue
$
15,018
$
13,957
Other information
Average residential mortgages
358,400
338,400
Average other loans and acceptances, net
76,300
75,700
Average deposits
333,800
293,500
Average credit card balances
20,800
18,200
Credit card purchase volumes
174,200
162,200
Branch mutual fund balances
(1)
174,700
178,600
Average branch mutual fund balances
183,100
194,400
AUA – Self-directed brokerage
(1)
128,700
127,600
Number as at October 31:
Branches
1,143
1,162
ATMs
4,003
4,028
(1)
Represents year-end spot balances.
0
50,000
100,000
400,000
300,000
350,000
200,000
250,000
150,000
Other loans and
acceptances, net
Residential mortgages
Deposits
Average residential mortgages, loans and deposits
(Millions of Canadian dollars)
2023
2022
Business Banking
Business Banking offers a wide range of lending, leasing, deposit, investment, foreign exchange, cash management, auto dealer
financing, trade products, and services to small- and medium-sized commercial businesses across Canada. With one of the
largest teams of relationship managers and specialists in the industry, our commitment to client experience and trusted advice
has earned us leading market share in business lending and deposits.
Financial performance
Total revenue increased $707 million or 13% compared to last year, primarily due to higher net interest income reflecting higher
spreads, and average volume growth of 14% in loans and 2% in deposits. Higher volumes contributed to higher credit fees.
Average loans and acceptances increased 14% and average deposits increased 2%, mainly due to strong growth in priority
sectors and from new client acquisition.
Selected highlights
Table 20
(Millions of Canadian dollars)
2023
2022
Total revenue
$
6,032
$
5,325
Other information (average)
Loans and acceptances, net
125,800
110,800
Deposits
241,800
237,900
2022
Loans and acceptances, net
Deposits
Average loans and acceptances and deposits
(Millions of Canadian dollars)
0
100,000
150,000
175,000
125,000
25,000
50,000
75,000
250,000
225,000
200,000
2023
Caribbean & U.S. Banking
Our Caribbean Banking business provides personal and commercial banking to a range of clients, including individuals, small
businesses, general commercial entities, regional and multi-national corporations, and governments; supported by an extensive
branch, ATM, online, and mobile banking network.
Our U.S. Banking business serves the needs of Canadian retail and small business clients providing personalized, digitally-
enabled cross-border banking solutions enabling a cross-border lifestyle in all 50 states across the U.S.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
41
Financial performance
Total revenue increased $209 million or 24% from last year, primarily due to higher net interest income reflecting improved
spreads.
Average loans and acceptances increased 15% and average deposits increased 5%, primarily due to the impact of foreign
exchange translation and increased client activity.
Selected highlights
Table 21
(Millions of Canadian dollars,
except number of and percentage amounts)
2023
2022
Total revenue
$
1,070
$
861
Other information
NIM
4.08%
2.90%
Average loans and acceptances, net
11,700
10,200
Average deposits
21,900
20,800
AUA
(1), (2)
10,800
10,400
Average AUA
(2)
10,500
10,200
AUM
(1)
5,500
5,300
Number as at October 31:
Branches
38
38
ATMs
271
269
(1)
Represents year-end spot balances.
(2)
Comparative amounts have been revised from those previously presented.
2022
Loans and acceptances, net
Deposits
Average loans and deposits
(Millions of Canadian dollars)
0
10,000
12,500
15,000
17,500
5,000
7,500
2,500
22,500
20,000
2023
Wealth Management
Wealth Management is a global business serving clients in key financial centres. We serve affluent, HNW and UHNW individual and
institutional clients with a comprehensive suite of advice-based solutions and strategies to help them achieve their financial goals.
$17.5 billion
> 6,100
~ 83%
Total revenue
Client-facing advisors
GAM AUM outperforming the benchmark
on a 3-year basis
1
Asset under Administration
(AUA)
Total AUA
$3,982 billion
35% Personal
64% Institutional
1% Mutual Funds
Assets under Management
(AUM)
Total AUM
$1,059 billion
50% Personal
25% Mutual Funds
25% Institutional
Our lines of business include Canadian Wealth
Management, U.S. Wealth Management (including
City National), Global Asset Management (GAM),
International Wealth Management and Investor
Services.
•
Canadian Wealth Management is the largest
full-service wealth advisory business in
Canada, as measured by AUA, serving HNW and
UHNW clients
•
U.S. Wealth Management (including City
National) encompasses our private client group
(PCG) and clearing and custody (C&C)
businesses. PCG is the 6
th
largest full-service
wealth advisory firm in the U.S., as measured by
AUA, and City National is a U.S.-based
relationship bank serving the entertainment
industry, mid-market businesses, HNW
individuals and other clients who value
personalized banking relationships
•
GAM is the largest retail mutual fund company
in Canada as measured by AUM, as well as a
leading institutional asset manager
•
International Wealth Management serves HNW
and UHNW clients, primarily through key
financial centres in the U.K., Ireland, the
Channel Islands and Asia
•
Investor Services safeguards client assets and
supports the growth of Canadian and U.K. asset
managers and asset owners, investment
counsellors and other financial institutions
1
As at September 2023, gross of fees.
42
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
2023 Operating environment
›
Earnings in the current fiscal year benefitted from the high interest rate environment reflecting rate increases by the Fed, BoC
and other central banks, while shifting client preferences in favour of higher yielding products and unfavourable market
conditions impacted our fee-based revenue.
›
Our wealth advisory businesses performed well with continued net positive flows of fee-based client assets reflecting the
strength of our business driven by the quality of our advice, the breadth of our investment and holistic wealth planning
solutions and clients’ trust in our brand. The mutual fund sector continues to be impacted by lower sales due to the high
interest rate environment and market volatility.
›
Results for our Investor Services business were impacted by industry headwinds, such as continued pricing pressure, partially
offset by rising interest rates.
›
We continued to invest in our people and technology to maintain our competitive advantage and increase efficiencies in an
environment characterized by market volatility, rapidly changing client preferences and increasing regulatory requirements.
›
The credit environment was impacted by slowing economic growth and rising interest rates, resulting in higher provisions on
impaired and performing loans.
Strategic priorities
OUR STRATEGY
PROGRESS IN 2023
PRIORITIES IN 2024
In Canada, be the premier service
provider for HNW and UHNW clients
Further extended our position as industry leader in our
full-service private wealth business
Continued to focus on holistic wealth planning, including
advisor training on intergenerational and business
wealth transfer
Continued to expand RBC
®
Premier Banking to deepen
banking relationships with Wealth Management clients
Focused on the business owner client segment,
deepening client relationships across the various
business segments
Continued to enhance our digital and data capabilities to
drive increased client satisfaction and advisor
productivity
Implemented unique capabilities that are becoming
increasingly important to our client base, such as private
alternative investment products
Continue to retain and attract top-performing advisors to
strengthen our talent advantage
Deliver a differentiated client experience through
enriched advisor-client interactions and seamless digital
experiences
Deepen client relationships by leveraging the combined
strengths across other business segments with a focus
on the business owner client segment
Continue to invest in digital solutions to streamline and
improve efficiency and advisor productivity
Modernize legacy infrastructure and systems to ensure
ongoing resiliency in our technology platforms
In the U.S., become the leading
private and commercial bank and
wealth manager in our key markets
Continued to invest in key areas needed to grow our U.S.
Wealth Management business, including substantial
financial advisor recruitment, executing on our
technology transformation and providing proactive
liquidity to our clients through a revamped securities-
based lending platform
At City National, we continued to focus on enhancing our
risk management and compliance capabilities across the
three lines of defence for sustainable, organic growth in
the future
Continue to deliver an exceptional client experience for
targeted HNW, UHNW, middle market and business
banking segments
Leverage the combined strengths within U.S. Wealth
Management (including City National) and Capital
Markets to deepen client relationships
At City National, we will continue to focus on enhancing
our risk management and compliance capabilities across
the three lines of defence for sustainable, organic growth
in the future
In select global financial centres,
become the most trusted regional
private bank
Continued to deliver on successful growth initiatives,
bringing the full strength and breadth of RBC to our
clients
Focused on delivering a differentiated client experience
by leveraging our global capabilities
Leveraged RBC Brewin Dolphin to increase distribution,
AUM and client base to position ourselves as top
five largest wealth manager in the U.K.
In Asia, continued growth momentum achieved through
the addition of experienced client-facing advisors and
net new assets
Focus on growing market share in target markets
Continue to leverage our global strengths to better serve
clients
Continue to deliver an exceptional client experience and
increase business effectiveness and talent capabilities
Successful integration of RBC Brewin Dolphin to enhance
client value proposition and consolidation of position in
the U.K. local market
In Asia, focus on deepening cross-business, global
collaboration and enhancing digital and product
capabilities
In asset management, be a leading,
diversified asset manager focused on
global institutional and North
American retail clients
Maintained #1 market share in Canadian mutual fund
AUM
RBC
®
iShares strategic alliance maintained #1 market
share in Canadian ETFs
Completed shift to a more unified asset management
operating model to increase collaboration and better
leverage infrastructure and people resources
Continue to focus on delivering exceptional investment
performance and valued insights with the client
experience at the centre of all that we do
Continue to expand our investment capabilities to meet
evolving client needs in our target distribution regions
Attract, grow and retain future-ready
talent
Advanced our representation and strengthened inclusion
of historically underrepresented groups through targeted
engagement initiatives and partnerships including: Ivey’s
Women in Asset Management Program, Women Advisor
Experience Listening Sessions, Diversity Leadership
Councils and Employee Resource Groups
Elevate leadership capabilities to grow and develop
talent
Continue to strengthen our culture of inclusion and
belonging
Drive a high-performance culture that empowers and
enables people to deliver on our ambitious goals
Outlook
The ongoing uncertainty in the macroeconomic environment, including the impact of high interest rates and an expected
slowdown in economic growth, will continue to impact markets.
Despite this uncertainty, we believe our diversified businesses remain well-positioned to continue growing our leading
position in Canada and increasing our market share in the HNW and UHNW client segments globally, leveraging the strength of
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
43
our brand, reputation and solid financial position. Our strategy remains unchanged as we continue to focus on delivering an
unmatched client experience through holistic goals-based advice, attracting and retaining top-performing advisors, and
collaborating across the enterprise to bring the full breadth of our capabilities to our clients. We will continue to invest in our
people and technology to improve client and advisor experiences, drive operational efficiencies, and further strengthen our risk,
compliance and controls infrastructure to meet heightened regulatory requirements.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook
section.
Wealth Management
Table 22
(Millions of Canadian dollars, except number of, percentage amounts and as otherwise noted)
2023
2022
(1)
Net interest income
$
4,495
$
3,886
Non-interest income
13,049
12,357
Total revenue
17,544
16,243
PCL on performing assets
153
20
PCL on impaired assets
175
13
PCL
328
33
Non-interest expense
14,128
12,015
Income before income taxes
3,088
4,195
Net income
$
2,427
$
3,210
Revenue by business
Canadian Wealth Management
$
4,443
$
4,308
U.S. Wealth Management (including City National)
7,969
7,448
U.S. Wealth Management (including City National) (US$ millions)
5,908
5,757
Global Asset Management
2,626
2,667
International Wealth Management
1,273
426
Investor Services
(2)
1,233
1,394
Key ratios
ROE
9.9%
15.8%
NIM
2.66%
2.47%
Pre-tax margin
(3)
17.6%
25.8%
Selected balance sheet information
Average total assets
$
193,100
$
177,400
Average total earning assets, net
169,300
157,100
Average loans and acceptances, net
113,800
102,400
Average deposits
(2)
163,800
198,000
Other information
AUA
(2), (4), (5)
$
3,981,500
$
5,294,800
U.S. Wealth Management (including City National)
(4)
752,700
700,100
U.S. Wealth Management (including City National) (US$ millions)
(4)
542,800
513,700
Investor Services
(4)
2,488,600
3,906,900
AUM
(4)
1,058,900
991,500
Average AUA
(2)
4,987,200
5,710,700
Average AUM
1,058,000
966,300
PCL on impaired loans as a % of average net loans and acceptances
0.15%
0.01%
Number of employees (FTE)
25,196
26,150
Number of advisors
(6)
6,169
6,158
Adjusted results
(7)
Total revenue – adjusted
$
17,786
$
16,243
Income before income taxes – adjusted
3,330
4,195
Net income – adjusted
2,604
3,210
U.S. Wealth Management (including City National) revenue – adjusted
8,211
7,448
U.S. Wealth Management (including City National) revenue (US$ millions) – adjusted
6,083
5,757
Key ratios – adjusted
(7)
Selected balance sheet and other information
ROE – adjusted
10.6%
15.8%
Pre-tax margin – adjusted
18.7%
25.8%
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items
(Millions of Canadian dollars, except percentage amounts)
2023 vs. 2022
Increase (decrease):
Total revenue
$
441
PCL
10
Non-interest expense
369
Net income
50
Percentage change in average U.S. dollar equivalent of C$1.00
(4)%
Percentage change in average British pound equivalent of C$1.00
(3)%
Percentage change in average Euro equivalent of C$1.00
(5)%
(1)
Amounts have been revised from those previously presented to conform to our new basis of segment presentation. For further details, refer to the About Royal Bank of
Canada section.
(2)
On July 3, 2023, we completed the partial sale of RBC Investor Services operations. The completion of the sale of the business of the U.K. branch of RBC Investor Services
Trust and the RBC Investor Services business in Jersey remains subject to customary closing conditions, including regulatory approvals. For further details, refer to
Note 6 of our 2023 Annual Consolidated Financial Statements.
(3)
Pre-tax margin is defined as Income before income taxes divided by Total revenue.
(4)
Represents year-end spot balances.
(5)
In addition to Canadian Wealth Management, U.S. Wealth Management (including City National), International Wealth Management and Investor Services AUA includes
$6,200 million (2022 – $6,400 million) related to GAM.
(6)
Represents client-facing advisors across all our Wealth Management businesses.
(7)
These are non-GAAP measures and non-GAAP ratios. During the year ended October 31, 2023, we recognized impairment losses of $177 million (before–tax $242 million) on
our interest in an associated company. For further details on this specified item, including a reconciliation, refer to the Key performance and non-GAAP measures section.
44
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Client assets – AUA
Table 23
(Millions of Canadian dollars)
2023
2022
AUA, beginning balance
(1)
$
1,387,900
$
1,322,300
Asset inflows
414,600
380,600
Asset outflows
(396,400)
(325,100)
Total net flows
(1)
18,200
55,500
Market impact
44,400
(153,000)
Acquisitions/dispositions
–
79,800
Foreign exchange/other
42,400
83,300
Total market, acquisition/dispositions and foreign exchange/other impact
(1)
86,800
10,100
AUA, balance at end of year
(1)
1,492,900
1,387,900
Investor Services, balance at end of year
(2)
2,488,600
3,906,900
Total AUA
$
3,981,500
$
5,294,800
(1)
Includes AUA from the following lines of business; Canadian Wealth Management, U.S. Wealth Management (including City National), Global Asset Management and
International Wealth Management.
(2)
Includes the impact from the partial sale of RBC Investor Services operations. For further details, refer to Note 6 of our 2023 Annual Consolidated Financial Statements.
AUA by geographic mix and asset class
Table 24
(Millions of Canadian dollars)
2023
2022
Canada
(1), (2)
Money market
$
21,600
$
26,200
Fixed income
46,100
30,500
Equity
86,700
81,800
Multi-asset and other
388,800
369,500
Total Canada
543,200
508,000
U.S.
(1), (2)
Money market
31,600
40,700
Fixed income
131,600
116,000
Equity
271,600
246,300
Multi-asset and other
318,000
297,100
Total U.S.
752,800
700,100
Other International
(1), (2)
Money market
18,800
16,600
Fixed income
11,300
8,900
Equity
49,300
47,000
Multi-asset and other
117,500
107,300
Total International
196,900
179,800
AUA, balance at end of year
(2)
1,492,900
1,387,900
Investor Services, balance at end of year
(3)
2,488,600
3,906,900
Total AUA
$
3,981,500
$
5,294,800
(1)
Geographic information is based on the location from where our clients are served.
(2)
Includes AUA from the following lines of business; Canadian Wealth Management, U.S. Wealth Management (including City National), Global Asset Management and
International Wealth Management.
(3)
Includes the impact from the partial sale of RBC Investor Services operations. For further details, refer to Note 6 of our 2023 Annual Consolidated Financial Statements.
Client assets – AUM
Table 25
2023
2022
(Millions of Canadian dollars)
Money
market
Fixed
income
Equity
Multi-asset
and other
Total
Total
AUM, beginning balance
$
37,800
$ 195,600
$ 129,400
$ 628,700
$
991,500
$ 1,000,600
Institutional inflows
160,200
52,500
7,000
19,500
239,200
175,600
Institutional outflows
(159,400)
(42,300)
(10,000)
(14,300)
(226,000)
(180,000)
Personal flows, net
800
2,600
(2,100)
9,000
10,300
21,000
Total net flows
1,600
12,800
(5,100)
14,200
23,500
16,600
Market impact
800
2,900
4,600
19,200
27,500
(116,700)
Acquisition/dispositions
–
–
–
–
–
58,500
Foreign exchange
400
3,500
800
11,700
16,400
32,500
Total market, acquisition/dispositions
and foreign exchange impact
1,200
6,400
5,400
30,900
43,900
(25,700)
AUM, balance at end of year
$
40,600
$ 214,800
$ 129,700
$ 673,800
$ 1,058,900
$
991,500
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
45
Financial performance
2023 vs. 2022
Net income decreased $783 million or 24% from last year, mainly attributable to higher staff costs and professional fees, largely
reflecting continued investments in the operational infrastructure of City National. Higher PCL and the impact of the specified item
relating to impairment losses on our interest in an associated company also contributed to the decrease. These factors were
partially offset by higher net interest income driven by higher interest rates. Adjusted net income decreased $606 million or 19%.
Total revenue increased $1,301 million or 8%, primarily due to the inclusion of RBC Brewin Dolphin, higher net interest income
driven by higher interest rates partially offset by lower deposits, as well as the impact of foreign exchange translation. These
factors were partially offset by the impact of the specified item relating to impairment losses on our interest in an associated
company. Adjusted total revenue increased $1,543 million or 9%.
PCL increased $295 million, primarily in U.S. Wealth Management (including City National), mainly reflecting higher
provisions on impaired loans largely in the real estate and related and telecom and media sectors resulting in a 14 bps increase
in the PCL on impaired loans ratio. Higher provisions on performing loans, primarily reflecting unfavourable changes to our
macroeconomic forecast and credit quality, also contributed to the increase.
Non-interest expense increased $2,113 million or 18%, mainly due to the inclusion of RBC Brewin Dolphin and related costs.
Higher staff costs and professional fees, largely reflecting continued investments in the operational infrastructure of City
National, as well as the impact of foreign exchange translation also contributed to the increase.
AUA decreased $1,313 billion or 25%, primarily in the Investor Services line of business reflecting the partial sale of RBC
Investor Services operations. This was partially offset by AUA growth in other Wealth Management lines of business, mainly due
to the impact of market appreciation and foreign exchange translation as well as net sales.
AUM increased $67 billion or 7%, primarily due to the impact of market appreciation. Net sales and the impact of foreign
exchange translation also contributed to the increase.
For further details on specified items, including a reconciliation, refer to the Key performance and non-GAAP measures section.
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 2,000 investment advisors providing comprehensive financial solutions with a focus on HNW and
UHNW clients. Additionally, we provide discretionary investment management and estate and trust services to our clients
through over 120 investment counsellors and over 115 trust professionals across Canada.
We compete with domestic banks and trust companies, investment counselling firms, bank-owned full-service brokerages
and boutique brokerages, mutual fund companies and global private banks. In Canada, bank-owned wealth managers continue to
be the major players.
Financial performance
Revenue increased $135 million or 3% from last year, primarily due to higher average fee-based client assets, largely driven by net
sales, as well as higher net interest income from higher interest rates partially offset by lower deposits.
Selected highlights
Table 26
(Millions of Canadian dollars)
2023
2022
Total revenue
$
4,443
$
4,308
Other information
Average loans and acceptances,
net
5,200
5,600
Average deposits
20,900
28,600
AUA
(1)
548,600
511,300
AUM
(1)
184,300
171,700
Average AUA
536,100
519,600
Average AUM
182,200
171,800
(1)
Represents year-end spot balances.
0
200,000
100,000
300,000
400,000
600,000
500,000
2023
2022
AUA
AUM
Average AUA and AUM
(Millions of Canadian dollars)
U.S. Wealth Management (including City National)
U.S. Wealth Management (including City National) encompasses PCG and our C&C businesses. PCG is the 6
th
largest full-service
wealth advisory firm in the U.S., as measured by number of advisors, with over 2,100 financial advisors. Our C&C business
delivers clearing and execution services for small to mid-sized independent broker-dealers and registered investment advisor
firms. City National provides comprehensive financial solutions to affluent individuals, entrepreneurs, professionals, their
businesses and their families, and other clients who value personalized banking relationships through a high-touch service
model, proactive advice and financial solutions. City National offers a broad range of lending, deposit, cash management,
equipment financing, wealth management and other products and services. In the U.S., we operate in a fragmented and highly
competitive industry. Our competitors include other broker-dealers, commercial banks and other financial institutions that
service HNW and UHNW individuals, entrepreneurs and their businesses.
46
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Financial performance
Revenue increased $521 million or 7% from last year. In U.S. dollars, revenue increased $151 million or 3%, mainly due to higher
net interest income driven by higher interest rates partially offset by lower deposits. Higher revenue from sweep deposits also
contributed to an increase in transactional revenue. These factors were partially offset by the impact of the specified item
relating to impairment losses on our interest in an associated company and gains on the sale of certain non-core affiliates in the
same period last year. Adjusted revenue in U.S. dollars increased $326 million or 6%.
NIM was up 15 bps, reflecting the impact of the higher interest rate environment.
For further details on specified items, including a reconciliation, refer to the Key performance and non-GAAP measures section.
Selected highlights
Table 27
(Millions of Canadian dollars,
except as otherwise noted)
2023
2022
Total revenue
$
7,969
$
7,448
Other information
(Millions of U.S. dollars)
Total revenue
5,908
5,757
NIM
2.53%
2.38%
Average earning assets, net
103,500
98,100
Average loans, guarantees and
letters of credit, net
75,900
68,800
Average deposits
83,200
90,600
AUA
(1)
542,800
513,700
AUM
(1)
176,900
159,200
Average AUA
544,000
538,100
Average AUM
174,500
168,100
(1)
Represents year-end spot balances.
0
200,000
100,000
300,000
400,000
600,000
500,000
2023
2022
AUA
AUM
Average AUA and AUM
(Millions of U.S. dollars)
Global Asset Management
GAM provides global investment management services and solutions for individual and institutional investors in Canada, the
U.K., the U.S., Europe and Asia. We provide a broad range of investment management services through mutual, pooled and
private funds, fee-based accounts and separately managed portfolios. We distribute our investment solutions through a broad
network of bank branches, our self-directed and full-service wealth advisory businesses, independent third-party advisors and
private banks, and directly to individual clients. We also provide investment solutions directly to institutional clients, including
pension plans, insurance companies, corporations, endowments and foundations.
We are the largest retail fund company in Canada measured by AUM, as well as a leading institutional asset manager. We
face competition in Canada from banks, insurance companies and asset management organizations. The Canadian fund
management industry is large and mature, but remains a relatively fragmented industry.
In the U.S., our asset management business offers investment management solutions and services, primarily to institutional
investors, and competes with independent asset management firms, as well as those that are part of national and international
banks and insurance companies.
Internationally, through our global capabilities distributed under the brand RBC BlueBay Asset Management, we offer
investment management solutions for institutions and, through private banks including RBC Wealth Management
®
, to HNW and
UHNW investors. We face competition from asset managers that are owned by international banks, as well as national and
regional asset managers in the geographies where we serve clients.
Financial performance
Revenue decreased $41 million or 2% from last year, mainly due to lower average fee-based client assets, largely driven by
unfavourable market conditions. This was partially offset by changes in the fair value of seed capital investments.
Selected highlights
Table 28
(Millions of Canadian dollars)
2023
2022
Total revenue
$
2,626
$
2,667
Other information
Canadian net long-term mutual
fund sales (redemptions)
(1)
(11,367)
(5,246)
Canadian net money market
mutual fund sales
(redemptions)
(1)
1,121
(127)
AUM
(2)
541,300
522,700
Average AUM
550,700
562,200
(1)
As reported to the Investment Funds Institute of Canada. Includes all
prospectus-based mutual funds across our Canadian GAM businesses.
(2)
Represents year-end spot balances.
0
600,000
2023
2022
Average AUM
(Millions of Canadian dollars)
100,000
200,000
300,000
500,000
400,000
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
47
International Wealth Management
International Wealth Management includes operations in the U.K., Ireland, the Channel Islands and Asia. We provide customized
and integrated wealth management solutions to HNW, UHNW and corporate clients in key financial centres. Competitors to our
International Wealth Management business include global wealth managers, traditional private banks and domestic wealth
managers.
Financial performance
Revenue increased $847 million from last year, primarily reflecting the inclusion of RBC Brewin Dolphin, as well as an increase in
net interest income driven by higher interest rates.
Selected highlights
Table 29
(Millions of Canadian dollars)
2023
2022
Total revenue
$
1,273
$
426
Other information
Average loans, guarantees
and letters of credit, net
4,800
5,000
Average deposits
11,800
12,300
AUA
(1), (2)
185,400
170,100
AUM
(1), (2)
87,900
80,100
Average AUA
185,200
97,200
Average AUM
89,600
15,400
(1)
Represents year-end spot balances.
(2)
AUA and AUM reflect the inclusion of $79,800 million and $72,400 million,
respectively, due to the acquisition of RBC Brewin Dolphin, which closed on
September 27, 2022.
0
50,000
100,000
200,000
150,000
2023
2022
AUA
AUM
Average AUA and AUM
(Millions of Canadian dollars)
Investor Services
Investor Services delivers asset servicing solutions to Canadian and U.K. asset managers and asset owners, investment
counsellors and other financial institutions. Our product and service offering includes custody, fund administration, shareholder
services, middle office and market services (including foreign exchange, securities finance and cash/liquidity management).
Competitors to our Investor Services business include domestic and international custodians with Canadian and U.K. operations.
Financial performance
Revenue decreased $161 million or 12% from last year, primarily due to reduced revenue following the partial sale of RBC Investor
Services operations, partially offset by the gain on the sale.
Selected highlights
Table 30
(Millions of Canadian dollars)
2023
2022
Total revenue
(1)
$
1,233
$
1,394
Other information
Average deposits
(1)
18,000
39,203
AUA
(1), (2)
2,488,600
3,906,900
Average AUA
(1)
3,525,500
4,392,600
(1)
Amounts reflect the impact of the partial sale of RBC Investor Services
operations, which was completed on July 3, 2023. For further details, refer to
Note 6 of our 2023 Annual Consolidated Financial Statements.
(2)
Represents year-end spot balances.
0
6,000,000
2023
2022
Average AUA
(Millions of Canadian dollars)
2,000,000
4,000,000
48
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Insurance
RBC Insurance
®
offers a comprehensive suite of advice and solutions for individual and business clients, including life, health,
wealth, property & casualty, travel, group benefits, annuities, and reinsurance.
$5.7 billion
> 4.8 million
2,781
Total revenue
Number of clients
Employees
Premiums and Deposits
Total premiums
and deposits
$5.9 billion
45% Life and Health
45% Annuity
8%
Segregated Fund Deposits
2%
Property and Casualty
RBC Insurance
®
is one of the largest Canadian bank-owned insurance
organizations on a total revenue basis and operates under two business lines:
Canadian Insurance and International Insurance.
In Canada, we offer life, health, travel, wealth accumulation solutions, and
annuities to individuals and businesses. We also offer property & casualty
insurance through a distribution agreement with Aviva Canada. Our products
and services are distributed through multiple channels, including proprietary
sales force, digital platforms, and a network of independent brokers and
partners.
Outside Canada, we operate globally in the reinsurance and retrocession
markets offering longevity reinsurance, life retrocession, and reinsurance for
creditor life, disability, and critical illness.
2023 Operating environment
›
In Canada, the industry continued to face challenges and opportunities, including a higher interest rate environment,
generational and demographic change, the growing importance of an omnichannel experience, and novel distribution
partnerships to reach new client segments. In response, we continued our journey towards becoming a client-led organization
underpinned by superior advice and solutions to provide clients with the coverage they need. We sustained a strong presence
across most insurance businesses serving retail and business clients and remain well-positioned to deliver innovative
products through our strong network of advisors and partners. Additionally, progress has been realized across our strategic
objectives to establish digital leadership and to develop and sustain excellence in distribution. Prioritizing investment in our
people and positioning ourselves as an employer of choice also remains a key area of focus. Our ambition is to be at the
forefront of tailored, client-led advice and solutions, leveraging technology and data.
›
In the U.K., the reinsurance market for longevity risk transfer remains competitive. Our business strategy continues to
selectively pursue niche opportunities in the longevity markets as potential clients actively manage longevity risk.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
49
Strategic priorities
OUR STRATEGY
PROGRESS IN 2023
PRIORITIES IN 2024
Grow our core insurance business
Generated over $1B in group annuity new business
sales representing ~20% growth, and providing
retirement income security to more Canadian
retirees
Maintained leadership in market share for
individual disability insurance
Enhanced our mental health offering in
partnership with Personalize Prescribing Inc.
(PPI), providing access to affordable drug
compatibility testing for all group plan members
and their eligible dependents before a mental
illness becomes debilitating
Drive profitable business growth by continuing the
journey to become a client-led organization
underpinned by superior advice and solutions
Grow our client base by leveraging proprietary
channels to deepen client relationships across
multiple products and solutions
Develop and sustain excellence in distribution
Ranked #1 for broker relationship management
capabilities
1
and #1 proprietary insurance
distribution network
2
Reduced end-to-end cycle time for life insurance
applications by 5 days through process re-design
Launched RBC YourTerm
®
on the eApplication
platform for our proprietary sales force, providing
digital signature capability, and eliminating the
need for signature booklets
Drive deep client relationships through
distribution excellence, including channel growth
and by supporting our agents and partners with
best-in-class tools, and unique value propositions
Accelerate investments in product innovation,
digitization, and data
Achieved a near 40% reduction in claim decision
time for individual disability claims through
end-to-end process review and optimization
Developed and implemented predictive analytics
data models to assist in claims processing, fraud
detection, and personalized product
recommendations for clients
Launched digital enrollment solutions for
Guarantee Standard Issue
®
(GSI
®
) clients,
automating the entire intake process including
application, underwriting, policy issue, settlement,
and online policy view
Partnered with Epilogue Wills, one of the leading
digital estate planning tools in the market,
launching a new digital capability to embed a fully
integrated and interactive quote for the RBC
Simplified
®
Term insurance product
Launched Wealth electronic forms for segregated
funds to simplify the way we do business by
reducing manual transaction costs while also
improving the advisor and client experience
Invest in technology, digital, and data capabilities
to drive market leading experience with
personalized, easy to navigate end-to-end
integrated consumer journeys
Evolve our risk culture
Published the inaugural market update on the
funds in participating life account. The funds
outperformed the overall market as well as
participating competitor funds in a turbulent year
In partnership with Medaca Health Group, we
enhanced our disability claims management
practices by providing individuals on disability
and struggling with mental health diagnosis, with
rapid access to workplace psychiatrists and
mental health professionals
Progressed final preparations for the
implementation of the new accounting standard
IFRS 17 effective for us on November 1, 2023
Evolve our robust risk frameworks, controls, and
risk culture to enable business growth in strategic
areas, protect clients, and meet the expectations
of both federal and provincial regulators
Attract, grow, and retain future-ready talent
Remained a highly engaged, diverse workforce
receptive to change and willing to go above and
beyond to serve our clients and deliver strong ROE
to RBC
Launched a Diversity Champion program to
promote awareness and discussion on
psychological safety and explore the individual
and collective meaning of diversity, inclusion,
equity and belonging
Elevate leadership capabilities to grow and
develop talent
Continue to strengthen our culture of inclusion
and belonging
Drive a high-performance culture that empowers
and enables people to deliver on our ambitious
goals
Outlook
The insurance industry is expected to continue experiencing change in fiscal 2024 driven by demographic change, the growing
importance of the omnichannel experience, clients’ need for holistic financial advice, and distribution innovation. As Canadians
focus more attention on having a seamless experience transitioning between a digital interface and advisors, we will remain
focused on further strengthening our client-led advice and solutions and leveraging technology and data to provide a seamless
client experience. We will seek to maintain our strength by investing in operational improvements, enhancing the omnichannel
client experience, and focusing on sustainable growth. This will enable achievement of our goal of being an innovative, client-
focused provider of a full suite of insurance solutions and should allow us to thrive in a rapidly changing environment.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook
section.
1
NMG Consulting Canadian Individual Life Insurance Study 2022
2
Investment Executive Insurance Advisors’ Report Card
50
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Insurance
Table 31
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
2023
2022
Non-interest income
Net earned premiums
$
5,131
$
4,653
Investment Income, gains/(losses) on assets supporting insurance policyholder liabilities
(1)
326
(1,363)
Fee income
218
220
Total revenue
5,675
3,510
PCL
–
–
Insurance policyholder benefits and claims
(1)
3,699
1,468
Insurance policyholder acquisition expense
323
315
Non-interest expense
653
588
Income before income taxes
1,000
1,139
Net income
$
803
$
857
Revenue by business
Canadian Insurance
$
3,087
$
653
International Insurance
2,588
2,857
Key ratios
ROE
37.3%
36.4%
Selected balance sheet information
Average total assets
$
23,500
$
22,500
Other information
Premiums and deposits
(2)
$
5,929
$
5,498
Canadian Insurance
3,385
2,999
International Insurance
2,544
2,499
Insurance claims and policy benefit liabilities
11,966
11,511
Fair value changes on investments backing policyholder liabilities
(1)
(91)
(1,888)
Number of employees (FTE)
2,781
2,731
(1)
Includes unrealized gains and losses on investments backing policyholder liabilities attributable to fluctuation of assets designated as FVTPL. The investments which
support actuarial liabilities are predominantly fixed income assets designated as FVTPL. Consequently, changes in the fair values of these assets are recorded in
Insurance premiums, investment and fee income in the Consolidated Statements of Income and are largely offset by changes in the fair value of the actuarial liabilities,
the impact of which is reflected in PBCAE.
(2)
Premiums and deposits include premiums on risk-based individual and group insurance and annuity products as well as segregated fund deposits, consistent with
insurance industry practices.
Financial performance
2023 vs. 2022
Net income decreased $54 million or 6% from last year, largely due to higher capital funding costs, partially offset by improved
claims experience.
Total revenue increased $2,165 million or 62%, primarily reflecting the change in fair value of investments backing
policyholder liabilities, higher group annuity sales, and business growth across most products, all of which are largely offset in
PBCAE as indicated below.
PBCAE increased $2,239 million, primarily reflecting the change in fair value of investments backing policyholder liabilities,
higher group annuity sales, and business growth across most products, all of which are largely offset in revenue. These factors
were partially offset by improved claims experience.
Non-interest expense increased $65 million or 11%, largely due to higher staff-related costs and ongoing technology
investments.
Business line review
Canadian Insurance
We offer life, health, travel, wealth accumulation solutions, and annuities to individuals and businesses across Canada. We also
offer property & casualty insurance through a distribution agreement with Aviva Canada. Our life and health portfolio includes
participating whole life, term life, critical illness, disability, and group benefits, including long-term disability, and health and
dental insurance. Wealth solutions include a family of segregated funds as well as individual annuities. Our travel products
include out-of-province/country medical coverage, and trip cancellation and interruption insurance.
Our group annuities business helps defined benefit pension plan sponsors better manage and control risk. RBC Insurance
®
has a set of strategies and initiatives aimed at building our momentum and positioning us for growth in this product line, where
companies are increasingly looking to transfer the risks associated with their pension obligations to insurance companies –
either through group annuity contracts or longevity swap products.
In Canada, many of our competitors specialize in either life and health, wealth, or in property and casualty products. As a
multi-line carrier, we offer a broad suite of solutions, increasing convenience for our clients. Many of our solutions hold market
leadership positions, including our disability insurance, term life, and group annuity products.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
51
Financial performance
Total revenue increased $2,434 million from last year, primarily reflecting the change in fair value of investments backing
policyholder liabilities, higher group annuity sales, and business growth across most products, all of which are largely offset in
PBCAE.
Premiums and deposits increased $386 million or 13%, mainly driven by group annuity and individual and group life and
health sales, partially offset by segregated fund products.
Selected highlights
Table 32
(Millions of Canadian dollars)
2023
2022
Total revenue
$ 3,087
$
653
Other information
Premiums and deposits
Life and health
1,614
1,416
Property and casualty
108
81
Annuity
1,067
834
Segregated fund deposits
596
668
Fair value changes on investments
backing policyholder liabilities
(224)
(2,259)
0
1,000
4,000
3,000
2,000
Property and casualty
Segregated fund
Annuity
Life and health
2023
Premiums and deposits
(Millions of Canadian dollars)
2022
International Insurance
International Insurance is comprised of our reinsurance product lines which reinsure risks of other insurance and reinsurance
companies. We offer life, health, and longevity reinsurance solutions.
The global reinsurance market is competitive as there are many participants. Market share is largely held by a small number
of reinsurers, with RBC Insurance
®
continuing to selectively pursue niche opportunities.
Financial performance
Total revenue decreased $269 million or 9% from last year, primarily reflecting the change in fair value of investments backing
policyholder liabilities, which is largely offset in PBCAE.
Premiums and deposits increased $45 million or 2%.
Selected highlights
Table 33
(Millions of Canadian dollars)
2023
2022
Total revenue
$ 2,588
$ 2,857
Other information
Premiums and deposits
Life and health
1,040
1,044
Annuity
1,504
1,455
Fair value changes on investments
backing policyholder liabilities
133
371
0
1,000
4,000
3,000
2,000
2023
Premiums and deposits
(Millions of Canadian dollars)
2022
Life and health
Annuity
52
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Capital Markets
RBC Capital Markets
®
is a premier global investment bank providing expertise in advisory & origination, sales & trading,
lending & financing and transaction banking to corporations, institutional clients, asset managers, private equity firms and
governments globally. Our professionals provide clients with the advice, products, and services their businesses need from 60
offices in 16 countries. Our presence extends across North America, the U.K. & Europe, Australia, Asia and other regions.
> 21,500
#9
7,253
Number of clients
Global league table rankings
1
Employees
Revenue by Geography
Total revenue
$11.1 billion
49%
U.S.
29%
Canada
17%
U.K. & Europe
5%
Australia, Asia &
other re
g
ions
We operate two main business lines, Corporate & Investment Banking and
Global Markets.
In North America, we offer a full suite of products and services which include
equity and debt origination and distribution, advisory services, sales & trading,
and transaction banking. In Canada, we are a market leader with a strategic
presence in all lines of capital markets businesses. In the U.S., where our
competitors include large global investment banks, we have a full industry
sector coverage and investment banking product range, as well as capabilities
in credit, secured lending, municipal finance, fixed income, currencies &
commodities, and equities.
Outside North America, we have a targeted strategic presence in the U.K. &
Europe, Australia, Asia & other markets aligned to our global expertise. In the
U.K. & Europe, we offer a diversified set of capabilities in key industry sectors of
focus. In Australia and Asia, we compete with global and regional investment
banks in targeted areas aligned to our global expertise, including fixed income
distribution and currencies trading, secured financing, as well as corporate &
investment banking.
2023 Operating environment
›
The fiscal 2023 operating environment was characterized by an uncertain outlook amidst financial sector turmoil, slower
economic growth, persistent inflation and ongoing geopolitical risks. While industry-wide fee pools continue to remain muted
as clients largely maintain a risk-off position, our market share gains helped deliver strong results.
›
Trading activity remained elevated as we saw improvement in the credit trading environment as well as robust results in
macro-focused businesses, such as rates and foreign exchange, underpinned by strong client flows. We continued to be
disciplined with our moderate growth strategy in our lending business. Despite elevated funding costs putting pressure on net
interest margins, we delivered strong results and our balance sheet strength enabled us to continue to support our clients
during the 2023 fiscal year.
›
The credit environment was impacted by slowing economic growth and rising interest rates, resulting in higher provisions on
impaired and performing loans.
1
Source: Dealogic, based on global investment bank fees, Fiscal 2023
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
53
Strategic priorities
OUR STRATEGY
PROGRESS IN 2023
PRIORITIES IN 2024
Grow and deepen client relationships
Delivered holistic coverage to clients and
deepened key relationships, resulting in high
quality mandates and notable wins in Corporate &
Investment Banking and Global Markets
Awarded Best Investment Bank in Canada as part
of Euromoney’s Awards of Excellence in 2023
Notable client examples include:
•
Exclusive Buyside Advisor to Saint-Gobain on
its C$1.3 billion acquisition of Building
Products of Canada
•
Joint Active Bookrunner on American Water
Works Company’s US$1.7 billion follow-on
equity offering
Extend our client centric approach and drive
multi-product global client relationships to gain
market share
Strengthen client coverage in underpenetrated
sectors and products
Drive greater collaboration and connectivity
across RBC to better support clients
Lead with advice and extend capabilities
Built new product capabilities, including in U.S.
Cash Management, and expanded in advisory
areas including in risk solutions to lead with ideas
and insights
Notable client examples include:
•
Exclusive Financial Advisor to TransAlta
Corporation and provided fairness opinion to
the Board of Directors on the acquisition of
the outstanding common shares of TransAlta
Renewables for consideration of C$1.4 billion
•
Exclusive Financial Advisor on the sale of 20%
of Corient (CI Financial’s U.S. Wealth
Management business) for US$1.0 billion
(implying US$5 billion Enterprise Value), the
largest private transaction in the wealth
management sector in 2023
Further grow in areas of advisory and origination,
through additional investments and partnerships
across Corporate & Investment Banking and
Global Markets
Continue to advance ESG initiatives, including
supporting clients in achieving their energy
transition goals
Leverage digital and data to deliver
innovative solutions
Expanded our digital research platform into next
generation applications, utilizing alternative data
Launched Aiden
®
Arrival, the second algorithm on
RBC’s AI-based electronic trading platform, in
Europe. RBC Capital Markets was ranked 2nd
overall among North American and European
banks at incorporating and advancing AI
technology by Evident AI Index in February 2023
Generate differentiated insights and thought
leadership leveraging Elements, RBC’s alternative
data and analytics platform
Advance the client digital experience and broaden
electronic execution capabilities
Prioritize and align for impact
Integrated Treasury Services and Transaction
Banking into Capital Markets, driving stronger
strategic alignment across the business
Further embedded a culture of productivity and
efficiency to enable accelerated investments
Strategically invest across talent, technology and
capital, prioritizing areas of greatest impact
Align business and functional strategies to
improve execution on an end-to-end basis to build
scale and maximize return on investment
Drive agility and ease of doing business
Prioritized investments in technology and
functional infrastructure in alignment with
business strategy
Shifted investment mix more towards client
digitization and new product capabilities
Simplify functional processes to improve client
and employee experience
Continue to drive cross-platform and geographic
collaboration across businesses and asset classes
Engage, enable and empower our talent
Invested in talent across internal promotions and
external senior hires, and increased internal
mobility
Progressed diverse representation by embedding
our Diversity & Inclusion (D&I) strategy more
deeply into the business
Recognized as the Best FX Bank for Diversity as
part of the Euromoney’s 2023 FX Awards
Elevate leadership capabilities to grow and
develop talent
Advance diverse representation and continue to
strengthen our culture of inclusion and belonging
Drive a high-performance culture that empowers
and enables people to deliver on our ambitious
goals
Outlook
In fiscal 2024, the outlook remains uncertain and financial market volatility is expected to persist. Amidst these market dynamics,
we expect Global Investment Banking fee pools to return to historical levels with some moderation in Global Markets industry
revenue pools. We will continue to pursue market share growth in both our Corporate & Investment Banking and Global Markets
businesses. In Investment Banking, we will continue to focus on targeted sectors and investment in talent, with an emphasis on
advisory products. In Global Markets, our focus remains on delivering robust results through continued resource optimization,
acceleration of cross-selling activities, further deployment of electronic and digital capabilities, and building on our strong risk
management practices. In Corporate Banking, following higher levels of balance sheet deployment in support of client financing
demands in fiscal 2023, we will continue to pursue a disciplined growth approach to deepen relationships with lending clients to
drive growth in our non-lending businesses. This strategy will continue to be underpinned by strong credit risk management
practices, optimization of our financial resources and supporting our clients in the execution of their strategies.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook
section.
54
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Capital Markets
Table 34
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
2023
2022
(1)
Net interest income
(2)
$
3,379
$
4,944
Non-interest income
(2)
7,672
5,005
Total revenue
(2)
11,051
9,949
PCL on performing assets
125
(32)
PCL on impaired assets
436
19
PCL
561
(13)
Non-interest expense
6,509
5,816
Income before income taxes
3,981
4,146
Net income
$
4,139
$
3,368
Revenue by business
Corporate & Investment Banking
$
5,375
$
4,765
Global Markets
6,013
5,619
Other
(337)
(435)
Key ratios
ROE
14.6%
12.1%
Selected balance sheet information
Average total assets
$
1,107,100
$
1,056,100
Average trading securities
160,900
139,400
Average loans and acceptances, net
144,900
131,400
Average deposits
291,700
284,800
Other information
Number of employees (FTE)
7,253
7,017
Credit information
PCL on impaired loans as a % of average net loans and acceptances
0.30%
0.01%
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items
(Millions of Canadian dollars, except percentage amounts)
2023 vs. 2022
Increase (decrease):
Total revenue
$
374
PCL
19
Non-interest expense
186
Net income
165
Percentage change in average U.S. dollar equivalent of C$1.00
(4)%
Percentage change in average British pound equivalent of C$1.00
(3)%
Percentage change in average Euro equivalent of C$1.00
(5)%
(1)
Amounts have been revised from those previously presented to conform to our new basis of segment presentation. For further details, refer to the About Royal Bank of
Canada section.
(2)
The teb adjustment for 2023 was $559 million (2022 – $572 million). For further discussion, refer to the How we measure and report our business segments section.
2023
2022
Revenue by region
(Millions of Canadian dollars)
Australia, Asia & other regions
U.K. & Europe
U.S.
Canada
0
1,500
3,000
4,500
6,000
7,500
9,000
10,500
12,000
Financial performance
2023 vs. 2022
Net income increased $771 million or 23% from last year, mainly due to lower taxes reflecting changes in earnings mix, higher
revenue in Corporate & Investment Banking and Global Markets and the impact of foreign exchange translation. These factors
were partially offset by higher PCL, higher compensation and ongoing technology investments.
Total revenue increased $1,102 million or 11%, mainly due to higher fixed income trading across all regions. The prior year
also included the impact of loan underwriting markdowns. The impact of foreign exchange translation also contributed to the
increase. These factors were partially offset by lower equity trading revenue across all regions.
PCL was $561 million compared to $(13) million last year, mainly reflecting higher provisions on impaired loans across most
sectors, resulting in a 29 bps increase in the PCL on impaired loans ratio. Provisions taken on performing loans in the current
year driven by unfavourable changes to our macroeconomic forecast and credit quality outlook also contributed to the increase.
Non-interest expense increased $693 million or 12%, mainly due to higher compensation on increased results, the impact of
foreign exchange translation and ongoing technology investments.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
55
Business line review
Corporate & Investment Banking
Corporate & Investment Banking comprises our corporate lending, municipal finance, loan syndication, debt and equity
origination, M&A advisory services and transaction banking services. For debt and equity origination, revenue is allocated
between Corporate & Investment Banking and Global Markets based on the contribution of each group in accordance with an
established agreement.
Financial performance
Corporate & Investment Banking revenue of $5,375 million increased $610 million or 13% from last year.
Investment Banking revenue increased $279 million or 16%, as the prior year included the impact of loan underwriting
markdowns, partially offset by lower loan syndication activity across most regions this year.
Lending and other revenue increased $331 million or 11%, primarily due to improved margins in transaction banking and
higher securitization financing revenue.
Selected highlights
Table 35
(Millions of Canadian dollars)
2023
2022
(1)
Total revenue
(2)
$
5,375
$
4,765
Breakdown of revenue
(2)
Investment banking
2,065
1,786
Lending and other
(3)
3,310
2,979
Other information
Average assets
125,000
109,000
Average loans and acceptances, net
117,000
101,500
(1)
Amounts have been revised from those previously presented to conform to
our new basis of segment presentation. For further details, refer to the About
Royal Bank of Canada section.
(2)
The teb adjustment for the year ended October 31, 2023 was $135 million
(October 31, 2022 – $39 million). For further discussion, refer to the How we
measure and report our business segments section.
(3)
Comprises our corporate lending, client securitization, and global credit
businesses.
0
1,000
6,000
5,000
2,000
3,000
4,000
2023
2022
Investment banking
Lending and other
Breakdown of total revenue
(Millions of Canadian dollars)
Global Markets
Global Markets comprises our sales and trading businesses including fixed income, foreign exchange, commodities, and equities,
as well as our repo and secured financing products.
Financial performance
Global Markets revenue of $6,013 million increased $394 million or 7% from last year.
Revenue in our Fixed income, currencies and commodities business increased $654 million or 24%, largely driven by higher
fixed income trading in the U.S. and Europe.
Revenue in our Equities business decreased $149 million or 10%, primarily due to lower equity trading revenue primarily in
the U.S., partially offset by the impact of foreign exchange translation.
Revenue in our Treasury services & funding business decreased $111 million or 8%, mainly due to lower securities lending
revenue.
Selected highlights
Table 36
(Millions of Canadian dollars)
2023
2022
(1)
Total revenue
(2)
$
6,013
$
5,619
Breakdown of revenue
(2)
Fixed income, currencies
and commodities
3,335
2,681
Equities
1,309
1,458
Treasury services and funding
(3), (4)
1,369
1,480
Other information
Average assets
968,000
930,000
(1)
Amounts have been revised from those previously presented to conform to
our new basis of segment presentation. For further details, refer to the About
Royal Bank of Canada section.
(2)
The teb adjustment for the year ended October 31, 2023 was $424 million
(October 31, 2022 – $533 million). For further discussion, refer to the How we
measure and report our business segments section.
(3)
Effective the first quarter of 2023, the Treasury Services business moved to the
Capital Markets segment, combining with our Repo and secured financing
business. For further details, refer to the About Royal Bank of Canada section.
(4)
Comprises our secured funding businesses for internal businesses and
external clients.
0
1,000
2,000
7,000
6,000
3,000
4,000
5,000
2023
2022
Treasury services
and funding
Global equities
Fixed income, currencies
and commodities
Breakdown of total revenue
(Millions of Canadian dollars)
56
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Other
Other includes our legacy portfolio, which mainly consists of our U.S. commercial mortgage-backed securities (MBS), bank-
owned life insurance (BOLI) derivative contracts and structured rates in Asia.
Financial performance
Other revenue increased $98 million or 22% from last year, mainly reflecting changes in the fair value of hedges related to our
share-based compensation plans, which was largely offset in non-interest expense, as well as the impact of fair value changes in
our legacy U.S. portfolios.
Corporate Support
Corporate Support consists of Technology & Operations, which provides the technological and operational foundation required
to effectively deliver products and services to our clients, Functions, which includes our finance, human resources, risk
management, internal audit and other functional groups, as well as our Corporate Treasury function. Reported results for
Corporate Support mainly reflect enterprise level activities which are not allocated to business segments. For further details,
refer to the How we measure and report our business segments section.
Corporate Support
Table 37
(Millions of Canadian dollars)
2023
2022
Net interest income (loss)
(1)
$
1,181
$
(132)
Non-interest income (loss)
(1), (2)
(1,442)
(728)
Total revenue
(1), (2)
(261)
(860)
PCL
–
1
Non-interest expense
(2)
668
(247)
Income (loss) before income taxes
(1)
(929)
(614)
Income taxes (recoveries)
(1)
(160)
(616)
Net income (loss)
$
(769)
$
2
(1)
Teb adjusted.
(2)
Revenue for the year ended October 31, 2023, included gains of $111 million (October 31, 2022 – losses of $363 million) on economic hedges of our U.S. Wealth Management
(including City National) share-based compensation plans, and non-interest expense included $109 million (October 31, 2022 – $(289) million) of share-based
compensation expense driven by changes in the fair value of liabilities relating to our U.S. Wealth Management (including City National) share-based compensation
plans.
Due to the nature of activities and consolidation adjustments reported in this segment, we believe that a comparative period
analysis is not relevant.
Total revenue and Income taxes (recoveries) in each period in Corporate Support include the deduction of the teb adjustments
related to the gross-up of income from Canadian taxable corporate dividends and the U.S. tax credit investment business
recorded in Capital Markets. The amount deducted from revenue was offset by an equivalent increase in Income taxes
(recoveries).
The teb amount for the year ended October 31, 2023 was $559 million and was $572 million last year.
The following identifies the material items, other than the teb impacts noted previously, affecting the reported results in each
year.
2023
Net loss was $769 million, primarily due to the impact of the CRD and other tax related adjustments of $1,050 million, as well as
the after-tax impact of transaction and integration costs of $302 million relating to the planned acquisition of HSBC Canada, both
of which are specified items. These factors were partially offset by a specified item relating to certain deferred tax adjustments of
$578 million. In addition, the net loss includes an unfavourable impact from residual unallocated items offset by a favourable
impact from tax-related items.
For further details on specified items, refer to the Key performance and non-GAAP measures section.
2022
Net income was $2 million. Net favourable tax adjustments and asset/liability management activities were offset by residual
unallocated items.
Quarterly financial information
Fourth quarter performance
Q4 2023 vs. Q4 2022
Fourth quarter net income of $4,131 million was up $249 million or 6%. Diluted EPS of $2.90 was up $0.16 and ROE of 15.2% was
down 40 bps. Our CET1 ratio of 14.5% was up 190 bps from a year ago. Our earnings were up primarily due to a specified item
relating to certain deferred tax adjustments, as well as a favourable impact from tax-related items, which are both reported in
Corporate Support. Higher earnings in Capital Markets and Insurance also contributed to the increased results, which were
partially offset by lower earnings in Wealth Management and Personal & Commercial Banking.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
57
Total revenue increased $459 million or 4%, largely due to higher average fee-based client assets reflecting net sales and the
inclusion of RBC Brewin Dolphin and higher spreads and average volume growth in Canadian Banking. A favourable impact from
tax-related items also contributed to the increase. These factors were partially offset by the impact of economic hedges,
impairment losses on our interest in an associated company in Wealth Management, and lower equity trading revenue in Capital
Markets.
Total PCL of $720 million increased $339 million or 89%, primarily reflecting higher provisions in Personal & Commercial
Banking and Capital Markets. The PCL on loans ratio of 34 bps increased 16 bps.
PBCAE decreased $24 million or 21%, primarily reflecting the change in fair value of investments backing policyholder
liabilities, improved claims experience and benefits from favourable reinsurance contract renegotiations. These factors were
partially offset by lower favourable investment-related experience, business growth including group annuity sales and lower
favourable annual actuarial assumption updates.
Non-interest expense increased $934 million or 13%, mainly attributable to higher staff costs, including severance,
transaction and integration costs relating to the planned acquisition of HSBC Canada and the impact of legal provisions in our
Wealth Management segment. The inclusion of RBC Brewin Dolphin and related costs and higher professional fees, largely
reflecting continued investments in the operational infrastructure of City National, also contributed to the increase. These
factors were partially offset by reduced expenses following the partial sale of RBC Investor Services operations.
Income tax expense decreased $1,039 million, primarily due to the impact of a specified item relating to certain deferred tax
adjustments, changes in earnings mix and lower income before income taxes. The effective income tax rate of (1.5)% decreased
21.6% from last year, primarily due to the impact of certain deferred tax adjustments as noted above and changes in earnings
mix.
Q4 2023 vs. Q3 2023
Net income of $4,131 million was up $259 million or 7% compared to last quarter, primarily due to a specified item relating to
certain deferred tax adjustments, as well as a favourable impact from tax-related items, both in Corporate Support. These factors
were partially offset by a specified item relating to impairment losses on our interest in an associated company, as well as the
impact of legal provisions, both in Wealth Management.
Quarterly results and trend analysis
Our quarterly results are impacted by a number of trends and recurring factors, which include seasonality of certain businesses,
general economic and market conditions, and fluctuations in the Canadian dollar relative to other currencies. The following table
summarizes our results for the last eight quarters (the period):
Quarterly results
(1)
Table 38
2023
2022
(Millions of Canadian dollars,
except per share and percentage amounts)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Personal & Commercial Banking
$
5,718
$
5,563
$
5,298
$
5,541
$
5,419
$
5,182
$
4,739
$
4,803
Wealth Management
(2)
4,188
4,402
4,394
4,560
4,287
3,997
3,973
3,986
Insurance
589
1,848
1,347
1,891
644
1,233
234
1,399
Capital Markets
(2), (3)
2,564
2,679
2,662
3,146
2,505
1,889
2,531
3,024
Corporate Support
(3)
(33)
(3)
(181)
(44)
(288)
(169)
(257)
(146)
Total revenue
13,026
14,489
13,520
15,094
12,567
12,132
11,220
13,066
PCL
720
616
600
532
381
340
(342)
105
PBCAE
92
1,379
1,006
1,545
116
850
(180)
997
Non-interest expense
8,143
7,861
7,494
7,675
7,209
6,386
6,434
6,580
Income before income taxes
4,071
4,633
4,420
5,342
4,861
4,556
5,308
5,384
Income taxes
(60)
761
771
2,128
979
979
1,055
1,289
Net income
$ 4,131
$
3,872
$
3,649
$
3,214
$
3,882
$
3,577
$
4,253
$
4,095
EPS – basic
$
2.90
$
2.74
$
2.58
$
2.29
$
2.75
$
2.52
$
2.97
$
2.84
– diluted
2.90
2.73
2.58
2.29
2.74
2.51
2.96
2.84
Effective income tax rate
(1.5)%
16.4%
17.4%
39.8%
20.1%
21.5%
19.9%
23.9%
Period average US$ equivalent
of C$1.00
$
0.732
$
0.750
$
0.737
$
0.745
$
0.739
$
0.783
$
0.789
$
0.787
(1)
Fluctuations in the Canadian dollar relative to other foreign currencies have affected our consolidated results over the period.
(2)
Amounts have been revised from those previously presented to conform to our new basis of segment presentation. For further details, refer to the About Royal Bank of
Canada section.
(3)
Teb adjusted. For further discussion, refer to the How we measure and report our business segments section.
58
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Seasonality
Seasonal factors may impact our results in certain quarters. The first quarter has historically been stronger for our Capital
Markets businesses. The second quarter has fewer days than the other quarters, which generally results in a decrease in net
interest income and certain expense items. The third and fourth quarters include the summer months which generally results in
lower client activity and may negatively impact the results of our Capital Markets trading business.
Trend analysis
Earnings over the period have been impacted by the factors noted below.
Personal & Commercial Banking revenue has benefitted from solid volume growth in loans and deposits over the period. NIM
has been favourably impacted over the majority of the period by the higher interest rate environment. NIM has been adversely
impacted by a shift in deposit mix in fiscal 2023.
Wealth Management revenue has generally benefitted from growth in average fee-based client assets, which was impacted
by market conditions, and volume growth in loans over the period. The higher interest rate environment also favourably
impacted revenue over the majority of the period. The revenue of RBC Brewin Dolphin has been included since the acquisition
closed on September 27, 2022. On July 3, 2023, we completed the sale of the European asset servicing activities of RBC Investor
Services and its associated Malaysian centre of excellence. The fourth quarter of 2023 reflected impairment losses on our
interest in an associated company.
Insurance revenue has fluctuated over the period, primarily due to the impact of changes in the fair value of investments
backing policyholder liabilities as well as the timing of group annuity sales, both of which are largely offset in PBCAE. Group
annuity sales can vary significantly by quarter and are generally higher in the first half of the fiscal year.
Capital Markets revenue is influenced, to a large extent, by market conditions that impact client activity. In the second half
of fiscal 2022, there was a decline in global investment banking fee pools amidst challenging market conditions, including the
impact of loan underwriting markdowns in the third quarter. In 2023, we saw strong client activity, driving higher sales & trading
revenues particularly in the first quarter.
PCL is comprised of provisions taken on performing assets and provisions taken on impaired assets. PCL on performing
assets fluctuated over the period as it is impacted by changes in credit quality, macroeconomic conditions, and exposures.
Throughout the first half of 2022, we saw improvements in our macroeconomic forecast and credit quality outlook, as the
economic impact from the COVID-19 pandemic eased in most regions, resulting in releases of provisions on performing assets.
We have seen provisions on performing assets over the remainder of the period generally reflecting unfavourable changes in
credit quality and our macroeconomic forecast. PCL on impaired assets was low during the early part of the period, but has
trended upwards over the remainder of the period.
PBCAE has fluctuated over the period reflecting changes in the fair value of investments backing policyholder liabilities,
which is impacted by changes in market conditions, as well as group annuity sales, both of which are largely offset in revenue.
PBCAE has also fluctuated due to the impact of investment-related experience and claims costs over the period. Actuarial
adjustments, which generally occur in the fourth quarter of each year, also impact PBCAE.
Non-interest expense has been impacted by fluctuations in variable compensation over the period, commensurate with
fluctuations in revenue and earnings. Changes in the fair value of our U.S. share-based compensation plans, which are largely
offset in revenue, have also contributed to fluctuations over the period and are impacted by market conditions. While we
continue to focus on efficiency management activities, expenses over the period also reflect investments in staff and technology.
Non-interest expenses of RBC Brewin Dolphin have been included since the acquisition closed on September 27, 2022. Beginning
in fiscal 2023, expenses have also included transaction and integration costs relating to the planned acquisition of HSBC Canada.
Our effective income tax rate has fluctuated over the period, mostly due to varying levels of tax adjustments and changes in
earnings mix. The second and fourth quarters of 2022 reflected the impact of net favourable tax adjustments and an increase in
income from lower tax rate jurisdictions, respectively. The first quarter of 2023 reflects the impact of the CRD and other tax
related adjustments. The fourth quarter of 2023 reflects the recognition of deferred tax assets relating to realized losses in City
National associated with the intercompany sale of certain debt securities.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
59
Financial condition
Condensed balance sheets
Table 39
As at October 31 (Millions of Canadian dollars)
2023
2022
Assets
Cash and due from banks
$
61,989
$
72,397
Interest-bearing deposits with banks
71,086
108,011
Securities, net of applicable allowance
(1)
409,730
318,223
Assets purchased under reverse repurchase agreements and securities borrowed
340,191
317,845
Loans
Retail
569,951
549,751
Wholesale
287,826
273,967
Allowance for loan losses
(5,004)
(3,753)
Other – Derivatives
142,450
154,439
– Other
(2)
126,773
126,339
Total assets
$
2,004,992
$ 1,917,219
Liabilities
Deposits
$
1,231,687
$ 1,208,814
Other – Derivatives
142,629
153,491
– Other
(2)
501,530
436,714
Subordinated debentures
11,386
10,025
Total liabilities
1,887,232
1,809,044
Equity attributable to shareholders
117,661
108,064
Non-controlling interests
99
111
Total equity
117,760
108,175
Total liabilities and equity
$
2,004,992
$ 1,917,219
(1)
Securities are comprised of trading and investment securities.
(2)
Other – Other assets and liabilities include Segregated fund net assets and liabilities, respectively.
2023 vs. 2022
Total assets increased $88 billion or 5% from last year. Foreign exchange translation increased total assets by $14 billion.
Cash and due from banks was down $10 billion or 14%, mainly due to lower deposits with central banks, reflecting our short-
term cash management activities.
Interest-bearing deposits with banks decreased $37 billion or 34%, largely due to the impact of the partial sale of RBC
Investor Services operations. For further details, refer to Note 6 of our 2023 Annual Consolidated Financial Statements. Lower
deposits with central banks also contributed to the decrease, reflecting our cash and liquidity management activities.
Securities, net of applicable allowance, were up $92 billion or 29%, largely due to higher government debt securities mainly
reflecting cash management activities and business activities. Higher equity trading and corporate debt securities also
contributed to the increase.
Assets purchased under reverse repurchase agreements (reverse repos) and securities borrowed increased $22 billion or
7%, largely due to increased client demand. The impact of foreign exchange translation also contributed to the increase.
Loans (net of Allowance for loan losses) were up $33 billion or 4%, largely due to volume growth in residential mortgages
and wholesale loans. The impact of foreign exchange translation also contributed to the increase.
Derivative assets were down $12 billion or 8%, primarily attributable to the impact of foreign exchange translation.
Total liabilities increased $78 billion or 4% from last year. Foreign exchange translation increased total liabilities by $14 billion.
Deposits increased $23 billion or 2% due to an increase in term deposits attributable to higher interest rates and the impact
of foreign exchange translation. These factors were partially offset by a decrease in demand and notice deposits and the impact
of the partial sale of RBC Investor Services operations.
Derivative liabilities were down $11 billion or 7%, primarily attributable to the impact of foreign exchange translation.
Other liabilities increased $65 billion or 15%, primarily due to higher obligations related to repurchase agreements (repos)
reflecting increased client demand.
Total equity increased $10 billion or 9%, primarily reflecting earnings, net of dividends, and the issuance of common shares.
Off-balance sheet arrangements
In the normal course of business, we engage in a variety of financial transactions that, for accounting purposes, are not recorded
on our Consolidated Balance Sheets. Off-balance sheet transactions are generally undertaken for risk, capital and funding
management purposes which benefit us and our clients. These include transactions with structured entities and may also include
the issuance of guarantees. These transactions give rise to, among other risks, varying degrees of market, credit, liquidity and
funding risk, which are discussed in the Risk management section.
We use structured entities to securitize our financial assets as well as assist our clients in securitizing their financial assets.
These entities are not operating entities, typically have no employees, and may or may not be recorded on our Consolidated
Balance Sheets.
60
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
In the normal course of business, we engage in a variety of financial transactions that may qualify for derecognition. We
apply the derecognition rules to determine whether we have transferred substantially all the risks and rewards or control
associated with the financial assets to a third party. If the transaction meets specific criteria, it may qualify for full or partial
derecognition from our Consolidated Balance Sheets.
Securitizations of our financial assets
We periodically securitize our credit card receivables and residential and commercial mortgage loans primarily to diversify our
funding sources, enhance our liquidity position and for capital purposes. We also securitize residential and commercial
mortgage loans as part of our sales and trading activities.
We securitize our credit card receivables, on a revolving basis, through a consolidated structured entity. We securitize single
and multiple-family residential mortgages through the National Housing Act Mortgage-Backed Securities (NHA MBS) program.
The majority of our securitization activities are recorded on our Consolidated Balance Sheets as we do not meet the
derecognition criteria. During 2023 and 2022, we did not derecognize any mortgages securitized through the NHA MBS program.
For further details, refer to Note 7 and Note 8 of our 2023 Annual Consolidated Financial Statements.
We also periodically securitize commercial mortgage loans by selling them in collateral pools, which meet certain
diversification, leverage and debt coverage criteria, to structured entities, one of which is sponsored by us. Securitized
commercial mortgage loans are derecognized from our Consolidated Balance Sheets as we have transferred substantially all of
the risks and rewards of ownership of the securitized assets. During the year ended October 31, 2023, we did not securitize any
commercial mortgages (October 31, 2022 – $450 million). Our continuing involvement with the transferred assets is limited to
servicing certain of the underlying commercial mortgages sold. As at October 31, 2023, there was $2 billion of commercial
mortgages outstanding that we continue to service related to these securitization activities (October 31, 2022 – $2 billion).
Involvement with unconsolidated structured entities
In the normal course of business, we engage in a variety of financial transactions with structured entities to support our
customers’ financing and investing needs, including securitization of our clients’ financial assets, creation of investment
products, and other types of structured financing.
We have the ability to use credit mitigation tools such as third-party guarantees, credit default swaps, and collateral to
mitigate risks assumed through securitization and re-securitization exposures. The process in place to monitor the credit quality
of our securitization and re-securitization exposures involves, among other things, reviewing the performance data of the
underlying assets. We affirm our ratings each quarter and formally confirm or assign a new rating at least annually. For further
details on our activities to manage risks, refer to the Risk management section.
Below is a description of our activities with respect to certain significant unconsolidated structured entities. For a complete
discussion of our interests in consolidated and unconsolidated structured entities, refer to Note 8 of our 2023 Annual
Consolidated Financial Statements.
Multi-seller conduits
We administer multi-seller conduits which are used primarily for the securitization of our clients’ financial assets. Our clients
primarily use our multi-seller conduits to diversify their financing sources and to reduce funding costs by leveraging the value of
high-quality collateral. The conduits offer us a favourable revenue stream and risk-adjusted return.
We provide services such as transaction structuring, administration, backstop liquidity facilities and partial credit
enhancements to the multi-seller conduits. Revenue for all such services amounted to $387 million during the year
(October 31, 2022 – $296 million).
Our total commitment to the conduits in the form of backstop liquidity and credit enhancement facilities is shown below. The
total committed amount of these facilities exceeds the total amount of the maximum assets that may have to be purchased by
the conduits under the purchase agreements. As a result, the maximum exposure to loss attributable to our backstop liquidity
and credit enhancement facilities is less than the total committed amounts of these facilities.
Liquidity and credit enhancement facilities
Table 40
2023
2022
As at October 31 (Millions of Canadian dollars)
Notional of
committed
amounts
(1)
Allocable
notional
amounts
Maximum
exposure
to loss
(2)
Notional of
committed
amounts
(1)
Allocable
notional
amounts
Maximum
exposure
to loss
(2)
Backstop liquidity facilities
$ 54,713
$ 51,469
$ 51,469
$ 48,235
$ 45,261
$ 45,261
Credit enhancement facilities
(3)
3,244
3,244
3,244
2,974
2,974
2,974
Total
$ 57,957
$ 54,713
$ 54,713
$ 51,209
$ 48,235
$ 48,235
(1)
Based on total committed financing limit.
(2)
Not presented in the table above are derivative assets with a fair value of $2 million (October 31, 2022 – $25 million) which are a component of our total maximum
exposure to loss from our interests in the multi-seller conduits. Refer to Note 8 of our 2023 Annual Consolidated Financial Statements for more details.
(3)
Includes $18 million (October 31, 2022 – $14 million) of Financial standby letters of credit.
As at October 31, 2023, the notional amount of backstop liquidity facilities we provide increased $6 billion or 13% from last year,
primarily due to an increase in outstanding securitized assets of the multi-seller conduits. The notional amount of partial credit
enhancement facilities we provide increased $270 million or 9% from last year, primarily due to higher client usage of the
multi-seller conduits.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
61
Maximum exposure to loss by client type
Table 41
2023
2022
As at October 31 (Millions of dollars)
US$
C$
Total C$
US$
C$
Total C$
Outstanding securitized assets
Auto and truck loans and leases
$ 11,197
$
3,874
$ 19,402
$
10,553
$
3,967
$
18,351
Consumer loans
4,170
–
5,783
3,198
–
4,359
Credit cards
4,226
510
6,371
4,932
719
7,441
Dealer floor plan receivables
1,075
592
2,083
1,012
580
1,960
Equipment receivables
2,086
965
3,858
2,291
243
3,365
Fleet finance receivables
1,835
190
2,735
785
213
1,283
Commercial loans
(1)
542
530
1,282
143
428
624
Residential mortgages
–
1,785
1,785
–
1,785
1,785
Student loans
2,312
141
3,348
2,013
139
2,882
Trade receivables
2,954
–
4,097
2,306
–
3,144
Transportation finance
2,752
153
3,969
2,119
153
3,041
Total
$ 33,149
$
8,740
$ 54,713
$
29,352
$
8,227
$
48,235
Canadian equivalent
$ 45,973
$
8,740
$ 54,713
$
40,007
$
8,227
$
48,235
(1)
Exposures previously classified as Insurance premiums are now classified as Commercial loans, reflecting an alignment with rating agency classification and reporting.
Our overall exposure increased $6 billion or 13% compared to last year, primarily due to an increase in the outstanding
securitized assets of the multi-seller conduits. All of the multi-seller conduits transactions were internally rated A or above. All
transactions funded by the unconsolidated multi-seller conduits are internally rated using a rating system as outlined in the
internal ratings map in the credit risk section.
Multiple independent debt rating agencies review all of the transactions in the multi-seller conduits. Transactions financed
in the U.S. multi-seller conduits are reviewed by Moody’s Investors Service (Moody’s‡), Standard & Poor’s (S&P‡) and Fitch
Ratings (Fitch‡). Transactions in two of the Canadian multi-seller conduits are reviewed by DBRS Morningstar (DBRS‡) and
Moody’s while one of the Canadian multi-seller conduits is also reviewed by S&P. Each applicable rating agency also reviews
ongoing transaction performance on a monthly basis and may publish reports detailing portfolio and program information
related to the conduits.
As at October 31, 2023, the total asset-backed commercial paper (ABCP) issued by the conduits amounted to $37 billion, an
increase of $4 billion or 12% from last year, primarily due to higher client usage. The rating agencies that rate the ABCP rated
100% (October 31, 2022 – 100%) of the total amount issued within the top ratings category.
Structured finance
We provide liquidity facilities to certain municipal bond tender option bond trusts in which we have an interest but do not
consolidate because the residual certificates issued by the tender option bond trusts are held by third parties. As at
October 31, 2023, our maximum exposure to loss from these unconsolidated municipal bond tender option bond trusts was
$3 billion (October 31, 2022 – $3 billion).
We provide senior warehouse financing to unaffiliated structured entities that are established by third parties to acquire
loans and issue term collateralized loan obligations (CLO). Subordinated financing is provided during the warehouse phase by
either the collateral manager or third-party investors. Subordinated financing serves as the first loss tranche which absorbs
losses prior to ourselves as the senior lender. A portion of the proceeds from the sale of the term CLO is used to fully repay the
senior warehouse financing that we provide. As at October 31, 2023, our maximum exposure to loss associated with the
outstanding senior warehouse financing facilities was $796 million (October 31, 2022 – $640 million). The increase in our
maximum exposure to loss from last year was driven by the addition of new financing facilities partially offset by the repayment
of existing financing facilities.
We provide senior financing to unaffiliated structured entities that are established by third parties to acquire loans.
Subordinated financing is provided by either the collateral manager or third-party investors. Subordinated financing serves as
the first loss tranche which absorb losses prior to ourselves as the senior lender. These facilities tend to be longer in term than
the CLO warehouse facilities and benefit from credit enhancement designed to cover a multiple of historical losses. As at
October 31, 2023, our maximum exposure to loss associated with the outstanding senior financing facilities was $6 billion
(October 31, 2022 – $5 billion). The increase in our maximum exposure to loss from last year was driven by the addition of new
financing facilities partially offset by the repayment of existing financing facilities.
Non-RBC managed investment funds
We invest in hedge funds primarily to provide clients with desired exposures to reference funds. As we make investments in the
reference funds, exposures to the funds are simultaneously transferred to clients through derivative transactions. Our maximum
exposure to loss in the reference funds is limited to our investments in the funds. As at October 31, 2023, our maximum exposure
to loss was $2 billion (October 31, 2022 – $3 billion). The decrease in our maximum exposure to loss from last year was driven by
redemptions in third-party investment funds.
We also provide liquidity facilities to certain third-party investment funds. The funds issue unsecured variable-rate preferred
shares and invest in portfolios of tax-exempt bonds. As at October 31, 2023, our maximum exposure to loss on these funds was
$632 million (October 31, 2022 – $667 million). The decrease in our maximum exposure to loss from last year was driven by
redemption of capital by third-party investors of the funds.
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, 2023, our maximum exposure to loss
62
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
in these entities was $15 billion (October 31, 2022 – $14 billion). The increase in our maximum exposure to loss compared to last
year reflects an increase in client activity with third-party securitization vehicles. Interest and non-interest income earned in
respect of these investments was $528 million (October 31, 2022 – $186 million).
Other
Other unconsolidated structured entities include managed investment funds, arrangements to pass credit risk to third parties,
credit investment products and tax credit funds. Refer to Note 8 of our 2023 Annual Consolidated Financial Statements for
more details regarding our other unconsolidated structured entities.
Guarantees, retail and commercial commitments
We provide our clients with guarantees and commitments that expose us to liquidity and funding risks. Our maximum potential
amount of future payments in relation to our commitments and guarantee products as at October 31, 2023 amounted to
$496 billion compared to $453 billion last year. The increase compared to last year was primarily driven by growth in other
commitments to extend credit, sponsored member guarantees, backstop liquidity facilities and financial standby letters of credit.
Refer to Liquidity and funding risk and Note 24 of our 2023 Annual Consolidated Financial Statements for details regarding our
guarantees and commitments.
Risk management
We are in the business of managing the risks inherent to the financial services industry as we aim to create maximum value for
our shareholders, clients, employees and communities. The ability to manage risk is a core competency of the bank, and is
supported by our risk-aware culture and risk management approach. Our view of risks is dynamic, and reflects the pace of
change in the financial services industry.
Top and emerging risks
An important component of our risk management approach is to ensure that top and emerging risks, as they evolve, are
identified, managed and incorporated into our existing risk management assessment, measurement, monitoring and escalation
processes and addressed in our risk frameworks and policies. These practices are intended to ensure a forward-looking risk
assessment is maintained by management in the course of business development and as part of the execution of ongoing risk
oversight responsibilities. Top and emerging risks are discussed by senior management and the Board on a regular basis.
We have developed supplementary internal guidance to support enterprise-wide identification and assessment of all
material risks, including those that are not readily apparent. Top and emerging risks encompass those that could materially
impact our financial results, financial and operational resilience, reputation, business model or strategy, as well as those that
may materially impact us as the risks evolve. The following represents our top and emerging risks:
Top & emerging risks
Description
Business and economic
conditions
Our financial results are affected to varying degrees by the general business and economic conditions in
the geographic regions in which we operate. These conditions may include factors such as: economic
growth or contraction trends, consumer saving and spending habits; consumer and corporate borrowing
and repayment patterns; unemployment rates; the differing economic trajectories among nations across
the globe; global tensions and geopolitical uncertainty; the level of business investment and overall
business sentiment; trade; the emergence of a new outbreak of a pandemic or other health crisis; the
level of government spending, as well as fiscal and monetary policy; the level of activity and volatility of
the financial markets; disruptions to energy and other commodity markets; competitiveness; supply
chain challenges and labour shortages; the evolution of elevated inflationary pressures; and possible
stagflation or deflation. Moreover, interest rate changes and actions taken by central banks to manage
inflation or the broader economy have implications for us. Our financial results are sensitive to changes
in interest rates, as described in the Systemic risk section.
For example, a slowdown in economic growth or an economic downturn could adversely impact
employment rates and household incomes, consumer spending, housing prices, corporate earnings and
business investment, and could adversely affect our business, including, but not limited to, the demand
for our loan and other products, and result in lower earnings, and higher credit losses. In addition to
risks arising from monetary policy tightening, risks are also emerging around how governments may
continue to seek to recoup pandemic-related support, or any new support provided to deal with
emerging economic challenges. This may include, for example, changes to tax policy to address fiscal
capacity concerns and to balance budgets in the future.
There are also emerging risks related to wealth and income inequality, as well as changing demographics
and immigration, which could impact the labour market, the housing market, inflation, demand and
consumer trends, and potentially have broader societal and government policy implications.
Canadian housing and
household indebtedness
Canadian housing and household indebtedness risks remain heightened in the current interest rate
environment. Concerns around elevated levels of Canadian household debt, which accelerated during
the COVID-19 pandemic, could escalate if interest rates remain higher for longer, if the cost of living
increases further, or if job losses increase significantly, potentially resulting in, among other things,
higher credit losses. Moreover, continued interest rate increases or slowing economic growth could
adversely impact housing market activity and housing prices, which could push loan-to-value (LTV)
ratios higher and further increase credit losses.
While real estate rental activity has rebounded in certain markets, challenging affordability conditions,
supply constraints, elevated borrowing and construction costs may have an adverse impact on future
real estate investment and demand.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
63
Top & emerging risks
Description
Information technology,
cyber and third-party risks
Information technology (IT) risk, cyber risks and third-party risk remain top risks, not only for the
financial services sector, but for other industries worldwide. Geopolitical tensions have increased the
risk of nation state actors attacking critical infrastructure, including banks and critical third parties
(e.g., utilities, telecom providers, etc.). We continue to be subject to the heightened inherent risk of
cyberattacks, data breaches, cyber extortion and similar compromises, due to: (i) the size, scale and
global nature of our operations; (ii) our heavy reliance on the internet to conduct day-to-day business
activities; (iii) our intricate technological infrastructure; and (iv) our reliance on third-party service
providers. Our potential exposure to these risks increases as we continue to partner with third-party
service providers and adopt new business models and technologies (e.g., cloud computing, Artificial
Intelligence (AI) and machine learning). Threat actors gravitate towards vulnerabilities in an ecosystem,
and the weakest link in the supply chain can be a supplier or third-party service provider that may not
have sufficiently robust controls. Other key drivers of third-party risk include global economic pressures
related to inflation, and concentration of suppliers and fourth parties (i.e. vendors of our third party
providers) within the broader supply chain. Third-party providers critical to our operations are actively
monitored for impacts on their ability to deliver services to us, including impacts resulting from fourth
parties.
Ransomware threats are growing in sophistication and being used to launch major supply chain attacks.
Additionally, clients’ use of personal devices can create further avenues for potential cyber-related
incidents, as the bank has little or no control over the safety of these devices. Resulting implications
could include business interruptions, client service disruptions, financial loss, theft of intellectual
property and confidential information, litigation, enhanced regulatory attention and penalties, as well as
reputational damage. Furthermore, the adoption of emerging technologies, such as cloud computing, AI,
including generative AI, and robotics, call for continued focus and investment to manage risks
effectively. For more details on how we are managing these risks, refer to the Operational risk section.
Geopolitical uncertainty
In 2023, the Russia-Ukraine conflict continued to produce turmoil in the geopolitical landscape, with
ongoing impacts to the global economy and markets. Domestic disturbances in Russia may also signal
weakening internal stability and growing tail risks associated with Russia-West tensions. The duration
and path of the conflict remains uncertain and could continue to exacerbate global tensions, energy and
other commodity shortages, supply chain disruptions, inflationary pressures, weakening sentiment and
growth prospects, market volatility, cyberattacks, and the proliferation of sanctions and trade measures.
In particular, Europe continues to face uncertainty given its trade relationships with impacted regions
and its weakening economic prospects.
Tensions remain elevated between China and the U.S. and its allies over a number of issues, including
trade, technology, human rights, Taiwan, Hong Kong and Macau. Moreover, these trade tensions produce
additional vulnerabilities to the Canadian economy given the country’s trading relationship with the U.S.
and China, Canada’s two largest trading partners. Tensions between China and its neighbours over
territorial claims, and the prospect of even closer relations between China and Russia, as well as closer
relations between these two countries and Iran and North Korea, add further global and economic
uncertainty.
Geopolitical tensions in the Middle East and other regions could also add to economic and market
uncertainties. Should the war between Israel and Hamas broaden or escalate regionally, this may
destabilize global security, markets, and economic growth, along with key commodity markets. In
addition, an uncertain geopolitical or economic environment could lead to increases in polarization,
social unrest or terrorism, each of which could have direct or indirect impacts to the bank.
More broadly, the future of global trade remains uncertain, as countries look to decrease reliance on the
global supply chain and nations with differing values. Increased protectionism and economic
nationalism could reshape global alliances and financial systems as the supply of critical goods of
economic and national importance (e.g., energy, critical minerals, semiconductors) remains one of the
top priorities of governments. We will continue to monitor these developments and others, and will
assess the implications they have on us.
Environmental and
social risk
(including climate change)
We, like other organizations, are subject to increased regulatory requirements and stakeholder
expectations to address social and racial inequality and other human rights issues.
Risks associated with climate change are evolving as it relates to the global transition to a net-zero
economy and physical climate risks (e.g., extreme weather events and chronic shifts in climate).
Environmental and social risks, including climate change, are each unique and transverse risks, and
impact all of our principal risk types in different ways and to varying degrees, including but not limited to
strategic, operational, credit, reputation, legal and regulatory environment, and regulatory compliance
risks.
For details on these risks and how we are managing them, refer to the Overview of other risks –
Environmental and Social risk section.
64
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Top & emerging risks
Description
Digital disruption
and innovation
As the demand for digital banking services grow, the need to meet the rapidly evolving needs of clients
and compete with traditional and non-traditional competitors has increased our strategic and reputation
risks. Additional risks continue to emerge as demographic trends, evolving client expectations, the
increased power to analyze data and the emergence of disruptors are creating competitive pressures
across a number of sectors. Moreover, established technology companies, new competitors, and
regulatory changes continue to foster new business models that could challenge traditional banks and
financial products. Finally, while the adoption of new technologies, such as AI (including generative AI)
and machine learning, presents opportunities for us, it is resulting or could result in new and complex
strategic, operational, regulatory, compliance and reputation risks that would need to be managed
effectively.
Privacy and data
related risks
The protection and responsible use of personal information are critical to maintaining our clients’ trust.
In addition, the management and governance of our data also remains a top risk given the high value
attributed to our data for the insights it can generate for clients and communities. Resulting implications
from failing to manage data and privacy risks could include financial loss, theft of intellectual property
and/or confidential information, litigation, enhanced regulatory attention and penalties, as well as
reputational damage. Effective privacy and information management practices continue to grow in
importance, as demonstrated by the continued development of complex regulations in the jurisdictions
in which we operate. Privacy and data related risks have also heightened as a result of the evolving
threat landscape, and associated data breach risks. For details on how we are managing these risks,
refer to the Operational risk section.
Regulatory changes
The ongoing introduction of new or revised regulations requires enhanced focus across the organization
on meeting additional regulatory requirements across the multiple jurisdictions in which we operate.
Financial and other reforms that have been implemented or are being implemented across multiple
jurisdictions, such as digital, data and technology reforms, cyber security and anti-money laundering
regulations, interest rate benchmark and payments reform, as well as privacy, climate, sustainability and
consumer protection regulatory initiatives, continue to impact our operations and strategies. For more
details, refer to the Legal and regulatory environment risk section.
Culture and conduct risks
Our Purpose, values and risk principles are key dimensions of our culture. We demonstrate our culture
through our conduct – the behaviours, decisions and actions of the organization and our employees.
Culture and conduct risks are considered top risks for the financial services industry due to the impact
that our choices, behaviours, and overall risk governance can have on outcomes for our clients and
other stakeholders. We embed client considerations into our decision-making processes and continue to
focus on the fair treatment of clients which also aligns with regulatory direction. We seek to be
responsive to evolving employee needs while expecting employees to always act with integrity.
Regulators continue to focus on conduct risks, and heightened expectations generally from regulators
could lead to investigations, remediation requirements, higher compliance costs and enforcement
actions and fines, and potential criminal prosecutions or imposition of sanctions, which may involve
prohibitions or restrictions on some of our activities. While we take steps to continue to strengthen our
conduct practices, and prevent and detect risk outcomes which could potentially harm clients,
employees or the integrity of the markets, such outcomes may not always be prevented or detected. For
more details, refer to the Culture and conduct risks section.
Overview
As a global financial institution with a diversified business model, we actively manage a variety of risks to help protect and
enable our businesses by following these risk management principles:
Risk management principles
•
Effectively balance risk and reward to enable sustainable growth.
•
Collectively share the responsibility for risk management.
•
Undertake only risks we understand and make thoughtful and future-focused risk decisions.
•
Always uphold our Purpose and vision, and consistently abide by our values and Code of Conduct to maintain our
reputation and the trust of our clients, colleagues and communities.
•
Maintain a healthy and robust control environment to protect our stakeholders.
•
Use judgment and common sense.
•
Always be operationally prepared and financially resilient for a potential crisis.
The dynamic nature of the financial services industry, and technological innovation, necessitate that our processes, tools, and
practices are continuously improving and responding to the changing landscape and emerging risks. We seek to accomplish this
through an effective and evolving risk management approach. All risk-taking activities and exposures are within the Board-
approved risk appetite, corresponding constraints and risk limits. We seek to ensure that our business activities and transactions
provide an appropriate balance of return for the risks assumed and the costs incurred. Our organizational design and
governance processes are structured with the intent of maintaining independence of the Group Risk Management (GRM) function
from the businesses it supports.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
65
Risk drivers
We define risk as the potential vulnerabilities in the short-, medium- or long-term that may impact our financial results, financial
and operational resilience, reputation, business model or strategy. Risk can be realized through losses or an undesirable
outcome with respect to volatility of earnings in relation to expected earnings, capital adequacy or liquidity. Our principal risks
include credit, market, liquidity, insurance, operational, regulatory compliance, strategic, reputation, legal and regulatory
environment, competitive, and systemic risks, that have been classified into four categories (risk drivers) based on the level of
control and influence that we can exert against these risks. There are certain activities that we undertake that will give rise to
several risks. There are also certain risks that are transverse (e.g., climate and conduct risks) that can impact other risk types.
Top and emerging risk categories are maintained by GRM and reviewed regularly to ensure all principal risks are reflected. This
classification methodology provides a common language and discipline for the identification and assessment of risk in existing
businesses, new businesses, products or initiatives, as well as acquisitions and alliances.
Control and influence
More
More
Less
Less
Macroeconomic
Adverse changes in the macroeconomic environment can lead to a material impact on the real economy or
the financial system in any of the regions in which we operate.
– Examples include persistent inflationary pressures and high interest rates, high unemployment, economic
slowdowns or recessions, deterioration in the Canadian housing market, abrupt changes in the geopolitical
environment, unfavourable global trade agreements, political uncertainties, or the outbreak of a pandemic
or other health crises.
The macroeconomic risk driver is the least controllable type of risk arising from the business environment in
which we operate.
However, we have in place a number of controls to mitigate the impacts of systemic risk, including our
diversified business model and funding sources, financial crisis management strategies and protocols,
stress testing programs, and product and geographic diversification.
Resultant impacts can materialize as loss of revenue, as well as the realization of credit, market or
operational risk losses.
Strategic
Business strategy is a major driver of our risk appetite, including acquisitions and dispositions, responses to
threats posed by non-traditional competitors and responses to proposed changes in the regulatory
environment. Consequently, the strategic choices and capital allocations we make may change our risk
profile.
Choosing the wrong strategy, or poorly executing on the correct strategy, could result in reputational risk
consequences, impact our revenue mix, and/or affect our exposure to earnings volatility and loss absorption
capacity.
There is a fair degree of control and influence that we can exert in managing strategic and reputation risk.
While the legal and regulatory environment and competitive risks are less controllable, we advocate with
government and regulators and as an active participant in the Canadian and global financial services
industry.
Operational /
Regulatory
Compliance
The complexity and scope of our operations across the globe exposes us to operational and regulatory
compliance risks.
We have a certain level of control over these risks through the effective management of operational risk and
regulatory compliance risk, including how we manage our dependence on people, systems, and processes.
We also 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.
Transactional /
Positional
A more traditional risk perspective involving the risks of credit, market, liquidity and insurance losses,
arising from, among other things, lending transactions and balance sheet positions. These risks are an
integral part of our day-to-day business activities.
We understand these risks well and have the greatest level of control and influence over them.
We earn revenue by taking these transactional/positional risks.
Enterprise risk management
Under the oversight of the Board and senior management, the Enterprise Risk Management Framework (ERMF) provides an
overview of our enterprise-wide programs for managing risk, including identifying, assessing, measuring, controlling, monitoring
and reporting on the significant risks that face the organization.
Risk governance
We have an effective and well-established risk governance framework in place that seeks to ensure risks impacting our
businesses are identified, appropriately categorized, assessed, managed and communicated to the Board in a timely manner.
This framework has been established, and is maintained in alignment with, the expectations of OSFI, the Basel Committee on
Banking Supervision’s (BCBS) corporate governance principles and the requirements and expectations of other regulators in the
jurisdictions in which we conduct business, and in accordance with industry best practices. The Board oversees the
implementation of our risk management framework, while employees at all levels of the organization are responsible for
managing the day-to-day risks that arise in the context of their mandates. As illustrated below, we use the three lines of defence
governance model so that risks are appropriately and adequately managed throughout the enterprise to achieve our strategic
objectives.
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Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
All employees across our businesses
and functional areas
Accountable for:
Identification;
Assessment;
Measurement;
Mitigation;
Monitoring; and
Reporting of risk against approved
policies and appetite
FIRST LINE OF DEFENCE
RISK OWNERS
RISK OWNERS
Establishes risk management practices and
provides risk guidance
Provides oversight of the effectiveness of
First Line risk management practices
Monitors and independently reports on the
level of risk against established risk appetite
The CRO has direct access to the Risk Committee
The Chief Compliance Officer and the Chief
Anti-Money Laundering Officer have direct
access to the Audit Committee
Other Functional Units includes the
Chief Financial Officer (CFO) Group, RBC Law
Group, Human Resources and the Chief
Administrative officer (CAO) Group. While these
other Functional Units perform some First Line
activities, they also have designated
Second Line roles in supporting RBC’s
enterprise-wide risk management program
SECOND LINE OF DEFENCE
RISK OVERSIGHT
RISK OVERSIGHT
RISK
MANAGEMENT
OTHER
FUNCTIONAL
UNITS
GLOBAL
COMPLIANCE
AND ANTI-
MONEY
LAUNDERING
Internal Audit
Independent assurance to management
and the Board on the effectiveness of risk
management practices
THIRD LINE OF DEFENCE
INDEPENDENT ASSURANCE
INDEPENDENT ASSURANCE
The
Board
periodically approves our Code of Conduct and closely collaborates with management to set the tone from above and promote a strong
governance culture that influences RBC at every level and across all our global businesses. The Board also approves our risk appetite, provides oversight
and carries out its risk management mandate primarily through its committees:
AUDIT COMMITTEE
RISK COMMITTEE
BOARD OF DIRECTORS
GOVERNANCE COMMITTEE
HUMAN RESOURCES COMMITTEE
The
Risk Committee
assists the Board in overseeing our risk management by ensuring that policies, processes and procedures, as well as the appropriate
organizational structure, budget and resources are in place to manage RBC’s significant risks. The Risk Committee oversees the risk management function,
annually assessing its effectiveness and periodically reviewing the results of independent assessments of the risk management functions. Its oversight
activities include the review of the GRM function which evaluates GRM’s success against its key priorities, the mandate of the Chief Risk Officer (CRO), and
GRM’s organizational structure, budget and resources.
The
Audit Committee
assists the Board in its oversight of the integrity of our financial statements; the qualifications, performance, and independence of
our external auditors; the performance of our internal audit function, internal controls; and
compliance with legal and regulatory requirements. In addition,
it oversees the finance, compliance, anti-money laundering and internal audit functions, having regard to their independence from the businesses whose
activities they review. It annually assesses the effectiveness of the Finance and Internal Audit functions, and it reviews and approves their respective
organizational structure, budget and resources, and charter, as well as the mandates of the CFO and the Chief Audit Executive.
The
Governance Committee
recommends to the Board individuals for Board member election or re-election and oversees the process for evaluating Board,
committee and director effectiveness. Moreover, the Governance Committee serves at the conduct review committee and oversees the management of
culture and conduct. Additional responsibilities include (i) developing and recommending governance frameworks, principles and policies to the Board;
(ii) overseeing and coordinating ESG matters at the Board and its committees; (iii) monitoring developments in corporate governance and adapting best
practices to the bank’s needs and circumstances; and (iv) reviewing shareholder proposals and recommending responses to the Board.
The
Human Resources Committee
assists the Board in its oversight of compensation policies and major compensation programs, compensation risk
management and the compensation for the CEO and Group Executives (GE). It also oversees our pension plans, key talent management and human
resources strategies and practices, including employee engagement, diversity & inclusion and health & wellness, as well as succession plans for key
senior leadership roles.
Actively shapes enterprise risk appetite and recommends it for Board approval.
THE GROUP EXECUTIVE AND GROUP RISK COMMITTEE
Visibly supports and communicates enterprise risk appetite, seeking to ensure that sufficient resources and expertise are in place to help
provide effective oversight of adherence to the enterprise risk appetite.
Seeks to ensure principles, policies, authorities, resources, responsibilities and reporting are in place to support the control infrastructure
necessary for an effective enterprise-wide risk management program.
Oversees culture and conduct strategy and key activities.
Provides appropriate and timely information to the Board or its Committees with regard to the identification, measurement and management
of the significant risks to which we are exposed across all of our legal entities, businesses and operations globally.
The Compensation Risk Management Oversight Committee (CRMOC) oversees the design of major compensation programs in an effort to
ensure alignment with sound risk management principles, and that risks that may not be fully captured in our current financial performance
are appropriately considered in variable compensation payouts, including our enterprise risk profile relative to risk appetite. The CRMOC has
responsibility for ensuring our compensation programs align with the Financial Stability Board (FSB) Principles for Sound Compensation
Practices and Implementation Standards and other applicable guidance and best practices.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
67
Risk appetite
Effective risk management protects us from unacceptable
losses or undesirable outcomes with respect to earnings
volatility, capital adequacy or liquidity, reputation risk or other
risks while supporting and enabling our overall business
strategy. It requires the clear articulation of our risk appetite,
which is the amount and type of risk that we are able and willing
to accept in the pursuit of our business objectives. It reflects our
self-imposed upper bound to risk-taking, set at levels inside of
regulatory limits and constraints, and influences our risk
management philosophy, Code of Conduct, business practices
and resource allocation. It provides clear boundaries and sets
an overall tone for balancing risk-reward trade-offs to ensure
the long-term viability of the organization.
Our risk appetite is integrated into our strategic, financial,
and capital planning processes, as well as ongoing business
decision-making processes and is reviewed and approved
annually by the Board.
Our Enterprise Risk Appetite Framework (ERAF) outlines the
foundational aspects of our approach to risk appetite,
articulates our quantitative and qualitative risk appetite
statements and their supporting measures and associated
constraints, which can be applied at the enterprise, business
segment, business unit and legal entity level, and describes our
requirements and expectations to embed effective risk appetite
practices throughout the organization.
Risk Capacity
Risk Limits &
Management Delegated
Authorities
Risk Appetite &
Board Delegated Authorities
Risk Profile
Risk Posture
R
i
s
k
A
p
p
e
t
i
t
e
C
o
m
p
o
n
e
n
t
s
Risk appetite statements
Quantitative statements
Qualitative statements
•
Manage earnings volatility and exposure to future
losses under normal and stressed conditions.
•
Avoid excessive concentrations of risk.
•
Ensure capital adequacy and sound management of
liquidity and funding risk.
•
Ensure sound management of operational and
regulatory compliance risk.
•
Maintain strong credit ratings and a risk profile in the
top half of our peer group.
•
Always uphold our Purpose and vision and
consistently abide by our values and Code of Conduct
to maintain our reputation and the trust of our
clients, colleagues and communities.
•
Undertake only risks we understand. Make thoughtful
and future-focused risk decisions, taking
environmental and social considerations into account.
•
Effectively balance risk and reward to enable
sustainable growth.
•
Maintain a healthy and robust control environment to
protect our stakeholders.
•
Always be operationally prepared and financially
resilient for a potential crisis.
The allocation of our risk appetite across the bank is supported by the establishment of delegated authorities or risk limits.
These delegated authorities or risk limits represent the maximum level of risk permitted for a line of business, portfolio,
individual or group and are used to govern ongoing operations. Risk posture, the anticipated shift in risk profile as a result of
changes in objectives, strategies and external factors, is used to provide insights on key areas that may require management
attention to ensure strategies are able to be executed successfully within our risk appetite.
Risk measurement
Quantifying risk is a key component of our enterprise-wide risk and capital management processes. Risk measurement and
planning processes are integrated across the enterprise, especially in regards to forward-looking projections and analyses,
including but not limited to, stress testing, recovery and resolution planning, and credit provisioning.
Certain risks, such as credit, market, liquidity and insurance risks, can be more easily quantified than others, such as
operational, reputation, strategic, legal, and regulatory compliance risks. For the risks that are more difficult to quantify, greater
emphasis is placed on qualitative risk factors and assessment of activities to gauge the overall level of risk. In addition,
judgmental risk measures and techniques such as stress testing, and scenario and sensitivity analyses can be used to assess and
measure risks, and we are continuously evolving our risk measures and techniques to manage our risks. Our primary methods for
measuring risk include:
•
Quantifying expected loss: losses that are statistically expected to occur as a result of conducting business in a given time
period;
•
Quantifying unexpected loss: an estimate of the deviation of actual earnings from expected earnings, over a specified time
horizon;
•
Stress testing: evaluates, from a forward-looking perspective, the potential effects of a set of specified changes in risk
factors, corresponding to exceptional but plausible adverse economic and financial market events; and
•
Back-testing: the realized values are compared to the parameter estimates that are currently used in an effort to ensure the
parameters remain appropriate for regulatory and economic capital calculations.
68
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Stress testing
Stress testing is an important component of our risk management framework. Stress testing results are used for:
•
Assessing the viability of long-term business plans and strategies;
•
Monitoring our risk profile relative to our risk appetite in terms of earnings and capital at risk;
•
Setting limits;
•
Identifying key risks to, and potential shifts in, our capital and liquidity levels, as well as our financial position;
•
Enhancing our understanding of available mitigating actions in response to potential adverse events; and
•
Assessing the adequacy of our capital and liquidity levels.
Our enterprise-wide stress tests evaluate key balance sheet, income statement, leverage, capital and liquidity impacts arising
from risk exposures and changes in earnings. The results are used by the Board, Group Risk Committee (GRC) and senior
management risk committees to understand our performance drivers under stress, and review stressed capital, leverage and
liquidity ratios against regulatory thresholds and internal limits. The results are also incorporated into our Internal Capital
Adequacy Assessment Process (ICAAP) and capital plan analyses.
We evaluate a number of enterprise-wide stress scenarios over a multi-year horizon, featuring a range of severities. Our
Board reviews the recommended scenarios, and GRM leads the scenario assessment process. Results from across the
organization are integrated to develop an enterprise-wide view of the impacts, with input from subject matter experts in GRM,
Corporate Treasury, Finance, Economics and the various business segments. Generally, our stress testing scenarios evaluate
global recessions, equity market corrections, elevated debt levels, changes in interest rates, real estate price corrections, and
shocks to credit spreads and commodity markets, among other factors. During our fiscal 2023 stress testing exercises, we
addressed several top and emerging risks including geopolitical tensions, rising interest rates, cyber threats and climate risks,
with a focus on the impacts of these risks on revenue, losses, net income and capital projections.
Ongoing stress testing and scenario analyses within specific risk types, such as market risk (including Interest Rate Risk in
the Banking Book [IRRBB]), liquidity risk, retail and wholesale credit risk, operational risk and insurance risk, supplement and
support our enterprise-wide analyses. Results from these risk-specific programs are used in a variety of decision-making
processes including risk limit setting, portfolio composition evaluation, risk appetite articulation and business strategy
implementation.
In addition to ongoing enterprise-wide and risk-specific stress testing, we use ad hoc and reverse stress testing to deepen
our knowledge of the risks we face. Ad hoc stress tests are one-off analyses used to investigate developing conditions or to stress
a particular portfolio in more depth. Reverse stress tests aim to reverse-engineer scenarios that might lead to a particular severe
outcome, such as bank non-viability, and are used in resolution & recovery planning and to improve our understanding of risk/
return boundaries.
In addition to internal stress tests, we participate in a number of regulatory stress testing exercises, on a periodic basis, across
several jurisdictions.
Model governance and validation
Quantitative models are used for many purposes including, but not limited to, the valuation of financial products, the
identification, measurement and management of different types of risk, stress testing, assessing capital adequacy, informing
business and risk decisions, measuring compliance with internal limits, meeting financial reporting and regulatory requirements,
and issuing public disclosures.
Model risk is the risk of adverse financial and/or reputational consequences to the enterprise arising from the use or misuse
of a model at any stage throughout its life cycle and is managed through our model risk governance and oversight structure. The
governance and oversight structure, which is implemented through our three lines of defence governance model, is founded on
the basis that model risk management is a shared responsibility across the three lines spanning all stages of the model’s life
cycle.
Prior to being used, models are subject to independent validation and approval by our enterprise model risk management
function, a team of modelling professionals with reporting lines independent of those of the model owners, developers and users.
The validation seeks to ensure that models are sound and capable of fulfilling their intended use. In addition to independently
validating models prior to use, our enterprise model risk management function provides controls that span the life-cycle of a
model, including model change management procedures, requirements for ongoing monitoring, and annual assessments to
ensure each model continues to serve its intended purpose.
AI based applications are subject to the same model governance and validation requirements as other models and are
assessed in conjunction with other relevant risk functions. Controls for predominant AI risks, including fairness and
explainability, are subject to Risk Committee oversight and approval. Model risk reports including AI matters are reviewed
periodically by the Board.
Risk control
Our enterprise-wide risk management approach is supported by a comprehensive set of risk controls that are defined in our
ERMF. The ERMF serves as the foundation for our approach to risk management and promotes RBC’s risk management
principles, approach and governance. It further sets the expectations for the development and communication of policies, the
establishment of formal independent risk review and approval processes, and the establishment of delegated risk approval
authorities and risk limits. The ERMF is further reinforced and supported by a number of additional Board-approved risk
frameworks, various policies thereunder and a comprehensive set of risk controls. Together, our risk frameworks and supporting
policies provide direction and insight on how respective risks are identified, assessed, measured, managed, mitigated, monitored
and reported. The enterprise-wide policies are considered our minimum requirements, articulating the parameters within which
business groups and employees must operate.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
69
Enterprise Risk Management
Framework
Enterprise Risk Appetite
Framework
Enterprise Culture and
Conduct Risks
Framework
Enterprise-Wide Policies for Multiple Risk Types
(e.g., Product Suitability Risk Policy; Policy on Risk Limits and Risk Approval Authorities; Policy on Environmental (including Climate) and Social Risk; Stress-Testing Policy)
Segment or Region-specific Risk Policy and Procedures
The approval hierarchy for risk frameworks and policy documents:
Board of Directors or Board Committees
Senior Management Committees
(e.g., Policy Review Committee, Operational Risk Committee, Asset Liability Committee) for most policies.
Board or Board Committee approval is required in some instances (e.g., RBC Code of Conduct, Dividend Policy)
Generally, by business or Functional Unit management/committees.
Group Risk Management approval is required if there are significant
risk implications
Enterprise Risk Policy Architecture
Supporting Risk-specific Enterprise-Wide Policies (examples)
AML
Compliance
Management
Framework
Data
Management
& Reporting
Framework
Credit Risk
Management
Framework
Operational
Risk
Management
Framework
Market Risk
Management
Framework
Regulatory
Compliance
Management
Framework
Regulatory
Compliance
Management
Framework
Information
Technology
Risk
Management
Framework
Reputation
Risk
Management
Framework
Operational
Risk
Management
Framework
Liquidity
Risk
Management
Framework
Insurance
Risk
Management
Framework
Capital
Management
Framework
Credit Risk
Mitigation
Policy
Internal
Controls
Management
Policy
Market Risk
Policy
Liquidity
Risk Policy
Insurance
Risk
Mitigation
Policy
AML Client
Risk
Management
Policy
Data
Management
& Reporting
Policy
Dividends
& Capital
Note Coupons
Policy
Privacy Risk
Management
Policy
Internal
Controls
Management
Policy
Information
Security
Policy
Fiduciary
Risk Policy
Risk appetite, risk approval authorities and risk limits
Risk Appetite is the amount and type of risk that we are able and willing to accept in the pursuit of our business objectives. It
reflects our self-imposed upper bound to risk taking and influences our risk management philosophy, conduct, operating style
and resource allocation. Risk Appetite is supported by Risk Approval Authorities delegated by the Board to senior management
which provide thresholds for escalation of exposures and transactions to the Risk Committee of the Board for review and
approval. The allocation of Risk Appetite and Board Delegated Authorities may be supported by the establishment of
management delegated authorities and/or risk limits. These represent the maximum level of risk permitted for a line of business,
portfolio, individual or other groups. These authorities and limits are used to implement risk management strategies and govern
ongoing operations. Excesses to risk approval authorities and risk limits can act as early warning indicators for risk appetite
constraints allowing for timely management attention. Senior management can delegate some or all of their authorities onwards
to others in the organization. The delegated authorities enable the approval of single name, geographic and industry sectors, and
product and portfolio exposures within defined parameters and limits. They are also used to manage concentration risk,
establish underwriting and inventory limits for trading and investment banking activities and set market risk tolerances.
Risk review and approval processes
Risk review and approval processes provide an important control mechanism and are established by GRM based on the nature,
size and complexity of the risk involved. In general, the risk review and approval process involves a formal review and approval
by an individual, group or committee that is independent from the originator. The approval responsibilities are governed by the
Enterprise Risk Appetite Framework and the delegated risk authorities and risk limits are based on the following categories:
transactions, projects and initiatives, and new products and services.
Risk monitoring and reporting
Enterprise and business segment level risk monitoring and internal reporting are critical components of our enterprise risk
management program and support the ability of senior management and the Board to effectively perform their risk management
and oversight responsibilities. The ongoing monitoring of our risk profile, and the organization’s risk exposure against our risk
appetite, enables proactive risk management and oversight. It seeks to ensure that our businesses operate within established
and approved risk appetite; detect areas where business activity or growth may be constrained in the future; identify situations
where risk taking may be overly conservative or aggressive; enable senior management to assess the impact of stress and
unanticipated events; and inform the development and implementation of risk mitigation strategies in order to operate within
risk appetite. The Risk Committee of the Board receives a CRO report at each meeting that has been reviewed by senior
management, and which includes, among others, top and emerging risks, industry trends or other notable items. On a quarterly
basis, we provide our Enterprise Risk Report to senior management and the Risk Committee of the Board which includes, among
others, top and emerging risks, risk profile relative to our risk appetite, portfolio quality metrics and a range of risks we face
along with an analysis of the related issues, key trends and, when required, management actions. On an annual basis, we provide
a benchmarking review to the Board which compares our performance to peers across a variety of risk metrics and includes a
composite risk scorecard which provides an objective measure of our ranking relative to the peer group. In addition to our
regular risk monitoring, other risk-specific presentations are provided to, and discussed with, senior management and the Board
on top and emerging risks or changes in our risk profile. In addition, we publish external reports on risk matters to comply with
regulatory requirements.
70
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
our disclosures on credit, market and liquidity and funding risks in accordance with IFRS 7
, Financial Instruments: Disclosures
,
and include discussion on how we measure our risks and the objectives, policies and methodologies for managing these risks.
Therefore, these shaded text and marked tables represent an integral part of our 2023 Annual Consolidated Financial
Transactional/positional risk drivers
on a timely basis and may arise directly from the risk of default of a primary obligor (e.g., issuer, debtor, counterparty,
borrower or policyholder), indirectly from a secondary obligor (e.g., guarantor or reinsurer), and/or through off-balance sheet
exposures, contingent credit risk, associated credit risk and/or transactional risk. Credit risk includes counterparty credit risk
arising from both trading and non-trading activities. Exposure to credit risk may occur any time funds are extended,
The responsibility for managing credit risk is shared broadly following the three lines of defence governance model. The
allocation of the Board approved credit risk appetite is supported by the establishment of risk approval authorities and risk
limits, delegated by the Board to the President & CEO and CRO. Credit transactions in excess of these authorities must be
approved by the Risk Committee of the Board. To facilitate day-to-day business activities, the CRO has been empowered to
further delegate credit risk approval authorities to individuals within GRM, the business segments, and functional units as
deemed necessary.
•
Ensuring credit quality is not compromised for growth;
•
Managing credit risks in transactions, relationships and portfolios;
•
Avoiding excessive concentrations in correlated credit risks;
•
Using our credit risk rating and scoring systems or other approved credit risk assessment or rating methodologies,
policies and tools;
•
Pricing appropriately for the credit risk taken;
•
Detecting and preventing inappropriate credit risk through effective systems and controls;
•
Applying consistent credit risk exposure measurements;
•
Ongoing credit risk monitoring and administration;
•
Transferring credit risk to third parties where appropriate through approved credit risk mitigation techniques (e.g., sale,
hedging, insurance, securitization); and
•
Avoiding activities that are inconsistent with our values, Code of Conduct or policies.
The Enterprise Credit Risk Management Framework (ECRMF) provides an overview of our approach to the management of
Credit Risk including principles, methodologies, systems, roles and responsibilities, reports and controls. Additional
supporting policies exist that are designed to provide further clarification of roles and responsibilities, acceptable practices,
limits and key controls within the enterprise.
Credit risk measurement
We quantify credit risk at both the individual obligor and portfolio levels to manage expected credit losses and minimize
unexpected losses to limit earnings volatility and ensure we are adequately capitalized.
We employ a variety of risk measurement methodologies to measure and quantify credit risk for our wholesale and retail
credit portfolios. The wholesale portfolio is comprised of businesses, sovereigns, public sector entities, banks and other
financial institutions, as well as certain HNW individuals. The retail portfolio is comprised of residential mortgages, personal
loans, credit cards and small business loans. Our credit risk rating systems are designed to assess and quantify the risk
inherent in credit activities in an accurate and consistent manner. The resulting ratings and scores are then used for both
client- and transaction-level risk decision-making and as key inputs for our risk measurement and capital calculations.
Measurement of economic and regulatory capital
Economic capital, which is our internal quantification of risks, is used for limit setting. It is also used for internal capital
adequacy and allocation of capital to the Insurance segment. Our methodology for allocating capital to our business
segments, other than Insurance, is based on regulatory requirements. For further details, refer to the Capital management
section.
In measuring credit risk to determine regulatory capital, two principal approaches are available: the Internal Ratings
Based (IRB) Approach and the Standardized Approach as per OSFI’s CAR guideline. The IRB Approach allows both a full
modelled based approach referred to as the Advanced Internal Ratings Based (A-IRB) Approach and a more supervisory-
based approach know as the Foundation Internal Ratings Based Approach (F-IRB).
The Standardized Approach applies primarily to Wealth Management, including our City National wholesale portfolio, as
well as our Caribbean banking operations, and is based on risk weights prescribed by OSFI that are used to calculate RWA for
credit risk exposure.
The A-IRB Approach, which applies to most of our retail and wholesale credit risk exposures (excluding F-IRB exposures
discussed below), utilizes three key parameters which form the basis of our credit risk measures for both regulatory and
economic capital:
•
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 following a default.
These parameters are determined based primarily on historical experience from internal credit risk rating systems in
PD is estimated based on a long-run average of default rates for a specific rating grade or for a particular pool of
exposure. The PD assigned to a default grade(s) or pools, consistent with the definition of default, is 100%.
factors such as the current utilization of approved limit. As with LGD, rates are estimated to reflect an economic downturn,
with added conservatism to reflect data and statistical uncertainties identified in the modelling process.
Each credit facility is assigned an LGD rate that is largely driven by factors that impact the extent of losses anticipated in
the event the obligor defaults. These factors mainly include seniority of debt, collateral and the industry sector in which the
obligor operates. Estimated LGD rates draw primarily on internal loss experiences. Where we have limited internal loss data,
we also refer to appropriate external data to supplement the estimation process. LGD rates are estimated to reflect
conditions that might be expected to prevail in a period of an economic downturn, with additional conservatism added to
reflect data limitations and statistical uncertainties identified in the estimation process.
Estimates of PD, LGD and EAD are reviewed on an annual basis and updates are then validated by an independent
validation team within the bank. In addition, quarterly monitoring and back-testing is performed by the estimation team.
These ratings and risk measurements are used to determine our expected losses as well as economic and regulatory capital,
setting of risk limits, portfolio management and product pricing.
The F-IRB Approach is a prescribed regulatory approach that must be used to determine RWA related to our exposures to
all banks and large corporates defined as having total consolidated revenues in excess of $750 million annually. The F-IRB
Approach uses the same PD parameter as the A-IRB Approach but requires the use of supervisory-prescribed EAD and LGD
parameters.
Financial and regulatory measurement distinctions
Expected loss models are used for both regulatory capital and accounting purposes. Under both models, expected losses are
calculated as the product of PD, LGD and EAD. However, there are certain key differences under current Basel and IFRS
reporting frameworks which could lead to significantly different expected loss estimates, including:
•
Basel PDs are based on long-run averages over an entire economic cycle. IFRS PDs are based on current conditions,
adjusted for estimates of future conditions that will impact PD under probability-weighted macroeconomic scenarios.
•
Basel PDs consider the probability of default over the next 12 months. IFRS PDs consider the probability of default over
the next 12 months only for instruments in stage 1. Expected credit losses for instruments in stage 2 are calculated using
lifetime PDs.
•
Basel LGDs are based on severe but plausible downturn economic conditions. IFRS LGDs are based on current conditions,
adjusted for estimates of future conditions that will impact LGD under probability-weighted macroeconomic scenarios.
For further details, refer to the Critical accounting policies and estimates section.
Gross credit risk exposure
Gross credit risk is categorized as i) lending-related and other credit risk or ii) trading-related credit risk, and is calculated
based on the Basel III framework. Under this method, EAD for all lending-related and other credit transactions and trading-
related repo-style transactions is calculated before taking into account any collateral and is inclusive of an estimate of
potential future changes to that credit exposure. EAD for derivatives is calculated inclusive of collateral in accordance with
regulatory guidelines.
Lending-related and other credit risk includes:
•
Loans and acceptances outstanding, undrawn commitments, and other exposures, including contingent liabilities such as
letters of credit and guarantees, debt securities carried at FVOCI or amortized cost and deposits with financial
institutions. Undrawn commitments represent an estimate of the contractual amount that may be drawn upon at the time
of default of an obligor.
Trading-related credit risk includes:
•
Repo-style transactions, which include repurchase and reverse repurchase agreements and securities lending and
borrowing transactions. For repo-style transactions, gross exposure represents the amount at which securities were
initially financed, before taking collateral into account.
•
Derivative amounts which represent the credit equivalent amount, as defined by OSFI as the replacement cost plus an
add-on amount for potential future credit exposure, scaled by a regulatory factor. For further details on replacement cost
and credit equivalent amounts, refer to Note 9 of our 2023 Annual Consolidated Financial Statements.
Credit risk assessment
Wholesale credit risk
The wholesale credit risk rating system is designed to measure the credit risk inherent in our wholesale credit activities.
Each obligor is assigned a borrower risk rating (BRR), reflecting an assessment of the credit quality of the obligor. Each
BRR has a PD calibrated against it. The BRR differentiates the riskiness of an obligor and represents our evaluation of the
obligor’s ability and willingness to meet its contractual obligations on time over a three year time horizon. The assignment of
BRRs is based on the evaluation of the obligor’s business risk and financial risk through fundamental credit analysis, as well
as data-driven modelling. The determination of the PD associated with each BRR relies primarily on internal default history
since 2006. PD estimates are designed to be a long-run average of our experience across the economic cycle in accordance
with regulatory guidelines.
Our rating system is designed to stratify obligors into 22 grades. The following table aligns the relative rankings of our
22-grade internal risk ratings with the external ratings used by S&P and Moody’s.
Internal ratings map*
Table 42
PD Bands | ||||||
Ratings | Business and Bank | Sovereign | BRR | S&P | Moody’s | Description |
1 | 0.0000% – 0.0500% | 0.0000% – 0.0150% | 1+ | AAA | Aaa | |
2 | 0.0000% – 0.0500% | 0.0151% – 0.0250% | 1H | AA+ | Aa1 | |
3 | 0.0000% – 0.0500% | 0.0251% – 0.0350% | 1M | AA | Aa2 | |
4 | 0.0000% – 0.0500% | 0.0351% – 0.0450% | 1L | AA- | Aa3 | |
5 | 0.0000% – 0.0550% | 0.0451% – 0.0550% | 2+H | A+ | A1 | |
Investment Grade | ||||||
6 | 0.0551% – 0.0650% | 2+M | A | A2 | ||
7 | 0.0651% – 0.0750% | 2+L | A- | A3 | ||
8 | 0.0751% – 0.0850% | 2H | BBB+ | Baa1 | ||
9 | 0.0851% – 0.1030% | 2M | BBB | Baa2 | ||
10 | 0.1031% – 0.1775% | 2L | BBB- | Baa3 | ||
11 | 0.1776% – 0.3470% | 2-H | BB+ | Ba1 | ||
12 | 0.3471% – 0.6460% | 2-M | BB | Ba2 | ||
13 | 0.6461% – 1.0620% | 2-L | BB- | Ba3 | ||
14 | 1.0621% – 1.5520% | 3+H | B+ | B1 | ||
15 | 1.5521% – 2.2165% | 3+M | B | B2 | Non-investment | |
16 | 2.2166% – 4.5070% | 3+L | B- | B3 | Grade | |
17 | 4.5071% – 7.1660% | 3H | CCC+ | Caa1 | ||
18 | 7.1661% – 13.1760% | 3M | CCC | Caa2 | ||
19 | 13.1761% – 24.9670% | 3L | CCC- | Caa3 | ||
20 | 24.9671% – 99.9990% | 4 | CC | Ca | ||
21 | 100% | 5 | D | C | ||
22 | 100% | 6 | D | C | Impaired | |
*
This table represents an integral part of our 2023 Annual Consolidated Financial Statements.
Counterparty credit risk
Counterparty credit risk is the risk that a party with whom we have entered into a financial or non-financial contract will fail to
fulfill its contractual agreement and default on its obligation. It incorporates not only the contract’s current value, but also
considers how that value can move as market conditions change. Counterparty credit risk usually arises from trading-related
derivative and repo-style transactions. Derivative transactions include forwards, futures, swaps and options, and can have
underlying references that are either financial (e.g., interest rate, foreign exchange, credit, or equity) or non-financial (e.g.,
precious metal or other commodities). For further details on our derivative instruments and credit risk mitigation, refer to Note 9
of our 2023 Annual Consolidated Financial Statements.
Trading counterparty credit activities are undertaken in a manner consistent with the relevant requirements under
enterprise Credit, Market, and Model risk management frameworks and with approval in accordance with the appropriate
delegated authorities.
The primary risk mitigation techniques for trading counterparty credit risk are close-out netting and collateralization.
Close-out netting considers the net value of contractual obligations between counterparties in a default situation, thereby
reducing overall credit exposure. Collateralization is when a borrower pledges assets as security, which provides recourse to the
lender in the event of default. The policies that we maintain in relation to the recognition of risk mitigation from these techniques
incorporate such considerations as:
•
The use of standardized agreements such as the International Swaps and Derivatives Association Master Agreement and
Credit Support Annex;
•
Generally restricting eligible collateral to high quality liquid assets, primarily cash and highly-rated government securities,
subject to appropriate haircuts; and
•
The use of initial margin and variation margin arrangements in accordance with regulatory requirements and internal risk
standards.
Similarly, for securities finance and repurchase trading activity we mitigate counterparty credit risk via the use of
standardized securities finance agreements, and by taking collateral generally in the form of eligible liquid securities.
We also mitigate counterparty credit risk through the use of central counterparties (CCPs). These highly-regulated entities
intermediate trades between participating bilateral counterparties and mitigate credit risk through the use of initial and
variation margin and the ability to net offsetting trades amongst participants. The specific structure and capitalization, including
contingent capital arrangements, of individual CCPs are analyzed as part of assigning an internal counterparty credit risk rating
and determining appropriate counterparty credit risk limits.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
73
Wrong-way risk
Wrong-way risk is the risk that exposure to a counterparty is adversely correlated with the credit quality of that counterparty.
There are two types of wrong-way risk:
•
Specific wrong-way risk, which exists when our exposure to a particular counterparty is positively correlated with the PD of
the counterparty due to the nature of our transactions with them (e.g., loans collateralized by shares or debt issued by the
counterparty or a related party). Specific wrong-way risk over-the-counter (OTC) derivative trades are done on an exception
basis only, and are permitted only when explicitly pre-approved by GRM. Factors considered in reviewing such trades include
the credit quality of the counterparty, the nature of the asset(s) underlying the derivative and the existence of credit
mitigation.
•
General wrong-way risk, which exists when there is a positive correlation between the PD of the counterparties and general
macroeconomic or market factors. General wrong way risk can arise in various circumstances, depending on the transaction,
collateral type, and the nature of the counterparty. We monitor general wrong-way counterparty credit risk using a variety of
metrics including stress scenarios, correlation analysis, and investment strategy concentration.
Credit scoring is the primary risk rating system for assessing obligor and transaction risk for retail exposures. Scoring models
use internal and external data to assess and score borrowers, predict future performance and manage limits for existing loans
and collection activities. Credit scores are one of the factors employed in the acquisition of new clients and management of
existing clients. The credit score of the borrower is used to assess credit risk for each independent acquisition or account
management action, leading to an automated decision or guidance for an adjudicator. Credit scoring improves credit decision
We seek to continuously improve our credit scoring and analytic capabilities by exploring client behavioral data and
advanced analytical techniques to make sound credit decisions.
rating categories. The following table maps PD bands to various summarized risk levels for retail exposures:
Internal ratings map*
Table 43
PD bands | Description |
0.050% – 3.965% | Low risk |
3.966% – 7.428% | Medium risk |
7.429% – 99.99% | High risk |
100% | Impaired/Default |
*
This table represents an integral part of our 2023 Annual Consolidated Financial Statements.
Credit risk mitigation
use of collateral.
Structuring of transactions
Specific credit policies and procedures set out the requirements for structuring transactions. Risk mitigants include the use
of guarantees, collateral, seniority, LTV requirements and covenants. Product-specific guidelines set out appropriate
product structuring as well as client and guarantor criteria.
Collateral
When we advance credit, we often require obligors to pledge collateral as security. The extent of risk mitigation provided by
collateral depends on the amount, type and quality of the collateral taken. Specific requirements relating to collateral
valuation and management are set out in our credit risk management policies.
The types of collateral we use to secure credit or trading facilities within the bank are varied. For example, our securities
financing and collateralized OTC derivatives activities are primarily secured by cash and highly-rated liquid government and
agency securities. Wholesale lending to business clients is often secured by pledges of the assets of the business, such as
accounts receivable, inventory, operating assets and commercial real estate. In Canadian Banking and Wealth Management,
collateral typically consists of a pledge over a real estate property, or a portfolio of debt securities and equities trading on a
recognized exchange.
•
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
•
We continue to actively manage our mortgage portfolio and perform stress testing, based on a combination of
increasing unemployment, rising interest rates and a downturn in real estate markets.
•
We seek to be in compliance with regulatory requirements that govern residential mortgage underwriting practices,
including LTV parameters and property valuation requirements.
held during the period.
Credit risk approval
The Board, GE, GRC and other senior management committees work together to ensure the ECRMF and supporting policies,
processes and procedures exist to manage credit risk and approve related credit risk limits. Reports are provided to the
Board, the GRC, and senior executives to keep them informed of our risk profile, including significant credit risk issues, shifts
in exposures and trending information, to ensure appropriate and timely actions can be taken where necessary. Our
enterprise-wide credit risk policies set out the minimum requirements for the management of credit risk in a variety of
borrower, transactional and portfolio management contexts.
Transaction approval
Credit transactions are governed by our RBC Enterprise Policy on Risk Limits and Risk Approval Authorities that captures the
authorities and risk limits delegated to management as well as the credit rules policy, which outlines the minimum standards
for managing credit risk at the individual client relationship and/or transaction level. The credit rules policy is further
supported by business and/or product-specific policies and guidelines as appropriate. Where a transaction will exceed
senior management’s authorities, the approval of the Risk Committee of the Board is required.
Product approval
Proposals for credit products and services are comprehensively reviewed and approved under a risk assessment process
and are subject to product and suitability risk approval authorities which increase as the level of risk increases. New and
amended products must be reviewed relative to all risk drivers, including credit risk. All existing products must be reviewed
on a regular basis following a risk-based assessment approach.
Credit risk limits
•
The allocation of risk appetite and Board delegated authorities are supported by the establishment of risk limits which
take both regulatory constraints and internal risk management judgment into account. Risk limits are established at the
following levels: single name limits, regional, country and industrial sector limits (notional and economic capital),
regulatory large exposure limits, product and portfolio limits, and underwriting and distribution risk limits. These limits
apply across all businesses, portfolios, transactions and products.
•
We actively manage credit exposures and limits to ensure alignment with our risk appetite, to maintain our target
business mix and to ensure that there is no undue concentration risk.
•
Concentration risk is defined as the risk arising from large exposures that are highly correlated such that their
ability to meet contractual obligations could be similarly affected by changes in economic, political, or other risk
drivers.
•
Credit concentration limits are reviewed on a regular basis after considering business, economic, financial, and
Credit risk administration
Loan forbearance
In our overall management of borrower relationships, economic or legal reasons may necessitate forbearance to certain clients
with respect to the original terms and conditions of their loans. We have specialized groups and formalized policies that direct
the management of high risk, delinquent or defaulted borrowers. We strive to identify borrowers in financial difficulty early and
modify their loan terms to minimize losses and assist clients in need. A forbearance agreement may be entered into with the
borrower where we will forbear from enforcing on security in exchange for concessions made by the borrower. In these
circumstances, a borrower may be granted concessions that would not otherwise be considered. Examples of such concessions
to retail borrowers may include rate reduction, payment deferral and term extensions. Concessions to wholesale borrowers may
include payment deferral, restructuring the agreements, modifying the original terms of the agreement and/or relaxation of
covenants. For both retail and wholesale loans, the appropriate remediation techniques are based on the individual borrower’s
situation, our policy and the client’s willingness and capacity to meet the new arrangement.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
75
Credit risk exposure by portfolio, sector and geography
The following table presents our credit risk exposures under the Basel regulatory defined classes and reflects EAD. The
classification of our sectors aligns with our view of credit risk by industry.
Credit risk exposure by portfolio, sector and geography
Table 44
As at
October 31
2023
(1)
October 31
2022
Credit risk
(2), (3)
Counterparty credit risk
(6)
Credit risk (2), (3)
Counterparty credit risk
(6)
On-balance
sheet amount
Off-balance sheet
amount
(4)
Repo-style
transactions
Derivatives
Total
exposure
On-balance
sheet amount
Off-balance sheet
amount (4)
Repo-style
transactions
Derivatives
Total
exposure
(Millions of Canadian dollars)
Undrawn
Other
(5)
Undrawn
Other (5)
Retail
Residential secured
(7)
$
451,610
$
114,612
$
–
$
–
$
–
$
566,222
$
393,346
$ 107,604
$
–
$
–
$
–
$
500,950
Qualifying revolving
(8)
36,091
110,473
–
–
–
146,564
32,474
94,949
–
–
–
127,423
Other retail
48,162
20,804
136
–
–
69,102
98,070
19,993
136
–
–
118,199
Total retail
$
535,863
$ 245,889
$
136
$
–
$
–
$
781,888
$
523,890
$ 222,546
$
136
$
–
$
–
$
746,572
Wholesale
Agriculture
$
11,316
$
2,792
$
46
$
–
$
117
$
14,271
$
10,417
$
2,089
$
36
$
–
$
161
$
12,703
Automotive
11,568
8,586
680
–
1,148
21,982
8,919
9,184
317
–
1,606
20,026
Banking
82,319
3,060
2,267
101,736
41,300
230,682
73,335
5,487
1,036
111,559
38,830
230,247
Consumer discretionary
18,348
9,132
650
–
1,030
29,160
19,666
9,297
569
–
949
30,481
Consumer staples
8,680
6,996
546
–
2,070
18,292
7,103
6,750
346
–
1,923
16,122
Oil and gas
6,498
8,373
1,614
–
3,134
19,619
6,086
11,272
1,923
–
5,959
25,240
Financial services
48,589
24,140
4,818
83,692
22,611
183,850
45,394
25,017
3,530
69,790
24,546
168,277
Financing products
3,988
1,265
1,447
472
1,079
8,251
5,762
2,352
163
237
780
9,294
Forest products
1,485
1,004
313
–
67
2,869
1,143
1,033
230
–
78
2,484
Governments
270,382
6,960
1,482
10,736
5,692
295,252
279,401
5,678
1,563
18,745
6,290
311,677
Industrial products
11,251
9,898
623
–
811
22,583
10,755
9,319
601
–
1,216
21,891
Information technology
5,252
6,942
357
118
704
13,373
5,291
7,144
298
55
1,908
14,696
Investments
25,921
4,608
701
–
383
31,613
23,764
3,946
669
157
458
28,994
Mining and metals
2,144
3,548
1,044
–
391
7,127
2,377
4,259
945
–
467
8,048
Public works and
infrastructure
2,613
1,534
529
–
156
4,832
2,614
2,417
497
–
144
5,672
Real estate and related
102,235
20,406
1,592
–
850
125,083
89,926
18,295
1,872
–
818
110,911
Other services
30,617
14,203
2,598
–
741
48,159
27,839
13,425
2,848
33
852
44,997
Telecommunication
and media
8,597
6,529
132
–
2,794
18,052
7,301
8,298
79
–
2,751
18,429
Transportation
8,461
5,925
1,009
–
2,408
17,803
6,394
6,386
930
–
2,069
15,779
Utilities
14,495
20,389
6,367
–
4,638
45,889
12,318
20,651
5,275
–
5,081
43,325
Other sectors
8,698
2,773
1,193
88
20,084
32,836
4,113
1,700
71
73
20,126
26,083
Total wholesale
$
683,457
$ 169,063
$ 30,008
$ 196,842
$ 112,208
$ 1,191,578
$
649,918
$ 173,999
$ 23,798
$ 200,649
$ 117,012
$ 1,165,376
Total exposure
(2)
$ 1,219,320
$ 414,952
$ 30,144
$ 196,842
$ 112,208
$ 1,973,466
$ 1,173,808
$ 396,545
$ 23,934
$ 200,649
$ 117,012
$ 1,911,948
By geography
(9)
Canada
$
729,131
$
306,474
$
10,676
$
80,664
$
42,123
$
1,169,068
$
697,015
$ 284,705
$
9,444
$
79,795
$
41,923
$ 1,112,882
U.S.
358,605
79,256
13,459
62,966
24,878
539,164
334,821
79,829
10,145
59,866
24,161
508,822
Europe
58,496
21,987
3,467
27,637
31,749
143,336
79,343
25,485
2,603
39,244
36,107
182,782
Other International
73,088
7,235
2,542
25,575
13,458
121,898
62,629
6,526
1,742
21,744
14,821
107,462
Total exposure
(2)
$ 1,219,320
$ 414,952
$ 30,144
$ 196,842
$ 112,208
$ 1,973,466
$ 1,173,808
$ 396,545
$ 23,934
$ 200,649
$ 117,012
$ 1,911,948
(1)
Balances as at October 31, 2023 reflect our adoption of the revised CAR guidelines that came into effect in Q2 2023 as part of OSFI’s implementation of the Basel III
reforms.
(2)
Excludes securitization, banking book equities and other assets not subject to the standardized or IRB approach.
(3)
EAD for standardized exposures are reported net of allowance for impaired assets and EAD for IRB exposures are reported gross of all ACL and partial write-offs as per
regulatory definitions.
(4)
EAD for undrawn credit commitments and other off-balance sheet amounts are reported after the application of credit conversion factors.
(5)
Includes other off-balance sheet exposures such as letters of credit and guarantees.
(6)
Counterparty credit risk EAD reflects exposure amounts after netting. Collateral is included in EAD for repo-style transactions to the extent allowed by regulatory
guidelines. Exchange traded derivatives are included in Other sectors.
(7)
Includes residential mortgages and home equity lines of credit.
(8)
Includes credit cards, unsecured lines of credit and overdraft protection products.
(9)
Geographic profile is based on country of residence of the borrower.
2023 vs. 2022
Total credit risk exposure increased $62 billion or 3% from last year, primarily due to volume growth in loans and undrawn
commitments.
76
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Net International exposure by region and client type
(1), (2)
Table 45
As at
October 31
2023
October 31
2022
Asset type
Client type
(Millions of Canadian dollars)
Loans
Outstanding
Securities
(3)
Repo-style
transactions
Derivatives
Financials
Sovereign
Corporate
Total
Total
Europe (excluding
U.K.)
$ 15,112
$ 19,204
$
1,772
$
2,271
$ 15,202
$
5,518
$ 17,639
$
38,359
$
57,753
U.K.
7,144
23,919
534
3,131
9,318
17,791
7,619
34,728
39,949
Caribbean
8,331
11,029
381
186
7,267
4,190
8,470
19,927
19,688
Asia-Pacific
6,746
36,150
1,695
1,083
15,004
25,344
5,326
45,674
35,338
Other
(4)
357
1,876
332
20
427
1,693
465
2,585
3,043
Net International
exposure
(5), (6)
$ 37,690
$ 92,178
$
4,714
$
6,691
$ 47,218
$ 54,536
$ 39,519
$ 141,273
$ 155,771
(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)
Exposures are calculated on a fair value basis and net of collateral, which includes $326 billion against repo-style transactions (October 31, 2022 – $357 billion) and
$15 billion against derivatives (October 31, 2022 – $14 billion).
(3)
Securities include $13 billion of trading securities (October 31, 2022 – $13 billion), $41 billion of deposits (October 31, 2022 – $56 billion), and $38 billion of investment
securities (October 31, 2022 – $35 billion).
(4)
Includes exposures in the Middle East, Africa, and Latin America.
(5)
Excludes $4,790 million (October 31, 2022 – $5,213 million) of exposures to supranational agencies.
(6)
Reflects $2,533 million of mitigation through credit default swaps, which are largely used to hedge single name exposures and market risk (October 31, 2022 –
$2,233 million).
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
77
Residential mortgages and home equity lines of credit (insured vs. uninsured)
(1)
Residential mortgages and home equity lines of credit are secured by residential properties. The following table presents a
breakdown by geographic region.
Residential mortgages and home equity lines of credit
Table 46
As at October 31, 2023
(Millions of Canadian dollars,
except percentage amounts)
Residential mortgages
Home equity
lines of credit
(3)
Insured
(2)
Uninsured
Total
Total
Region
(4)
Canada
Atlantic provinces
$
8,474
44%
$
10,765
56%
$
19,239
$
1,630
Quebec
11,831
27
31,741
73
43,572
3,111
Ontario
30,359
15
168,264
85
198,623
16,558
Alberta
18,840
45
22,596
55
41,436
4,403
Saskatchewan and
Manitoba
8,546
42
11,803
58
20,349
1,749
B.C. and territories
11,911
16
62,475
84
74,386
7,048
Total Canada
(5)
89,961
23
307,644
77
397,605
34,499
U.S.
–
–
33,683
100
33,683
2,090
Other International
–
–
3,213
100
3,213
1,538
Total International
–
–
36,896
100
36,896
3,628
Total
$ 89,961
21%
$ 344,540
79%
$ 434,501
$ 38,127
As at October 31, 2022
(Millions of Canadian dollars,
except percentage amounts)
Residential mortgages
Home equity
lines of credit
(3)
Insured
(2)
Uninsured
Total
Total
Region
(4)
Canada
Atlantic provinces
$
8,460
46%
$
10,052
54%
$
18,512
$
1,659
Quebec
12,444
29
30,623
71
43,067
3,300
Ontario
31,409
17
156,700
83
188,109
17,009
Alberta
19,663
47
22,154
53
41,817
4,923
Saskatchewan and
Manitoba
8,847
43
11,808
57
20,655
1,940
B.C. and territories
12,290
17
59,347
83
71,637
7,386
Total Canada
(5)
93,113
24
290,684
76
383,797
36,217
U.S.
–
–
31,956
100
31,956
1,776
Other International
–
–
3,043
100
3,043
1,621
Total International
–
–
34,999
100
34,999
3,397
Total
$
93,113
22%
$
325,683
78%
$
418,796
$
39,614
(1)
Disclosure is provided in accordance with the requirements of OSFI’s Guideline B-20 (Residential Mortgage Underwriting Practices and
Procedures).
(2)
Insured residential mortgages are mortgages whereby our exposure to default is mitigated by insurance through the Canadian
Mortgage and Housing Corporation or other private mortgage default insurers.
(3)
Includes $38,108 million and $19 million of uninsured and insured home equity lines of credit, respectively (October 31, 2022 –
$39,591 million and $23 million, respectively), reported within the personal loan category. The amounts in the U.S. and Other
International include term loans collateralized by residential mortgages.
(4)
Region is based upon the address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador,
Prince Edward Island, Nova Scotia and New Brunswick, and B.C. and territories are comprised of British Columbia, Nunavut, Northwest
Territories and Yukon.
(5)
Total consolidated residential mortgages in Canada of $398 billion (October 31, 2022 – $384 billion) includes $12 billion (October 31, 2022 –
$12 billion) of mortgages with commercial clients in Canadian Banking, of which $9 billion (October 31, 2022 – $9 billion) are insured
mortgages, and $18 billion (October 31, 2022 – $17 billion) of residential mortgages in Capital Markets, of which $18 billion (October 31,
2022 – $17 billion) are held for securitization purposes. All of the residential mortgages held for securitization purposes are insured
(October 31, 2022 – all insured).
78
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Residential mortgages portfolio by amortization period
(1)
The following table provides a summary of the percentage of residential mortgages that fall within the remaining amortization
periods based upon current customer payment amounts, which incorporate payments larger than the minimum contractual
amount and/or higher frequency of payments.
Residential mortgages portfolio by amortization period
Table 47
As at
October 31
2023
October 31
2022
Canada
(2)
U.S. and other
International
Total
Canada
U.S. and other
International
Total
Amortization period
≤
25 years
57%
26%
55%
57%
25%
54%
> 25 years
≤
30 years
20
74
24
16
75
21
> 30 years
≤
35 years
1
–
1
2
–
2
> 35 years
22
–
20
25
–
23
Total
100%
100%
100%
100%
100%
100%
(1)
Disclosure is provided in accordance with the requirements of OSFI’s Guideline B-20 (Residential Mortgage Underwriting Practices and
Procedures).
(2)
Our policy is to originate mortgages with amortization periods of 30 years or less. Amortization periods greater than 30 years reflect the
impact of increases in interest rates on our variable rate mortgage portfolios. For these loans, the amortization period resets to the
original amortization schedule upon renewal. We do not originate mortgage products with a structure that would result in negative
amortization, as payments on variable rate mortgages automatically increase to ensure accrued interest is covered.
Average LTV ratios
(1)
The following table provides a summary of our average LTV ratios for newly originated and acquired uninsured residential
mortgages and RBC Homeline Plan
®
products by geographic region, as well as the respective LTV ratios for our total Canadian
Banking residential mortgage portfolio outstanding.
Average LTV ratios
Table 48
For the year ended
October 31
2023
October 31
2022
Uninsured
Uninsured
Residential
mortgages
(2)
RBC Homeline
Plan
®
products
(3)
Residential
mortgages
(2)
RBC Homeline
Plan
®
products
(3)
Average of newly originated
and acquired for the period,
by region
(4)
Atlantic provinces
71%
71%
72%
73%
Quebec
70
70
72
72
Ontario
70
64
70
66
Alberta
72
71
73
73
Saskatchewan and Manitoba
73
73
73
75
B.C. and territories
68
63
68
66
U.S.
74
n.m.
75
n.m.
Other International
69
n.m.
72
n.m.
Average of newly originated
and acquired for the
period
(5), (6)
70%
66%
71%
68%
Total Canadian Banking
residential mortgages
portfolio
(7)
55%
47%
52%
46%
(1)
Disclosure is provided in accordance with the requirements of OSFI’s Guideline B-20 (Residential Mortgage Underwriting Practices and
Procedures).
(2)
Residential mortgages exclude residential mortgages within the RBC Homeline Plan
®
products.
(3)
RBC Homeline Plan
®
products are comprised of both residential mortgages and home equity lines of credit.
(4)
Region is based upon address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, Prince
Edward Island, Nova Scotia and New Brunswick, and B.C. and territories are comprised of British Columbia, Nunavut, Northwest
Territories and Yukon.
(5)
The average LTV ratio for newly originated and acquired uninsured residential mortgages and RBC Homeline Plan
®
products is calculated
on a weighted basis by mortgage amounts at origination.
(6)
For newly originated mortgages and RBC Homeline Plan
®
products, LTV is calculated based on the total facility amount for the residential
mortgage and RBC Homeline Plan
®
product divided by the value of the related residential property.
(7)
Weighted by mortgage balances and adjusted for property values based on the Teranet – National Bank National Composite House Price
Index.
n.m.
not meaningful
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
79
Credit quality performance
The following credit quality performance tables and analysis provide information on loans, which represents loans, acceptances
and commitments, and other financial assets.
Gross impaired loans (GIL)
Table 49
As at and for the year ended
(Millions of Canadian dollars, except percentage amounts)
October 31
2023
October 31
2022
Personal & Commercial Banking
$
1,905
$
1,362
Wealth Management
514
278
Capital Markets
1,285
559
Total GIL
$
3,704
$
2,199
Impaired loans, beginning balance
$
2,199
$
2,308
Classified as impaired during the period (new impaired)
(1)
3,959
1,711
Net repayments
(1)
(622)
(450)
Amounts written off
(1,572)
(1,149)
Other
(2)
(260)
(221)
Impaired loans, balance at end of period
$
3,704
$
2,199
GIL as a % of related loans and acceptances
Total GIL as a % of related loans and acceptances
0.42%
0.26%
Personal & Commercial Banking
0.31%
0.23%
Canadian Banking
0.26%
0.18%
Caribbean Banking
3.45%
3.93%
Wealth Management
(3)
0.44%
0.24%
Capital Markets
(3)
0.89%
0.39%
(1)
Certain GIL movements for Canadian Banking retail and wholesale portfolios are generally allocated to new impaired, as
Net repayments and certain Other movements are not reasonably determinable. Certain GIL movements for Caribbean
Banking retail and wholesale portfolios are generally allocated to Net repayments and new impaired, as Net repayments
and certain Other movements are not reasonably determinable.
(2)
Includes return to performing status during the period, recoveries of loans and advances previously written off, sold, and
foreign exchange translation and other movements.
(3)
Amounts have been revised from those previously presented to conform to our new basis of segment presentation. For
further details, refer to the About Royal Bank of Canada section.
2023 vs. 2022
Total GIL of $3,704 million increased $1,505 million or 68% from last year and the total GIL ratio of 42 bps increased 16 bps, due to
higher impaired loans in Capital Markets, Personal & Commercial Banking and Wealth Management.
GIL in Personal & Commercial Banking increased $543 million or 40%, primarily due to higher impaired loans in our Canadian
Banking retail and commercial portfolios. Higher impaired loans in our Canadian Banking commercial portfolios were in a few
sectors, mainly the consumer discretionary and real estate and related sectors.
GIL in Wealth Management increased $236 million or 85%, mainly driven by higher impaired loans in U.S. Wealth
Management (including City National) in a few sectors, including the real estate and related and telecom and media sectors,
partially offset by lower impaired loans in the consumer discretionary sector.
GIL in Capital Markets increased $726 million, mainly due to higher impaired loans in the real estate and related and telecom
and media sectors, partially offset by lower impaired loans in the other services sector.
Allowance for credit losses
Table 50
As at
(Millions of Canadian dollars)
October 31
2023
October 31
2022
Personal & Commercial Banking
$
3,718
$
3,200
Wealth Management
(1)
618
383
Capital Markets
(1)
1,012
598
ACL on loans
5,348
4,181
ACL on other financial assets
(2)
18
33
Total ACL
$
5,366
$
4,214
ACL on loans is comprised of:
Retail
$
2,591
$
2,285
Wholesale
1,609
1,227
ACL on performing loans
$
4,200
$
3,512
ACL on impaired loans
1,148
669
(1)
Amounts have been revised from those previously presented to conform to our new basis of segment presentation. For
further details, refer to the About Royal Bank of Canada section.
(2)
ACL on other financial assets mainly represents allowances on debt securities measured at FVOCI and amortized cost,
accounts receivable and financial guarantees.
2023 vs. 2022
Total ACL of $5,366 million increased $1,152 million or 27% from last year, primarily reflecting an increase of $1,167 million in ACL
on loans.
80
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
ACL on performing loans of $4,200 million increased $688 million or 20%, mainly due to higher ACL in Personal & Commercial
Banking, reflecting unfavourable changes in credit quality and portfolio growth. Higher ACL in Wealth Management and Capital
Markets also contributed to the increase.
ACL on impaired loans of $1,148 million increased $479 million or 72%, primarily due to higher ACL in Capital Markets and
Personal & Commercial Banking.
due to changes in market determined variables such as interest rates, credit spreads, equity prices, commodity prices, foreign
The measures of financial condition impacted by market risk are as follows:
1.
Positions whose revaluation gains and losses are reported in revenue, which includes:
a)
Changes in the fair value of instruments classified or designated as FVTPL, and
b)
Hedge ineffectiveness.
2.
CET1 capital, which includes:
a)
All of the above, plus
b)
Changes in the fair value of FVOCI securities where revaluation gains and losses are reported as OCI,
c)
Changes in the Canadian dollar value of investments in foreign subsidiaries, net of hedges, due to foreign exchange
translation, and
d)
Changes in the fair value of employee benefit plan deficits.
3.
CET1 ratio, which includes:
a)
All of the above, plus
b)
Changes in RWA resulting from changes in traded market risk factors, and
c)
Changes in the Canadian dollar value of RWA due to foreign exchange translation.
4.
The economic value of the Bank, which includes:
a)
Points 1 and 2 above, plus
b)
Changes in the economic value of other non-trading positions, net interest income, and fee based income, as a
result of changes in market risk factors.
1
As an element of the ERAF, the Board approves our overall market risk constraints. GRM creates and manages the control
structure for FVTPL positions which are designed to ensure that business is conducted on a basis consistent with Board
requirements. The Market and Counterparty Credit Risk function within GRM is responsible for creating and managing the
controls and governance procedures that are designed to ensure that risk taken is consistent with risk appetite constraints set
by the Board. These controls include limits on probabilistic measures of potential loss such as Value-at-Risk and stress tests as
defined below:
Value-at-Risk (VaR)
is a statistical measure of potential loss for a financial portfolio computed at a given level of
confidence and over a defined holding period. We measure VaR at the 99th percentile confidence level for price movements
over a one-day holding period using historic simulation of the last two years of equally weighted historic market data.
These calculations are updated daily with current risk positions, with the exception of certain less material positions that
are not actively traded and are updated on at least a monthly basis.
Trading VaR captures potential loss for our trading
portfolio that excludes the impacts of non-trading FVTPL positions such as loan underwriting commitments. Total VaR
captures potential loss for all positions classified as FVTPL.
VaR is a statistical estimate based on historical market data and should be interpreted with knowledge of its limitations,
which include the following:
•
VaR will not be predictive of future losses if the realized market movements differ significantly from the historical
periods used to compute it.
•
VaR projects potential losses over a one-day holding period and does not project potential losses for risk positions
held over longer time periods.
•
VaR is measured using positions at close of business and does not include the impact of trading and hedging activity
over the course of a day.
We validate our VaR 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 and range in duration up to 90 days. Examples include the COVID-19 Pandemic of 2020, Global Financial Crisis
of 2008 and the Taper Tantrum of 2013. Hypothetical scenarios are designed to be forward-looking at potential future market
stresses, and are designed to be severe but plausible. We are constantly evaluating and refining these scenarios as market
conditions change. Stress results are calculated assuming an instantaneous revaluation of our positions with no
1
Trading portfolios are comprised of trading instruments in accordance with OSFI’s Capital Adequacy Requirements (CAR) Guideline. Trading involves market-making,
positioning and arbitrage activities conducted primarily within our Global Markets business in the Capital Markets segment.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
81
These measures are computed on all positions that are FVTPL for financial reporting purposes, with the exception of those in a
designated hedging relationship and those in our insurance businesses.
Market risk measures – FVTPL positions
Table 51
| October 31, 2023 | October 31, 2022 (1) | |||||||
| For the year ended | For the year ended | |||||||
(Millions of Canadian dollars) | As at | Average | High | Low | As at | Average | High | Low |
Equity | $ 10 | $ 11 | $ 26 | $ 6 | $ 20 | $ 18 | $ 30 | $ 10 |
Foreign exchange | 4 | 3 | 25 | 2 | 3 | 4 | 7 | 1 |
Commodities | 5 | 5 | 8 | 4 | 6 | 5 | 6 | 3 |
Interest rate (2) | 38 | 32 | 49 | 20 | 31 | 29 | 65 | 13 |
Credit specific (3) | 7 | 5 | 8 | 4 | 5 | 7 | 9 | 4 |
Diversification (4) | (35) | (31) | n.m. | n.m. | (34) | (33) | n.m. | n.m. |
Trading VaR | $ 29 | $ 25 | $ 36 | $ 16 | $ 31 | $ 30 | $ 50 | $ 19 |
Total VaR (5) | $ 121 | $ 51 | $ 127 | $ 27 | $ 59 | $ 53 | $ 87 | $ 34 |
*
This table represents an integral part of our 2023 Annual Consolidated Financial Statements.
(1)
Amounts have been revised from those previously presented to align with a trading VaR view.
(2)
General credit spread risk and funding spread risk associated with uncollateralized derivatives are included under interest rate VaR.
(3)
Credit specific risk captures issuer-specific credit spread volatility.
(4)
Trading VaR is less than the sum of the individual risk factor VaR results due to risk factor diversification.
(5)
The average total VaR for the year ended October 31, 2023 includes $14 million (October 31, 2022 – $11 million) related to loan underwriting commitments.
n.m.
not meaningful
2023 vs. 2022
Average Trading VaR of $25 million decreased $5 million from last year, primarily driven by exposure changes in our equity
derivatives portfolio.
Average total VaR of $51 million remained stable. Total VaR was elevated as at October 31, 2023, primarily reflecting the
impact of economic hedges.
The following chart displays a bar graph of our daily trading revenue and a line graph of our daily market risk Trading VaR. We
incurred 1 day of net trading losses in 2023, largely associated with stresses in the U.S. regional banking sector in Q2 2023.
Trading revenue
(teb),
(1)
and Trading VaR
(2)
(Millions of Canadian dollars)
Nov 1, 2022
Jan 31, 2023
Apr 30, 2023
Jul 31, 2023
Oct 31, 2023
80
60
40
20
-20
-40
0
-60
Tradin
g
Revenue (teb)
(1)
Trading VaR
(2)
(1)
Trading revenue (teb) amounts in the chart above exclude the impact of loan underwriting commitments.
(2)
VaR amounts in the chart above have been revised from those previously presented to reflect Trading VaR corresponding to our trading porfolios.
82
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
The following chart displays the distribution of daily trading revenue in 2023 and 2022 with 1 day of net trading losses in 2023 as
mentioned above and 4 days of net trading losses in 2022. The largest reported trading revenue was $56 million with an average
daily revenue of $17 million.
Frequency in Number of Days
Daily net trading revenue (C$ millions)
2023
2022
0
10
20
30
40
50
60
70
80
90
Trading revenue for the year ended October
31, 2023
(teb), (1)
(1)
(1)
Trading revenue (teb) amounts in the chart above exclude the impact of loan underwriting commitments and structured entities.
Market risk measures for assets and liabilities of RBC Insurance
®
We offer a range of insurance products to clients and hold investments to meet the future obligations to policyholders. The
investments which support actuarial liabilities are predominantly fixed income assets designated as FVTPL. Consequently,
changes in the fair values of these assets are recorded in the Consolidated Statements of Income and are largely offset by
changes in the fair value of the actuarial liabilities, the impact of which is reflected in PBCAE. As at October 31, 2023, we held
assets in support of approximately $12 billion of liabilities with respect to insurance obligations (October 31, 2022 – $12 billion).
2
IRRBB arises primarily from traditional customer-originated banking products such as deposits and loans, and includes
related hedges and interest rate risk from securities held for liquidity management purposes. Factors contributing to IRRBB
include mismatches between asset and liability repricing dates, relative changes in asset and liability rates in response to
market rate scenarios, and other product features affecting the expected timing of cash flows, such as options to pre-pay
loans or redeem term deposits prior to contractual maturity. IRRBB sensitivities are regularly measured and reported, and
subject to limits and controls with independent oversight from GRM.
The Board approves the risk appetite for IRRBB, and the Asset Liability Committee (ALCO) and GRM provide ongoing
governance through IRRBB risk policies, limits, operating standards and other controls. IRRBB reports are reviewed regularly
by GRM, ALCO, the GRC, the Risk Committee of the Board and the Board.
IRRBB measurement
To monitor and control IRRBB, we assess two primary metrics, Net Interest Income (NII) risk and Economic Value of Equity
(EVE) risk, under a range of market shocks, scenarios, and time horizons. Market scenarios include currency-specific parallel
and non-parallel yield curve changes, interest rate volatility shocks, and interest rate scenarios prescribed by regulators.
In measuring NII risk, detailed banking book balance sheets and income statements are dynamically simulated to
estimate the impact of market stress scenarios on projected NII. Assets, liabilities and off-balance sheet positions are
simulated over various time horizons. The simulations incorporate maturities, renewals, and new originations along with
prepayment and redemption behaviour. Product pricing and volumes are forecasted based on past experience to determine
response expectations under a given market shock scenario. EVE risk captures the market value sensitivity to changes in
rates. In measuring EVE risk, deterministic (single-scenario) and stochastic (multiple-scenario) valuation techniques are
applied to spot position data. NII and EVE risks are measured for a range of market risk stress scenarios which include
extreme but plausible changes in market rates and volatilities. IRRBB measures assume continuation of existing hedge
strategies.
Management of NII and EVE risk is complementary and supports our efforts to generate a sustainable high-quality NII
stream. NII and EVE risks for specific units are measured daily, weekly or monthly depending on materiality, complexity and
hedge strategy.
A number of assumptions affecting cash flows, product re-pricing and the administration of rates underlie the models
used to measure NII and EVE risk. The key assumptions pertain to the projected funding date of mortgage rate commitments,
fixed-rate loan prepayment behaviour, term deposit redemption behaviour, and the term and rate profile of non-maturity
deposits. All assumptions are derived empirically based on historical client behaviour and product pricing with consideration
of possible forward-looking changes. All models and assumptions used to measure IRRBB are subject to independent
oversight by GRM.
Market risk measures – IRRBB Sensitivities
The following table shows the potential before-tax impact of an immediate and sustained 100 bps increase or decrease in
interest rates on projected EVE and 12-month NII, assuming no subsequent hedging. Interest rate risk measures are based on
current on and off-balance sheet positions which can change over time in response to business activity and management
2
IRRBB positions include the impact of derivatives in hedge accounting relationships, FVOCI securities used for interest rate risk management and economic hedges.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
83
Table 52
October 31 | October 31 | |||||||
2023 | 2022 | |||||||
EVE risk | NII risk (1) | |||||||
Canadian | U.S. dollar | Canadian | U.S. dollar | |||||
(Millions of Canadian dollars) | dollar impact | impact | Total | dollar impact | impact | Total | EVE risk | NII risk (1) |
Before-tax impact of: | ||||||||
100 bps increase in rates | $ (1,445) | $ (107) | $ (1,552) | $ 381 | $ 270 | $ 651 | $ (1,900) | $ 781 |
100 bps decrease in rates | 1,430 | (77) | 1,353 | (409) | (342) | (751) | 1,709 | (839) |
*
This table represents an integral part of our 2023 Annual Consolidated Financial Statements.
(1)
Represents the 12-month NII exposure to an instantaneous and sustained shift in interest rates.
As at October 31, 2023, an immediate and sustained -100 bps shock would have had a negative impact to our NII of $751 million,
down from $839 million last year, and an immediate and sustained +100 bps shock would have had a negative impact to our EVE
of $1,552 million, down from $1,900 million last year. The change in NII sensitivity reflects a change in product mix and the change
in EVE sensitivity can be attributed to a reduction in the term of fixed rate assets. During 2023, NII and EVE risks remained within
approved limits.
Market risk measures for other material non-trading portfolios
Investment securities carried at FVOCI
We held $128 billion of investment securities carried at FVOCI as at October 31, 2023, compared to $93 billion at the end of the
prior year. We hold debt securities carried at FVOCI primarily as investments, as well as to manage liquidity risk and hedge
interest rate risk in our non-trading banking balance sheet. As at October 31, 2023, our portfolio of investment securities carried
at FVOCI is interest rate sensitive and would impact OCI by a pre-tax change in value of $5 million as measured by the change in
the value of the securities for a one basis point parallel increase in yields. The portfolio also exposes us to credit spread risk of a
pre-tax change in value of $28 million, as measured by the change in value for a one basis point widening of credit spreads. The
value of the investment securities carried at FVOCI included in our IRRBB measures as at October 31, 2023 was $125 billion. Our
investment securities carried at FVOCI also include equity exposures of $1 billion as at October 31, 2023, compared to $1 billion at
the end of the prior year.
Foreign exchange rate risk is the potential adverse impact on earnings and economic value due to changes in foreign currency
rates. Our revenue, expenses and income denominated in currencies other than the Canadian dollar are subject to
fluctuations as a result of changes in the value of the average Canadian dollar relative to the average value of those
currencies. Our most significant exposure is to the U.S. dollar, due to our operations in the U.S. and other activities conducted
in U.S. dollars. Our other significant exposure is to the British pound due to our activities conducted internationally in this
currency. A strengthening or weakening of the Canadian dollar compared to the U.S. dollar and British pound could reduce or
increase, as applicable, the translated value of our foreign currency denominated revenue, expenses and earnings and could
have a significant effect on the results of our operations. We are also exposed to foreign exchange rate risk arising from our
investments in foreign operations. For unhedged equity investments, when the Canadian dollar appreciates against other
currencies, the unrealized translation losses on net foreign investments decreases our shareholders’ equity through the other
components of equity and decreases the translated value of the RWA of the foreign currency-denominated asset. The reverse
is true when the Canadian dollar depreciates against other currencies. Consequently, we consider these impacts in selecting
Derivatives related to non-trading activity
Derivatives are also used to hedge market risk exposure unrelated to our trading activity. Hedge accounting is elected where
applicable. These derivatives are included in our IRRBB measures and other internal non-trading market risk measures. We use
interest rate swaps to manage our IRRBB, funding and investment activities. Interest rate swaps are also used to hedge changes
in the fair value of certain fixed-rate instruments. We also use foreign exchange derivatives to manage our exposure to equity
investments in subsidiaries that are denominated in foreign currencies, particularly the U.S. dollar, British Pound, and Euro.
For further details on the application of hedge accounting and the use of derivatives for hedging activities, refer to Notes 2 and 9
of our 2023 Annual Consolidated Financial Statements.
84
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Linkage of market risk to selected balance sheet items
The following tables provide the linkages between selected balance sheet items with positions included in our trading market risk
and non-trading market risk disclosures, which illustrates how we manage market risk for our assets and liabilities through
different risk measures:
Linkage of market risk to selected balance sheet items
Table 53
As at October 31, 2023
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
$
61,989
$
–
$
61,989
Interest rate
Interest-bearing deposits with banks
71,086
1
71,085
Interest rate
Securities
Trading
190,151
171,483
18,668
Interest rate, credit spread
Investment, net of applicable allowance
219,579
–
219,579
Interest rate, credit spread, equity
Assets purchased under reverse repurchase
agreements and securities borrowed
340,191
304,672
35,519
Interest rate
Loans
Retail
569,951
–
569,951
Interest rate
Wholesale
287,826
3,134
284,692
Interest rate
Allowance for loan losses
(5,004)
–
(5,004)
Interest rate
Segregated fund net assets
2,760
–
2,760
Interest rate
Other
Derivatives
142,450
139,011
3,439
Interest rate, foreign exchange
Other assets
108,178
8,699
99,479
Interest rate
Assets not subject to market risk
(3)
15,835
Total assets
$
2,004,992
$
627,000
$
1,362,157
Liabilities subject to market risk
Deposits
$
1,231,687
$
51,025
$
1,180,662
Interest rate
Segregated fund liabilities
2,760
–
2,760
Interest rate
Other
Obligations related to securities sold short
33,651
33,555
96
Obligations related to assets sold under
repurchase agreements and securities
loaned
335,238
312,551
22,687
Interest rate
Derivatives
142,629
130,094
12,535
Interest rate, foreign exchange
Other liabilities
109,533
12,491
97,042
Interest rate
Subordinated debentures
11,386
–
11,386
Interest rate
Liabilities not subject to market risk
(4)
20,348
Total liabilities
$
1,887,232
$
539,716
$
1,327,168
Total equity
117,760
Total liabilities and equity
$
2,004,992
(1)
Traded risk includes positions that are classified or designated as FVTPL and positions whose revaluation gains and losses are reported in revenue within our trading
portfolios. Market risk measures of VaR and stress tests are used as risk controls for traded risk.
(2)
Non-traded risk includes positions used in the management of IRRBB and other non-trading portfolios. Other material non-trading portfolios include positions from RBC
Insurance
®
and investment securities, net of applicable allowance, not included in IRRBB.
(3)
Assets not subject to market risk include physical and other assets.
(4)
Liabilities not subject to market risk include payroll related and other liabilities.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
85
As at October 31, 2022 (1)
Market risk measure
(Millions of Canadian dollars)
Balance sheet
amount
Traded risk
(2)
Non-traded
risk
(3)
Non-traded risk
primary risk sensitivity
Assets subject to market risk
Cash and due from banks
$
72,397
$
–
$
72,397
Interest rate
Interest-bearing deposits with banks
108,011
2
108,009
Interest rate
Securities
Trading
148,205
131,071
17,134
Interest rate, credit spread
Investment, net of applicable allowance
170,018
–
170,018
Interest rate, credit spread, equity
Assets purchased under reverse repurchase
agreements and securities borrowed
317,845
287,454
30,391
Interest rate
Loans
Retail
549,751
26
549,725
Interest rate
Wholesale
273,967
5,921
268,046
Interest rate
Allowance for loan losses
(3,753)
–
(3,753)
Interest rate
Segregated fund net assets
2,638
–
2,638
Interest rate
Other
Derivatives
154,439
151,244
3,195
Interest rate, foreign exchange
Other assets
109,629
8,826
100,803
Interest rate
Assets not subject to market risk
(4)
14,072
Total assets
$
1,917,219
$
584,544
$
1,318,603
Liabilities subject to market risk
Deposits
$
1,208,814
$
39,000
$
1,169,814
Interest rate
Segregated fund liabilities
2,638
–
2,638
Interest rate
Other
Obligations related to securities sold short
35,511
35,482
29
Obligations related to assets sold under
repurchase agreements and securities
loaned
273,947
264,025
9,922
Interest rate
Derivatives
153,491
139,406
14,085
Interest rate, foreign exchange
Other liabilities
102,881
10,594
92,287
Interest rate
Subordinated debentures
10,025
–
10,025
Interest rate
Liabilities not subject to market risk
(5)
21,737
Total liabilities
$
1,809,044
$
488,507
$
1,298,800
Total equity
108,175
Total liabilities and equity
$
1,917,219
(1)
Amounts have been revised from those previously presented to align with the definition of trading risk in accordance with OSFI’s CAR Guidelines.
(2)
Traded risk includes positions that are classified or designated as FVTPL and positions whose revaluation gains and losses are reported in revenue within our trading
portfolios. Market risk measures of VaR and stress tests are used as risk controls for traded risk.
(3)
Non-traded risk includes positions used in the management of IRRBB and other non-trading portfolios. Other material non-trading portfolios include positions from RBC
Insurance
®
and investment securities, net of applicable allowance, not included in IRRBB.
(4)
Assets not subject to market risk include physical and other assets.
(5)
Liabilities not subject to market risk include payroll related and other liabilities.
timely and cost-effective manner to meet our commitments. Liquidity risk arises from mismatches in the timing and value of
on-balance sheet and off-balance sheet cash flows.
Governance of liquidity risk
Our liquidity risk management activities are conducted in accordance with internal frameworks and policies, including the
Enterprise Risk Management Framework (ERMF), the Enterprise Risk Appetite Framework (ERAF), the Enterprise Liquidity Risk
Management Framework (LRMF), the Enterprise Liquidity Risk Policy, and the Enterprise Pledging Policy. Collectively, our
frameworks and policies establish liquidity and funding management requirements appropriate for the execution of our
strategy and ensuring liquidity risk remains within our risk appetite.
Liquidity risk objectives, policies and risk appetite are reviewed regularly, and updated to reflect changes in industry
practice and relevant regulatory guidance. Enterprise policies are supported by subsidiary, operational, desk and product-
level policies and standards that specify risk control elements, such as parameters, methodologies, limits and authorities
governing the measurement and management of liquidity. Management practices, parameters, models and methodologies are
also subject to regular review, and are updated to reflect market conditions and business mix. Stress testing is employed to
assess the robustness of the control framework and inform liquidity contingency plans.
Responsibilities for liquidity risk oversight and management
The Board, the Risk Committee of the Board, the Group Risk committee (GRC), the Asset Liability Committee (ALCO), and the
Policy Review Committee (PRC) are accountable for the identification, assessment, control, monitoring and oversight of
liquidity risk. The GRC, PRC and/or the ALCO review liquidity reporting and policies prior to review by the Board or its
committees.
•
The Board, the Risk Committee of the Board, the GRC and the ALCO regularly review information on our consolidated
liquidity position;
•
The PRC approves the Liquidity Risk Policy, which establishes minimum risk control elements in accordance with the
Board-approved risk appetite and the LRMF, and the Pledging Policy, which outlines the requirements and authorities for
the management of our pledging activities;
•
The ALCO annually approves the Enterprise Liquidity Contingency Plan (ELCP) and provides strategic direction and
oversight to Corporate Treasury, other functions, and business segments on the management of liquidity and funding.
In addition to our committee oversight framework, liquidity risk management activities are subject to the three lines of
defence governance model. Corporate Treasury, the first line of defence for the management of liquidity risk, is subject to
independent second line challenge and oversight by GRM. RBC Internal Audit is the third line of defence. The three lines of
defence are independent of the business whose activities generate liquidity risks.
Liquidity risk mitigation strategies and techniques
Our liquidity management policies and practices are designed to ensure the soundness of our liquidity position. Our liquidity
profile is structured to ensure that we have sufficient liquidity to satisfy current and prospective commitments in both normal
and stressed conditions. For this purpose, we employ the following liquidity risk mitigation strategies and techniques:
•
Maintaining a sufficient buffer of cash, central bank reserves, and unencumbered marketable securities, supported by a
demonstrated capacity to monetize these securities during stress;
•
Access to a broad range of funding sources, including a stable base of core client deposits and a diversified wholesale
funding mix;
•
Access to central bank funding facilities in Canada and the U.S., and select other jurisdictions in which we operate;
•
Timely and granular risk measurement and reporting to control and monitor liquidity sources and uses, and inform liquidity
risk management decisions;
•
A comprehensive program for liquidity stress testing and crisis management;
•
Governance of pledging activity through limits and designated liquid asset buffers to address potential increased pledging
activity;
•
Achieving an appropriate balance between the level of exposure allowed under our risk appetite and the cost of risk
mitigation;
•
Transparent liquidity transfer pricing and cost allocation mechanisms to align risk management with business strategies;
and
•
A three-lines-of-defence governance model providing effective oversight and challenge of liquidity risk strategies, metrics,
assumptions, and controls.
Our dedicated liquid asset portfolios are managed and controlled in accordance with internal policies and are subject to
minimum asset quality and other relevant requirements (e.g., term to maturity, diversification, and eligibility for central bank
advances). These securities, along with other unencumbered liquid assets held for trading or other activities, contribute to our
liquidity reserve, as reflected in the liquidity disclosures below.
Risk tolerance
Our liquidity risk appetite is reviewed at a minimum annually by ALCO, GRC, and the Risk Committee of the Board before it is
recommended for approval to the Board. Risk appetite, a key element of our enterprise risk management framework, is
defined as the amount and type of risk that RBC is able and willing to take in pursuit of its business objectives.
Risk measurement and internal liquidity reporting
We maintain robust liquidity risk measurement capabilities to support timely and frequent reporting of information for the
management of our liquidity position and oversight of risk. This reporting, which includes internal and regulatory metrics, is
used to monitor adherence with our risk appetite and limits, and position relative to regulatory minimums. Regulatory metrics
used to manage and control liquidity risk include OSFI’s Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR) and
Net Cumulative Cash Flow (NCCF). The specificity with which we measure and manage liquidity allows us to make ongoing
informed assessments of the demands and mobility of liquidity, considering currency requirements, access to foreign
exchange markets and commitments, and expectations under local regulations.
Internal assessments of liquidity risk include application of scenario-specific assumptions against our assets and
liabilities, and various off-balance sheet commitments and obligations to project cash flows over varying time horizons and
degrees of stress. For example, certain government bonds could be quickly and easily converted to cash without significant
loss of value. In contrast, lower-rated securities may not be deemed appropriate sources of liquidity in times of stress, or may
incur higher potential monetization costs. While relationship-based deposits contractually can be withdrawn immediately, in
practice, these balances can be relatively stable sources of funding depending on several factors, such as the nature of the
client and their intended use. Assumptions and methodologies informing our assessment of liquidity risk are periodically
reviewed and validated to ensure alignment with our operating environment, expected economic and market conditions,
rating agency preferences, regulatory requirements and generally accepted industry practices.
To manage liquidity risk within our liquidity risk appetite, we set limits on various metrics over a range of time horizons,
jurisdictions and currencies. We also consider various levels of stress conditions in our development of appropriate
contingency, recovery and resolution plans. Our liquidity risk measurement and control activities cover multiple areas:
Structural (longer-term) liquidity risk
We use both internal and regulatory metrics to manage and control the structural alignment between long-term illiquid assets,
the availability of core relationship deposits and longer-term funding. Conversely, we aim to align the use of shorter-term
wholesale funding with assets of equivalent liquidity-generating potential.
Tactical (shorter-term) liquidity risk
To address potential immediate cash flow risks during periods of stress, we use short-term net cash flow limits to control risk
at the material unit, subsidiary and currency levels. Net cash flow positions are determined by applying internally-derived risk
assumptions and parameters to known and anticipated cash flows for all material unencumbered assets, liabilities and
off-balance sheet activities. Additional product-level controls and limits are employed to manage concentration risk and
perceived market capacity limitations for more sensitive liquidity sources and uses. We also control tactical liquidity by
adhering to relevant regulatory standards, such as LCR.
Stress testing
Our comprehensive stress testing program informs internal assessments of the sufficiency of liquid assets, and whether they
are adequately pre-positioned and accessible to meet stressed liquidity needs. Our stress tests, which include elements of
scenario and sensitivity analyses, measure our prospective exposure to systemic and RBC-specific events over periods of
time. Different degrees of severity are considered for each type of crisis with some scenarios reflecting multiple downgrades
to our credit ratings.
Contingency liquidity risk management and funding plans
Contingency liquidity risk planning assesses the impact of sudden stress on our liquidity risk position and identifies a range of
potential mitigating actions and plans. Corporate Treasury maintains the Enterprise Liquidity Contingency Plan (ELCP) and
regional liquidity contingency plans (LCPs) that identify potential sources of stress and guide our responses to liquidity crises.
Potential sources of stress are calibrated based on relevant historical experience and resulting contingent funding needs,
including those from draws on committed credit and liquidity lines, demands for increased collateral and deposit run-offs. The
ELCP also identifies alternative liquidity sources and considerations for their use.
Additionally, under the leadership of Corporate Treasury, enterprise and regional Liquidity Crisis Teams (LCTs) each meet
regularly to assess our liquidity status, review, and approve the LCPs and during times of stress, provide linkages to the front
line and other functions to support effective and coordinated crisis management and oversight. Enterprise and local LCTs
include members from key business segments, GRM, Finance, Operations, and Communications. The liquidity status
assessment and monitoring process informs management, the Board and regulatory agencies of our assessment of internal
Liquidity reserve and asset encumbrance
The following tables provide summaries of our liquidity reserve and asset encumbrance. To varying degrees, unencumbered
assets represent a ready source of funding. Unencumbered assets are the difference between total and encumbered assets from
both on- and off-balance sheet sources. Encumbered assets include: (i) bank-owned liquid assets that are either pledged as
collateral (e.g., repo financing and derivative pledging) or not freely available due to regulatory or internal policy requirements
(e.g., earmarked to satisfy mandatory reserve or regional capital adequacy requirements and to maintain continuous access to
payment and settlement systems); (ii) securities received as collateral from securities financing and derivative transactions
which have either been re-hypothecated where permissible (e.g., to obtain financing through repos or to cover securities sold
short) or have no liquidity value since re-hypothecation is prohibited; and (iii) illiquid assets that have been securitized and sold
into the market or that have been pledged as collateral in support of structured term funding vehicles. As per our liquidity
management framework and practice, encumbered assets are not considered a source of liquidity.
Liquidity reserve
Our liquidity reserve consists only of available unencumbered liquid assets. Although unused wholesale funding capacity could
be another potential source of liquidity, it is excluded in the determination of the liquidity reserve.
88
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Liquidity reserve
Table 54
As at October 31, 2023
(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 deposits with banks
(1)
$
135,353
$
–
$
135,353
$
3,329
$
132,024
Securities issued or guaranteed by sovereigns, central
banks or multilateral development banks
(2)
325,002
363,377
688,379
425,109
263,270
Other securities
130,209
118,651
248,860
153,700
95,160
Other liquid assets
(3)
31,706
–
31,706
28,953
2,753
Total liquid assets
$
622,270
$
482,028
$1,104,298
$
611,091
$
493,207
As at October 31, 2022
(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 deposits with banks
$
180,408
$
–
$
180,408
$
3,601
$
176,807
Securities issued or guaranteed by sovereigns, central
banks or multilateral development banks
(2)
246,916
326,089
573,005
373,893
199,112
Other securities
110,057
119,129
229,186
135,349
93,837
Other liquid assets
(3)
42,090
–
42,090
40,318
1,772
Total liquid assets
$
579,471
$
445,218
$ 1,024,689
$
553,161
$
471,528
As at
(Millions of Canadian dollars)
October 31
2023
October 31
2022
Royal Bank of Canada
$
210,191
$
186,855
Foreign branches
79,947
90,910
Subsidiaries
203,069
193,763
Total unencumbered liquid assets
$
493,207
$
471,528
(1)
Includes balances that are classified as held for sale and presented in Other assets. For further details, refer to Note 6 of our 2023 Annual Consolidated Financial
Statements.
(2)
Includes liquid securities issued by provincial governments and U.S. government-sponsored entities working under U.S. Federal government’s conservatorship
(e.g., Federal National Mortgage Association and Federal Home Loan Mortgage Corporation).
(3)
Encumbered liquid assets amount represents cash collateral and margin deposit amounts pledged related to OTC and exchange-traded derivative transactions.
The liquidity reserve is typically most affected by routine flows of retail and commercial client banking activities, where liquid
asset portfolios reflect changes in deposit and loan balances, as well as business strategies and client flows related to the
activities in Capital Markets. Corporate Treasury also affects liquidity reserves through the management of funding issuances,
which could result in timing differences between when debt is issued and funds are deployed into business activities.
2023 vs. 2022
Total unencumbered liquid assets increased $22 billion or 5% from last year, mainly due to an increase in on-balance sheet
securities reflecting higher client deposit levels, partially offset by a decrease in cash and deposits with banks.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
89
Asset encumbrance
The table below provides a summary of our on- and off-balance sheet amounts for cash, securities and other assets,
distinguishing between those that are encumbered, and those available for sale or use as collateral in secured funding
transactions. Other assets, such as mortgages and credit card receivables, can also be monetized, albeit over longer timeframes
than those required for marketable securities. As at October 31, 2023, our unencumbered assets available as collateral comprised
24% of total assets (October 31, 2022 – 24%).
Asset encumbrance
Table 55
As at
October 31
2023
October 31
2022
Encumbered
Unencumbered
Encumbered
Unencumbered
(Millions of Canadian dollars)
Pledged as
collateral
Other
(1)
Available as
collateral
(2)
Other
(3)
Total
Pledged as
collateral
Other (1)
Available as
collateral (2)
Other (3)
Total
Cash and deposits
with banks
(4)
$
–
$
3,329
$
132,024
$
–
$
135,353
$
–
$
3,601
$
176,807
$
–
$
180,408
Securities
Trading
99,990
–
100,517
2,252
202,759
62,941
–
91,738
3,303
157,982
Investment, net of
applicable allowance
7,752
–
211,827
–
219,579
7,996
–
162,022
–
170,018
Assets purchased under
reverse repurchase
agreements and securities
borrowed
(5)
495,233
27,343
6,876
1,862
531,314
456,292
21,709
9,192
3,409
490,602
Loans
Retail
Mortgage securities
26,365
–
28,079
–
54,444
28,208
–
27,263
–
55,471
Mortgage loans
69,802
–
37,313
272,942
380,057
62,905
–
26,696
273,724
363,325
Non-mortgage loans
6,775
–
–
128,675
135,450
6,066
–
–
124,889
130,955
Wholesale
–
–
10,056
278,052
288,108
–
–
9,119
264,848
273,967
Allowance for loan losses
–
–
–
(5,004)
(5,004)
–
–
–
(3,753)
(3,753)
Segregated fund net assets
–
–
–
2,760
2,760
–
–
–
2,638
2,638
Other
Derivatives
–
–
–
142,450
142,450
–
–
–
154,439
154,439
Others
(6)
28,953
–
2,753
89,747
121,453
40,318
–
1,772
81,611
123,701
Total assets
$ 734,870
$ 30,672
$
529,445
$ 913,736
$ 2,208,723
$ 664,726
$ 25,310
$
504,609
$ 905,108
$ 2,099,753
(1)
Includes assets restricted from use to generate secured funding due to legal or other constraints.
(2)
Represents assets that are immediately available for use as collateral, including NHA MBS, our unencumbered mortgage loans that qualify as eligible collateral at FHLB,
as well as loans that qualify as eligible collateral for discount window facility available to us and lodged at the FRBNY.
(3)
Other unencumbered assets are not subject to any restrictions on their use to secure funding or as collateral but would not be considered immediately available.
(4)
Includes balances that were classified as held for sale and presented in Other assets. For further details, refer to Note 6 of our 2023 Annual Consolidated Financial
Statements.
(5)
Includes bank-owned liquid assets and securities received as collateral from off-balance sheet securities financing, derivative transactions, and margin lending. Includes
$27 billion (October 31, 2022 – $22 billion) of collateral received through reverse repurchase transactions that cannot be rehypothecated in its current legal form.
(6)
The Pledged as collateral amount represents cash collateral and margin deposit amounts pledged related to OTC and exchange-traded derivative transactions.
2023 vs. 2022
Total unencumbered assets available as collateral have increased $25 billion from last year, mainly due to an increase in
on-balance sheet securities as well as higher available loan balances eligible as collateral at FHLB. These factors were partially
offset by a decrease in cash and deposits with banks.
Funding
Maintaining a diversified funding base is a key strategy for managing our liquidity risk profile.
Core funding, comprising capital, longer-term wholesale liabilities and a diversified pool of personal as well as the stable
portion of our commercial and institutional deposits, is the foundation of our structural liquidity position.
Wholesale funding activities are well-diversified by geography, investor segment, instrument, currency, structure, and
maturity. We maintain an ongoing presence in different funding markets, which allows us to continuously monitor market
developments and trends, identify opportunities and risks, and take appropriate and timely actions.
We continuously evaluate opportunities to expand into new markets and untapped investor segments since
diversification expands our wholesale funding flexibility, minimizes funding concentration and dependency, and generally
reduces financing costs.
We regularly assess our funding concentration and have implemented limits on certain funding sources to support
Deposit and funding profile
As at October 31, 2023, relationship-based deposits, which are the primary source of funding for retail and commercial lending,
were $844 billion or 52% of our total funding (October 31, 2022 – $819 billion or 54%). The remaining portion is comprised of short-
and long-term wholesale funding.
Funding for highly liquid assets consists primarily of short-term wholesale funding that reflects the monetization period of
those assets. Long-term wholesale funding is used mostly to fund less liquid wholesale assets and to support liquid asset buffers.
Senior long-term debt issued by the bank on or after September 23, 2018, that has an original term greater than 400 days and
is marketable, subject to certain exceptions, is subject to the Canadian Bank Recapitalization (Bail-in) regime. Under the Bail-in
regime, in circumstances when the Superintendent of Financial Institutions has determined that a bank may no longer be viable,
90
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
the Governor in Council may, upon a recommendation of the Minister of Finance that he or she is of the opinion that it is in the
public interest to do so, grant an order directing the Canada Deposit Insurance Corporation (CDIC) to convert all or a portion of
certain shares and liabilities of that bank into common shares. As at October 31, 2023, the notional value of issued and
outstanding long-term debt subject to conversion under the Bail-in regime was $106 billion (October 31, 2022 – $85 billion).
For further details on our wholesale funding, refer to the Composition of wholesale funding tables below.
Long-term debt issuance
During 2023, we continued to experience favourable unsecured wholesale funding access and pricing. We issued, either directly
or through our subsidiaries, unsecured long-term funding of $44 billion in various currencies and markets.
management purposes. Our total secured long-term funding includes outstanding MBS sold, covered bonds that are
For further details, refer to the Off-balance sheet arrangements section.
(1)
Table 56
As at | ||
October 31 | October 31 | |
(Millions of Canadian dollars) | 2023 | 2022 |
Unsecured long-term funding | $ 139,882 | $ 119,241 |
Secured long-term funding | 74,720 | 68,953 |
Subordinated debentures | 12,038 | 10,639 |
$ 226,640 | $ 198,833 | |
*
This table represents an integral part of our 2023 Annual Consolidated Financial Statements.
(1)
Based on original term to maturity greater than 1 year.
The following table summarizes our registered programs and their authorized limits by geography.
Programs by geography
Table 57
Canada
U.S.
Europe/Asia
•
Canadian Shelf Program – $25 billion
•
U.S. Shelf Program – US$50 billion
•
European Debt Issuance Program – US$75 billion
•
Global Covered Bond Program –
€
75 billion
•
Japanese Issuance Programs – ¥1 trillion
As presented in the following charts, our current long-term debt profile is well-diversified by both currency and product.
Long-term debt
(1)
– funding mix by currency of issuance
Euro
20%
Other
11%
U.S. dollar
45%
Canadian dollar
24%
Long-term debt
(1)
– funding mix by product
Covered Bonds
24%
Unsecured
funding
62%
MBS/CMB (2)
6%
Cards
securitization
3%
Subordinated
debentures
5%
(1)
Includes unsecured and secured long-term funding and subordinated
debentures with an original term to maturity greater than 1 year
(1)
Includes unsecured and secured long-term funding and subordinated
debentures with an original term to maturity greater than 1 year
(2)
Mortgage-backed securities and Canada Mortgage Bonds
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
91
The following table shows the composition of our wholesale funding based on remaining term to maturity:
Composition of wholesale funding
(1)
Table 58
As at October 31, 2023
(Millions of Canadian dollars)
Less than
1 month
1 to 3
months
3 to 6
months
6 to 12
months
Less than
1 year
sub-total
1 year to
2 years
2 years and
greater
Total
Deposits from banks
(2)
$
4,606
$
460
$
319
$
355
$
5,740
$
–
$
–
$
5,740
Certificates of deposit and commercial paper
10,130
7,020
11,858
27,029
56,037
69
–
56,106
Asset-backed commercial paper
(3)
4,533
3,829
6,354
2,155
16,871
–
–
16,871
Senior unsecured medium-term notes
(4)
43
6,311
133
18,828
25,315
22,790
54,070
102,175
Senior unsecured structured notes
(5)
1,343
1,898
2,081
3,343
8,665
5,495
15,744
29,904
Mortgage securitization
–
530
375
1,484
2,389
2,225
9,607
14,221
Covered bonds/asset-backed securities
(6)
–
3,236
–
1,685
4,921
10,844
44,733
60,498
Subordinated liabilities
–
–
–
1,500
1,500
2,748
7,791
12,039
Other
(7)
8,918
5,098
2,293
2,462
18,771
14,058
90
32,919
Total
$ 29,573
$ 28,382
$ 23,413
$ 58,841
$ 140,209
$ 58,229
$ 132,035
$ 330,473
Of which:
– Secured
$ 10,861
$ 10,124
$
7,483
$
5,324
$
33,792
$ 13,069
$
54,340
$ 101,201
– Unsecured
18,712
18,258
15,930
53,517
106,417
45,160
77,695
229,272
As at October 31, 2022
(Millions of Canadian dollars)
Less than
1 month
1 to 3
months
3 to 6
months
6 to 12
months
Less than
1 year
sub-total
1 year to
2 years
2 years and
greater
Total
Deposits from banks
(2)
$
5,758
$
34
$
311
$
1,766
$
7,869
$
–
$
–
$
7,869
Certificates of deposit and commercial paper
9,482
16,575
23,676
39,674
89,407
–
–
89,407
Asset-backed commercial paper
(3)
3,488
2,373
6,646
722
13,229
–
323
13,552
Senior unsecured medium-term notes
(4)
375
5,968
2,846
13,189
22,378
19,108
48,556
90,042
Senior unsecured structured notes
(5)
404
721
2,136
4,091
7,352
2,363
9,898
19,613
Mortgage securitization
–
1,238
421
2,614
4,273
2,402
9,697
16,372
Covered bonds/asset-backed securities
(6)
–
1,016
1,960
2,838
5,814
4,575
42,194
52,583
Subordinated liabilities
60
–
–
110
170
1,483
8,986
10,639
Other
(7)
7,241
2,934
8,673
4,387
23,235
10,219
409
33,863
Total
$
26,808
$
30,859
$
46,669
$
69,391
$
173,727
$
40,150
$ 120,063
$
333,940
Of which:
– Secured
$
9,030
$
6,641
$
15,367
$
7,536
$
38,574
$
6,977
$
52,605
$
98,156
– Unsecured
17,778
24,218
31,302
61,855
135,153
33,173
67,458
235,784
(1)
Excludes bankers’ acceptances and repos.
(2)
Excludes deposits associated with services we provide to 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 and mortgage loans.
(7)
Includes tender option bonds (secured) of $5,104 million (October 31, 2022 – $6,038 million), bearer deposit notes (unsecured) of $4,529 million (October 31, 2022 –
$3,478 million), floating rate notes (unsecured) of $1,675 million (October 31, 2022 – $2,145 million), other long-term structured deposits (unsecured) of $16,896 million
(October 31, 2022 – $12,411 million), and FHLB advances (secured) of $4,507 million (October 31, 2022 – $9,609 million), and wholesale guaranteed interest certificates of
$208 million (October 31, 2022 – $182 million). Bearer deposit notes (unsecured), floating rate notes (unsecured) and wholesale guaranteed interest certificates amounts
have been revised from those previously presented.
92
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Credit ratings
Our ability to access unsecured funding markets and to engage in certain collateralized business activities on a cost-effective
basis are largely dependent on maintaining competitive credit ratings. Credit ratings and outlooks provided by rating agencies
reflect their views and methodologies. Ratings are subject to change, based on a number of factors including, but not limited to,
our financial strength, competitive position, liquidity and other factors not completely within our control.
The following table presents our major credit ratings:
Credit ratings
(1)
Table 59
As at November 29, 2023
Short-term debt
Legacy senior long-term debt
(2)
Senior long-term debt
(3)
Outlook
Moody’s
(4)
P-1
Aa1
A1
stable
Standard & Poor’s
(5)
A-1+
AA-
A
stable
Fitch Ratings
(6)
F1+
AA
AA-
stable
DBRS
(7)
R-1 (high)
AA (high)
AA
stable
(1)
Credit ratings are not recommendations to purchase, sell or hold a financial obligation in as much 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)
Includes senior long-term debt issued prior to September 23, 2018 and senior long-term debt issued on or after September 23, 2018 which is excluded from
the Bail-in regime.
(3)
Includes senior long-term debt issued on or after September 23, 2018 which is subject to conversion under the Bail-in regime.
(4)
On November 6, 2023, Moody’s affirmed our ratings with stable outlook.
(5)
On May 25, 2023, Standard & Poor’s affirmed our ratings with a stable outlook.
(6)
On June 20, 2023, Fitch Ratings affirmed our ratings with a stable outlook.
(7)
On May 12, 2023, DBRS affirmed our ratings with a stable outlook.
Additional contractual obligations for rating downgrades
We are required to deliver collateral to certain counterparties in the event of a downgrade from our current credit rating. The
following table shows the additional collateral obligations required at the reporting date in the event of a one-, two- or three-
notch downgrade. 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 due to several factors,
including the transfer of trading activity to centrally cleared financial market infrastructures and exchanges, the expiration of
transactions with downgrade triggers, the imposition of internal limitations on new agreements to exclude downgrade triggers,
as well as normal course mark-to-market. There is no outstanding senior debt issued in the market that contains rating triggers
that would lead to early prepayment of principal.
Additional contractual obligations for rating downgrades
Table 60
As at
October 31
2023
October 31
2022
(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
$
217
$
138
$
199
$
236
$
146
$
304
Other contractual funding or margin requirements
(1)
41
57
42
38
21
25
(1)
Includes GICs issued by our municipal markets business out of New York.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
93
Liquidity Coverage Ratio (LCR)
The LCR is a Basel III metric that measures the sufficiency of high-quality liquid assets (HQLA) available to meet liquidity needs
over a 30-day period in an acute stress scenario. The BCBS and OSFI regulatory minimum coverage level for LCR is 100%.
OSFI requires Canadian banks to disclose the LCR using the standard Basel disclosure template and calculated using the
average of daily LCR positions during the quarter.
Liquidity coverage ratio common disclosure template
(1)
Table 61
For the three months ended
October 31
2023
(Millions of Canadian dollars, except percentage amounts)
Total unweighted
value (average)
(2)
Total weighted
value (average)
High-quality liquid assets
Total high-quality liquid assets (HQLA)
$
384,290
Cash outflows
Retail deposits and deposits from small business customers, of which:
$
360,167
$
34,667
Stable deposits
(3)
121,924
3,658
Less stable deposits
238,243
31,009
Unsecured wholesale funding, of which:
407,280
198,854
Operational deposits (all counterparties) and deposits in networks of cooperative
banks
(4)
150,032
35,505
Non-operational deposits
221,760
127,861
Unsecured debt
35,488
35,488
Secured wholesale funding
39,561
Additional requirements, of which:
349,440
79,711
Outflows related to derivative exposures and other collateral requirements
70,080
20,190
Outflows related to loss of funding on debt products
10,736
10,736
Credit and liquidity facilities
268,624
48,785
Other contractual funding obligations
(5)
26,747
26,747
Other contingent funding obligations
(6)
760,747
12,569
Total cash outflows
$
392,109
Cash inflows
Secured lending (e.g., reverse repos)
$
312,357
$
53,592
Inflows from fully performing exposures
16,102
9,851
Other cash inflows
35,338
35,338
Total cash inflows
$
98,781
Total adjusted
value
Total HQLA
$
384,290
Total net cash outflows
293,328
Liquidity coverage ratio
131%
July 31
2023
(Millions of Canadian dollars, except percentage amounts)
Total adjusted
value
Total HQLA
$
382,789
Total net cash outflows
285,527
Liquidity coverage ratio
134%
(1)
The LCR is calculated in accordance with OSFI’s LAR guideline, which, in turn, reflects liquidity-related requirements issued by the BCBS. The LCR for the quarter ended
October 31, 2023 is calculated as an average of 62 daily positions.
(2)
With the exception of other contingent funding obligations, unweighted inflow and outflow amounts are items maturing or callable in 30 days or less. Other contingent
funding obligations also include debt securities with remaining maturity greater than 30 days.
(3)
As defined by the BCBS, stable deposits from retail and small business customers are deposits that are insured and are either held in transactional accounts or the bank
has an established relationship with the client making the withdrawal unlikely.
(4)
Operational deposits from customers other than retail and small and medium-sized enterprises, are deposits which clients need to keep with the bank in order to
facilitate their access and ability to use payment and settlement systems primarily for clearing, custody and cash management activities.
(5)
Other contractual funding obligations primarily include outflows from unsettled securities trades and outflows from obligations related to securities sold short.
(6)
Other contingent funding obligations include outflows related to other off-balance sheet facilities that carry low LCR runoff factors (0% – 5%).
94
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
We manage our LCR position within a target range that reflects our liquidity risk tolerance, business mix, asset composition and
funding capabilities. The range is subject to periodic review, considering changes to internal requirements and external
developments.
We maintain HQLAs in major currencies with dependable market depth and breadth. Our treasury management practices are
designed to ensure that the levels of HQLA are actively managed to meet target LCR objectives. Our Level 1 assets, as calculated
according to OSFI LAR and the BCBS LCR requirements, represent 88% of total HQLA. These assets consist of cash, placements
with central banks and highly rated securities issued or guaranteed by governments, central banks and supranational entities.
LCR captures cash flows from on- and off-balance sheet activities that are either expected or could potentially occur within
30 days in an acute stress scenario. Cash outflows result from the application of withdrawal and non-renewal factors to demand
and term deposits, differentiated by client type (wholesale, retail and small- and medium-sized enterprises). Cash outflows also
arise from business activities that create contingent funding and collateral requirements, such as repo funding, derivatives, short
sales of securities and the extension of credit and liquidity commitments to clients. Cash inflows arise primarily from maturing
secured loans, interbank loans and non-HQLA securities.
LCR does not reflect any market funding capacity that we believe would be available in a stress situation. All maturing
wholesale debt is assigned 100% outflow in the LCR calculation.
Q4 2023 vs. Q3 2023
The average LCR for the quarter ended October 31, 2023 was 131%, which translates into a surplus of approximately $91 billion,
compared to 134% and a surplus of approximately $97 billion in the prior quarter. Average LCR levels decreased from prior
quarter primarily due to lower wholesale funding levels and loan growth, partially offset by an increase in client deposits.
Net Stable Funding Ratio (NSFR)
NSFR is a Basel III metric that measures the sufficiency of available stable funding relative to the amount of required stable
funding. The BCBS and OSFI regulatory minimum coverage level for NSFR is 100%.
Available stable funding is defined as the portion of capital and liabilities expected to be reliable over the one-year time
horizon considered by the NSFR. Required stable funding is a function of the liquidity characteristics and residual maturities of
various bank assets and off-balance sheet exposures.
OSFI requires Canadian D-SIBs to disclose the NSFR using the standard Basel disclosure template. Amounts presented in this
disclosure template are determined in accordance with the requirements of OSFI’s LAR guideline and are not necessarily aligned
with the classification requirements prescribed under IFRS.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
95
Net Stable Funding Ratio common disclosure template
(1)
Table 62
As at October 31, 2023
Unweighted value by residual maturity
(2)
Weighted
value
(Millions of Canadian dollars, except percentage amounts)
No maturity
< 6 months
6 months to
< 1 year
≥
1 year
Available Stable Funding (ASF) Item
Capital:
$ 117,650
$
–
$
–
$
11,047
$ 128,697
Regulatory Capital
117,650
–
–
11,047
128,697
Other Capital Instruments
–
–
–
–
–
Retail deposits and deposits from small business customers:
301,314
104,626
46,055
55,553
470,509
Stable deposits
(3)
97,270
44,770
24,000
26,429
184,167
Less stable deposits
204,044
59,856
22,055
29,124
286,342
Wholesale funding:
285,377
510,037
64,539
148,995
358,921
Operational deposits
(4)
163,133
–
–
–
81,567
Other wholesale funding
122,244
510,037
64,539
148,995
277,354
Liabilities with matching interdependent assets
(5)
68
1,800
2,964
20,378
–
Other liabilities:
45,718
235,759
14,112
NSFR derivative liabilities
24,683
All other liabilities and equity not included in the above
categories
45,718
196,349
1,230
13,497
14,112
Total ASF
$ 972,239
Required Stable Funding (RSF) Item
Total NSFR high-quality liquid assets (HQLA)
$
44,012
Deposits held at other financial institutions for operational
purposes
–
664
–
–
332
Performing loans and securities:
211,825
312,964
115,838
536,388
706,996
Performing loans to financial institutions secured by Level 1
HQLA
–
110,421
20,430
275
16,133
Performing loans to financial institutions secured by non-Level 1
HQLA and unsecured performing loans to financial
institutions
4,886
118,014
26,780
29,873
60,715
Performing loans to non-financial corporate clients, loans to
retail and small business customers, and loans to sovereigns,
central banks and PSEs, of which:
135,078
59,852
32,108
170,886
305,884
With a risk weight of less than or equal to 35% under the
Basel II standardized approach for credit risk
–
744
710
2,666
2,460
Performing residential mortgages, of which:
36,953
21,769
34,707
315,334
275,215
With a risk weight of less than or equal to 35% under the
Basel II standardized approach for credit risk
36,953
21,751
34,689
314,368
274,376
Securities that are not in default and do not qualify as HQLA,
including exchange-traded equities
34,908
2,908
1,813
20,020
49,049
Assets with matching interdependent liabilities
(5)
68
1,800
2,964
20,378
–
Other assets:
2,662
311,650
82,617
Physical traded commodities, including gold
2,662
2,262
Assets posted as initial margin for derivative contracts and
contributions to default funds of CCPs
18,788
15,970
NSFR derivative assets
25,787
1,103
NSFR derivative liabilities before deduction of variation margin
posted
54,824
2,741
All other assets not included in the above categories
–
154,335
19
57,897
60,541
Off-balance sheet items
791,176
29,674
Total RSF
$ 863,631
Net Stable Funding Ratio (%)
113%
As at July 31, 2023
(Millions of Canadian dollars, except percentage amounts)
Weighted
value
Total ASF
$
938,870
Total RSF
834,782
Net Stable Funding Ratio (%)
112%
(1)
The NSFR is calculated in accordance with OSFI’s Liquidity Adequacy Requirements (LAR) guideline, which, in turn, reflects liquidity-related requirements issued by the
BCBS.
(2)
Totals for the following rows encompass the residual maturity categories of less than 6 months, 6 months to less than 1 year, and greater than or equal to 1 year in
accordance with the requirements of the common disclosure template prescribed by OSFI: Other liabilities, NSFR derivative liabilities, Other assets, Assets posted as
initial margin for derivative contracts and contributions to default funds of CCPs, NSFR derivative assets, NSFR derivative liabilities before deduction of variation margin
posted, and Off-balance sheet items.
(3)
As defined by the BCBS, stable deposits from retail and small business customers are deposits that are insured and are either held in transactional accounts or the bank
has an established relationship with the client making the withdrawal unlikely.
(4)
Operational deposits from customers other than retail and small and medium-sized enterprises, are deposits which clients need to keep with the bank in order to
facilitate their access and ability to use payment and settlement systems primarily for clearing, custody and cash management activities.
(5)
Interdependent assets and liabilities represent National Housing Act Mortgage-Backed Securities (NHA MBS) liabilities, including liabilities arising from transactions
involving the Canada Mortgage Bond program and their corresponding encumbered mortgages.
96
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Available stable funding is comprised primarily of a diversified pool of personal and commercial deposits, capital, and long-term
wholesale liabilities. Required stable funding is driven mainly by the bank’s mortgage and loan portfolio, secured loans to
financial institutions and to a lesser extent by other less liquid assets. NSFR does not reflect any unused market funding capacity
that we believe would be available.
Volume and composition of available stable funding is actively managed to optimize our structural funding position and
meet NSFR objectives. Our NSFR is managed in accordance with our comprehensive LRMF.
Q4 2023 vs. Q3 2023
The NSFR as at October 31, 2023 was 113%, which translates into a surplus of approximately $109 billion, compared to 112% and a
surplus of approximately $104 billion in the prior quarter. NSFR increased compared to the prior quarter mainly due to an
increase in deposits and stable funding, partially offset by loan growth.
Contractual maturities of financial assets, financial liabilities and off-balance sheet items
The following tables provide remaining contractual maturity profiles of all our assets, liabilities, and off-balance sheet items at
their carrying value (e.g., amortized cost or fair value) at the balance sheet date. Off-balance sheet items are allocated based on
the expiry date of the contract.
Details of contractual maturities and commitments to extend funds are a source of information for the management of
liquidity risk. Among other purposes, these details form a basis for modelling a behavioural balance sheet with effective
maturities to calculate liquidity risk measures. For further details, refer to the Risk measurement and internal liquidity reporting
section.
Contractual maturities of financial assets, financial liabilities and off-balance sheet items
Table 63
As at October 31, 2023
(Millions of Canadian dollars)
Less than
1 month
1 to 3
months
3 to 6
months
6 to 9
months
9 to 12
months
1 year
to 2 years
2 years
to 5 years
5 years
and greater
With no
specific
maturity
Total
Assets
Cash and deposits with banks
$ 130,121
$
8
$
–
$
–
$
–
$
–
$
–
$
–
$
2,946
$
133,075
Securities
Trading
(1)
117,373
56
103
26
46
99
127
8,997
63,324
190,151
Investment, net of applicable allowance
5,090
6,436
3,890
5,547
8,678
41,734
66,047
81,337
820
219,579
Assets purchased under reverse repurchase
agreements and securities borrowed
(2)
146,722
71,346
60,468
20,475
16,889
3,754
–
–
20,537
340,191
Loans, net of applicable allowance
30,889
23,026
31,442
37,978
41,285
201,479
320,082
77,460
89,132
852,773
Other
Customers’ liability under acceptances
16,493
5,247
–
–
–
–
5
–
(50)
21,695
Derivatives
10,074
13,655
9,292
6,955
6,173
18,905
33,260
44,136
–
142,450
Other financial assets
41,116
2,836
3,205
212
587
191
279
2,600
3,170
54,196
Total financial assets
497,878
122,610
108,400
71,193
73,658
266,162
419,800
214,530
179,879
1,954,110
Other non-financial assets
5,657
1,793
1,765
191
2,591
1,976
2,422
5,776
28,711
50,882
Total assets
$ 503,535
$ 124,403
$ 110,165
$
71,384
$
76,249
$ 268,138
$ 422,222
$ 220,306
$ 208,590
$ 2,004,992
Liabilities and equity
Deposits
(3)
Unsecured borrowing
$ 109,666
$
59,128
$
62,531
$
76,957
$
66,846
$
59,845
$
77,782
$
27,314
$ 588,165
$ 1,128,234
Secured borrowing
4,992
6,044
7,337
4,100
1,489
6,965
13,616
8,706
–
53,249
Covered bonds
–
2,543
–
–
1,687
9,422
31,847
4,705
–
50,204
Other
Acceptances
16,493
5,247
–
–
–
–
5
–
–
21,745
Obligations related to securities sold short
33,651
–
–
–
–
–
–
–
–
33,651
Obligations related to assets sold under
repurchase agreements and securities
loaned
(2)
254,955
37,121
19,509
(6)
(1)
279
–
–
23,381
335,238
Derivatives
9,716
16,359
9,311
6,346
5,974
19,290
32,400
43,233
–
142,629
Other financial liabilities
44,207
5,295
3,028
1,382
1,692
959
2,253
14,402
3,945
77,163
Subordinated debentures
–
–
–
–
–
–
1,937
9,449
–
11,386
Total financial liabilities
473,680
131,737
101,716
88,779
77,687
96,760
159,840
107,809
615,491
1,853,499
Other non-financial liabilities
929
6,613
221
216
150
1,102
2,009
12,928
9,565
33,733
Equity
–
–
–
–
–
–
–
–
117,760
117,760
Total liabilities and equity
$ 474,609
$ 138,350
$ 101,937
$
88,995
$
77,837
$
97,862
$ 161,849
$ 120,737
$ 742,816
$ 2,004,992
Off-balance sheet items
Financial guarantees
$
544
$
2,013
$
3,528
$
3,691
$
4,716
$
784
$
7,314
$
701
$
23
$
23,314
Commitments to extend credit
7,086
8,338
14,774
14,447
18,361
58,978
205,504
23,181
5,524
356,193
Other credit-related commitments
14,799
1,173
1,563
1,858
1,659
169
435
49
95,099
116,804
Other commitments
91
10
15
15
15
55
128
178
985
1,492
Total off-balance sheet items
$
22,520
$
11,534
$
19,880
$
20,011
$
24,751
$
59,986
$ 213,381
$
24,109
$ 101,631
$
497,803
(1)
Trading debt securities classified as FVTPL have been included in the less than 1 month category as there is no expectation to hold these assets to their contractual
maturity.
(2)
Open reverse repo and repo contracts, which have no set maturity date and are typically short term, have been included in the with no specific maturity category.
(3)
A major portion of relationship-based deposits are repayable on demand or at short notice on a contractual basis while, in practice, these customer balances form a core
base for our operations and liquidity needs, as explained in the preceding Deposit and funding profile section.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
97
As at October 31, 2022
(Millions of Canadian dollars)
Less than
1 month
1 to 3
months
3 to 6
months
6 to 9
months
9 to 12
months
1 year
to 2 years
2 years
to 5 years
5 years
and greater
With no
specific
maturity
Total
Assets
Cash and deposits with banks
$ 177,946
$
2
$
–
$
–
$
–
$
–
$
–
$
–
$
2,460
$
180,408
Securities
Trading
(1)
86,491
592
71
8
–
104
170
8,710
52,059
148,205
Investment, net of applicable allowance
3,250
7,490
7,390
3,537
4,873
12,303
50,979
79,387
809
170,018
Assets purchased under reverse repurchase
agreements and securities borrowed
(2)
122,836
76,590
58,750
19,246
17,212
1,131
–
–
22,080
317,845
Loans, net of applicable allowance
31,203
21,795
29,253
39,919
34,658
150,826
348,411
75,091
88,809
819,965
Other
Customers’ liability under acceptances
11,632
6,235
5
–
–
–
–
–
(45)
17,827
Derivatives
13,100
19,753
10,184
7,004
6,009
20,709
36,081
41,571
28
154,439
Other financial assets
48,485
1,964
1,666
199
457
246
231
2,364
3,025
58,637
Total financial assets
494,943
134,421
107,319
69,913
63,209
185,319
435,872
207,123
169,225
1,867,344
Other non-financial assets
6,744
1,609
196
(357)
2,647
1,691
2,510
5,192
29,643
49,875
Total assets
$ 501,687
$ 136,030
$ 107,515
$
69,556
$
65,856
$ 187,010
$
438,382
$
212,315
$
198,868
$ 1,917,219
Liabilities and equity
Deposits
(3)
Unsecured borrowing
$
91,052
$
56,920
$
52,671
$
64,685
$
83,220
$
39,327
$
60,161
$
18,500
$
645,195
$ 1,111,731
Secured borrowing
4,343
6,271
7,365
2,007
4,626
6,059
15,400
7,824
–
53,895
Covered bonds
–
1,016
1,960
1,993
–
3,839
28,692
5,688
–
43,188
Other
Acceptances
11,632
6,235
5
–
–
–
–
–
–
17,872
Obligations related to securities sold short
35,511
–
–
–
–
–
–
–
–
35,511
Obligations related to assets sold under
repurchase agreements and securities
loaned
(2)
211,929
35,600
7,743
1,055
313
946
–
–
16,361
273,947
Derivatives
13,096
22,073
10,994
7,097
5,244
20,135
34,226
40,626
–
153,491
Other financial liabilities
57,152
1,390
1,353
656
958
892
2,378
11,411
1,117
77,307
Subordinated debentures
–
–
–
110
–
–
1,881
8,034
–
10,025
Total financial liabilities
424,715
129,505
82,091
77,603
94,361
71,198
142,738
92,083
662,673
1,776,967
Other non-financial liabilities
1,021
6,585
298
156
178
1,046
1,073
12,357
9,363
32,077
Equity
–
–
–
–
–
–
–
–
108,175
108,175
Total liabilities and equity
$ 425,736
$ 136,090
$
82,389
$
77,759
$
94,539
$
72,244
$
143,811
$
104,440
$
780,211
$ 1,917,219
Off-balance sheet items
Financial guarantees
$
545
$
2,211
$
3,745
$
3,274
$
3,446
$
1,415
$
4,550
$
1,068
$
37
$
20,291
Commitments to extend credit
7,016
6,879
14,184
21,094
17,133
49,135
193,990
19,269
4,516
333,216
Other credit-related commitments
1,934
1,135
1,674
1,448
1,469
541
520
85
90,821
99,627
Other commitments
24
11
16
16
16
60
136
187
849
1,315
Total off-balance sheet items
$
9,519
$
10,236
$
19,619
$
25,832
$
22,064
$
51,151
$
199,196
$
20,609
$
96,223
$
454,449
(1)
Trading debt securities classified as FVTPL have been included in the less than 1 month category as there is no expectation to hold these assets to their contractual
maturity.
(2)
Open reverse repo and repo contracts, which have no set maturity date and are typically short term, have been included in the with no specific maturity category.
(3)
A major portion of relationship-based deposits are repayable on demand or at short notice on a contractual basis while, in practice, these customer balances form a core
base for our operations and liquidity needs, as explained in the preceding Deposit and funding profile section.
98
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
The following tables provide remaining contractual maturity analysis of our financial liabilities and off-balance sheet items.
Disclosed amounts are the contractual undiscounted cash flows of all financial liabilities (e.g., par value or amount payable
upon maturity). The amounts do not reconcile directly with those in our consolidated balance sheets as the table incorporates
only cash flows relating to payments on maturity and do not recognize premiums, discounts or mark-to-market adjustments
recognized in the instruments’ carrying values as at the balance sheet date. Financial liabilities are based upon the earliest
period in which they are required to be paid. For off-balance sheet items, the undiscounted cash flows potentially payable under
financial guarantees and commitments to extend credit are classified based on the earliest date they can be called.
Contractual maturities of financial liabilities and off-balance sheet items – undiscounted basis*
Table 64
As at October 31, 2023 | ||||||
On | Within | 1 year | 2 years | 5 years | ||
(Millions of Canadian dollars) | demand | 1 year | to 2 years | to 5 years | and greater | Total |
Financial liabilities | ||||||
Deposits (1) | $ 510,868 | $ 482,738 | $ 74,465 | $ 124,906 | $ 42,920 | $ 1,235,897 |
Other | ||||||
Acceptances | – | 21,740 | – | 5 | – | 21,745 |
Obligations related to securities sold short | – | 33,741 | – | – | – | 33,741 |
Obligations related to assets sold under | ||||||
repurchase agreements and securities loaned | 23,381 | 311,154 | 279 | – | – | 334,814 |
Other liabilities | 608 | 54,844 | 284 | 657 | 12,463 | 68,856 |
Lease liabilities | – | 653 | 621 | 1,519 | 1,971 | 4,764 |
Subordinated debentures | – | – | – | 1,939 | 9,457 | 11,396 |
534,857 | 904,870 | 75,649 | 129,026 | 66,811 | 1,711,213 | |
Off-balance sheet items | ||||||
Financial guarantees (2) | $ 23,308 | $ 2 | $ 4 | $ – | $ – | $ 23,314 |
Other commitments (3) | – | 61 | 55 | 128 | 178 | 422 |
Commitments to extend credit (2) | 5,617 | 114,495 | 48,848 | 178,048 | 9,185 | 356,193 |
28,925 | 114,558 | 48,907 | 178,176 | 9,363 | 379,929 | |
Total financial liabilities and off-balance sheet | ||||||
items | $ 563,782 | $ 1,019,428 | $ 124,556 | $ 307,202 | $ 76,174 | $ 2,091,142 |
As at October 31, 2022 | ||||||
On | Within 1 | 1 year | 2 years | 5 years | ||
(Millions of Canadian dollars) | demand | year | to 2 years | to 5 years | and greater | Total |
Financial liabilities | ||||||
Deposits (1) | $ 562,288 | $ 463,711 | $ 50,169 | $ 106,568 | $ 37,260 | $ 1,219,996 |
Other | ||||||
Acceptances | – | 17,872 | – | – | – | 17,872 |
Obligations related to securities sold short | – | 35,395 | – | – | – | 35,395 |
Obligations related to assets sold under | ||||||
repurchase agreements and securities loaned | 16,367 | 256,756 | 948 | – | – | 274,071 |
Other liabilities | 508 | 61,420 | 220 | 709 | 9,191 | 72,048 |
Lease liabilities | – | 654 | 630 | 1,609 | 2,217 | 5,110 |
Subordinated debentures | – | 110 | – | 1,884 | 8,042 | 10,036 |
579,163 | 835,918 | 51,967 | 110,770 | 56,710 | 1,634,528 | |
Off-balance sheet items | ||||||
Financial guarantees (2) | $ 20,289 | $ 2 | $ – | $ – | $ – | $ 20,291 |
Other commitments (3) | – | 73 | 60 | 136 | 187 | 456 |
Commitments to extend credit (2) | 284,606 | 48,573 | 1 | 36 | – | 333,216 |
304,895 | 48,648 | 61 | 172 | 187 | 353,963 | |
Total financial liabilities and off-balance sheet | ||||||
items | $ 884,058 | $ 884,566 | $ 52,028 | $ 110,942 | $ 56,897 | $ 1,988,491 |
*
This table represents an integral part of our 2023 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 for our operations and liquidity needs, as explained in the preceding Deposit and funding profile.
(2)
We believe that it is highly unlikely that all or substantially all of these guarantees and commitments will be drawn or settled within one year, and contracts may expire
without being drawn or settled. The management of the liquidity risk associated with potential extensions of funds is outlined in the preceding Risk measurement and
internal liquidity reporting section.
(3)
Includes commitments related to short-term and low-dollar value leases, leases not yet commenced, and lease payments related to non-recoverable tax.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
99
Insurance risk
Insurance risk refers to the potential financial loss that may arise where the amount, timing and/or frequency of benefit and/or
premium payments under insurance and reinsurance contracts are different than expected. Insurance risk is distinct from those
risks covered by other parts of our risk management framework (e.g., credit, market and operational risk) where those risks are
ancillary to, or accompany, the risk transfer. The five insurance sub-risks are: morbidity, mortality, longevity, policyholder
behaviour (lapse), and travel risk.
Our Insurance Risk Management Framework provides an overview of our processes and tools for identifying, assessing,
managing, mitigating and reporting on the insurance risks that face the organization. These are also supported by our robust
three lines of defence governance structure, which is consistent with our Enterprise Risk Management Framework.
Operational/regulatory compliance risk drivers
Operational risk
Operational risk is the risk of loss or harm resulting from people, inadequate or failed internal processes, controls and systems
or from external events. Operational risk is inherent in all of our activities and third-party activities and failure to manage
operational risk can result in direct or indirect financial loss, reputational impact or regulatory scrutiny and proceedings in the
various jurisdictions where we operate.
Our management of operational risk follows the three lines of defence governance model, encompassing the organizational roles
and responsibilities for a coordinated enterprise-wide approach. For further details on the structure and organization of our
operational risk management and control function, refer to the Risk management – Enterprise risk management section.
Operational risk framework
We have an Enterprise Operational Risk Framework which sets out the processes to identify, assess, monitor, measure, report
and communicate on operational risk. The processes are established through the following:
•
Risk identification and assessment tools, including the collection and analysis of risk event data, help risk owners
understand and proactively manage operational risk exposures. Risk assessments are intended to ensure alignment
between risk exposures and efforts to manage them. Management uses outputs of these tools to make informed risk
decisions.
•
Risk monitoring tools alert management to changes in the operational risk profile. When paired with escalation and
monitoring triggers, risk monitoring tools can identify risk trends, warn management of risk levels that approach or exceed
defined limits, as well as prompt actions and mitigation plans to be undertaken.
•
Risk capital measurement is designed to provide credible estimation of potential risk exposure, including surfacing risk
vulnerabilities, and informs strategic and capital planning decisions, which are ultimately intended to ensure that the bank is
sufficiently resilient to withstand operational risk losses both in normal times and under stress situations.
•
Risk reporting and communication processes seek to ensure that relevant operational risk information is made available to
management in a timely manner to support risk-informed business decisions.
Conclusions from our operational risk programs enable learning based on what has occurred, insights into whether it could
happen elsewhere in the organization, and what controls we need to amend or implement. These conclusions support the
articulation of our operational risk appetite and are used to inform the overall level of operational risk exposure which thereby
defines our operational risk profile. This profile includes significant operational risk exposures, potential new and emerging
exposures and trends, and overall conclusions on the control environment and risk outlook.
We consider the potential risks and rewards of our decisions to strike a balance between accepting potential losses versus
incurring costs of mitigation, the expression of which is in the form of our operational risk appetite. Our operational risk appetite
is established at the Board level and cascaded throughout each of our business segments. We proactively identify and
investigate corporate insurance opportunities to mitigate and reduce potential future impacts of operational risk.
Management reports have been implemented at various levels to support proactive management of operational risk and
transparency of risk exposures. These reports are provided to senior management on a regular basis and provide detail on the
main drivers of the risk status and trend for each of our business segments and the bank overall. In addition, changes to the
operational risk profile that are not aligned to our business strategy or operational risk appetite are identified and discussed at
the Operational Risk Committee (comprised of executives across the business and risk management) and presented to GRC and
the Risk Committee of the Board.
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Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Our operations expose us to many different operational risks, which may adversely affect our businesses and financial
results. The following list is not exhaustive, as other factors could also adversely affect our results.
Operational risk
Management strategy
Information technology
and cybersecurity risk
Information technology risk is the risk associated with the use, ownership, operation and adoption
of information systems that can result in business interruptions, client service disruptions and loss
of confidential information causing financial loss, reputational damage, and regulatory fines and
penalties. We maintain a risk driven program to address the risks following our operational risk
framework supported by a global team of technology risk management experts.
Cybersecurity risk is the risk to the business associated with cyberattacks initiated to disrupt or
disable our operations or to expose or damage data. We have a dedicated team of technology and
cybersecurity professionals that manage a comprehensive program to help protect the
organization against breaches and other incidents by ensuring appropriate security and
operational controls are in place. We continue to strengthen our cyber-control framework and to
improve our resilience and cybersecurity capabilities including 24 hour monitoring, cyber
intelligence analysis of internal and external threats, and alerting of potentially suspicious
security events and incidents. Throughout the year, we continued to invest in our cybersecurity
program, and multiple scenarios, assessments and simulations were conducted to test our
resiliency strategy.
Information management
and privacy risk
Information management risk is the risk of failing to manage information appropriately through its
lifecycle due to inadequate processes, controls and technology resulting in legal and regulatory
consequences, reputational damage and/or financial loss. We have made substantial investments
in the Enterprise Chief Data Office (CDO) and functional and regional data management and data
governance units to promote awareness of and effectively manage information management risk.
Managing information management risk is fundamental to realizing our Data Vision, which is to
become a data-driven organization that uses data effectively and efficiently to improve client
experience and decision-making.
Privacy risk is defined as the risk of improper creation or collection, use, disclosure, retention or
destruction of personal information (PI) that identifies an individual or can be reasonably used to
identify an individual. PI includes the personal information entrusted to RBC by its Clients and
Employees. Privacy Risk includes the risk of failure to safeguard PI against unauthorized access or
use. The collection, use and sharing of data, as well as the management and governance of data,
are increasingly important as we continue to invest in digital solutions and innovation, as well as
expanding our business activities, which is also reflected through regulatory developments
relating to data privacy. The CDO and the Global Privacy Office partner with cross-functional
teams to develop and implement enterprise-wide standards and practices that describe how data
is used, protected, managed and governed.
Money laundering and
Terrorist financing risk
Money laundering and Terrorist financing risk is the risk that our products, services and delivery
channels are misused to facilitate the laundering of proceeds of crime, financing of terrorist
activity, bribery, corruption and other activities that may violate applicable economic sanctions
(collectively know as “Financial Crimes”). We maintain an enterprise-wide program designed to
deter, detect and report suspected money laundering and terrorist financing or suspicious
activities across our organization, while seeking to ensure compliance with the laws and
regulations of the various jurisdictions in which we operate. Our Enterprise Financial Crimes
program is dedicated to the continuous development and maintenance of robust policies,
guidelines, training, risk-assessment tools and models to enable our employees to manage
evolving money laundering and terrorist financing risks, economic sanctions and regulatory
expectations. The Enterprise Financial Crimes program is regularly evaluated in an effort to ensure
it remains current and aligned with industry standards, best practices and all applicable laws,
regulations and guidance. Risks of non-compliance can include enforcement actions, criminal
prosecutions and reputational damage.
Third-party risk
Third-party risk is the risk of failure to effectively manage third parties which may expose us to
service disruptions, regulatory action, financial loss, litigation or reputational damage. We have a
risk-based enterprise-wide program designed to provide oversight for third-party relationships,
ensure compliance with global regulatory expectations, and enable effective responses to events
that can cause service disruptions, financial loss or various other risks that could impact us. Our
approach to third-party risk mitigation is outlined in policies and standards that establish the
requirements for identifying and managing risks throughout the engagement with a third-party
(including risks resultant from supplier concentration and through fourth parties across the supply
chain). Third-party providers critical to our operations are actively monitored for their ability to
deliver services to us, including impacts resultant from vendors of our third-party providers (i.e.
fourth parties).
Business continuity risk
Business continuity risk is the risk of being unable to maintain, continue or restore essential
business operations during and/or after an event that prevents us from conducting business in the
normal course. Exposure to disruptive operational events interrupts the continuity of our business
operations and could negatively impact our financial results, reputation, client outcomes and/or
result in harm to our employees. These operational events could result from the impact of severe
weather, outbreak of a pandemic or other health crisis, failed processes, technology failures or
cyber threats. Our risk-based enterprise-wide business continuity management program considers
multiple scenarios to address the consequences of a disruption and its effects on the availability
of our people, processes, facilities, technology and third-party arrangements. Our approach to
business continuity management is outlined in policies and standards embedded across the
organization and the related risks are regularly measured, monitored, reported and integrated into
our operational risk management and control framework.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
101
Operational risk capital
Requirements for operational risk capital are determined in accordance with OSFI issued guidelines. Upon implementation of the
Basel III reforms in Q2 2023, we adopted a new Standardized Approach (SA) for the measurement of operational risk capital. This
SA methodology is a formula-based calculation where a Business Indicator Component (BIC) is multiplied by an Internal Loss
Multiplier (ILM) to determine operational risk capital. The BIC is a financial statement-based proxy for operational risk that
reflects a 3-year average of specified components of net income multiplied by a set of supervisory provided coefficients. The ILM
is a scaling factor that is based on our 10-year historical operational loss average relative to the BIC. Operational Risk losses are
recorded in our operational risk management system, and robust processes exist to support high quality internal loss data. For
further details on operational risk capital, refer to the Capital management section.
Operational risk loss events
As at October 31, 2023, our operational risk losses remain within our risk appetite. For further details on our contingencies,
including litigation, refer to Notes 24 and 25 of our 2023 Annual Consolidated Financial Statements.
Culture and conduct risk
Our values set the tone of our organizational culture and translate into desired behaviours as articulated in our Code of Conduct
and leadership model. We define conduct as the manifestation of culture through the behaviours, judgment, decisions and
actions of the organization and its employees. Our organizational direction establishes the expectation of good conduct
outcomes as the operating norm for the organization, all employees, and third-party service providers operating on our behalf to
drive positive outcomes for our clients, employees, other stakeholders, financial markets and our reputation. We hold ourselves
to the highest standards of conduct to build the trust of our clients, colleagues and communities. The desired outcomes from
effective culture and conduct practices align with our purpose and values and support our risk appetite statements.
Risk culture is a subset of our overall culture that influences how, individually and collectively, we take and manage risks.
Our risk culture helps us identify and understand risks, openly discuss risks and act on the organization’s current and perceived
future risks. Our risk culture practices are grounded in our existing risk management and human resource disciplines and
protocols. When combined with the elements of effective leadership and values, these practices provide a base from which the
resulting risk culture and conduct can be assessed, monitored, sustained and subjected to ongoing enhancement.
Our Board-approved Enterprise Culture and Conduct Risks Framework provides organizational direction and describes our
approach to a set of related topics applicable to all risk categories such as fair outcomes for clients and other stakeholders, and
our culture, including accountability and risk culture, conduct risk, sales conduct and client practices, and misconduct.
On a regular basis, management communicates behavioural expectations to our employees with an emphasis on conduct
and values. Our leadership model also supports and encourages effective challenge between the businesses and control
functions. These behavioural expectations are supported by tools and resources which are designed to help employees live our
values, report misconduct and raise concerns, including those that might have ethical implications. We are committed to
fostering an environment where employees feel safe to speak up without retaliation. Employees have the ability to report
matters through a global anonymous Conduct Hotline. In addition, our Code of Conduct outlines an employee’s responsibility to
be truthful, respect others and comply with laws, regulations and our policies. Anyone who breaches or fails to report an actual
or possible breach of the Code of Conduct is subject to corrective or disciplinary action. This can range from reprimands and
impacts on performance ratings and compensation, to termination of employment relationships with the organization. As well,
Internal Audit conducts select behavioural science reviews to better understand and enhance employee attitudes and
behaviours as they relate to risk management.
Organizational Direction
articulated through:
Values
Leadership Model
Code of Conduct
Risk Appetite
Risk Principles
Outcomes for
Stakeholders
Clients
Employees
Financial Markets
Regulators
Our Reputation
Shareholders
Individual &
Collective Conduct
exhibited through:
Behaviours
Judgment
Decisions
Actions
Drives
Apply lessons learned
Sets expected
Influences
Shapes
Culture Factors
Influential to Managing
Conduct Risk
Risk Awareness
Tone from Above
Accountability
Speaking Up
Incentives
Regulatory compliance risk
Regulatory compliance risk is the risk of potential non-conformance with laws, rules, regulations and prescribed practices in any
jurisdiction in which we operate. Issues regarding compliance with laws and regulations can arise in a number of areas in large
complex financial institutions, such as ourselves, and are often the result of inadequate or failed internal processes, controls,
people or systems. We currently are, and may be at any given time, subject to a number of legal and regulatory proceedings and
subject to numerous governmental and regulatory examinations, investigations and other inquiries.
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Management’s Discussion and Analysis
Laws and regulations are in place to protect the financial and other interests of our clients, shareholders and the public. As a
large-scale global financial institution, we are subject to numerous laws and extensive and evolving regulation by governmental
agencies, supervisory authorities and self-regulatory organizations in Canada, the U.S., the U.K., Europe and other jurisdictions in
which we operate. Such regulation continues to become increasingly extensive and complex. In addition, regulatory scrutiny and
expectations in Canada, the U.S., the U.K., Europe and other jurisdictions for large financial institutions with respect to, among
other things, governance, risk management practices and controls, and conduct, as well as the enforcement of regulatory
compliance matters, has intensified. Failure to comply with these regulatory requirements and expectations or to resolve any
identified deficiencies could result in increased regulatory oversight and restrictions. Resolution of such matters can also result
in the payment of substantial penalties, agreements with respect to future operation of our business, actions with respect to
relevant personnel, admission of wrongdoing, and guilty pleas with respect to criminal charges, which may in turn prohibit us
from conducting certain types of business absent regulatory relief.
Operating in this increasingly complex regulatory environment and intense regulatory enforcement environment, we are and
have been subject to a variety of legal proceedings, including civil claims and lawsuits, criminal charges, regulatory scrutiny,
examinations and proceedings, investigations, audits and requests for information by various governmental regulatory agencies
and law enforcement authorities in various jurisdictions, and we anticipate that our ongoing business activities will give rise to
such matters in the future. The global scope of our operations also means that a single issue may give rise to overlapping
regulatory investigations, regulatory proceedings and or civil litigation claims in different jurisdictions. RBC can be subject to
such proceedings due to alleged violations of law or, if determined by regulators, allegedly inadequate policies, procedures,
controls or remediation of deficiencies. Changes to laws, including tax laws, regulations or regulatory policies, as well as the
changes in how they are interpreted, implemented or enforced, could adversely affect us, for example, by lowering barriers to
entry in the businesses in which we operate, increasing our costs of compliance, or limiting our activities and ability to execute
our strategic plans. In addition, the severity of the remedies sought in legal and regulatory proceedings to which RBC is subject
have increased. Further, there is no assurance that we always will be, or be deemed to be, in compliance with laws, regulations or
regulatory policies or expectations. Accordingly, it is possible that we could receive a judicial or regulatory enforcement
judgment or decision that results in significant fines, damages, penalties, and other costs or injunctions, criminal convictions, or
loss of licenses or registrations that would damage our reputation, and negatively impact our earnings and ability to conduct
some of our businesses. We are also subject to litigation arising in the ordinary course of our business and the adverse
resolution of any litigation could have a significant adverse effect on our results or could give rise to significant reputational
damage, which in turn could impact our future business prospects.
Our Regulatory Compliance Management Framework outlines how we manage and mitigate the regulatory compliance risks
associated with failing to comply with, or adapt to, current and changing laws and regulations in the jurisdictions in which we
operate.
Regulatory compliance risk includes the regulatory risks associated with financial crimes (which include, but are not limited
to, money laundering, terrorist financing, bribery, corruption, and violations of economic sanctions), privacy, market conduct,
consumer protection and business conduct, as well as prudential and other generally applicable non-financial requirements.
Specific compliance policies, procedures and supporting frameworks have been developed to seek to manage regulatory
compliance risk.
Strategic risk drivers
Strategic risk
Strategic risk is the risk that the enterprise or particular business areas will make inappropriate strategic choices, or will be
unable to successfully implement selected strategies or achieve the expected benefits. Business strategy is a major driver of our
risk appetite and consequently the strategic choices we make in terms of business mix determine how our risk profile changes.
Responsibility for selecting and successfully implementing business strategies is mandated to the individual heads of each
business segment. Oversight of strategic risk is the responsibility of the heads of the business segments and their operating
committees, the Enterprise Strategy & Transformation group, the GE and the Board. The Enterprise Strategy & Transformation
group supports the management of strategic risk through the strategic planning process, articulated within our Enterprise
Strategic Planning Policy, ensuring alignment across our business, financial, capital and risk planning.
Our annual business portfolio review and project approval request processes help to identify and mitigate strategic risk by
seeking to ensure that strategies for new initiatives, lines of business, and the enterprise as a whole align with our risk appetite
and risk posture. GRM provides oversight of strategic risk by providing independent reviews of these processes, establishing
enterprise risk frameworks, and independently monitoring and reporting on the level of risk established against our risk appetite
metrics in accordance with the three lines of defence governance model.
For details on the key strategic priorities for our business segments, refer to the Business segment results section.
Reputation risk
Reputation risk is the risk of an adverse impact on stakeholders’ perception of RBC due to i) perceived or actual misalignment
between stakeholder perceptions of RBC and the actions or inactions of the bank, its employees, or individuals or groups
affiliated with RBC (e.g. stakeholder perceptions of our role as a good corporate citizen), ii) negative or shifting public sentiment
on existing, evolving, or emerging industry or global issues, or iii) negative outcomes relating to any risk inherent to the financial
services industry, including ineffective management of these risks, or situations beyond our control such as external events or
systemic risks. A strong and trustworthy reputation will generally strengthen our market position, reduce the cost of capital,
increase shareholder value, strengthen our resiliency, and help attract and retain top talent. Conversely, damage to our
reputation can result in reduced share price and market capitalization, increased cost of capital, loss of strategic flexibility,
inability to enter or expand into markets, loss of client loyalty and business, regulatory fines and penalties, restrictive
agreements with regulators or prosecutors, or criminal prosecutions. The sources of reputation risk are widespread. Reputation
risk is a transverse risk which can manifest as an outcome of other risk types including but not limited to credit, regulatory, legal,
operational, and environmental and social risks. We can also experience reputation risk from a failure to maintain an effective
control environment, exhibit good conduct and maintain appropriate cultural practices.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
103
Managing our reputation risk is an integral part of our organizational culture and our overall enterprise risk management
approach, as well as a priority for employees and our Board. Our Board-approved Reputation Risk Management Framework
provides an overview of our approach to identify, assess, manage, monitor and report on reputation risk. This framework outlines
governance authorities, roles and responsibilities, and controls and mechanisms to manage our reputation risk, including our
culture of integrity, compliance with our Code of Conduct and operating within our risk appetite.
Our governance of reputation risk aims to be holistic and provides an integrated view of potential reputation issues across
the organization. This governance structure is designed to ensure that ownership and accountability for reputation risk are
understood across the enterprise, both proactive and reactive reputation risk decisions are escalated to senior management for
review and evaluation, and reporting on reputation risk is comprehensive and integrated.
Legal and regulatory environment risk
Legal and regulatory environment risk is the risk that new or modified laws and regulations, and the interpretation or application
of laws and regulations, will negatively impact the way in which we operate, both in Canada and in the other jurisdictions in
which we conduct business. The full impact of some of these changes on our business will not be known until final rules are
implemented and market practices have developed in response. We continue to respond to these and other developments and
are working to minimize any potential adverse business or economic impact. The following provides a high-level summary of
some of the key regulatory changes that have potential to increase or decrease our costs, impact our profitability and increase
the complexity of our operations.
Global uncertainty
Significant uncertainty about inflationary pressures and geopolitical tensions continues to pose risks to the global economic
outlook. In October 2023, the International Monetary Fund (IMF) projected global growth of 3.0% in calendar 2023 which remains
unchanged from its July 2023 forecast and is up from 2.7% in October 2022. The IMF projected global growth in 2024 of 2.9%. The
global growth recovery from the COVID-19 pandemic and the Russia-Ukraine conflict remains slow and uneven, as economic
activity in certain geographies has not yet returned to pre-pandemic levels, resulting in regional divergences. The resolution of
the U.S. debt ceiling standoff, and decisive actions taken by global authorities to contain instability in the U.S. regional banking
sector have reduced the immediate risks of financial turmoil. However, uncertainty remains regarding: interest rates being
sustained at higher levels for longer; the severity and impact of central banks’ monetary policy tightening as they attempt to
reduce persistent levels of elevated inflation; ongoing geopolitical tensions, including those between Russia and Ukraine and the
conflict in the Middle East; extreme weather-related events; and the potential re-emergence of financial sector instability as
banks face regulatory reform in the U.S. Our diversified business model, as well as our product and geographic diversification,
continue to help mitigate the risks posed by global uncertainty.
Environment and social-related legal and regulatory activity
Environmental and social-related regulations, frameworks, and guidance that apply to banks, insurers and asset managers
continue to rapidly evolve. As such, new or heightened requirements could result in increased regulatory, compliance or other
costs or higher capital requirements, and may subject us to different and potentially conflicting requirements in the various
jurisdictions in which we operate. We continue to monitor the development of applicable laws in this area, including but not
limited to the evolution of disclosure requirements for public issuers and climate risk management requirements for financial
institutions.
In Canada, OSFI released its final Guideline B-15 – Climate Risk Management on March 7, 2023, which sets out expectations for the
management and disclosure of climate-related risks for federally regulated financial institutions (FRFIs) and aims to support
FRFIs in developing greater resilience to, and management of, these risks. The first set of guidelines will be effective fiscal
year-end 2024, with annual disclosures required to be made publicly available no later than 180 days after fiscal year-end. OSFI
intends to review and amend the guideline as practices and standards evolve. We are currently assessing the impact of the
guideline and have initiated work to meet the requirements by the effective date.
In the U.S., the SEC issued proposed rule changes on March 21, 2022, which would require many registrants to include certain
climate-related disclosures in their regulatory filings, including the financial statements. We continue to monitor developments in
this area. In addition, various states in the United States have enacted or proposed statutes or regulations addressing
environmental and/or social matters. As environmental and social issues become more politicized, statutes or regulations in
certain states may be interpreted to prohibit governmental entities, such as public pension funds and issuers of municipal bonds,
from doing business with certain financial institutions, and political pressure may be placed upon governmental entities to not
do business with certain financial institutions, based on the financial institutions’ perceived positions on certain environmental
and/or social matters. We continue to monitor developments in this area and assess their impacts on our businesses.
Internationally, the International Sustainability Standards Board (ISSB) issued its inaugural standards on June 26, 2023, being
IFRS S1 General Requirements for Disclosures of Sustainability-related Financial Information and IFRS S2 Climate-related
Disclosures (collectively, the ISSB Standards). IFRS S1 sets out general reporting requirements for disclosing sustainability-
related financial information. IFRS S2 requires an entity to disclose information about climate-related risks and opportunities
and the impact on an entity’s financial position, performance, cash flows, strategy and business model. The applicability of the
standards and the effective date for Canadian reporting issuers is subject to adoption by Canadian regulators, and we continue
to monitor communication from the Canadian Securities Administrators.
In addition, the European Union’s Corporate Sustainability Reporting Directive (CSRD) requires reporting under the
European Sustainability Reporting Standards (ESRS). The ESRS, which were adopted by the European Commission on July 31,
2023, set out the requirements for companies to report on sustainability-related impacts, opportunities and risks. We are
currently assessing the impact of the CSRD.
We continue to monitor trends in climate-related litigation and regulatory enforcement actions, including those involving claims
of “greenwashing”, which generally refer to claims that false or misleading information about an organization’s products or
services or operations has been conveyed to suggest that the organization is doing more to protect the environment than it is,
and to assess the impact on our litigation and regulatory compliance risks.
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Management’s Discussion and Analysis
Government of Canada 2023 Budget
On March 28, 2023, the Government of Canada presented its 2023 budget (“Budget 2023”), which introduced a number of
proposed measures including a proposal to deny the dividend received deduction in respect of dividends received by financial
institutions after December 31, 2023 on shares of corporations resident in Canada where such shares are mark-to-market
property for tax purposes, and a new 2% tax on net share buybacks for publicly listed corporations occurring on or after
January 1, 2024. Budget 2023 also reinforced the Government of Canada’s commitment to the Organization for Economic
Co-operation and Development’s two-pillar plan for international tax reform, including a global 15% minimum tax on
multinational enterprises, and associated draft legislation for a Global Minimum Tax Act was published on August 4, 2023 and the
period for public comment was closed on September 29, 2023. Timing of enactment of these changes remains uncertain, and
legislation remains subject to amendment prior to enactment. The ultimate impact of the proposed measures will depend on the
final legislation.
Budget 2023 also introduced harmonized sales tax (HST) on payment card clearing services, to be applied prospectively in
all cases and retroactively under certain circumstances. A bill with this legislation received royal assent and became law on
June 22, 2023.
Third-party risk management
On April 24, 2023, OSFI released its final Guideline B-10 – Third-Party Risk Management, which sets out expectations for managing
risks associated with third-party arrangements for FRFIs.
This guideline will be effective on May 1, 2024. We have assessed the requirements and do not anticipate any issues in
complying with the requirements by the effective date.
Interest Rate Benchmark Reform
As part of the interest rate benchmark reform, the publication of all remaining USD London Interbank Offered Rate (LIBOR)
settings ceased on June 30, 2023. As at October 31, 2023, and consistent with our transition plan, our exposure to financial
instruments referencing USD LIBOR is no longer material. For further details, refer to Note 2 of our 2023 Annual Consolidated
Financial Statements.
Additionally, on July 27, 2023 the Canadian Alternative Reference Rate Working Group published a market notice confirming
that effective November 1, 2023, no new CDOR or Bankers’ Acceptance (BA) based lending will be permitted. This announcement
does not impact the ability to draw on existing CDOR or BA loan facilities entered into prior to November 1, 2023 and is in line with
OSFI’s expectations. Our transition plan has been updated to reflect this announcement.
Federal Deposit Insurance Corporation (FDIC) special assessment
On November 16, 2023, the FDIC Board of Directors approved the imposition of a special assessment on certain U.S. depository
institutions to recover the cost associated with protecting uninsured depositors following the closures of Silicon Valley Bank and
Signature Bank. The special assessment will be assessed at an annual rate of approximately 13.4 basis points of a U.S. depository
institution’s uninsured deposits over a specified threshold, to be collected over an anticipated eight quarterly assessment
periods with the first quarterly assessment period beginning January 1, 2024. The cost of the special assessment for us is
expected to be approximately US$120 million.
For further details on regulatory capital and related requirements, refer to the risk and Capital management sections of this 2023
Annual Report.
Competitive risk
Competitive risk is the risk of an inability to build or maintain a sustainable competitive advantage in a given market or markets
and includes the potential for loss of market share due to competitors offering superior products and services. Competitive risk
can arise from within or outside the financial sector, from traditional or non-traditional competitors, domestically or globally.
There is intense competition for clients among financial services companies. Client loyalty and retention can be influenced by
several factors, including new technology used or services offered by our competitors, relative service levels and prices, product
and service attributes, reputation, actions taken by our competitors, and adherence with competition and anti-trust laws. Other
companies, such as insurance companies and non-financial companies, as well as new technological applications, are
increasingly offering services traditionally provided by banks. This competition could also reduce our revenue which could
adversely affect our results.
We identify and assess competitive risks as part of our overall risk management process. Our products and services are
regularly benchmarked against existing and potential competitors. In addition, we regularly conduct risk reviews of our products,
services, mergers and acquisitions strategy, and we seek to ensure adherence to competition and anti-trust laws. Our annual
strategy-setting process also plays an integral role in managing competitive risk.
Macroeconomic risk drivers
Systemic risk
Systemic risk is the risk that the financial system as a whole, or a major part of it – either in an individual country, a region or
globally – is put in real and immediate danger of collapse or serious damage due to an unforeseen event causing a substantive
shock to the financial system with the likelihood of material damage to the economy, and which would result in financial,
reputation, legal or other risks for us.
Systemic risk is considered to be the least controllable risk, leading to increased vulnerabilities as experienced during the
2008 global financial crisis and the COVID-19 pandemic. In 2023, U.S. regional bank failures highlighted the potential vulnerability
of the financial system to systemic risks, particularly given tightening financial regulations and technology-driven increases in
transaction velocity. Our ability to mitigate systemic risk when undertaking business activities is limited, other than through
collaborative mechanisms between key industry participants, and, as appropriate, the public sector and regulators to reduce the
frequency and impact of these risks. The two most significant measures in mitigating the impact of systemic risk are
diversification and stress testing.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
105
Our diversified business model, portfolios, products, activities and funding sources help mitigate the potential impacts from
systemic risk. Our established risk limits also seek to ensure our portfolio is diversified, and concentration risk is reduced and
remains within our risk appetite.
Stress testing involves consideration of the simultaneous movements in several risk factors. Stress testing seeks to ensure
our business strategies and capital planning are robust by measuring the potential impacts of credit, market, liquidity and
operational risks, under adverse economic conditions. Our enterprise-wide stress testing program evaluates the potential effects
of a set of specified changes in risk factors, corresponding to exceptional but plausible adverse economic and financial market
events. These stress scenarios are evaluated across the organization, and results are integrated to develop an enterprise-wide
view of the impacts on our financial results and capital requirements. For further details on our stress testing, refer to the
Enterprise risk management section.
Our financial results are affected by the business and economic conditions in the geographic regions in which we operate.
These conditions include consumer saving and spending habits as well as consumer borrowing and repayment patterns,
business investment, government spending, exchange rates, sovereign debt risks, the level of activity and volatility of the capital
markets, strength of the economy and inflation. Given the importance of our Canadian and U.S. operations, an economic
downturn may largely affect our personal and business lending activities and may result in higher provisions for credit losses.
Deterioration and uncertainty in global capital markets could result in continued high volatility that would impact results in
Capital Markets. In Wealth Management, weaker market conditions could lead to lower average fee-based client assets and
transaction volumes. In addition, worsening financial and credit market conditions may adversely affect our ability to access
capital markets on favourable terms and could negatively affect our liquidity, resulting in increased funding costs and lower
transaction volumes in Capital Markets and Wealth Management.
Our financial results are also sensitive to changes in interest rates. To address persistent inflationary pressures, major
central banks continued increasing benchmark interest rates during fiscal 2023 and the future path of monetary policy is
uncertain. While there may be a potential benefit to our NIM, elevated interest rates generally result in higher funding costs. If
elevated interest rates are coupled with persistent inflation, it could increase market volatility and reduce asset values, and
adversely impact household and corporate balance sheets. This could lead to credit deterioration and impact our financial
results, particularly in our Personal & Commercial Banking, Wealth Management and Capital Markets businesses.
Overview of other risks
In addition to the risks described in the risk sections, there are other risk factors, described below, which may affect our
businesses and financial results. The following discussion is not exhaustive as other factors could also adversely affect our
results.
Government fiscal, monetary and other policies
Our businesses and earnings are affected by monetary policies that are adopted by the BoC, the Fed in the U.S., the ECB in the
European Union (EU), the BoE in the U.K. and monetary authorities in other jurisdictions in which we operate, as well as the fiscal
policies of the governments of Canada, the U.S., the U.K., Europe and such other jurisdictions. Such policies can also adversely
affect our clients and counterparties in Canada, the U.S. and internationally, which may increase the risk of default by such
clients and counterparties.
Tax risk and transparency
Tax risk refers to the risk of loss related to unexpected tax liabilities. The tax laws and systems that are applicable to us are
complex and wide-ranging. As a result, we seek to ensure that any decisions or actions related to tax always reflect our
assessment of the long-term costs and risks involved, including their impact on our reputation and our relationship with clients,
shareholders and regulators.
Our approach to taxation is grounded in principles which are reflected in our Code of Conduct, is governed by our Enterprise
Tax Risk Management Policy, and incorporates the fundamentals of our risk drivers. Oversight of our tax policy and the
management of tax risk is the responsibility of the GE, the CFO and the Senior Vice President, Taxation. We discuss our tax
strategy with the Audit Committee annually and provide updates on our tax position on a regular basis.
Our tax strategy is designed to provide transparency and support our business strategy, and is aligned with our corporate
vision and values. We seek to maximize shareholder value by structuring our businesses in a tax-efficient manner while
considering reputation risk by being in compliance with all laws and regulations. Our policy requires that we:
•
Act with integrity and in a straightforward, open and honest manner in all tax matters;
•
Ensure tax strategy is aligned with our business strategy supporting only bona fide transactions with a business purpose
and economic substance;
•
Ensure all intercompany transactions are conducted in accordance with applicable transfer pricing requirements;
•
Ensure our full compliance and full disclosure to tax authorities of our statutory obligations; and
•
Endeavour to work with the tax authorities to build positive long-term relationships and where disputes occur, address
them constructively.
With respect to assessing the needs of our clients, we consider a number of factors including the purpose of the transactions. We
seek to ensure that we only support bona fide client transactions with a business purpose and economic substance. Should we
become aware of client transactions that are aimed at evading their tax obligations, we will not proceed with the transactions.
We operate in 29 countries worldwide. Our activities in these countries are subject to both Canadian and international tax
legislation and other regulations, and are fully disclosed to the relevant tax authorities. The Taxation group and GRM both
regularly review the activities of all entities in an effort to ensure compliance with tax requirements and other regulations.
Given that we operate globally, complex tax legislation and accounting principles have resulted in differing legal
interpretations between the respective tax authorities we deal with and ourselves, and we are at risk of tax authorities
disagreeing with prior positions we have taken for tax purposes. When this occurs, we are committed to an open and transparent
dialogue with the tax authorities to facilitate a quick assessment and prompt resolution of the issues where possible. Failure to
106
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
adequately manage tax risk and resolve issues with tax authorities in a satisfactory manner could adversely impact our results,
potentially to a material extent in a particular period, and/or significantly impact our reputation.
Tax contribution
In 2023, total income and other tax expense, including income taxes in the Consolidated Statements of Comprehensive Income
and Changes in Equity, to various levels of governments globally totalled $5 billion (2022 – $6 billion). In Canada, total income
and other tax expense for the year ended October 31, 2023 to various levels of government totalled $4 billion (2022 – $5 billion).
Payroll taxes
Income taxes
Value added and
sales taxes
Capital taxes
Property taxes
Insurance premium taxes
Business taxes
0
2,000
1,000
8,000
7,000
6,000
5,000
4,000
3,000
2023
2022
Income and other tax expense – by category
(Millions of Canadian dollars)
0
2,000
1,000
8,000
7,000
6,000
5,000
4,000
3,000
Other International
U.S.
Canada
2023
2022
Income and other tax expense – by geography
(Millions of Canadian dollars)
For further details on income and other tax expense, refer to the Financial performance section.
Environmental and social risk
Environmental and social (E&S) risk is the potential for an E&S issue associated with us, a client, transaction, product, supplier or
activity, to have a negative impact on us, including our financial position, operations, legal and regulatory compliance, or
reputation. It refers to the risk that we face as a result of the manner in which we, a supplier or a client manages E&S issues or
relationships with stakeholders and communities.
E&S issues include, but are not limited to, site contamination, waste management, land and resource use, biodiversity, water
quality and availability, climate change, environmental regulation, human rights (including, but not limited to social and racial
inequality and Indigenous Peoples’ rights), and community engagement.
E&S risks, including climate risk, are each unique and transverse risks and impact all our principal risk types in different
ways and to varying degrees, including but not limited to strategic, operational, credit, reputation, legal and regulatory
environment, and regulatory compliance risks. See the Climate risk section below for additional information specific to climate
risk.
Governance
The Board oversees how we manage our E&S risks, our enterprise approach to E&S risks, and how we conduct our business to
meet high standards of E&S responsibility. The Board approved our updated climate strategy, the RBC Climate Blueprint, which
was published in February 2022. The Committees of the Board have oversight of E&S risks that are specific to their respective
responsibilities, with the Governance Committee playing a specific oversight and coordination role over ESG matters, including
over certain of our ESG-related disclosures. For further details on risk governance, refer to the Enterprise risk management – Risk
governance section.
Roles and responsibilities related to E&S risk management are governed by the Enterprise Risk Management Framework and
the three lines of defence governance model. Business segments and functional areas are responsible for incorporating E&S risk
management requirements within their own operations, while GRM is responsible for developing and maintaining an integrated
enterprise view of E&S risk, including establishing policies and procedures, and performing effective challenge and oversight in
relation to E&S risk.
Risk management
We seek to integrate E&S risk considerations into our risk management processes. We continue to evolve our approach to E&S
risk by leveraging existing risk management capabilities, and where new capability builds are required, we incorporate regulatory
guidance, industry best practices and improved data analytics to identify and assess, measure, manage, mitigate, monitor and
report on potential impacts to clients, portfolios, and our operations.
Our Enterprise Policy on Environmental (including climate) and Social Risk (E&S Risk Policy)
1
serves as the foundation for
our approach to managing E&S risks arising from our activities. It outlines our principles for E&S risk management, and sets out
standards for how E&S risks arising from our activities are identified, assessed, measured, managed, mitigated, monitored and
reported.
The E&S Risk Policy is supported by additional policies and procedures on E&S risk management for business segments,
which includes an enhanced due diligence process which we undertake for certain corporate and commercial clients, to identify
E&S issues that may drive E&S risk for RBC. As a signatory to the Equator Principles (EP) framework, we also have a procedure
that outlines our governance for managing E&S risks related to certain project finance-related transactions. We also have policy
guidelines
2
in place for sensitive sectors and activities, which address our financing activities to clients and projects operating in
the coal-fired power generation and coal mining sectors, the Arctic ecosystem, the Arctic National Wildlife Refuge, and United
Nations Educational, Scientific and Cultural Organization (UNESCO) World Heritage Sites.
1
The E&S Risk Policy is not inclusive of the activities of, and assets under management by, RBC Global Asset Management (RBC GAM). RBC GAM has developed its own
policy with respect to these matters. RBC GAM includes, but is not limited to, the following wholly owned indirect subsidiaries of the Bank: RBC Global Asset Management
Inc. (including Phillips, Hager & North Investment Management), RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, RBC Global Asset
Management (Asia) Limited and BlueBay Asset Management LLP.
2
See RBC’s Policy Guidelines for Sensitive Sectors and Activities which address our lending activities.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
107
Climate risk
Climate risk is the risk related to the global transition to a net-zero economy (transition risk) and the physical impacts of climate
change (physical risk), which includes both chronic (longer-term) risks (e.g., rising sea levels and increases in average
temperatures) and acute (event driven) risks (e.g., wildfires and floods). Both we and our clients may be exposed to climate-
related transition risk, including through emerging regulatory and legal requirements, changing business and consumer
sentiment towards products and services, technological developments, and changes in stakeholder expectations. Additionally,
we and our clients may be vulnerable to climate-related physical risk through disruptions to operations and services.
We continue to advance our climate risk measurement, management, monitoring and reporting capabilities and our
understanding of the impact climate-related risks may have on our business and our clients’ businesses.
We maintain a diversified lending portfolio, which improves our resilience to geographic or sectoral downturns and limits
concentrations of credit exposure to climate risk. We continue to build our capability to assess the potential impact of both
transition and physical risk on our portfolio. In particular, we conduct portfolio, client and scenario analyses to assess our
exposure to, and the impact of, climate-related risks. As part of our annual stress testing and analysis, we continue to integrate
components of climate risk through transition and physical risk stresses and to assess its impact on our key portfolios. We seek
to improve data quality to further identify those sectors within our wholesale portfolio that are most affected by physical and
transition risk. We are continuing to expand our climate data inventory and enhance our climate data governance processes, to
improve our climate risk analytical capabilities.
We classify critical environment sites based on our business risk tolerance for site-specific downtime and, among other
things, site location, power supply, exposure to flooding, geological stability, and other hazards. We also take steps to mitigate
and adapt to climate change through our building design and our purchasing decisions.
Our continued development of our climate risk measurement capabilities will inform the enhancements to our climate risk
management practices and advance the integration of climate risks into our policies and procedures.
Human rights and codes of conduct
Our approach to identifying, assessing, managing and mitigating social issues such as human rights issues, is set out in our E&S
Risk Policy, and is supported by additional policies and position statements that reflect our approach to managing our
businesses in a responsible manner.
RBC is committed to respecting human rights, including those of any clients, employees, third parties with whom we conduct
business or who may be affected by our business activities – either directly or indirectly – and to taking the actions set out in
RBC’s Human Rights Position Statement (Statement) in order to meet the responsibility of businesses like ours to respect human
rights as set out in the United Nations Guiding Principles on Business and Human Rights. Our Statement is adopted at the highest
levels of our organization and is published on our website.
Our Modern Slavery Act Statement is published annually and sets out our commitment to preventing slavery and human
trafficking from taking place in our businesses and in our supply chains.
Our Code of Conduct establishes standards of desired behaviour that apply to all directors, employees, and contract
workers of the bank and its subsidiaries. In addition, our principles-based Supplier Code of Conduct articulates our expectations
with respect to a supplier’s business integrity, responsible business practices and responsible treatment of individuals and the
environment.
Framework and commitments
We are a participant or signatory to various industry principles and initiatives that are designed to help mitigate E&S risk within
our business activities or advance responsible business practices, including but not limited to the following:
•
RBC is a member of the Net-Zero Banking Alliance (NZBA), which is a global industry-led initiative to accelerate and support
efforts to address climate change by aligning member banks’ lending and investment portfolios with net-zero emissions by
2050
3
. As a member of the NZBA, we made a commitment to setting and disclosing interim emissions reduction targets for
our key high-emitting sectors.
•
RBC is a member of the Partnership for Carbon Accounting Financials (PCAF), which is an industry-led partnership to
facilitate transparency and enable financial institutions to assess and disclose greenhouse gas emissions of loans and
investments. In October 2022, in accordance with our NZBA commitment, we published our initial interim emissions
reduction targets in our lending activities for the oil and gas, power generation and automotive sectors
3
.
•
RBC is a signatory to the Equator Principles (EP), which is a benchmark for determining, assessing and managing E&S risks
for project finance. We report annually on projects assessed according to the EP framework.
•
RBC GAM and Brewin Dolphin Holdings Limited are signatories to the United Nations Principles for Responsible Investment
(UN PRI) and report on their responsible investment activities to the UN PRI.
In addition, we are committed to providing $500 billion in sustainable finance by 2025
4
. In October 2022, we published our
approach and methodology for classifying, tracking, and disclosing progress towards our sustainable finance commitment and to
support the identification of new growth opportunities for our clients and our business.
We may be exposed to legal, regulatory or reputation risk in the event that we do not fully implement these frameworks or
meet these commitments, goals or targets, either as a result of our own actions or due to external factors. More specifically, our
ability to achieve our climate and sustainable finance-related commitments, goals and targets, including those discussed above,
will depend on the collective efforts and actions across a wide range of stakeholders outside of our control, and there can be no
assurance that they will be achieved
5
.
3
Our NZBA commitments to achieving net-zero emissions in our lending by 2050 and to our initial 2030 interim emissions reduction targets for lending in three key sectors
(oil & gas, power generation and automotive) are not inclusive of the activities of, and the assets under management by, RBC GAM and RBC Wealth Management
(RBC WM). RBC WM includes, but is not limited to, the following affiliates: (a) RBC Dominion Securities Inc. (Member–Canadian Investor Protection Fund), RBC Direct
Investing Inc. (Member–Canadian Investor Protection Fund), Royal Mutual Funds Inc., RBC Wealth Management Financial Services Inc., Royal Trust Corporation of
Canada and The Royal Trust Company, which are separate but affiliated subsidiaries of us; and (b) Brewin Dolphin Holdings PLC and its subsidiaries.
4
Sustainable finance refers to financial activities that take into account environmental, social and governance factors.
5
External factors that could cause our actual results to differ materially from our expectations expressed in such commitments, goals and targets include the need for
more and better climate data and standardization of climate-related measurement methodologies, our ability to gather and verify data, our ability to successfully
implement various initiatives throughout our enterprise under expected time frames, difficulty in identifying transactions, products and services that meet the
sustainable finance classification criteria, the risk that eligible transactions or related initiatives will not be completed within any specified period or at all or with the
results or outcome as originally expected or anticipated by us, our ability to track transactions and report on them as performance against our climate or sustainable
finance commitment, the compliance of various third parties with our policies and procedures and their commitment to us, the need for active and continuing
participation and action of various stakeholders, technological advancements, the evolution of consumer behaviour, varying decarbonization efforts across economies,
the need for thoughtful climate policies around the world, the challenges of balancing emission reduction targets with an orderly, just and inclusive transition and
geopolitical factors that impact global energy needs, the legal and regulatory environment, and regulatory compliance considerations. Our climate- or sustainable
finance-related commitments, goals and targets are aspirational and may need to be changed or recalibrated as data improve and as climate science, transition
pathways and market practices regarding standards, methodologies, metrics and measurements evolve.
108
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Legal and regulatory developments
Environmental and social-related regulations, frameworks, and guidance that apply to banks, insurers and asset managers
continue to rapidly evolve. As such, new or heightened requirements could result in increased regulatory, compliance or other
costs or higher capital requirements, and may subject us to different and potentially conflicting requirements in the various
jurisdictions in which we operate. As regulatory requirements evolve, we will continue to monitor such developments and update
our risk management practices and disclosures as necessary. See the Legal and regulatory environment risk section for further
details.
Capital management
We actively manage our capital to maintain strong capital ratios and high ratings while providing strong returns to our
shareholders. In addition to the regulatory requirements, we consider the expectations of credit rating agencies, depositors and
shareholders, as well as our business plans, stress tests, peer comparisons and our internal capital ratio targets. Our goal is to
optimize our capital usage and structure, and to provide support for our business segments and clients. We also aim to generate
optimal returns for our shareholders, while protecting depositors and creditors.
Capital management framework
Our capital management framework establishes policies and processes for defining, measuring, raising and investing all forms of
capital in a coordinated and consistent manner. It sets our overall approach to capital management, including guiding principles
and roles and responsibilities relating to capital adequacy and transactions, dividends, solo capital, and management of RWA,
leverage ratio exposures, TLAC capital and TLAC leverage ratios. We manage and monitor capital from several perspectives,
including regulatory capital, solo capital and TLAC.
Our capital planning process is dynamic and involves various teams including Finance, Corporate Treasury, GRM, Economics
and our businesses, and covers internal capital ratio targets, potential capital transactions as well as projected dividend payouts
and share repurchases. This process considers our business operating plans, enterprise-wide stress testing and ICAAP,
regulatory capital changes and supervisory requirements, accounting changes, internal capital requirements, rating agency
metrics and solo capital.
Our capital plan is established on an annual basis and is aligned with the management actions included in the annual
business operating plan, which includes forecast growth in assets and earnings taking into account our business strategies, the
projected market and economic environment, and peer positioning. This includes incorporating potential capital transactions
based on our projected internal capital generation, business forecasts, market conditions and other developments, such as
accounting and regulatory changes that may impact capital requirements. All of the components in the capital plan are
monitored throughout the year and are revised as deemed appropriate.
Total capital requirements
Capital available and target
capital ratios
Capital impacts of
stress scenarios
Enterprise-wide
Stress Testing
ICAAP
Capital Plan and
Business
Operating Plan
Capital impacts of stress scenarios
Our enterprise-wide stress testing and annual ICAAP processes provide key inputs for capital planning, including setting
internal capital ratio targets. The stress scenarios are evaluated across the organization, and results are integrated to develop
an enterprise-wide view of financial impacts and capital requirements, which in turn facilitate the planning of mitigating actions
to absorb adverse events. ICAAP assesses capital adequacy and requirements covering all material risks, with a cushion for
plausible contingencies. In accordance with OSFI guidelines, major components of our ICAAP process include comprehensive risk
assessment, stress testing, capital assessment and planning, Board and senior management oversight, monitoring and reporting
and internal control review.
Our internal capital targets are established to maintain robust capital positions in excess of OSFI’s Basel III regulatory targets.
The results of our enterprise-wide stress testing and ICAAP processes are incorporated into the OSFI Capital Buffers, Domestic
Systemically Important Banks (D-SIB)/Globally Systemically Important Banks (G-SIB) surcharge, and Domestic Stability Buffer
(DSB), with a view to ensure that the bank has adequate capital to underpin risks and absorb losses under all plausible stress
scenarios given our risk profile and appetite. In addition, we include a discretionary cushion on top of OSFI’s regulatory targets to
reflect our risk appetite, our forecasts of potential negative downturns and to maintain our capital strength for forthcoming
regulatory and accounting changes, peer comparatives, rating agencies sensitivities, future acquisitions and solo capital level.
The Board is responsible for the ultimate oversight of capital management, including the annual review and approval of the
capital plan. ALCO and GE share responsibility for capital management and receive regular reports detailing our compliance with
approved limits and guidelines. The Audit and Risk Committees jointly approve the ICAAP process.
Basel III
Our consolidated regulatory capital requirements are determined by OSFI’s Capital Adequacy Requirements (CAR) guidelines,
which are based on the minimum Basel III capital ratio requirements adopted by the BCBS.
Under Basel III, banks select from two main approaches, the Standardized Approach (SA) or the IRB Approach, to calculate their
minimum regulatory capital required to support credit, market and operational risks. We adopted the Basel III IRB approach to
calculate credit risk capital for consolidated regulatory reporting purposes. While the majority of our credit risk exposures are
reported under the Basel III IRB Approach for regulatory capital purposes, certain portfolios continue to use the Basel III SA for credit
risk, primarily in Wealth Management, including our City National wholesale portfolio, and our Caribbean Banking operations. For
consolidated regulatory reporting of market risk capital, we currently use both the Internal Models-based and Standardized
Approaches. For consolidated regulatory reporting of operational risk capital we use the SA, as implemented under Basel III. We
determine our regulatory leverage ratio based on OSFI’s LR Guideline, which reflects the BCBS Basel III leverage ratio requirements.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
109
All federally regulated banks with a Basel III leverage ratio total exposure exceeding
€
200 billion at their financial year-end
are required, at a minimum, to publicly disclose in the first quarter following their year-end, the thirteen indicators used in the
annual G-SIB assessment methodology, with the goal of enhancing the transparency of the relative scale of banks’ potential
global systemic importance and data quality. The FSB publishes an updated list of G-SIBs annually. On November 27, 2023, we
were re-designated as a G-SIB by the FSB. This designation requires us to maintain a higher loss absorbency requirement
(common equity as a percentage of RWA) of 1% consistent with the D-SIB requirement.
OSFI’s TLAC guideline establishes two minimum standards: the risk-based TLAC ratio, which builds on the risk-based capital
ratios described in the CAR guideline, and the TLAC leverage ratio, which builds on the leverage ratio described in OSFI’s LR
guideline. The TLAC requirement is intended to address the sufficiency of a D-SIB’s loss absorbing capacity in supporting its
recapitalization in the event of its failure. TLAC is defined as the aggregate of Tier 1 capital, Tier 2 capital and external TLAC
instruments which allow conversion in whole or in part into common shares under the CDIC Act and meet all of the eligibility
criteria under the TLAC guideline.
OSFI requires all D-SIBs to publicly disclose their Pillar 2 DSB requirement as part of their quarterly disclosures, similar to
other current capital-related disclosure requirements. The level of the Pillar 2 buffer ranges between 0% and 4% of the entity’s
total RWA for each of the six systemically important banks in Canada. The DSB requirements must be met at the CET1 capital
level. OSFI undertakes a review of the DSB on a semi-annual basis, in June and December, and will publicly announce any
changes at that time.
On December 8, 2022, OSFI announced an increase in the DSB upper limit to 4% of total RWA from the upper limit of 2.5% of
total RWA, and an increase to the DSB level of 50 bps to 3%, effective February 1, 2023. On June 20, 2023, OSFI announced an
increase in the DSB level from the current 3% to 3.5% of total RWA effective November 1, 2023.
The following table provides a summary of OSFI’s current regulatory target ratios under Basel III and Pillar 2 requirements. We
are in compliance with all current capital, leverage and TLAC requirements imposed by OSFI:
Basel III – OSFI regulatory targets
Table 65
Basel III
capital,
leverage and TLAC
ratios
OSFI regulatory target requirements
for large banks under Basel III
RBC capital,
leverage
and TLAC
ratios as at
October 31,
2023
Domestic
Stability
Buffer
(3)
Minimum
including
Capital
Buffers,
D-SIB/G-SIB
surcharge and
Domestic
Stability
Buffer as at
October 31,
2023
Minimum
including
Capital
Buffers,
D-SIB/G-SIB
surcharge and
Domestic
Stability
Buffer effective
November 1,
2023
(4)
Minimum
Capital
Buffers
Minimum
including
Capital
Buffers
D-SIB/G-SIB
surcharge
(1)
Minimum
including
Capital
Buffers and
D-SIB/G-SIB
surcharge
(1), (2)
Common Equity
Tier 1
4.5%
2.6%
7.1%
1.0%
8.1%
14.5%
3.0%
11.1%
11.6%
Tier 1 capital
6.0%
2.6%
8.6%
1.0%
9.6%
15.7%
3.0%
12.6%
13.1%
Total capital
8.0%
2.6%
10.6%
1.0%
11.6%
17.6%
3.0%
14.6%
15.1%
Leverage ratio
3.5%
n.a.
3.5%
n.a.
3.5%
4.3%
n.a.
3.5%
3.5%
TLAC ratio
21.6%
n.a.
21.6%
n.a.
21.6%
31.0%
3.0%
24.6%
25.1%
TLAC leverage ratio
7.25%
n.a.
7.25%
n.a.
7.25%
8.5%
n.a.
7.25%
7.25%
(1)
A capital surcharge, equal to the higher of our D-SIB surcharge and the BCBS’s G-SIB surcharge, is applicable to risk-weighted capital.
(2)
The capital buffers include the capital conservation buffer of 2.5% and the countercyclical capital buffer (CCyB) as prescribed by OSFI. The CCyB, calculated in
accordance with OSFI’s CAR guidelines, was 0.06% as at October 31, 2023 (October 31, 2022 – 0.01%).
(3)
The DSB can range from 0% to 4% of total RWA and as at October 31, 2023 was set at 3% by OSFI.
(4)
Effective November 1, 2023, the DSB level increased by 50 bps. Minimum target requirements reflect CCyB requirements as at October 31, 2023 which are subject to
change based on exposures held at the reporting date.
n.a.
not applicable
110
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Regulatory capital, TLAC available, RWA, capital and TLAC ratios
Under Basel III, capital consists of CET1, Additional Tier 1, Tier 2 capital and external TLAC instruments.
CET1 capital comprises the highest quality of capital. Regulatory adjustments under Basel III include full deductions of
certain items and additional capital components that are subject to threshold deductions as prescribed in the CAR guidelines.
Tier 1 capital comprises predominantly CET1 and Additional Tier 1 items including non-cumulative preferred shares and
limited recourse capital notes (LRCNs) that meet certain criteria. Tier 2 capital primarily includes subordinated debentures that
meet certain criteria and certain loan loss allowances. Total capital is defined as the sum of Tier 1 and Tier 2 capital. Preferred
shares, LRCNs, and subordinated debentures issued after January 1, 2013 require Non-viability contingent capital (NVCC) features
to be included into regulatory capital. NVCC requirements ensure that non-common regulatory capital instruments bear losses
before banks seek government funding.
TLAC available is defined as the sum of Total capital and external TLAC instruments. External TLAC instruments comprise
predominantly senior bail-in debt, which includes eligible senior unsecured debt with an original term to maturity of greater than
400 days and remaining term to maturity of greater than 365 days.
Capital ratios are calculated by dividing CET1, Tier 1, Total capital and TLAC available by total RWA.
The following chart provides a summary of the major components of CET1, Additional Tier 1, Tier 2 capital and external TLAC instruments.
Common Equity
Tier 1 (CET1)
(1)
Additional Tier 1 Capital
Tier 2 Capital
External TLAC
Instruments
+
+
+
Tier 1 Capital
TLAC Available
Total Capital
Deductions
Non-significant investments in
Tier 1 instruments of financial
institutions
(3)
Significant investments in
other financial institutions’
and insurance subsidiaries’
Tier 1 instruments
Preferred shares
Limited recourse capital notes
Non-controlling interests in
subsidiaries’ Tier 1 instruments
Subordinated debentures less
amortization
Senior bail-in debt
Amortized portion of
subordinated debentures
Investments in own TLAC
instruments
Certain loan loss allowances
Non-controlling interests in
subsidiaries’ Tier 2 instruments
Non-significant investments in
Tier 2 and TLAC instruments
of financial institutions
(3)
Significant investments in
other financial institutions’
and insurance subsidiaries’
Tier 2 and TLAC instruments
Goodwill and other intangibles
Deferred tax assets on loss
carryforwards
Defined benefit pension fund
assets
Non-significant investments
in CET1 instruments of financial
institutions
(3)
Shortfall of provisions to
expected losses
Prudential valuation
adjustments
Prepaid portfolio insurance
assets
Non payment and non delivery
of trades
Equity investment in funds
subject to the fall-back
approach
Threshold
Deductions
(2)
Higher quality
capital
Lower quality
capital
Significant investments in
Insurance subsidiaries and
CET1 instruments in other
financial institutions
Mortgage servicing rights
Deferred tax assets relating
to temporary differences
Common shares
Retained earnings
Other components of equity
Non-controlling interests in
subsidiaries’ CET1 instruments
(1)
In accordance with OSFI’s regulatory adjustments announced in Q2 2020, our 2022 figures include capital modifications associated with Stage 1 and 2 allowances
which were subject to a 25% after-tax exclusion rate in fiscal 2022. This guidance ceased to apply at the beginning of fiscal 2023.
(2)
First level: The amount by which each of the items exceeds a 10% threshold of CET1 capital (after all deductions but before threshold deductions) will be
deducted from CET1 capital. Second level: The aggregate amount of the three items not deducted from the first level above and in excess of 15% of CET1 capital
after regulatory adjustments will be deducted from capital, and the remaining balance not deducted will be risk-weighted at 250%.
(3)
Non-significant investments are subject to certain CAR criteria that drive the amount eligible for deduction.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
111
The following tables provide details on our regulatory capital, TLAC available, RWA, and on ratios for capital, leverage and TLAC.
Our capital position remains strong and our capital, leverage and TLAC ratios remain well above OSFI regulatory targets:
Regulatory capital, TLAC available, RWA and capital, leverage and TLAC ratios
Table 66
As at
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
October 31
2023
October 31
2022
Capital
(1)
CET1 capital
$
86,611
$
76,945
Tier 1 capital
93,904
84,242
Total capital
104,952
93,850
Risk-weighted assets (RWA) used in calculation of capital ratios
(1)
Credit risk
$
475,842
$
496,898
Market risk
40,498
35,342
Operational risk
79,883
77,639
Total RWA
$
596,223
$
609,879
Capital ratios and Leverage ratio
(1)
CET1 ratio
14.5%
12.6%
Tier 1 capital ratio
15.7%
13.8%
Total capital ratio
17.6%
15.4%
Leverage ratio
4.3%
4.4%
Leverage ratio exposure (billions)
$
2,180
$
1,898
TLAC available and ratios
(2)
TLAC available
$
184,916
$
160,961
TLAC ratio
31.0%
26.4%
TLAC leverage ratio
8.5%
8.5%
(1)
Capital, RWA, and capital ratios are calculated using OSFI’s CAR guideline and the Leverage ratio is calculated using OSFI’s LR guideline.
Both the CAR guideline and LR guideline are based on the Basel III framework. The results for the year ended October 31, 2023 reflect our
adoption of the revised CAR and LR guidelines that came into effect in Q2 2023 as part of OSFI’s implementation of the Basel III reforms.
(2)
TLAC available and TLAC ratios are calculated using OSFI’s TLAC guideline. The TLAC standard is applied at the resolution entity level
which for us is deemed to be Royal Bank of Canada and its subsidiaries. A resolution entity and its subsidiaries are collectively called a
resolution group. The TLAC ratio and TLAC leverage ratio are calculated using the TLAC available as a percentage of total RWA and
leverage exposure, respectively.
Regulatory capital and TLAC available
Table 67
As at
(Millions of Canadian dollars)
October 31
2023
October 31
2022
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
$
19,365
$
17,162
Retained earnings
84,130
77,859
Accumulated other comprehensive income (and other reserves)
6,852
5,725
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)
11
11
Regulatory adjustments applied to CET1 under Basel III
(23,747)
(23,812)
Common Equity Tier 1 capital (CET1)
$
86,611
$
76,945
Additional Tier 1 capital: instruments and regulatory adjustments
Directly issued qualifying Additional Tier 1 instruments plus related stock
surplus
$
7,291
$
7,294
Directly issued capital instruments to phase out from Additional Tier 1
–
–
Additional Tier 1 instruments issued by subsidiaries and held by third parties
(amount allowed in group AT1)
2
3
Regulatory adjustments applied to Additional Tier 1 under Basel III
–
–
Additional Tier 1 capital (AT1)
$
7,293
$
7,297
Tier 1 capital (T1 = CET1 + AT1)
$
93,904
$
84,242
Tier 2 capital: instruments and provisions and regulatory adjustments
Directly issued qualifying Tier 2 instruments plus related stock surplus
$
9,683
$
8,587
Directly issued capital instruments subject to phase out from Tier 2
–
–
Tier 2 instruments issued by subsidiaries and held by third parties (amount
allowed in group Tier 2)
3
3
Collective allowance
1,362
1,018
Regulatory adjustments applied to Tier 2 under Basel III
–
–
Tier 2 capital (T2)
$
11,048
$
9,608
Total capital (T1 + T2)
$
104,952
$
93,850
External TLAC: instruments and regulatory adjustments
External TLAC instruments
$
78,952
$
66,528
Amortised portion of T2 instruments where remaining maturity > 1 year
1,248
818
Regulatory adjustments applied to TLAC under Basel III
(236)
(235)
TLAC available (Total capital + External TLAC)
$
184,916
$
160,961
112
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
2023 vs. 2022
Continuity of CET1 ratio (Basel III)
October 31,
2022
(1)
12.6%
258 bps
79 bps
33 bps
14.5%
6 bps
(126) bps
Net income
(Excluding the
impact of the
items, as noted
below)
(2), (3)
Dividends
(2)
RWA Growth
(excluding
FX)
Basel III
reforms
DRIP
(4)
Impact of the
CRD and other
tax related
adjustments
(5)
Other
(6)
October 31,
2023
(1)
(39) bps
(20) bps
(1)
Represents rounded figures.
(2)
Represents net internal capital generation of $8 billion or 132 bps consisting of Net income available to shareholders excluding the impact of specified items
and the partial sale of RBC Investor Services operations, less common and preferred share dividends and distributions on other equity instruments.
(3)
Excludes specified items for the impact of the CRD and other tax related adjustments, certain deferred tax adjustments, transaction and integration costs
relating to our planned acquisition of HSBC Canada and the impact of impairment losses on our interest in an associated company.
(4)
For further details about the Dividend reinvestment plan (DRIP), refer to Note 20 of our 2023 Annual Consolidated Financial Statements.
(5)
Includes the impact of the specified item for the impact of the CRD and other tax related adjustments.
(6)
Includes the impact of specified items for certain deferred tax adjustments, transaction and integration costs relating to our planned acquisition of HSBC
Canada and the impact of impairment losses on our interest in an associated company, as well as the impact of the partial sale of RBC Investor Services
operations.
Our CET1 ratio was 14.5%, up 190 bps from last year, mainly reflecting net internal capital generation, the favourable impact of the
Basel III reforms and share issuances under the DRIP. These factors were partially offset by RWA growth (excluding FX) and the
impact of the CRD and other tax related adjustments.
Our Tier 1 capital ratio of 15.7% was up 190 bps, mainly reflecting the factors noted above under the CET1 ratio.
Our Total capital ratio of 17.6% was up 220 bps, mainly reflecting the factors noted above under the Tier 1 capital ratio and a
favourable impact from the net issuance of subordinated debentures.
Our Leverage ratio of 4.3% was down 10 bps, mainly due to the reversal of the regulatory modification for central bank reserves
qualifying as HQLA, business-driven growth in leverage exposures and the impact of the CRD and other tax related adjustments.
These factors were partially offset by net internal capital generation and the impacts of share issuances under the DRIP, the
partial sale of RBC Investor Services operations and the Basel III reforms.
Leverage exposures increased by $282 billion, mainly driven by the reversal of the regulatory modification noted above,
business growth primarily in securities, personal and commercial lending in Canada, repo-style transactions and undrawn
commitments, partially offset by lower interest-bearing deposits with banks and cash. The impact of foreign exchange translation
also contributed to the increase. These factors were partially offset by the impact of the partial sale of RBC Investor Services
operations and the Basel III reforms.
Our TLAC ratio of 31.0% was up 460 bps, reflecting the factors noted above under the Total capital ratio, as well as a favourable
impact from a net increase in eligible external TLAC instruments.
Our TLAC leverage ratio of 8.5% was unchanged, reflecting the factors noted above under the Leverage ratio offset by a
favourable impact from a net increase in eligible external TLAC instruments.
External TLAC instruments include long-term senior debt subject to conversion into common shares under the Bail-in regime.
For further details, refer to Deposit and funding profile in the Liquidity and funding risk section.
Basel III RWA
OSFI requires banks to meet minimum risk-based capital requirements for exposures to credit risk, operational risk, and where
they have significant trading activity, market risk. RWA is calculated for each of these risk types and added together to determine
total RWA. In addition, a minimum capital floor requirement must be maintained as prescribed under OSFI’s CAR guidelines which
is currently set to 65% of RWA as calculated under current Basel III standardized credit risk and market risk approaches as
defined in the CAR guidelines. If the capital requirement is less than the required threshold, a floor adjustment to RWA must be
applied to the reported RWA as prescribed by OSFI’s CAR guidelines.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
113
Total capital risk-weighted assets
Table 68
2023
2022
Exposure
(2)
Average
of risk-
weights
(3)
Risk-weighted assets All-in Basis
(1)
As at October 31 (Millions of Canadian dollars,
except percentage amounts)
Standardized
approach
Advanced
approach
(A-IRB)
Foundation
approach
(F-IRB)
Other
Total
Total
Credit risk
Lending-related and other
Residential mortgages
$
566,257
8%
$
3,817
$
41,047
$
–
$
–
$
44,864
$
41,662
Other retail (personal, credit
cards and small business
treated as retail)
215,682
29%
5,369
56,345
–
–
61,714
65,506
Business (corporate,
commercial, medium-sized
enterprises and non-bank
financial institutions)
493,178
48%
70,130
93,208
75,227
–
238,565
238,823
Sovereign (government)
348,790
4%
2,767
11,251
–
–
14,018
15,910
Bank
35,751
40%
5,713
–
8,626
–
14,339
5,483
Total lending-related and other
$ 1,659,658
23%
$
87,796
$ 201,851
$ 83,853
$
–
$ 373,500
$
367,384
Trading-related
Repo-style transactions
$ 1,153,730
1%
$
107
$
222
$
7,367
$
96
$
7,792
$
8,668
Derivatives – including CVA
129,288
26%
568
3,040
15,730
13,657
32,995
40,138
Total trading-related
$ 1,283,018
3%
$
675
$
3,262
$ 23,097
$ 13,753
$
40,787
$
48,806
Total lending-related and other
and trading-related
$ 2,942,676
14%
$
88,471
$ 205,113
$106,950
$ 13,753
$ 414,287
$
416,190
Bank book equities
4,896
206%
10,074
–
–
–
10,074
5,682
Securitization exposures
69,736
17%
5,332
6,178
–
–
11,510
12,543
Regulatory scaling factor
n.a.
n.a.
n.a.
–
–
n.a.
–
18,267
Other assets
32,681
122%
n.a.
n.a.
n.a.
39,971
39,971
44,216
Total credit risk
$ 3,049,989
16%
$ 103,877
$ 211,291
$106,950
$ 53,724
$ 475,842
$
496,898
Market risk
Interest rate
$
3,575
$
12,831
$
–
$
–
$
16,406
$
13,256
Equity
2,534
1,125
–
–
3,659
4,001
Foreign exchange
2,641
1,024
–
–
3,665
3,735
Commodities
1,055
102
–
–
1,157
1,750
Specific risk
8,276
1,583
–
–
9,859
8,411
Incremental risk charge
–
5,752
–
–
5,752
4,189
Total market risk
$
18,081
$
22,417
$
–
$
–
$
40,498
$
35,342
Operational risk
$
79,883
$
–
$
–
$
–
$
79,883
$
77,639
Total risk-weighted assets
$ 3,049,989
$ 201,841
$ 233,708
$106,950
$ 53,724
$ 596,223
$
609,879
(1)
Balances as at October 31, 2023 reflect our adoption of the revised CAR guidelines that came into effect in Q2 2023 as part of OSFI’s implementation of the Basel III
reforms.
(2)
Total exposure represents exposure at default (EAD) which is the expected gross exposure upon the default of an obligor. This amount excludes any allowance against
impaired loans or partial write-offs and does not reflect the impact of credit risk mitigation.
(3)
Represents the average of counterparty risk weights within a particular category.
n.a.
not applicable
2023 vs. 2022
Total RWA was down $14 billion from last year, mainly reflecting the favourable impact of the Basel III reforms. This was partially
offset by the net impact of business growth, primarily in personal and commercial lending in Canada that was partly offset by
lower corporate lending and trading related activities. The impact of foreign exchange translation and net credit migration,
primarily in our wholesale portfolios, also partially offset the impact from the Basel III reforms. In our CET1 ratio, the impact of
foreign exchange translation on RWA is largely mitigated with economic hedges.
114
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Selected capital management activity
Selected capital management activity
Table 69
For the year ended October 31, 2023
(Millions of Canadian dollars, except number of shares)
Issuance or
redemption date
Number of
shares
(000s)
Amount
Tier 1 capital
Common shares activity
Issued in connection with share-based
compensation plans
(1)
740
$
68
Issued under the DRIP
(2)
16,042
2,012
Tier 2 capital
Issuance of February 1, 2033 subordinated
debentures
(3), (4)
January 31, 2023
$ 1,500
(1)
Amounts include cash received for stock options exercised during the period and fair value adjustments to stock options.
(2)
During the three months ended October 31, 2023, July 31, 2023 and April 30, 2023, the requirements of the DRIP were satisfied
through shares issued from treasury. For further details, refer to Note 20 of our 2023 Annual Consolidated Financial Statements.
(3)
For further details, refer to Note 19 of our 2023 Annual Consolidated Financial Statements.
(4)
Non-Viability Contingent Capital (NVCC) instruments.
On January 31, 2023, we issued $1,500 million of NVCC subordinated debentures. The notes bear interest at a fixed rate of 5.01%
per annum until February 1, 2028, and at the Daily Compounded Canadian Overnight Repo Rate Average plus 2.12% thereafter
until their maturity on February 1, 2033.
As at October 31, 2023, we did not have an active normal course issuer bid (NCIB).
On November 7, 2023, we redeemed all 15 thousand of our issued and outstanding Non-Cumulative First Preferred Shares
Series C-2 at a redemption price of US$ 1,000 per share. Concurrently, we redeemed all 615 thousand Series C-2 depositary shares,
each of which represents a one-fortieth interest in a Series C-2 share.
Dividends
Our common share dividend policy reflects our earnings outlook, payout ratio objective and the need to maintain adequate
levels of capital to support business plans. In 2023, our dividend payout ratio was 51%. Common share dividends paid during the
year were $7 billion.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
115
Selected share data
(1)
Table 70
2023
2022
(Millions of Canadian dollars, except number of shares
and as otherwise noted)
Number of
shares
(000s)
Amount
Dividends
declared
per share
Number of
shares (000s)
Amount
Dividends
declared
per share
Common shares issued
1,402,373
$ 19,398
$
5.34
1,385,591
$ 17,318
$
4.96
Treasury shares – common shares
(2)
(1,862)
(231)
(2,680)
(334)
Common shares outstanding
1,400,511
$ 19,167
1,382,911
$ 16,984
Stock options and awards
Outstanding
7,793
7,535
Exercisable
3,830
3,502
Available for grant
3,693
4,696
First preferred shares issued
Non-cumulative Series AZ
(3), (4)
20,000
$
500
$
0.93
20,000
$
500
$
0.93
Non-cumulative Series BB
(3), (4)
20,000
500
0.91
20,000
500
0.91
Non-cumulative Series BD
(3), (4)
24,000
600
0.80
24,000
600
0.80
Non-cumulative Series BF
(3), (4)
12,000
300
0.75
12,000
300
0.75
Non-cumulative Series BH
(4)
6,000
150
1.23
6,000
150
1.23
Non-cumulative Series BI
(4)
6,000
150
1.23
6,000
150
1.23
Non-cumulative Series BO
(3), (4)
14,000
350
1.20
14,000
350
1.20
Non-cumulative Series BT
(3), (4), (5)
750
750
4.20%
750
750
4.20%
Non-cumulative Series C-2
(6)
15
23
US$ 67.50
15
23
US$ 67.50
Other equity instruments issued
Limited recourse capital notes
Series 1
(3), (4), (7), (8)
1,750
1,750
4.50%
1,750
1,750
4.50%
Limited recourse capital notes
Series 2
(3), (4), (7), (8)
1,250
1,250
4.00%
1,250
1,250
4.00%
Limited recourse capital notes
Series 3
(3), (4), (7), (8)
1,000
1,000
3.65%
1,000
1,000
3.65%
Preferred shares and other equity
instruments issued
106,765
$
7,323
106,765
$
7,323
Treasury instruments – preferred shares and
other equity instruments
(2)
(9)
(9)
(12)
(5)
Preferred shares and other equity
instruments outstanding
106,756
$
7,314
106,753
$
7,318
Dividends on common shares
$
7,443
$
6,946
Dividends on preferred shares and
distributions on other equity
instruments
(9)
236
247
(1)
For further details about our capital management activity, refer to Note 20 of our 2023 Annual Consolidated Financial Statements.
(2)
Positive amounts represent a short position and negative amounts represent a long position.
(3)
Dividend rate will reset every five years.
(4)
NVCC instruments.
(5)
The dividends declared per share represent per annum dividend rate applicable to the shares issued as at the reporting date.
(6)
Represents 615,400 depositary shares relating to preferred shares Series C-2. Each depositary share represents one-fortieth interest in a share of Series C-2. On
November 7, 2023, we redeemed all 15 thousand of our issued and outstanding Non-Cumulative First Preferred Shares Series C-2 at a redemption price of US$ 1,000 per
share. Concurrently, we redeemed all 615 thousand Series C-2 depositary shares, each of which represents a one-fortieth interest in a Series C-2 share.
(7)
For Limited Recourse Capital Notes (LRCN) Series, the number of shares represent the number of notes issued and the dividends declared per share represent the annual
interest rate percentage applicable to the notes issued as at the reporting date.
(8)
In connection with the issuance of LRCN Series 1, on July 28, 2020, we issued $1,750 million of First Preferred Shares Series BQ (Series BQ); in connection with the issuance
of LRCN Series 2, on November 2, 2020, we issued $1,250 million of First Preferred Shares Series BR (Series BR); and in connection with the issuance of LRCN Series 3, on
June 8, 2021, we issued $1,000 million of First Preferred Shares Series BS (Series BS). The Series BQ, BR and BS preferred shares were issued at a price of $1,000 per share
and were issued to a consolidated trust to be held as trust assets in connection with the LRCN structure. For further details, refer to Note 20 of our
2023 Annual Consolidated Financial Statements.
(9)
Excludes distributions to non-controlling interests.
As at November 24, 2023, the number of outstanding common shares was 1,406,516,221, net of treasury shares held of 2,008,939,
and the number of stock options and awards was 7,776,117.
NVCC provisions require the conversion of the capital instrument into a variable number of common shares in the event that
OSFI deems a bank to be non-viable or a federal or provincial government in Canada publicly announces that a bank has
accepted or agreed to accept a capital injection. If a NVCC trigger event were to occur, our NVCC capital instruments as at
October 31, 2023, which were the preferred shares Series AZ, BB, BD, BF, BH, BI, BO, BT, LRCN Series 1, LRCN Series 2, LRCN
Series 3 and subordinated debentures due on January 27, 2026, July 25, 2029, December 23, 2029, June 30, 2030, January 28, 2033,
November 3, 2031, May 3, 2032 and February 1, 2033 would be converted into common shares pursuant to an automatic
conversion formula with a conversion price based on the greater of: (i) a contractual floor price of $5.00, and (ii) the current
market price of our common shares at the time of the trigger event (10-day weighted average). Based on a floor price of $5.00 and
including an estimate for accrued dividends and interest, these NVCC capital instruments would convert into a maximum of
5,013 million common shares, in aggregate, which would represent a dilution impact of 78.16% based on the number of common
shares outstanding as at October 31, 2023.
116
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Attributed capital
Our methodology for allocating capital to our business segments is based on the Basel III regulatory capital requirements, with
the exception of Insurance. For Insurance, the allocation of capital is based on fully diversified economic capital. Risk-based
capital attribution provides a uniform base for performance measurement among business segments, which compares to our
overall corporate return objective and facilitates management decisions in resource allocation in conjunction with other factors.
The calculation and attribution of capital involves a number of assumptions and judgments by management which are
monitored to ensure that the regulatory capital framework remains comprehensive and consistent. The models are benchmarked
to leading industry practices via participation in surveys, reviews of methodologies and ongoing interaction with external risk
management industry professionals.
For additional information on the risks highlighted below, refer to the Risk management section.
Royal Bank of
Canada
RWA
(C$ millions)
(1)
Credit
$475,842
Market
40,498
Operational
79,883
Attributed capital
(1)
Credit
62%
Market
5
Operational
1
0
Goodwill
and other
intangibles
17
Other
(2)
6
Personal &
Commercial
Banking
Attributed capital
(1)
Credit
68%
Market
–
Operational
12
Goodwill
and other
intangibles
16
Other
(2)
4
RWA
(C$ millions)
(1)
Credit
$190,334
Market
22
0
Operational
33,217
$223,771
Wealth
Management
RWA
(C$ millions)
(1)
Credit
$88,437
Market
1,063
Operational
26,031
$115,531
Attributed capital
(1)
Credit
45
%
Market
–
Operational
12
Goodwill
and other
intangibles
39
Other
(2)
4
Insurance
Attributed capital
(1)
Based on Economic
Capital:
Credit
13%
Market
16
Operational
8
Goodwill
and other
intangibles
12
Other
(2)
51
RWA
(C$ millions)
(1), (3)
Credit
$15,589
Market
–
Operational
–
$15,589
$596,223
Capital Markets
RWA
(C$ millions)
(1)
Credit
$169,136
Market
38,675
Operational
19,727
$227,538
Attributed capital
(1)
Credit
69%
Market
13
Operational
8
Goodwill
and other
intangibles
7
Other
(2)
3
(1)
RWA amount represents period-end spot balances. Attributed Capital represents average balances.
(2)
Other includes (a) non-Insurance segments: equity required to underpin Basel III regulatory capital deductions other than Goodwill and other intangibles as well as
capital modifications for expected loss provisioning and (b) Insurance segment: equity required to underpin risks associated with business, fixed assets and insurance
risks.
(3)
Insurance RWA represents our investments in the insurance subsidiaries capitalized at the regulatory prescribed rate as required under the OSFI CAR guideline.
Other considerations affecting capital
Capital treatment for equity investments in other entities is determined by a combination of accounting and regulatory
guidelines based on the size or nature of the investment. Three broad approaches apply as follows:
•
Consolidation: entities which we control are consolidated on our Consolidated Balance Sheets.
•
Deduction: certain holdings are deducted 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 and certain equity investments in funds.
•
Risk-weighting: equity investments that are not deducted from capital are risk-weighted at a prescribed rate for
determination of capital charges.
Regulatory capital approach for securitization exposures
Our securitization regulatory capital approach reflects Chapter 6 of OSFI’s CAR guidelines. For our securitization exposures, we
use an internal assessment approach (IAA) for exposures related to our ABCP business, and as per regulatory guidelines for
other securitization exposures we use a combination of approaches including an external ratings-based approach, an IRB
approach and a standardized approach.
While our IAA rating methodologies are based in large part on criteria that are published by External Credit Assessment
Institutions (ECAIs) such as S&P and therefore are similar to the methodologies used by these institutions, they are not identical.
Our ratings process includes a comparison of the available credit enhancement in a securitization structure to a stressed level of
projected losses. The stress level used is determined by the desired risk profile of the transaction. As a result, we stress the cash
flows of a given transaction at a higher level in order to achieve a higher rating. Conversely, transactions that only pass lower
stress levels achieve lower ratings.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
117
Many of the other securitization exposures (non-ABCP) carry external ratings and we use the external ratings-based
approach, otherwise will follow the SA, for determining the proper capital allocation for these positions. We periodically compare
our own ratings to ECAIs ratings to ensure that the ratings provided by ECAIs are reasonable.
GRM is responsible for providing risk assessments for capital purposes in respect of all our banking book exposures. GRM is
independent of the business originating the securitization exposures and performs its own analysis, sometimes in conjunction
with but always independent of the applicable business. GRM has developed asset class specific criteria guidelines which
provide the rating methodologies for each asset class. The guidelines are reviewed periodically and are subject to the ratings
replication process mandated by Pillar I of the Basel rules.
Regulatory developments
Basel III reforms
On January 31, 2022, OSFI announced revised capital, leverage, liquidity and disclosure guidelines that incorporate the final BCBS
Basel III reforms. OSFI’s first phase of the adoption of the final BCBS Basel III reforms came into effect in Q2 2023 and included
the following notable changes:
•
For IRB portfolios, elimination of a 6% regulatory scaling factor applied to RWA generated by internal models and
introduction of prescribed supervisory parameters applicable to certain asset classes within our wholesale portfolio.
•
Adoption of a new operational risk SA framework based on 3 years of average income and 10 years of historical losses.
•
Adoption of a new SA framework enhancing risk sensitivity.
•
Prescribed revisions to the existing regulatory capital floor from 70% to 65% requiring a transition to a new regulatory
capital floor of 72.5% of RWA under the SA by 2026. This new regulatory floor will be transitioned over three years, reflecting
a regulatory capital floor requirement of 67.5%, 70% and 72.5% in fiscal 2024, 2025 and 2026, respectively.
•
Application of a 50 bps leverage ratio buffer to all D-SIBs.
The revised Pillar 3 disclosure requirements that were effective upon adoption of the Basel III reforms are reflected in our
Q2 2023 standalone Pillar 3 Report with further additional updated disclosure requirements reflected in our Q4 2023 Pillar 3
Report.
On November 14, 2023, OSFI released Pillar 3 disclosure requirements related to the second phase of the implementation of the
final BCBS Basel III reforms relating to the revised credit valuation adjustment (CVA) and market risk chapters of the CAR
guideline. The guideline on the revised CVA and market risk chapters of the CAR was effective for us November 1, 2023, and the
impact is not expected to be material.
Revisions to CAR guidelines
On October 20, 2023, OSFI released further revisions to the CAR guidelines which established changes to capital requirements for
variable rate fixed-payment residential mortgages where payments are insufficient to cover the interest component. This
guideline is effective November 1, 2023, and we expect no impact on our capital requirements as we do not originate mortgage
products with a structure that would result in negative amortization.
Accounting and control matters
Critical accounting policies and estimates
Application of critical accounting policies, judgments, estimates and assumptions
Our significant accounting policies are described in Note 2 of our 2023 Annual Consolidated Financial Statements. Certain of
these policies and related estimates are recognized as critical because they require us to make particularly subjective or
complex judgments about matters that are inherently uncertain and significantly different amounts could be reported under
different conditions or using different assumptions. Our critical accounting judgments, estimates and assumptions relate to the
fair value of financial instruments, ACL, goodwill and other intangible assets, employee benefits, consolidation of structured
entities, derecognition of financial assets, application of the effective interest method, provisions, insurance claims and policy
benefit liabilities, and income taxes. Our critical accounting policies and estimates have been reviewed and approved by our
Audit Committee, in consultation with management, as part of their review and approval of our significant accounting policies,
judgments, estimates and assumptions.
Fair value of financial instruments
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. We determine fair value by incorporating factors that
market participants would consider in setting a price, including commonly accepted valuation approaches.
We give priority to third-party pricing services and valuation techniques with the highest and most consistent accuracy. The
level of accuracy is determined over time by comparing third-party price values to traders’ or system values, other pricing
service values and, when available, actual trade data. Other valuation techniques are used when a price or quote is not available.
Some valuation processes use models to determine fair value. We have a systematic and consistent approach to control the use
of models.
In determining fair value, a hierarchy is used which prioritizes the inputs to valuation techniques. The fair value hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. 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 include
one or more inputs that are unobservable and significant to the fair value of the asset or liability. Unobservable inputs are used
to measure fair value to the extent that observable inputs are not available at the measurement date. The availability of inputs
for valuation may affect the selection of valuation techniques. The classification of a financial instrument in the fair value
hierarchy for disclosure purposes is based upon the lowest level of input that is significant to the measurement of fair value.
118
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Where observable prices or inputs are not available, management judgment is required in the determination of fair values by
assessing other relevant sources of information such as historical data, proxy information from similar transactions, and through
extrapolation and interpolation techniques. For more complex or illiquid instruments, significant judgment is required to
determine the model used, 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. The selection of model inputs may be subjective and the
inputs may be unobservable. Unobservable inputs are inherently uncertain as there is little or no market data available from
which to determine the level at which the transaction would occur under normal business circumstances. Appropriate parameter
uncertainty and market risk valuation adjustments for such inputs and other model risk valuation adjustments are assessed in all
such instances.
Valuation adjustments may be subjective as they require significant judgment in the input selection, such as implied PD and
recovery rate, and are intended to arrive at a fair value that is determined based on assumptions that market participants would
use in pricing the financial instrument. The ultimate realized price for a transaction may differ from its recorded fair value
estimated using management judgment.
For further information on the fair value of financial instruments, refer to Notes 2 and 3 of our 2023 Annual Consolidated
Financial Statements.
Allowance for credit losses
An allowance for credit losses (ACL) is established for all financial assets, except for financial assets classified or designated as
FVTPL and equity securities designated as FVOCI, which are not subject to impairment assessment. Assets subject to impairment
assessment include loans, debt securities, interest-bearing deposits with banks, customers’ liability under acceptances, accounts
and accrued interest receivable, and finance and operating lease receivables. Off-balance sheet items subject to impairment
assessment include financial guarantees and undrawn loan commitments.
We measure the ACL on each balance sheet date according to a three-stage expected credit loss impairment model:
•
Performing financial assets
•
Stage 1 – From initial recognition of a financial asset to the date on which the asset has experienced a significant
increase in credit risk relative to its initial recognition, a loss allowance is recognized equal to the credit losses
expected to result from defaults occurring over the 12 months following the reporting date.
•
Stage 2 – Following a significant increase in credit risk relative to the initial recognition of the financial asset, a loss
allowance is recognized equal to the credit losses expected over the remaining lifetime of the asset.
•
Impaired financial assets
•
Stage 3 – When a financial asset is considered to be credit-impaired, a loss allowance is recognized equal to credit
losses expected over the remaining lifetime of the asset. Interest income is calculated based on the carrying
amount of the asset, net of the loss allowance, rather than on its gross carrying amount.
The ACL is a discounted probability-weighted estimate of the cash shortfalls expected to result from defaults over the relevant
time horizon. For loan commitments, credit loss estimates consider the portion of the commitment that is expected to be drawn
over the relevant time period. For financial guarantees, credit loss estimates are based on the expected payments required under
the guarantee contract. For finance lease receivables, credit loss estimates are based on cash flows consistent with the cash
flows used in measuring the lease receivable.
The ACL represents an unbiased estimate of expected credit losses on our financial assets as at the balance sheet date.
Judgment is required in making assumptions and estimations when calculating the ACL, including movements between the three
stages, the inclusion of forward looking information and the application of expert credit judgment. The underlying assumptions
and estimates may result in changes to the provisions from period to period that significantly affect our results of operations.
For further information on ACL, refer to Notes 2, 4 and 5 of our 2023 Annual Consolidated Financial Statements.
Goodwill and other intangible assets
We allocate goodwill to groups of cash-generating units (CGU). Goodwill is not amortized and is tested for impairment on an
annual basis, or more frequently if there are objective indications of impairment. We test for impairment by comparing the
recoverable amount of a CGU with its carrying amount.
We estimate the value in use and fair value less costs of disposal of our CGUs primarily using a discounted cash flow method
which incorporates each CGU’s internal forecasts of revenues and expenses. Significant management judgment is applied in the
determination of expected future cash flows (uncertainty in timing and amount), discount rates (based on CGU-specific risks)
and terminal growth rates. CGU-specific risks include country risk, business/operational risk, geographic risk (including political
risk, devaluation risk and government regulation), currency risk and price risk (including product pricing risk and inflation). If the
future cash flows and other assumptions in future periods deviate significantly from the current amounts used in our impairment
testing, the value of our goodwill could become impaired.
We assess for indicators of impairment of our other intangible assets at each reporting period. If there is an indication that
an asset may be impaired, an impairment test is performed by comparing the carrying amount of the intangible asset to its
recoverable amount. Where it is not possible to estimate the recoverable amount of an individual asset, we estimate the
recoverable amount of the CGU to which the asset belongs. Significant judgment is applied in estimating the useful lives and
recoverable amounts of our intangible assets and assessing whether certain events or circumstances constitute objective
evidence of impairment. We do not have any intangible assets with indefinite lives.
For further details, refer to Notes 2 and 11 of our 2023 Annual Consolidated Financial Statements.
Employee benefits
We sponsor a number of benefit programs for eligible employees, including registered pension plans, supplemental pension
plans, health, dental, disability and life insurance plans.
The calculation of defined benefit expenses and obligations depends on various assumptions such as discount rates,
healthcare cost trend rates, projected salary increases, retirement age, and mortality and termination rates. Discount rates are
determined using a yield curve based on spot rates from high quality corporate bonds. All other assumptions are determined by
us and are reviewed by the actuaries. Actual experience that differs from the actuarial assumptions will affect the amounts of
benefit obligations and remeasurements that we recognize. The weighted average assumptions used and the sensitivity of key
assumptions are presented in Note 17 of our 2023 Annual Consolidated Financial Statements.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
119
Consolidation of structured entities
Subsidiaries are those entities, including structured entities, over which we have control. We control an entity when we are
exposed, or have rights, to variable returns from our involvement with the entity and have the ability to affect those returns
through our power over the investee. We have power over an entity when we have existing rights that give us the current ability
to direct the activities that most significantly affect the entity’s returns (relevant activities). Power may be determined on the
basis of voting rights or, in the case of structured entities, other contractual arrangements.
We are not deemed to control an entity when we exercise power over an entity as the agent of a third party or parties. In
determining whether we are acting as an agent, we consider the overall relationship between us, the investee and other parties
to the arrangement with respect to the following factors: (i) the scope of our decision-making power; (ii) the rights held by other
parties; (iii) the remuneration to which we are entitled; and (iv) our exposure to variability of returns.
The determination of control is based on the current facts and circumstances and is continuously assessed. In some
circumstances, different factors and conditions may indicate that various parties control an entity depending on whether those
factors and conditions are assessed in isolation or in totality. Significant judgment is applied in determining whether we control
an entity, specifically, assessing whether we have substantive decision-making rights over the relevant activities and whether we
are exercising our power as a principal or an agent.
We consolidate all subsidiaries from the date we obtain control, and cease consolidation when an entity is no longer
controlled by us. Our consolidation conclusions affect the classification and amount of assets, liabilities, revenues and expenses
reported in our Consolidated Financial Statements.
For further details, refer to Note 8 of our 2023 Annual Consolidated Financial Statements.
Derecognition of financial assets
We periodically enter into transactions in which we transfer financial assets such as loans or MBS to structured entities or trusts
that issue securities to investors. We derecognize the assets when our contractual rights to the cash flows from the assets have
expired; when we retain the rights to receive the cash flows of the assets but assume an obligation to pay those cash flows to a
third party subject to certain pass-through requirements; or when we transfer our contractual rights to receive the cash flows
and substantially all of the risks and rewards of the assets have been transferred. When we retain substantially all of the risks
and rewards of the transferred assets, the transferred assets are not derecognized from our Consolidated Balance Sheets and
are accounted for as secured financing transactions. When we neither retain nor transfer substantially all risks and rewards of
ownership of the assets, we derecognize the assets if control over the assets is relinquished. If we retain control over the
transferred assets, we continue to recognize the transferred assets to the extent of our continuing involvement. Management
judgment is applied in determining whether we have transferred or retained substantially all risk and rewards of ownership of the
transferred financial asset.
The majority of assets transferred under repurchase agreements, securities lending agreements, and in our Canadian
residential mortgage securitization transactions do not qualify for derecognition. As a result, we continue to record the
associated transferred assets on our Consolidated Balance Sheets and no gains or losses are recognized for those securitization
activities. Otherwise, a gain or loss is recognized on securitization by comparing the carrying amount of the transferred asset
with its fair value at the date of the transfer. For further information on derecognition of financial assets, refer to Notes 2 and 7 of
our 2023 Annual Consolidated Financial Statements.
Application of the effective interest method
Interest is recognized in Interest income and Interest expense in the Consolidated Statements of Income generally for all interest
bearing financial instruments using the effective interest method. The effective interest rate is the rate that discounts estimated
future cash flows over the expected life of the financial asset or liability to the net carrying amount upon initial recognition.
Significant judgment is applied in determining the effective interest rate due to uncertainty in the timing and amounts of future
cash flows.
Provisions
Provisions are liabilities of uncertain timing or amount and are recognized when we have a present legal or constructive
obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a
reliable estimate can be made of the amount of the obligation. Provisions are measured as the best estimate of the consideration
required to settle the present obligation at the reporting date. Significant judgment is required in determining whether a present
obligation exists and in estimating the probability, timing and amount of any outflows. We record provisions related to litigation,
asset retirement obligations and other items.
The forward-looking nature of these estimates requires us to use a significant amount of judgment in projecting the timing
and amount of future cash flows. We record our provisions on the basis of all available information at the end of the reporting
period and make adjustments on a quarterly basis to reflect current expectations. Should actual results differ from our
expectations, we may incur expenses in excess of the provisions recognized.
Insurance claims and policy benefit liabilities
Insurance claims and policy benefit liabilities represent current claims and estimates for future insurance policy benefits.
Liabilities for life insurance contracts are determined using the Canadian Asset Liability Method, which incorporates
assumptions for mortality, morbidity, policy lapses and surrenders, investment yields, policy dividends, operating and policy
maintenance expenses, and provisions for adverse deviation. These assumptions are reviewed at least annually and updated in
response to actual experience and market conditions. Liabilities for property and casualty insurance represent estimated
provisions for reported and unreported claims. Liabilities for life and property and casualty insurance are included in Insurance
claims and policy benefit liabilities. Changes in Insurance claims and policy benefit liabilities are included in the Insurance
policyholder benefits, claims and acquisition expense in our Consolidated Statements of Income in the period in which the
estimates change. Refer to Note 15 of our 2023 Annual Consolidated Financial Statements for further information.
Income taxes
We are subject to income tax laws in various jurisdictions where we operate, and the complex tax laws are potentially subject to
different interpretations by us and the relevant taxation authority. Management judgment is applied in interpreting the relevant
tax laws, in assessing the probability of acceptance of our tax positions by the relevant tax authorities and in estimating the
120
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
expected timing and amount of the provision for current and deferred income taxes. A deferred tax asset or liability is determined
for each temporary difference based on the tax rates that are expected to be in effect in the period that the asset is realized or
the liability is settled, except for earnings related to our subsidiaries, branches, associates and interests in joint ventures where
the temporary differences will not reverse in the foreseeable future and we have the ability to control the timing of reversal.
On a quarterly basis, we review whether it is probable that the benefits associated with our deferred tax assets will be
realized, using both positive and negative evidence. Refer to Note 22 of our 2023 Annual Consolidated Financial Statements for
further information.
Future changes in accounting policy and disclosure
IFRS 17
Insurance Contracts
(IFRS 17)
In May 2017, the IASB issued IFRS 17 to establish a comprehensive insurance standard which provides guidance on the
recognition, measurement, presentation and disclosure of insurance contracts issued and reinsurance contracts held and will
replace the existing IFRS 4
Insurance Contracts
(IFRS 4). In June 2020, the IASB issued amendments to IFRS 17, including deferral
of the effective date by two years. This new standard is effective for us on November 1, 2023 and is to be applied retrospectively
with comparatives restated beginning November 1, 2022.
Under IFRS 17, insurance contracts are contracts under which we accept significant insurance risk from a policyholder by
agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. Embedded
derivatives, investment components and promises to provide non-insurance services, provided specific criteria are met, are
separated from the measurement of insurance and reinsurance contracts. Insurance and reinsurance contracts are aggregated
into portfolios that are subject to similar risks and are managed together, and then divided into groups based on the period of
issuance and expected profitability. Groups are separately recognized and measured using one of three measurement models
depending on the characteristics of the contracts:
•
For insurance contracts with direct participating features, the contracts are measured using the variable fee approach
(VFA).
•
For insurance contracts and reinsurance contracts held with a short duration of one year or less, the premium allocation
approach (PAA) is elected.
•
The general measurement method (GMM) is applied to all remaining contracts.
Under the GMM and VFA, the liabilities for remaining coverage and incurred claims for groups of contracts are measured as
the sum of the fulfilment cash flows and the contractual service margin (CSM), which are recalculated at the end of each
reporting period. The fulfilment cash flows consist of the present value of future cash flows and a risk adjustment for
non-financial risk. For insurance contracts, the CSM represents the unearned profit for providing insurance coverage. For
reinsurance contracts held, the CSM represents the net cost or net gain of purchasing reinsurance. Under the PAA, the liability for
remaining coverage for each group is measured as the premiums received less insurance revenue recognized for services
provided, while the liability for incurred claims is measured as the fulfillment cash flows for incurred claims plus adjustment on
any financing components. Losses from the recognition of onerous groups of insurance contracts, regardless of the
measurement model applied, are recognized in the Consolidated Statements of Income immediately.
The following are key differences between IFRS 17 and IFRS 4:
•
New business profits are deferred and measured as the CSM of the insurance contract liabilities and amortized into income
as insurance contract services are provided, while losses are recognized into income immediately. Under IFRS 4, gains and
losses are recognized in income immediately. On July 18, 2023, OSFI released regulatory guidance to allow the inclusion of
the CSM in calculating CET1 capital and related ratios, therefore, there will be no impact on the capital metrics from such
reduction in retained earnings resulting from the CSM.
•
Discount rates used in calculating the present value of insurance contract liabilities are based on the characteristics of the
insurance contracts unlike IFRS 4 which is based on the assets supporting the liabilities.
•
Presentation and disclosure changes are expected due to the new requirements.
While IFRS 17 impacts the timing of profit recognition of insurance contracts, it will have no impact on total profit recognized over
the lifetime of these contracts.
Governance
We are in the final stage of implementation for IFRS 17. As part of the implementation process, a comprehensive program and
governance structure led by Finance and the Insurance business was established to focus on the evaluation of the impacts of the
standard and implementation of policies, systems and processes required for the adoption. Regular updates are provided to
senior management as well as the Audit Committee and Board of Directors to ensure escalation of key issues and risks. We have
enhanced existing controls, and designed and operationalized new controls and governance procedures to support the
implementation of IFRS 17, including controls over data and systems, key assumptions and measurement approaches.
Impact of IFRS 17 transition excluding the impact of reclassifications of financial assets
Upon the adoption of IFRS 17, we will apply IFRS 17 retrospectively by adjusting our Consolidated Balance Sheets as at
November 1, 2022 and restating comparative information. The full retrospective approach will be applied for all insurance and
reinsurance contracts unless it is impracticable to do so. The full retrospective approach is applied to all contracts measured
using the PAA and all new contracts issued on and after November 1, 2022 measured using the GMM and VFA as if IFRS 17 had
always been applied. Due to data availability and the inability to use hindsight, the fair value approach is applied to contracts
issued before November 1, 2022 that are measured under the GMM and VFA. Under the fair value approach, the CSM of the
liability for remaining coverage is calculated as the difference between the fair value of a group of contracts and the fulfillment
cash flows measured at the date of transition.
Based on current estimates, the adoption of IFRS 17 is expected to result in a reduction in retained earnings of approximately
$2.4 billion, net of taxes, as at November 1, 2022. This is attributable to the establishment of the CSM and other remeasurement
changes to insurance and reinsurance contracts and related tax effects. The estimated CSM of all insurance contracts net of
reinsurance contracts held as at November 1, 2022 was approximately $1.8 billion. The net impact to our CET1 ratio is not expected
to be material. These estimates are subject to change as we finalize the quantitative impacts of the adoption in the first quarter
of 2024.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
121
Impact of reclassifications of financial assets
As permitted by IFRS 17, we will change the classification and measurement of certain eligible financial assets held in respect of
an activity that relates to insurance contracts upon the adoption of IFRS 17. We will apply these changes retrospectively by
adjusting our Consolidated Balance Sheets as at November 1, 2023 with no restatement of comparative information. We expect to
reclassify financial assets between fair value classification categories, which is not expected to have a net impact to total equity
nor the carrying amounts of those assets. Similarly, no net impact to our CET1 ratio is expected. This is subject to change as we
finalize the quantitative impacts of these changes and the quantitative impacts of adopting IFRS 17 in the first quarter of 2024.
Controls and procedures
Disclosure controls and procedures
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed
by us in reports filed or submitted under Canadian and U.S. securities laws is recorded, processed, summarized and reported
within the time periods specified under those laws and include controls and procedures that are designed to ensure that
information is accumulated and communicated to management, including the President and Chief Executive Officer, and the
Chief Financial Officer, to allow timely decisions regarding required disclosure.
As of October 31, 2023, management evaluated, under the supervision of and with the participation of the President and Chief
Executive Officer and the Chief Financial Officer, the effectiveness of our disclosure controls and procedures as defined under
rules adopted by the Canadian securities regulatory authorities and the U.S. SEC. Based on that evaluation, the President and
Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
October 31, 2023.
Internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with IFRS. However, because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements on a timely basis. See Management’s Report on
Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm.
There were no changes in our internal control over financial reporting during the year ended October 31, 2023 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Related party transactions
In the ordinary course of business, we provide normal banking services and operational services, and enter into other
transactions with associated and other related corporations, including our joint venture entities, on terms similar to those
offered to non-related parties. We grant loans to directors, officers and other employees at rates normally accorded to preferred
clients. In addition, we offer deferred share and other plans to non-employee directors, executives and certain other key
employees. For further information, refer to Notes 12 and 26 of our 2023 Annual Consolidated Financial Statements.
Supplementary information
Selected annual information
Table 71
(Millions of Canadian dollars, except per share amounts)
2023
2022
2021
Total revenue
$
56,129
$
48,985
$
49,693
Net income attributable to:
Shareholders
14,859
15,794
16,038
Non-controlling interest
7
13
12
$
14,866
$
15,807
$
16,050
Basic earnings per share
$
10.51
$
11.08
$
11.08
Diluted earnings per share
10.50
11.06
11.06
Dividends declared per common shares
5.34
4.96
4.32
Total assets
$ 2,004,992
$ 1,917,219
$ 1,706,323
Deposits
1,231,687
1,208,814
1,100,831
122
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Net interest income on average assets and liabilities
Table 72
Average balances
Interest
Average rate
(Millions of Canadian dollars, except for percentage amounts) (1)
2023
2022
2023
2022
2023
2022
Assets
Deposits with other banks
Canada
$
13,607
$
13,119
$
1,698
$
582
12.48%
4.44%
U.S.
88,774
81,962
3,963
911
4.46
1.11
Other International
15,402
22,819
1,191
204
7.73
0.89
117,783
117,900
6,852
1,697
5.82
1.44
Securities
Trading
154,741
135,117
7,465
4,754
4.82
3.52
Investment, net of applicable allowance
180,174
150,384
7,047
2,308
3.91
1.53
334,915
285,501
14,512
7,062
4.33
2.47
Asset purchased under reverse repurchase agreements and securities borrowed
383,246
360,068
22,164
5,447
5.78
1.51
Loans
(2)
Canada
Retail
502,459
478,696
23,862
15,146
4.75
3.16
Wholesale
120,047
103,034
8,878
5,344
7.40
5.19
622,506
581,730
32,740
20,490
5.26
3.52
U.S.
158,443
136,937
6,891
4,037
4.35
2.95
Other International
50,782
49,630
3,832
2,038
7.55
4.11
831,731
768,297
43,463
26,565
5.23
3.46
Total interest-earning assets
1,667,675
1,531,766
86,991
40,771
5.22
2.66
Non-interest-bearing deposits with other banks
71,959
99,564
–
–
–
–
Customers’ liability under acceptances
19,912
18,354
–
–
–
–
Other assets
243,328
237,167
–
–
–
–
Total assets
$ 2,002,874
$ 1,886,851
$ 86,991
$ 40,771
4.34%
2.16%
Liabilities and shareholders’ equity
Deposits
(3)
Canada
$
770,309
$
684,452
$ 27,627
$
8,660
3.59%
1.27%
U.S.
153,838
153,039
5,383
1,044
3.50
0.68
Other International
93,658
101,058
3,669
1,047
3.92
1.04
1,017,805
938,549
36,679
10,751
3.60
1.15
Obligations related to securities sold short
36,365
39,079
2,933
2,409
8.07
6.16
Obligations related to assets sold under repurchase agreements and securities
loaned
352,282
315,871
20,433
4,351
5.80
1.38
Subordinated debentures
11,036
10,133
666
288
6.03
2.84
Other interest-bearing liabilities
37,639
26,000
1,151
255
3.06
0.98
Total interest-bearing liabilities
1,455,127
1,329,632
61,862
18,054
4.25
1.36
Non-interest-bearing deposits
193,815
226,376
–
–
–
–
Acceptances
19,954
18,409
–
–
–
–
Other liabilities
223,121
209,890
–
–
–
–
Total liabilities
$ 1,892,017
$ 1,784,307
$ 61,862
$ 18,054
3.27%
1.01%
Equity
$
110,857
$
102,544
n.a.
n.a.
n.a.
n.a.
Total liabilities and shareholders’ equity
$ 2,002,874
$ 1,886,851
$ 61,862
$ 18,054
3.09%
0.96%
Net interest income and margin
$ 2,002,874
$ 1,886,851
$ 25,129
$ 22,717
1.25%
1.20%
Net interest income and margin (average earning assets, net)
(4)
Canada
$
970,243
$
870,147
$ 18,752
$ 15,761
1.93%
1.81%
U.S.
497,556
437,357
5,065
5,423
1.02
1.24
Other International
208,221
224,261
1,312
1,533
0.63
0.68
Total
$ 1,676,020
$ 1,531,765
$ 25,129
$ 22,717
1.50%
1.48%
(1)
Insurance segment assets and liabilities are included in Other assets and Other liabilities, respectively.
(2)
Interest income includes loan fees of $1,149 million (2022 – $1,033 million; 2021 – $888 million).
(3)
Deposits include personal chequing and savings deposits with average balances of $250 billion (2022 – $279 billion; 2021 – $258 billion), interest expense of $2,840 million
(2022 – $712 million; 2021 – $175 million) and average rates of 1.14% (2022 – 0.26%; 2021 – 0.07%). Deposits also include term deposits with average balances of $624 billion
(2022 – $500 billion; 2021 – $437 billion), interest expense of $24,260 million (2022 – $7,323 million; 2021 – $4,487 million) and average rates of 3.89% (2022 – 1.46%;
2021 – 1.03%).
(4)
Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
n.a.
not applicable
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
123
Change in net interest income
Table 73
2023 vs. 2022
2022 vs. 2021
Increase (decrease) due to
changes in
Increase (decrease) due to
changes in
(Millions of Canadian dollars) (1)
Average
volume
(2)
Average
rate
(2)
Net change
Average
volume (2)
Average
rate (2)
Net change
Assets
Deposits with other banks
Canada
(3)
$
22
$
1,094
$
1,116
$
25
$
451
$
476
U.S.
(3)
76
2,976
3,052
28
820
848
Other international
(3)
(66)
1,053
987
4
64
68
Securities
Trading
690
2,021
2,711
178
840
1,018
Investment, net of applicable allowance
457
4,282
4,739
163
1,004
1,167
Asset purchased under reverse repurchase
agreements and securities borrowed
351
16,366
16,717
173
3,965
4,138
Loans
Canada
(3)
Retail
(3)
752
7,964
8,716
1,155
333
1,488
Wholesale
(3)
882
2,652
3,534
657
1,130
1,787
U.S.
(3)
634
2,220
2,854
695
462
1,157
Other international
(3)
47
1,747
1,794
346
133
479
Total interest income
$
3,845
$
42,375
$
46,220
$
3,424
$
9,202
$
12,626
Liabilities
Deposits
Canada
(3)
1,086
17,881
18,967
434
3,526
3,960
U.S.
(3)
5
4,334
4,339
35
778
813
Other international
(3)
(77)
2,699
2,622
20
510
530
Obligations related to securities sold short
(167)
691
524
297
303
600
Obligations related to assets sold under
repurchase agreements and securities loaned
502
15,580
16,082
83
3,694
3,777
Subordinated debentures
26
352
378
19
90
109
Other interest-bearing liabilities
114
782
896
14
108
122
Total interest expense
$
1,489
$
42,319
$
43,808
$
902
$
9,009
$
9,911
Net interest income
$
2,356
$
56
$
2,412
$
2,522
$
193
$
2,715
(1)
Insurance segment assets and liabilities are included in Other assets and Other liabilities, respectively.
(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)
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 74
As at October 31 (Millions of Canadian dollars)
2023
2022
Canada
(1)
Residential mortgages
$ 397,605
$
383,797
Personal
79,705
79,422
Credit cards
22,140
19,778
Small business
13,681
12,669
Retail
513,131
495,666
Wholesale
143,475
126,751
$ 656,606
$
622,417
U.S.
(1)
Retail
50,058
47,402
Wholesale
119,068
114,799
169,126
162,201
Other International
(1)
Retail
6,762
6,683
Wholesale
47,028
50,289
53,790
56,972
Total loans and acceptances
$ 879,522
$
841,590
Total allowance for credit losses
(5,054)
(3,798)
Total loans and acceptances, net of allowance for credit losses
$ 874,468
$
837,792
(1)
Geographic information is based on residence of borrower.
124
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Loans and acceptances by portfolio and sector
Table 75
As at October 31 (Millions of Canadian dollars)
2023
2022
Residential mortgages
$ 434,501
$
418,796
Personal
98,734
97,709
Credit cards
23,035
20,577
Small business
13,681
12,669
Retail
$ 569,951
$
549,751
Agriculture
11,026
10,105
Automotive
11,503
8,770
Banking
7,146
7,016
Consumer discretionary
17,546
19,405
Consumer staples
8,463
6,940
Oil and gas
6,421
5,959
Financial services
38,029
41,353
Financing products
13,683
13,781
Forest products
1,428
1,094
Governments
5,767
5,632
Industrial products
11,057
10,537
Information technology
5,096
5,232
Investments
18,212
19,952
Mining and metals
1,858
2,223
Public works and infrastructure
2,970
3,006
Real estate and related
90,981
79,506
Other services
27,048
24,393
Telecommunication and media
8,507
7,176
Transportation
8,038
6,542
Utilities
13,978
11,847
Other sectors
814
1,370
Wholesale
$ 309,571
$
291,839
Total loans and acceptances
$ 879,522
$
841,590
Total allowance for credit losses
(5,054)
(3,798)
Total loans and acceptances, net of allowance for credit losses
$ 874,468
$
837,792
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
125
Gross impaired loans by portfolio and geography
Table 76
As at October 31 (Millions of Canadian dollars, except for percentage amounts)
2023
2022
Residential mortgages
$
682
$
560
Personal
280
200
Small business
244
138
Retail
1,206
898
Agriculture
$
36
$
18
Automotive
26
9
Banking
3
1
Consumer discretionary
315
254
Consumer staples
148
122
Oil and gas
17
57
Financial services
85
96
Financing products
–
–
Forest products
9
7
Governments
16
3
Industrial products
147
77
Information technology
26
5
Investments
96
9
Mining and metals
1
12
Public works and infrastructure
15
16
Real estate and related
1,104
322
Other services
180
246
Telecommunication and media
186
8
Transportation
59
6
Utilities
–
–
Other sectors
24
27
Wholesale
2,493
1,295
Acquired credit-impaired loans
5
6
Total GIL
(1)
$
3,704
$
2,199
Canada
(2)
Residential mortgages
$
481
$
352
Personal
247
174
Small business
244
138
Retail
972
664
Agriculture
16
17
Automotive
24
6
Banking
3
1
Consumer discretionary
195
69
Consumer staples
55
40
Oil and gas
17
10
Financial services
–
4
Financing products
–
–
Forest products
9
7
Governments
13
3
Industrial products
42
28
Information technology
8
3
Investments
20
2
Mining and metals
1
4
Public works and infrastructure
10
7
Real estate and related
168
88
Other services
72
56
Telecommunication and media
4
5
Transportation
27
6
Utilities
–
–
Other sectors
1
–
Wholesale
685
356
Total
$
1,657
$
1,020
U.S.
(2)
Retail
$
53
$
34
Wholesale
1,469
674
Total
$
1,522
$
708
Other International
(2)
Retail
$
181
$
200
Wholesale
344
271
Total
$
525
$
471
Total GIL
$
3,704
$
2,199
Allowance on impaired loans
(1,148)
(669)
Net impaired loans
$
2,556
$
1,530
GIL as a % of loans and acceptances
Residential mortgages
0.16%
0.13%
Personal
0.28%
0.20%
Small business
1.78%
1.09%
Retail
0.21%
0.16%
Wholesale
0.81%
0.45%
Total
0.42%
0.26%
Allowance on impaired loans as a % of GIL
31.00%
30.41%
(1)
Past due loans greater than 90 days not included in impaired loans were $257 million in 2023
(2022 – $170 million). For further details, refer to Note 5 of our 2023 Annual
Consolidated Financial Statements.
(2)
Geographic information is based on residence of borrower.
126
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Provision for credit losses by portfolio and geography
Table 77
For the year ended October 31 (Millions of Canadian dollars, except for percentage amounts)
2023
2022
Residential mortgages
$
63
$
13
Personal
467
259
Credit cards
460
333
Small business
61
43
Retail
1,051
648
Agriculture
$
20
$
1
Automotive
8
3
Banking
–
(3)
Consumer discretionary
143
47
Consumer staples
51
35
Oil and gas
11
(2)
Financial services
10
3
Financing products
–
–
Forest products
5
1
Governments
(1)
(1)
Industrial products
56
(6)
Information technology
12
(8)
Investments
15
3
Mining and metals
(1)
9
Public works and infrastructure
(3)
5
Real estate and related
222
32
Other services
72
25
Telecommunication and media
85
(1)
Transportation
74
(16)
Utilities
–
1
Other sectors
6
3
Wholesale
785
131
Acquired credit-impaired loans
–
(1)
Total PCL on impaired loans
$
1,836
$
778
Canada
(1)
Residential mortgages
$
61
$
15
Personal
463
271
Credit cards
449
326
Small business
61
43
Retail
1,034
655
Agriculture
4
1
Automotive
7
3
Banking
–
1
Consumer discretionary
101
36
Consumer staples
34
9
Oil and gas
(2)
(21)
Financial services
1
1
Financing products
–
–
Forest products
5
1
Governments
(1)
(1)
Industrial products
16
9
Information technology
2
1
Investments
8
2
Mining and metals
–
2
Public works and infrastructure
2
–
Real estate and related
41
23
Other services
12
9
Telecommunication and media
1
1
Transportation
9
1
Utilities
–
–
Other sectors
(1)
–
Wholesale
239
78
Total
$
1,273
$
733
U.S.
(1)
Retail
$
17
$
2
Wholesale
509
68
Total
$
526
$
70
Other International
(1)
Retail
$
–
$
(9)
Wholesale
37
(16)
Total
$
37
$
(25)
Total PCL on impaired loans
$
1,836
$
778
Total PCL on performing loans
660
(281)
Total PCL on other financial assets
(28)
(13)
Total PCL
$
2,468
$
484
PCL on loans as a % of average net loans and acceptances
0.29%
0.06%
PCL on impaired loans as a % of average net loans and acceptances
(1)
0.21%
0.10%
(1)
Geographic information is based on residence of borrower.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
127
Allowance on loans by portfolio and geography
(1)
Table 78
As at and for the year ended October 31 (Millions of Canadian dollars, except percentage amounts)
2023
2022
Allowance against impaired loans
Canada
(2)
Residential mortgages
$
86
$
44
Personal
138
85
Small business
58
48
Retail
$
282
$
177
Agriculture
$
4
$
2
Automotive
5
4
Banking
1
–
Consumer discretionary
85
27
Consumer staples
30
10
Oil and gas
4
7
Financial services
1
1
Financing products
–
–
Forest products
3
1
Governments
–
1
Industrial products
18
12
Information technology
2
2
Investments
7
1
Mining and metals
1
2
Public works and infrastructure
5
4
Real estate and related
41
25
Other services
5
12
Telecommunication and media
1
1
Transportation
8
3
Utilities
–
–
Other sectors
–
–
Wholesale
$
221
$
115
Total
$
503
$
292
U.S.
(2)
Retail
$
7
$
2
Wholesale
445
175
Total
$
452
$
177
Other International
(2)
Retail
$
92
$
98
Wholesale
101
102
Total
$
193
$
200
Total allowance on impaired loans
$
1,148
$
669
Allowance on performing loans
Residential mortgages
$
313
$
300
Personal
1,073
946
Credit cards
1,069
893
Small business
136
146
Retail
$
2,591
$
2,285
Wholesale
$
1,609
$
1,227
Total allowance on performing loans
$
4,200
$
3,512
Total allowance on loans
$
5,348
$
4,181
Key ratios
Allowance on loans as a % of loans and acceptances
0.61%
0.50%
Net write-offs as a % of average net loans and acceptances
0.14%
0.10%
(1)
Includes loans, acceptances, and commitments.
(2)
Geographic information is based on residence of borrower.
128
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Credit quality information by Canadian province
(1)
Table 79
As at and for the year ended October 31 (Millions of Canadian dollars)
2023
2022
Loans and acceptances
Atlantic provinces
(2)
$
32,513
$
30,709
Quebec
76,204
73,743
Ontario
321,139
300,477
Alberta
76,018
73,638
Other Prairie provinces
(3)
36,076
35,699
B.C. and territories
(4)
114,656
108,151
Total loans and acceptances in Canada
$
656,606
$
622,417
Gross impaired loans
Atlantic provinces
(2)
$
122
$
65
Quebec
275
172
Ontario
689
323
Alberta
260
233
Other Prairie provinces
(3)
137
121
B.C. and territories
(4)
174
106
Total GIL in Canada
$
1,657
$
1,020
PCL on impaired loans
Atlantic provinces
(2)
$
52
$
20
Quebec
81
47
Ontario
901
529
Alberta
99
48
Other Prairie provinces
(3)
55
39
B.C. and territories
(4)
85
50
Total PCL on impaired loans in Canada
$
1,273
$
733
(1)
Geographic information is based on residence of borrower.
(2)
Comprises Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick.
(3)
Comprises Manitoba and Saskatchewan.
(4)
Comprises British Columbia, Nunavut, Northwest Territories and Yukon.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
129
Glossary
Acceptances
A bill of exchange or negotiable instrument
drawn by the borrower for payment at
maturity and accepted by a bank. The
acceptance constitutes a guarantee of
payment by the bank and can be traded in the
money market. The bank earns a “stamping
fee” for providing this guarantee.
Allowance for credit losses (ACL)
The amount deemed adequate by
management to absorb expected credit losses
as at the balance sheet date. The allowance is
established for all financial assets subject to
impairment assessment, including certain
loans, debt securities, customers’ liability
under acceptances, financial guarantees, and
undrawn loan commitments. The allowance is
changed by the amount of provision for credit
losses recorded, which is charged to income,
and decreased by the amount of write-offs net
of recoveries in the period.
ACL on loans ratio
ACL on loans ratio is calculated as ACL on
loans as a percentage of total loans and
acceptances.
Asset-backed securities (ABS)
Securities created through the securitization
of a pool of assets, for example auto loans or
credit card loans.
Assets under administration (AUA)
Assets administered by us, which are
beneficially owned by clients, unless otherwise
noted. Services provided in respect of assets
under administration are of an administrative
nature, including safekeeping, collecting
investment income, settling purchase and sale
transactions, and record keeping.
Assets under management (AUM)
Assets managed by us, which are beneficially
owned by clients, unless otherwise noted.
Services provided in respect of assets under
management include the selection of
investments and the provision of investment
advice. We have assets under management
that are also administered by us and included
in assets under administration.
Attributed capital
Attributed capital is based on the Basel III
regulatory capital requirements for all our
business segments other than insurance for
which we attribute capital based on economic
capital.
Auction rate securities (ARS)
Debt securities whose interest rates are
regularly reset through an auction process.
Average earning assets, net
Average earning assets include interest-
bearing deposits with other banks, securities,
net of applicable allowance, assets purchased
under reverse repurchase agreements and
securities borrowed, loans, net of allowance,
cash collateral and margin deposits. Insurance
assets, and all other assets not specified are
excluded. The averages are based on the daily
balances for the period.
Basis point (bp)
One one-hundredth of a percentage point
(.01%).
Collateral
Assets pledged as security for a loan or other
obligation. Collateral can take many forms,
such as cash, highly rated securities, property,
inventory, equipment and receivables.
Collateralized debt obligation (CDO)
Securities with multiple tranches that are
issued by structured entities and
collateralized by debt obligations including
bonds and loans. Each tranche offers a varying
degree of risk and return so as to meet
investor demand.
Commercial mortgage-backed securities
(CMBS)
Securities created through the securitization
of commercial mortgages.
Commitments to extend credit
Unutilized amount of credit facilities available
to clients either in the form of loans, bankers’
acceptances and other on-balance sheet
financing, or through off-balance sheet
products such as guarantees and letters of
credit.
Common Equity Tier 1 (CET1) capital
A regulatory Basel III capital measure
comprised mainly of common shareholders’
equity less regulatory deductions and
adjustments for goodwill and intangibles,
defined benefit pension fund assets, shortfall
in allowances and other specified items.
Common Equity Tier 1 capital ratio
A risk-based capital measure calculated as
CET1 capital divided by risk-weighted assets.
Covered bonds
Full recourse on-balance sheet obligations
issued by banks and credit institutions that
are fully collateralized by assets over which
investors enjoy a priority claim in the event of
an issuer’s insolvency.
Credit default swaps (CDS)
A derivative contract that provides the
purchaser with a one-time payment should the
referenced entity/entities default (or a similar
triggering event occur).
Derivative
A contract between two parties, which
requires little or no initial investment and
where payments between the parties are
dependent upon the movements in price of an
underlying instrument, index or financial rate.
Examples of derivatives include swaps,
options, forward rate agreements and futures.
The notional amount of the derivative is the
contract amount used as a reference point to
calculate the payments to be exchanged
between the two parties, and the notional
amount itself is generally not exchanged by
the parties.
Dividend payout ratio
Common dividends as a percentage of net
income available to common shareholders.
Dividend yield
Dividends per common share divided by the
average of the high and low share price in the
relevant period.
Earnings per share (EPS), basic
Calculated as net income available to common
shareholders divided by the average number
of shares outstanding.
Earnings per share (EPS), diluted
Calculated as net income available to common
shareholders divided by the average number
of shares outstanding adjusted for the dilutive
effects of stock options and other convertible
securities.
Efficiency ratio
Non-interest expense as a percentage of total
revenue.
Expected credit losses
The difference between the contractual cash
flows due to us in accordance with the
relevant contractual terms and the cash flows
that we expect to receive, discounted to the
balance sheet date.
Fair value
Fair value of a financial instrument is the price
that would be received to sell an asset or paid
to transfer a liability in an orderly transaction
between market participants at the
measurement date.
Funding valuation adjustment
Funding valuation adjustments are calculated
to incorporate cost and benefit of funding in
the valuation of uncollateralized and under-
collateralized OTC derivatives. Future
expected cash flows of these derivatives are
discounted to reflect the cost and benefit of
funding the derivatives by using a funding
curve, implied volatilities and correlations as
inputs.
Guarantees and standby letters of credit
These primarily represent irrevocable
assurances that a bank will make payments in
the event that its client cannot meet its
financial obligations to third parties. Certain
other guarantees, such as bid and
performance bonds, represent non-financial
undertakings.
Hedge
A risk management technique used to mitigate
exposure from market, interest rate or foreign
currency exchange risk arising from normal
banking operations. The elimination or
reduction of such exposure is accomplished by
establishing offsetting positions. For example,
assets denominated in foreign currencies can
be offset with liabilities in the same currencies
or through the use of foreign exchange
hedging instruments such as futures, options
or foreign exchange contracts.
Hedge funds
A type of investment fund, marketed to
accredited high net worth investors, that is
subject to limited regulation and restrictions
on its investments compared to retail mutual
funds, and that often utilize aggressive
strategies such as selling short, leverage,
program trading, swaps, arbitrage and
derivatives.
High-quality liquid assets (HQLA)
HQLA are cash or assets that can be converted
into cash quickly through sales (or by being
pledged as collateral) with no significant loss
of value.
Impaired loans
Loans are classified as impaired when there
has been a deterioration of credit quality to
the extent that management no longer has
reasonable assurance of timely collection of
the full amount of principal and interest in
accordance with the contractual terms of the
loan agreement. Credit card balances are not
classified as impaired as they are directly
written off after payments are 180 days past
due.
International Financial Reporting Standards
(IFRS)
IFRS are principles-based standards,
interpretations and the framework adopted by
the International Accounting Standards Board.
Leverage ratio
A Basel III regulatory measure, the ratio
divides Tier 1 capital by the sum of total assets
plus specified off-balance sheet items. The
leverage ratio is a non-risk based measure.
Liquidity Coverage Ratio (LCR)
The Liquidity Coverage Ratio is a Basel III
metric designed to ensure banks hold a
sufficient reserve of high-quality liquidity
assets (HQLA) to allow them to service a
period of significant liquidity stress lasting
30 calendar days.
130
Royal Bank of Canada: Annual Report 2023
Management’s Discussion and Analysis
Loan-to-value (LTV) ratio
Calculated based on the total facility amount
for the residential mortgage and RBC
Homeline Plan product divided by the value of
the related residential property.
Master netting agreement
An agreement between us and a counterparty
designed to reduce the credit risk of multiple
derivative transactions through the creation of
a legal right of offset of exposure in the event
of a default.
Net interest income
The difference between what is earned on
assets such as loans and securities and what
is paid on liabilities such as deposits and
subordinated debentures.
Net interest margin (NIM) on average
earning assets, net
Calculated as net interest income divided by
average earning assets, net.
Net Stable Funding Ratio (NSFR)
The Net Stable Funding Ratio is a Basel III
metric defined as the amount of available
stable funding (ASF) relative to the amount of
requested stable funding (RSF). The ratio
should be at least equal to 100% on an ongoing
basis.
Normal course issuer bid (NCIB)
A program for the repurchase of our own
shares for cancellation through a stock
exchange that is subject to the various rules of
the relevant stock exchange and securities
commission.
Notional amount
The contract amount used as a reference point
to calculate payments for derivatives.
Off-balance sheet financial instruments
A variety of arrangements offered to clients,
which include credit derivatives, written put
options, backstop liquidity facilities, stable
value products, financial standby letters of
credit, performance guarantees, credit
enhancements, mortgage loans sold with
recourse, commitments to extend credit,
securities lending, documentary and
commercial letters of credit, sponsor member
guarantees, securities lending
indemnifications and indemnifications.
Office of the Superintendent of Financial
Institutions Canada (OSFI)
The primary regulator of federally chartered
financial institutions and federally
administered pension plans in Canada. OSFI’s
mission is to safeguard policyholders,
depositors and pension plan members from
undue loss.
Operating leverage
The difference between our revenue growth
rate and non-interest expense growth rate.
Options
A contract or a provision of a contract that
gives one party (the option holder) the right,
but not the obligation, to perform a specified
transaction with another party (the option
issuer or option writer) according to specified
terms.
Provision for credit losses (PCL)
The amount charged to income necessary to
bring the allowance for credit losses to a level
determined appropriate by management. This
includes provisions on performing and
impaired financial assets.
PCL on loans ratio
PCL on loans ratio is calculated using PCL on
loans as a percentage of average net loans
and acceptances.
RBC Homeline Plan products
This is comprised of residential mortgages and
secured personal loans whereby the borrower
pledges real estate as collateral.
Repurchase agreements
These involve the sale of securities for cash
and the simultaneous repurchase of the
securities for value at a later date. These
transactions normally do not constitute
economic sales and therefore are treated as
collateralized financing transactions.
Return on common equity (ROE)
Net income available to common
shareholders, expressed as a percentage of
average common equity.
Reverse repurchase agreements
These involve the purchase of securities for
cash and the simultaneous sale of the
securities for value at a later date. These
transactions normally do not constitute
economic sales and therefore are treated as
collateralized financing transactions.
Risk-weighted assets (RWA)
Assets adjusted by a regulatory risk-weight
factor to reflect the riskiness of on and
off-balance sheet exposures. Certain assets
are not risk-weighted, but deducted from
capital. The calculation is defined by OSFI’s
Capital Adequacy Requirements guidelines.
For more details, refer to the Capital
management section.
Securities lending
Transactions in which the owner of securities
agrees to lend it under the terms of a
prearranged contract to a borrower for a fee.
Collateral for the loan consists of either high
quality securities or cash and collateral value
must be at least equal to the market value of
the loaned securities. Borrowers pay a
negotiated fee for loans collateralized by
securities, whereas for cash collateral lenders
pay borrowers interest at a negotiated rate
and reinvest the cash collateral to earn a
return. An intermediary such as a bank often
acts as agent lender for the owner of the
security in return for a share of the revenue
earned by the owner from lending securities.
Most often, agent lenders indemnify the owner
against the risk of the borrower’s failure to
redeliver the loaned securities – counterparty
credit risk if a borrower defaults and market
risk if the value of the non-cash collateral
declines. The agent lender does not indemnify
against the investment risk of re-investing
cash collateral which is borne by the owner.
Securities sold short
A transaction in which the seller sells
securities and then borrows the securities in
order to deliver them to the purchaser upon
settlement. At a later date, the seller buys
identical securities in the market to replace
the borrowed securities.
Securitization
The process by which various financial assets
are packaged into newly issued securities
backed by these assets.
Standardized Approach (SA)
Risk weights prescribed by OSFI are used to
calculate RWA for the credit risk exposures.
Credit assessments by OSFI-recognized
external credit rating agencies of S&P,
Moody’s, Fitch, and DBRS are used to risk-
weight our Sovereign and Bank exposures
based on the standards and guidelines issued
by OSFI. For our Business and Retail
exposures, we use the standard risk weights
prescribed by OSFI.
Structured entities
A structured entity is an entity in which voting
or similar rights are not the dominant factor in
deciding who controls the entity, such as when
the activities that significantly affect the
entity’s returns are directed by means of
contractual arrangements. Structured entities
often have restricted activities, narrow and
well defined objectives, insufficient equity to
finance their activities, and financing in the
form of multiple contractually-linked
instruments.
Taxable equivalent basis (teb)
Income from certain specified tax advantaged
sources (eligible Canadian taxable corporate
dividends) is increased to a level that would
make it comparable to income from taxable
sources. There is an offsetting adjustment in
the tax provision, thereby generating the same
after-tax net income.
Tier 1 capital
Tier 1 capital comprises predominantly of CET1
capital, with additional Tier 1 items such as
preferred shares, limited recourse capital
notes and non-controlling interests in
subsidiaries Tier 1 instruments.
Tier 2 capital
Tier 2 capital consists mainly of subordinated
debentures that meet certain criteria, certain
loan loss allowances and non-controlling
interests in subsidiaries’ Tier 2 instruments.
Total loss absorbing capacity (TLAC)
The aggregate of Tier 1 capital, Tier 2 capital,
and external TLAC instruments which allow
conversion in whole or in part into common
shares under the Canada Deposit Insurance
Corporation Act and meet all of the eligibility
criteria under the guideline.
TLAC ratio
The risk-based TLAC ratio is defined as TLAC
divided by total risk-weighted assets.
TLAC leverage ratio
The TLAC leverage ratio is defined as TLAC
divided by the Leverage ratio exposure.
Total capital and total capital ratio
Total capital is defined as the total of Tier 1
and Tier 2 capital. The total capital ratio is
calculated by dividing total capital by risk-
weighted assets.
Tranche
A security class created whereby the risks and
returns associated with a pool of assets are
packaged into several classes of securities
offering different risk and return profiles from
those of the underlying asset pool. Tranches
are typically rated by ratings agencies, and
reflect both the credit quality of underlying
collateral as well as the level of protection
based on the tranches’ relative subordination.
Unattributed capital
Unattributed capital represents common
equity in excess of common equity attributed
to our business segments and is reported in
the Corporate Support segment.
Value-at-Risk (VaR)
A generally accepted risk-measurement
concept that uses statistical models based on
historical information to estimate within a
given level of confidence the maximum loss in
market value we would experience in our
financial portfolio from an adverse one-day
movement in market rates and prices.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2023
131
EDTF recommendations index
We aim to present transparent, high-quality risk disclosures by providing disclosures in this 2023 Annual Report and
Supplementary Financial Information package (SFI), and Pillar 3 Report, in accordance with recommendations from the FSB’s
Enhanced Disclosure Task Force (EDTF). Information within the SFI and Pillar 3 Report is not and should not be considered
incorporated by reference into this 2023 Annual Report.
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
132
1
2
Define risk terminology and measures
65-70, 130-131
–
3
Top and emerging risks
63-65
–
4
New regulatory ratios
109-114
–
Risk governance,
risk management
and business
model
5
Risk management organization
65-70
–
6
Culture and conduct risk
65-70
–
7
Risk in the context of our business activities
117
–
8
Stress testing
68-69, 81
–
Capital adequacy
and risk-weighted
assets (RWA)
9
Minimum Basel III capital ratios and
Domestic systemically important bank
surcharge
109-114
–
10
Composition of capital and reconciliation of
the accounting balance sheet to the
regulatory balance sheet
–
*
11
Flow statement of the movements in
regulatory capital
–
19
12
Capital strategic planning
109-114
–
13
RWA by business segments
–
20
14
Analysis of capital requirement, and related
measurement model information
71-75
*
15
RWA credit risk and related risk
measurements
–
*
16
Movement of risk-weighted assets by risk
type
–
20
17
Basel back-testing
68, 71-73
31
Liquidity
18
Quantitative and qualitative analysis of our
liquidity reserve
88-89, 94-95
–
Funding
19
Encumbered and unencumbered assets by
balance sheet category, and contractual
obligations for rating downgrades
90, 93
–
20
Maturity analysis of consolidated total
assets, liabilities and off-balance sheet
commitments analyzed by remaining
contractual maturity at the balance sheet
date
97-98
–
21
Sources of funding and funding strategy
90-92
–
Market risk
22
Relationship between the market risk
measures for trading and non-trading
portfolios and the balance sheet
85-86
–
23
Decomposition of market risk factors
81-86
–
24
Market risk validation and back-testing
81
–
25
Primary risk management techniques
beyond reported risk measures and
parameters
81-84
–
Credit risk
26
Bank’s credit risk profile
71-81, 178-185
21-31,*
Quantitative summary of aggregate credit
risk exposures that reconciles to the
balance sheet
124-129
*
27
Policies for identifying impaired loans
73-75, 119, 149-151
–
28
Reconciliation of the opening and closing
balances of impaired loans and
impairment allowances during the year
–
23, 28
29
Quantification of gross notional exposure
for OTC derivatives or exchange-traded
derivatives
76
32
30
Credit risk mitigation, including collateral
held for all sources of credit risk
74-75
*
Other
31
Other risk types
100-109
–
32
Publicly known risk events
104-105, 223-224
–
*
These disclosure requirements are satisfied or partially satisfied by disclosures provided in our Pillar 3 Report for the quarter ended October 31, 2023 and for the year
ended October 31, 2022.
132
Royal Bank of Canada: Annual Report 2023
Index for Enhanced Disclosure Task Force recommendations
REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS
Reports
134
Management’s Responsibility for Financial Reporting
134
Management’s Report on Internal Control over
Financial Reporting
135
Independent Auditor’s Report
138
Report of Independent Registered Public Accounting
Firm (PCAOB ID 271)
Consolidated Financial Statements
140
Consolidated Balance Sheets
141
Consolidated Statements of Income
142
Consolidated Statements of Comprehensive Income
143
Consolidated Statements of Changes in Equity
144
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
145
Note 1
General information
145
Note 2
Summary of significant accounting
policies, estimates and judgments
161
Note 3
Fair value of financial instruments
174
Note 4
Securities
178
Note 5
Loans and allowance for credit losses
185
Note 6
Significant acquisition
185
Note 7
Derecognition of financial assets
186
Note 8
Structured entities
190
Note 9
Derivative financial instruments and
hedging activities
200
Note 10
Premises and equipment
201
Note 11
Goodwill and other intangible assets
203
Note 12
Joint ventures and associated companies
204
Note 13
Other assets
204
Note 14
Deposits
205
Note 15
Insurance
207
Note 16
Segregated funds
208
Note 17
Employee benefits – Pension and other
post-employment benefits
213
Note 18
Other liabilities
213
Note 19
Subordinated debentures
214
Note 20
Equity
216
Note 21
Share-based compensation
218
Note 22
Income taxes
220
Note 23
Earnings per share
221
Note 24
Guarantees, commitments, pledged
assets and contingencies
223
Note 25
Legal and regulatory matters
224
Note 26
Related party transactions
226
Note 27
Results by business segment
227
Note 28
Nature and extent of risks arising from
financial instruments
228
Note 29
Capital management
229
Note 30
Offsetting financial assets and financial
liabilities
231
Note 31
Recovery and settlement of on-balance
sheet assets and liabilities
232
Note 32
Parent company information
234
Note 33
Principal subsidiaries
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
133
Management’s Responsibility for Financial Reporting
The accompanying consolidated financial statements of Royal Bank of Canada were prepared by management, which is
responsible for the integrity and fairness of the information presented, including the many amounts that must of necessity be
based on estimates and judgments. These consolidated financial statements were prepared in accordance with the
Bank Act
(Canada) and International Financial Reporting Standards as issued by the International Accounting Standards Board. Financial
information appearing throughout our Management’s Discussion and Analysis is consistent with these consolidated financial
statements.
Our internal controls are designed to provide reasonable assurance that transactions are authorized, assets are
safeguarded and proper records are maintained. These controls include quality standards in hiring and training of employees,
policies and procedures manuals, a corporate code of conduct and accountability for performance within appropriate and well-
defined areas of responsibility.
The system of internal controls is further supported by a compliance function, which is designed to ensure that we and our
employees comply with securities legislation and conflict of interest rules, and by an internal audit staff, which conducts periodic
audits of all aspects of our operations.
The Board of Directors oversees management’s responsibilities for financial reporting through an Audit Committee, which is
composed entirely of independent directors. This Committee reviews our consolidated financial statements and recommends
them to the Board for approval. Other key responsibilities of the Audit Committee include reviewing our existing internal control
procedures and planned revisions to those procedures, and advising the directors on auditing matters and financial reporting
issues. Our Chief Compliance Officer and Chief Internal Auditor have full and unrestricted access to the Audit Committee.
The Office of the Superintendent of Financial Institutions Canada (OSFI) examines and inquires into our business and affairs
as deemed necessary to determine whether the provisions of the
Bank Act
are being complied with, and that we are in sound
financial condition. In carrying out its mandate, OSFI strives to protect the rights and interests of our depositors and creditors.
PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm appointed by our shareholders upon the
recommendation of the Audit Committee and Board, has performed an independent audit of the consolidated financial
statements in accordance with Canadian generally accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States) as stated in their Independent Auditor’s Report and Report of Independent
Registered Public Accounting Firm, respectively. The auditors have full and unrestricted access to the Audit Committee to discuss
their audit and related findings.
David I. McKay
President and Chief Executive Officer
Nadine Ahn
Chief Financial Officer
Toronto, November 29, 2023
Management’s Report on Internal Control over Financial Reporting
Management of Royal Bank of Canada is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the President and Chief
Executive Officer and Chief Financial Officer and effected by the Board of Directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards
Board. It includes those policies and procedures that:
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions related to and
dispositions of our assets;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and our receipts and expenditures are made only in accordance
with authorizations of our management and directors; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our
assets that could have a material effect on our financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely
basis. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management evaluated, under the supervision of and with the participation of the President and Chief Executive Officer and
Chief Financial Officer, the effectiveness of our internal control over financial reporting as of October 31, 2023, 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, 2023, internal control over
financial reporting was effective based on the criteria established in the
Internal Control – Integrated Framework (2013).
The effectiveness of our internal control over financial reporting as of October 31, 2023, has been audited by
PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, as stated in their Report of Independent
Registered Public Accounting Firm, which appears herein.
David I. McKay
President and Chief Executive Officer
Nadine Ahn
Chief Financial Officer
Toronto, November 29, 2023
134
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Independent Auditor’s Report
To the Shareholders and Board of Directors of Royal Bank of Canada
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position
of Royal Bank of Canada and its subsidiaries (together, the Bank) as of October 31, 2023 and 2022, and its financial performance
and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the
International Accounting Standards Board (IFRS).
What we have audited
The Bank’s consolidated financial statements comprise:
•
the consolidated balance sheets as of October 31, 2023 and 2022;
•
the consolidated statements of income for the years then ended;
•
the consolidated statements of comprehensive income for the years then ended;
•
the consolidated statements of changes in equity for the years then ended;
•
the consolidated statements of cash flows for the years then ended; and
•
the notes to the consolidated financial statements, which include significant accounting policies and other explanatory
information.
Certain required disclosures have been presented elsewhere in the Management’s Discussion and Analysis, rather than in the
notes to the consolidated financial statements. These disclosures are cross-referenced from the consolidated financial
statements and are identified as audited.
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those
standards are further described in the
Auditor’s responsibilities for the audit of the consolidated financial statements
section of
our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Bank in accordance with the ethical requirements that are relevant to our audit of the consolidated
financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated
financial statements for the year ended October 31, 2023. These matters were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on
these matters.
Key audit matter
How our audit addressed the key audit matter
Allowance for Credit Losses for Financial Assets
Categorized as Stage 1 and Stage 2 (Stage 1 and Stage 2 ACL)
Refer to Note 2 – Summary of significant accounting policies,
estimates and judgments, Note 4 – Securities and Note 5 –
Loans and allowance for credit losses to the consolidated
financial statements.
The Bank’s allowance for credit losses for financial assets was
$5,366 million as of October 31, 2023 and represents
management’s estimate of expected credit losses on financial
assets as of the balance sheet date, of which a significant
portion relates to financial assets categorized as Stage 1 and
Stage 2. Performing financial assets are categorized as Stage 1
from initial recognition to the date on which the asset has
experienced a significant increase in credit risk relative to its
initial recognition. Performing financial assets transfer into
Stage 2 following a significant increase in credit risk relative to
the initial recognition. Financial assets are categorized as
Stage 3 when considered to be credit-impaired. As disclosed by
management, the measurement of expected credit losses is a
complex calculation that involves a significant number of
interrelated inputs and assumptions such as borrower risk
ratings, forward-looking macroeconomic conditions, scenario
design and the weight assigned to each scenario. The
probability of default, loss given default and exposure at
default inputs are modelled based on the macroeconomic
variables that are most closely correlated with credit losses.
Management’s estimation of expected credit losses in Stage 1
and Stage 2 considers five distinct future macroeconomic
Our approach to addressing the matter included the following
procedures, among others:
•
Testing the effectiveness of controls relating to the
estimation of the Stage 1 and Stage 2 ACL, including
controls over:
O
The probability of default, loss given default and
exposure at default models.
O
The design of future macroeconomic scenarios, the
forecasting of certain macroeconomic variables, and
the probability-weighting of these scenarios.
O
The assignment of borrower risk ratings.
O
The completeness and accuracy of certain data
inputs underlying the Stage 1 and Stage 2 ACL
calculation.
•
Testing management’s process for estimating the Stage 1
and Stage 2 ACL, which consisted of:
O
Testing the completeness and accuracy of certain
underlying data used in the estimation of the Stage 1
and Stage 2 ACL.
O
Using professionals with specialized skill and
knowledge to assist in evaluating:
•
The appropriateness of the probability of default,
loss given default and exposure at default
models used in the estimation of the Stage 1 and
Stage 2 ACL.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
135
Key audit matter
How our audit addressed the key audit matter
scenarios, each of which includes a forecast of relevant
macroeconomic variables, designed to capture a wide range of
possible outcomes and which are probability-weighted
according to management’s expectation of the relative
likelihood of the range of outcomes that each scenario
represents at the reporting date. Significant management
judgment is required in making assumptions and estimations
when calculating the Stage 1 and Stage 2 ACL.
We considered this a key audit matter due to:
•
The significant judgment required by management when
estimating the Stage 1 and Stage 2 ACL.
•
A high degree of auditor judgment and subjectivity in
performing procedures related to management’s
assumptions for:
O
Designing future macroeconomic scenarios.
O
Forecasting certain macroeconomic variables.
O
Probability-weighting scenarios.
O
Assigning borrower risk ratings.
•
The significant audit effort necessary to evaluate audit
evidence as the estimation of the Stage 1 and Stage 2 ACL is a
complex calculation that involves a large volume of data,
interrelated inputs and assumptions, some of which are
model-based.
•
The audit effort involved the use of professionals with
specialized skill and knowledge.
•
The reasonableness of significant inputs and
assumptions used in the estimation of the Stage 1
and Stage 2 ACL related to:
•
The design of future macroeconomic
scenarios.
•
Certain forecasted macroeconomic
variables.
•
The probability-weights assigned to these
scenarios.
•
The assignment of borrower risk ratings for
samples of loans.
Uncertain tax positions
Refer to Note 2 - Summary of significant accounting policies,
estimates and judgments and Note 22 - Income taxes to the
consolidated financial statements.
The Bank is subject to income tax laws in various jurisdictions
where it operates and the complex tax laws are potentially
subject to different interpretations by management and the
relevant taxation authorities. As disclosed by management,
significant judgment is required in the interpretation of the
relevant tax laws, and in assessing the probability of
acceptance of the Bank’s tax positions to determine tax
provisions, which includes management’s best estimate of
uncertain tax positions that are under audit or appeal by the
relevant taxation authorities. Management performs a review
on a quarterly basis to incorporate its best assessment based
on information available, but additional liability and income
tax expense could result based on the acceptance of the Bank’s
tax positions by the relevant tax authorities.
In some cases, the Bank has received reassessments denying
the tax deductibility of dividends from transactions including
those with Tax Indifferent Investors.
We considered this a key audit matter due to:
•
The significant judgment required by management, including
a high degree of estimation uncertainty, when:
O
Interpreting the relevant tax laws.
O
Assessing the probability of acceptance of the Bank’s
tax positions, which includes management’s best
estimate of uncertain tax positions that are under
audit or appeal by relevant taxation authorities.
•
A high degree of auditor judgment and subjectivity in
performing procedures and evaluating the uncertain tax
positions.
•
The audit effort involved the use of professionals with
specialized skill and knowledge.
Our approach to addressing the matter included the following
procedures, among others:
•
Testing the effectiveness of controls relating to the
evaluation of uncertain tax positions and the impact on tax
provisions.
•
Testing management’s process for (i) assessing the
probability of acceptance of the Bank’s tax positions; and
(ii) estimating provisions relating to uncertain tax positions,
if applicable, which reflects management’s best estimate of
uncertain tax positions that are under audit or appeal by
relevant taxation authorities. This consisted of:
O
Reviewing correspondence with relevant taxation
authorities.
O
Evaluating the appropriateness of the methods used.
O
Testing the completeness and accuracy of underlying
data used in the estimate.
O
Making inquiries of the Bank’s internal and external
legal counsel.
O
Evaluating, with the assistance of professionals with
specialized skill and knowledge:
•
Application of relevant tax laws.
•
The reasonableness of management’s
assessment of whether it is probable that the
relevant tax authorities will accept the Bank’s tax
positions.
•
Evidence used by management.
Other information
Management is responsible for the other information. The other information comprises the Management’s Discussion and
Analysis and the information, other than the consolidated financial statements and our auditor’s report thereon, included in the
annual report.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of
assurance conclusion thereon.
136
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated
financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are
required to report that fact. We have nothing to report in this regard.
Responsibilities of management and those charged with governance for the consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance
with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting
unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Bank’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally
accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and
maintain professional skepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or
error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and
appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is
higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations,
or the override of internal control.
•
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control.
•
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by management.
•
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on
the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s
report. However, future events or conditions may cause the Bank to cease to continue as a going concern.
•
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the underlying transactions and events in a manner that
achieves fair presentation.
•
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within
the Bank to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit
and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements
regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to
bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most
significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters.
We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when,
in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse
consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is Lona Mathis.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
November 29, 2023
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
137
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Royal Bank of Canada
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Royal Bank of Canada and its subsidiaries (together, the
Bank) as of October 31, 2023 and 2022, and the related consolidated statements of income, comprehensive income, changes in
equity and cash flows for the years then ended, including the related notes (collectively referred to as the consolidated financial
statements). We also have audited the Bank’s internal control over financial reporting as of October 31, 2023, based on criteria
established in
Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Bank as of October 31, 2023 and 2022, and its financial performance and its cash flows for the years then ended in
conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in
our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of October 31, 2023,
based on criteria established in
Internal Control – Integrated Framework
(2013) issued by the COSO.
Basis for Opinions
The Bank’s management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on
the Bank’s consolidated financial statements and on the Bank’s internal control over financial reporting based on our audits. We
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Bank in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. An entity’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the entity; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
entity are being made only in accordance with authorizations of management and directors of the entity; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Credit Losses for Financial Assets Categorized as Stage 1 and Stage 2 (Stage 1 and Stage 2 ACL)
As described in Notes 2, 4 and 5 to the consolidated financial statements, the Bank’s allowance for credit losses for financial
assets was $5,366 million as of October 31, 2023 and represents management’s estimate of expected credit losses on financial
assets as of the balance sheet date, of which a significant portion relates to financial assets categorized as Stage 1 and Stage 2.
Performing financial assets are categorized as Stage 1 from initial recognition to the date on which the asset has experienced a
significant increase in credit risk relative to its initial recognition. Performing financial assets transfer into Stage 2 following a
significant increase in credit risk relative to the initial recognition. Financial assets are categorized as Stage 3 when considered
138
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
to be credit-impaired. As disclosed by management, the measurement of expected credit losses is a complex calculation that
involves a significant number of interrelated inputs and assumptions such as borrower risk ratings, forward-looking
macroeconomic conditions, scenario design and the weight assigned to each scenario. The probability of default, loss given
default and exposure at default inputs are modelled based on the macroeconomic variables that are most closely correlated with
credit losses. Management’s estimation of expected credit losses in Stage 1 and Stage 2 considers five distinct future
macroeconomic scenarios, each of which includes a forecast of relevant macroeconomic variables, designed to capture a wide
range of possible outcomes and which are probability-weighted according to management’s expectation of the relative likelihood
of the range of outcomes that each scenario represents at the reporting date. Significant management judgment is required in
making assumptions and estimations when calculating the Stage 1 and Stage 2 ACL.
The principal considerations for our determination that performing procedures relating to the Stage 1 and Stage 2 ACL is a critical
audit matter are (i) the significant judgment required by management when estimating the Stage 1 and Stage 2 ACL; (ii) a high
degree of auditor judgment and subjectivity in performing procedures related to management’s assumptions for (a) designing
future macroeconomic scenarios, (b) forecasting certain macroeconomic variables, (c) probability-weighting scenarios, and
(d) assigning borrower risk ratings; (iii) the significant audit effort necessary to evaluate audit evidence as the estimation of the
Stage 1 and Stage 2 ACL is a complex calculation that involves a large volume of data, interrelated inputs and assumptions, some
of which are model-based; and (iv) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
estimation of the Stage 1 and Stage 2 ACL, including controls over (i) the probability of default, loss given default and exposure at
default models; (ii) the design of future macroeconomic scenarios, the forecasting of certain macroeconomic variables, and the
probability-weighting of these scenarios; (iii) the assignment of borrower risk ratings; and (iv) the completeness and accuracy of
certain data inputs underlying the Stage 1 and Stage 2 ACL calculation. These procedures also included, among others, testing
management’s process for estimating the Stage 1 and Stage 2 ACL. This consisted of (i) testing the completeness and accuracy of
certain underlying data used in the estimation of the Stage 1 and Stage 2 ACL; and (ii) with the assistance of professionals with
specialized skill and knowledge, evaluating (a) the appropriateness of the probability of default, loss given default and exposure
at default models used in the estimation of the Stage 1 and Stage 2 ACL, and (b) the reasonableness of significant inputs and
assumptions used in the estimation of the Stage 1 and Stage 2 ACL related to (1) the design of future macroeconomic scenarios,
(2) certain forecasted macroeconomic variables, (3) the probability-weights assigned to these scenarios, and (4) the assignment
of borrower risk ratings for samples of loans.
Uncertain Tax Positions
As described in Note 2 to the consolidated financial statements, the Bank is subject to income tax laws in various jurisdictions
where it operates and the complex tax laws are potentially subject to different interpretations by management and the relevant
taxation authorities. As disclosed by management, significant judgment is required in the interpretation of the relevant tax laws,
and in assessing the probability of acceptance of the Bank’s tax positions to determine tax provisions, which includes
management’s best estimate of uncertain tax positions that are under audit or appeal by the relevant taxation authorities.
Management performs a review on a quarterly basis to incorporate its best assessment based on information available, but
additional liability and income tax expense could result based on the acceptance of the Bank’s tax positions by the relevant tax
authorities. In some cases, as described in Note 22 to the consolidated financial statements, the Bank has received
reassessments denying the tax deductibility of dividends from transactions including those with Tax Indifferent Investors.
The principal considerations for our determination that performing procedures relating to uncertain tax positions is a critical
audit matter are (i) the significant judgment required by management, including a high degree of estimation uncertainty, when
(a) interpreting the relevant tax laws, and (b) assessing the probability of acceptance of the Bank’s tax positions, which includes
management’s best estimate of uncertain tax positions that are under audit or appeal by relevant taxation authorities; (ii) a high
degree of auditor judgment and subjectivity in performing procedures and evaluating the uncertain tax positions; and (iii) the
audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
evaluation of uncertain tax positions and the impact on tax provisions. These procedures also included, among others, testing
management’s process for (i) assessing the probability of acceptance of the Bank’s tax positions; and (ii) estimating provisions
relating to uncertain tax positions, if applicable, which reflects management’s best estimate of uncertain tax positions that are
under audit or appeal by relevant taxation authorities. This consisted of (i) evaluating the appropriateness of the methods used;
(ii) testing the completeness and accuracy of underlying data used in the estimate; (iii) reviewing correspondence with relevant
taxation authorities; (iv) making inquiries of the Bank’s internal and external legal counsel; and (v) evaluating, with the
assistance of professionals with specialized skill and knowledge, the application of relevant tax laws, the reasonableness of
management’s assessment of whether it is probable that the relevant tax authorities will accept the Bank’s tax positions, and
evidence used by management.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
November 29, 2023
We have served as the Bank’s auditor since 2016.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
139
Consolidated Balance Sheets
As at
(Millions of Canadian dollars)
October 31
2023
October 31
2022
Assets
Cash and due from banks
$
$
Interest-bearing deposits with banks
Securities
(Note 4)
Trading
Investment, net of applicable allowance
Assets purchased under reverse repurchase agreements and securities borrowed
Loans
(Note 5)
Retail
Wholesale
Allowance for loan losses
(Note 5)
(5,004 )
(3,753 )
Segregated fund net assets
(Note 16)
Other
Customers’ liability under acceptances
Derivatives
(Note 9)
Premises and equipment
(Note 10)
Goodwill
(Note 11)
Other intangibles
(Note 11)
Other assets
(Note 13)
Total assets
$ 2,004,992
$ 1,917,219
Liabilities and equity
Deposits
(Note 14)
Personal
$
$
Business and government
Bank
Segregated fund net liabilities
(Note 16)
Other
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under repurchase agreements and securities loaned
Derivatives
(Note 9)
Insurance claims and policy benefit liabilities
(Note 15)
Other liabilities
(Note 18)
Subordinated debentures
(Note 19)
Total liabilities
Equity attributable to shareholders
Preferred shares and other equity instruments
(Note 20)
Common shares
(Note 20)
Retained earnings
Other components of equity
Non-controlling interests
Total equity
Total liabilities and equity
$ 2,004,992
$ 1,917,219
The accompanying notes are an integral part of these Consolidated Financial Statements.
David I. McKay
Frank Vettese
President and Chief Executive Officer
Director
140
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Consolidated Statements of Income
For the year ended
(Millions of Canadian dollars, except per share amounts)
October 31
2023
October 31
2022
Interest and dividend income
(Note 3)
Loans
$
$
Securities
Assets purchased under reverse repurchase agreements and securities borrowed
Deposits and other
Interest expense
(Note 3)
Deposits and other
Other liabilities
Subordinated debentures
Net interest income
Non-interest income
Insurance premiums, investment and fee income
(Note 15)
Trading revenue
Investment management and custodial fees
Mutual fund revenue
Securities brokerage commissions
Service charges
Underwriting and other advisory fees
Foreign exchange revenue, other than trading
Card service revenue
Credit fees
Net gains on investment securities
Income (loss) from joint ventures and associates
(Note 12)
(219 )
Other
Total revenue
Provision for credit losses
(Notes 4 and 5)
Insurance policyholder benefits, claims and acquisition expense
(Note 15)
Non-interest expense
Human resources
(Notes 17 and 21)
Equipment
Occupancy
Communications
Professional fees
Amortization of other intangibles
(Note 11)
Other
Income before income taxes
Income taxes
(Note 22)
Net income
$
$
Net income attributable to:
Shareholders
$
$
Non-controlling interests
$
$
Basic earnings per share
(in dollars) (Note 23)
$
$
Diluted earnings per share
(in dollars) (Note 23)
Dividends per common share
(in dollars)
The accompanying notes are an integral part of these Consolidated Financial Statements.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
141
Consolidated Statements of Comprehensive Income
For the year ended
(Millions of Canadian dollars)
October 31
2023
October 31
2022
Net income
$
$
Other comprehensive income (loss), net of taxes
(Note 22)
Items that will be reclassified subsequently to income:
Net change in unrealized gains (losses) on debt securities and loans at fair value through
other comprehensive income
Net unrealized gains (losses) on debt securities and loans at fair value through other
comprehensive income
(14 )
(2,241 )
Provision for credit losses recognized in income
(14 )
(16 )
Reclassification of net losses (gains) on debt securities and loans at fair value through other
comprehensive income to income
(131 )
(12 )
(159 )
(2,269 )
Foreign currency translation adjustments
Unrealized foreign currency translation gains (losses)
Net foreign currency translation gains (losses) from hedging activities
(1,208 )
(1,449 )
Reclassification of losses (gains) on foreign currency translation to income
(160 )
(18 )
Reclassification of losses (gains) on net investment hedging activities to income
Net change in cash flow hedges
Net gains (losses) on derivatives designated as cash flow hedges
Reclassification of losses (gains) on derivatives designated as cash flow hedges to income
Items that will not be reclassified subsequently to income:
Remeasurement gains (losses) on employee benefit plans
(1), (Note 17)
(344 )
Net gains (losses) from fair value changes due to credit risk on financial liabilities designated at
fair value through profit or loss
(576 )
Net gains (losses) on equity securities designated at fair value through other
comprehensive income
(876 )
Total other comprehensive income (loss), net of taxes
Total comprehensive income (loss)
$
$
Total comprehensive income attributable to:
Shareholders
$
$
Non-controlling interests
$
$
(1)
Includes $(9 ) million that was reclassified from other comprehensive income to retained earnings.
The accompanying notes are an integral part of these Consolidated Financial Statements.
142
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Consolidated Statements of Changes in Equity
For the year ended October 31, 2023
Other components of equity
(Millions of Canadian dollars)
Preferred
shares and
other equity
instruments
Common
shares
Treasury –
preferred
shares and
other equity
instruments
Treasury –
common
shares
Retained
earnings
FVOCI
securities
and loans
Foreign
currency
translation
Cash flow
hedges
Total other
components
of equity
Equity
attributable to
shareholders
Non-controlling
interests
Total
equity
Balance at beginning of period
$
$ 17,318
$
(5 )
$
(334 )
$ 78,037
$
(2,357 )
$
$
$
$
$
$ 108,175
Changes in equity
Issues of share capital and other equity instruments
Common shares purchased for cancellation
Redemption of preferred shares and other equity instruments
Sales of treasury shares and other equity instruments
Purchases of treasury shares and other equity instruments
(519 )
(3,556 )
(4,075 )
(4,075 )
Share-based compensation awards
Dividends on common shares
(7,443 )
(7,443 )
(7,443 )
Dividends on preferred shares and distributions on other
equity instruments
(236 )
(236 )
(21 )
(257 )
Other
(18 )
(18 )
(18 )
Net income
Total other comprehensive income (loss), net of taxes
(876 )
(159 )
Balance at end of period
$
$ 19,398
$
(9 )
$
(231 )
$ 84,328
$
(2,516 )
$
$
$
$
$
$ 117,760
For the year ended October 31, 2022
Other components of equity
(Millions of Canadian dollars)
Preferred
shares and
other equity
instruments
Common
shares
Treasury –
preferred
shares and
other equity
instruments
Treasury –
common
shares
Retained
earnings
FVOCI
securities
and loans
Foreign
currency
translation
Cash flow
hedges
Total other
components
of equity
Equity
attributable to
shareholders
Non-controlling
interests
Total
equity
Balance at beginning of period
$
$
$
(39 )
$
(73 )
$
$
(88 )
$
$
$
$
$
$
Changes in equity
Issues of share capital and other equity instruments
(1 )
Common shares purchased for cancellation
(509 )
(4,917 )
(5,426 )
(5,426 )
Redemption of preferred shares and other equity instruments
(150 )
(5 )
(155 )
(155 )
Sales of treasury shares and other equity instruments
Purchases of treasury shares and other equity instruments
(518 )
(5,183 )
(5,701 )
(5,701 )
Share-based compensation awards
Dividends on common shares
(6,946 )
(6,946 )
(6,946 )
Dividends on preferred shares and distributions on other
equity instruments
(247 )
(247 )
(5 )
(252 )
Other
(56 )
(56 )
(56 )
Net income
Total other comprehensive income (loss), net of taxes
(2,269 )
Balance at end of period
$
$
$
(5 )
$
(334 )
$
$
(2,357 )
$
$
$
$
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
143
Consolidated Statements of Cash Flows
For the year ended
(Millions of Canadian dollars)
October 31
2023
October 31
2022
Cash flows from operating activities
Net income
$
$
Adjustments for non-cash items and others
Provision for credit losses
Depreciation
Deferred income taxes
(995 )
Amortization and impairment of other intangibles
Net changes in investments in joint ventures and associates
(108 )
Losses (Gains) on investment securities
(193 )
(43 )
Losses (Gains) on disposition of business
(92 )
(100 )
Adjustments for net changes in operating assets and liabilities
Insurance claims and policy benefit liabilities
(1,305 )
Net change in accrued interest receivable and payable
Current income taxes
(986 )
(3,336 )
Derivative assets
(58,898 )
Derivative liabilities
(10,452 )
Trading securities
(41,946 )
(8,931 )
Loans, net of securitizations
(34,688 )
(102,653 )
Assets purchased under reverse repurchase agreements and securities borrowed
(22,346 )
(9,942 )
Obligations related to assets sold under repurchase agreements and securities loaned
Obligations related to securities sold short
(1,860 )
(2,330 )
Deposits, net of securitizations
Brokers and dealers receivable and payable
(2,444 )
Other
Net cash from (used in) operating activities
Cash flows from investing activities
Change in interest-bearing deposits with banks
(28,373 )
Proceeds from sales and maturities of investment securities
Purchases of investment securities
(202,456 )
(122,964 )
Net acquisitions of premises and equipment and other intangibles
(2,730 )
(2,500 )
Net proceeds from (cash transferred for) dispositions
(313 )
Cash used in acquisitions, net of cash acquired
(2,047 )
Net cash from (used in) investing activities
(28,265 )
(57,054 )
Cash flows from financing activities
Issuance of subordinated debentures
Repayment of subordinated debentures
(170 )
(192 )
Issue of common shares, net of issuance costs
Common shares purchased for cancellation
(5,426 )
Issue of preferred shares and other equity instruments, net of issuance costs
Redemption of preferred shares and other equity instruments
(155 )
Sales of treasury shares and other equity instruments
Purchases of treasury shares and other equity instruments
(4,075 )
(5,701 )
Dividends paid on shares and distributions paid on other equity instruments
(5,549 )
(6,960 )
Dividends/distributions paid to non-controlling interests
(21 )
(5 )
Change in short-term borrowings of subsidiaries
(5,102 )
Repayment of lease liabilities
(655 )
(629 )
Net cash from (used in) financing activities
(9,833 )
(2,185 )
Effect of exchange rate changes on cash and due from banks
(4,152 )
Net change in cash and due from banks
(10,408 )
(41,449 )
Cash and due from banks at beginning of period
(1)
Cash and due from banks at end of period
(1)
$
$
Cash flows from operating activities include:
Amount of interest paid
$
$
Amount of interest received
Amount of dividends received
Amount of income taxes paid
(1)
We are required to maintain balances due to regulatory requirements or contractual restrictions from central banks, other regulatory authorities, and other
counterparties. The total balances were $3 billion as at October 31, 2023 (October 31, 2022 – $2 billion; October 31, 2021 – $2 billion).
The accompanying notes are an integral part of these Consolidated Financial Statements.
144
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
General information
Banking, Wealth Management, Insurance and Capital Markets products and services on a global basis. Refer to Note 27 for
The parent bank, Royal Bank of Canada Schedule I Bank under the
Bank Act
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.
in Canadian dollars. Tabular information is stated in millions of dollars, except as noted. These Consolidated Financial
Statements also comply with Subsection 308 of the
Bank Act
(Canada), which states that, except as otherwise specified by the
Office of the Superintendent of Financial Institutions Canada (OSFI), our Consolidated Financial Statements are to be prepared in
accordance with IFRS. The accounting policies outlined in Note 2 have been consistently applied to all periods presented.
Summary of significant accounting policies, estimates and judgments
requirements prescribed by OSFI, are summarized below. These accounting policies conform, in all material respects, to IFRS.
In preparing our Consolidated Financial Statements, management is required to make subjective estimates and assumptions that
affect the reported amount of assets, liabilities, net income and related disclosures. Estimates made by management are based
on historical experience and other assumptions that are believed to be reasonable. Key sources of estimation uncertainty
include: determination of fair value of financial instruments, allowance for credit losses, insurance claims and policy benefit
liabilities, pensions and other post-employment benefits, income taxes, goodwill and other intangible assets, and provisions.
Accordingly, actual results may differ from these and other estimates thereby impacting our future Consolidated Financial
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
Note 8
Application of the effective interest method
Note 2
Fair value of financial instruments
Note 2
Note 3
Derecognition of financial assets
Note 2
Note 7
Allowance for credit losses
Note 2
Note 4
Note 5
Income taxes
Note 2
Note 22
Employee benefits
Note 2
Note 17
Provisions
Note 2
Note 24
Note 25
Goodwill and other intangibles
Note 2
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
exposed, or have rights, to variable returns from our involvement with the entity and have the ability to affect those returns
through our power over the investee. We have power over an entity when we have existing rights that give us the current ability
to direct the activities that most significantly affect the entity’s returns (relevant activities). Power may be determined on the
basis of voting rights or, in the case of structured entities, other contractual arrangements.
We are not deemed to control an entity when we exercise power over an entity as the agent of a third party or parties. In
determining whether we are acting as an agent, we consider the overall relationship between us, the investee and other parties
to the arrangement with respect to the following factors: (i) the scope of our decision-making power; (ii) the rights held by other
parties; (iii) the remuneration to which we are entitled; and (iv) our exposure to variability of returns.
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Note 2
Summary of significant accounting policies, estimates and judgments
(continued)
The determination of control is based on the current facts and circumstances and is continuously assessed. In some
circumstances, different factors and conditions may indicate that various parties control an entity depending on whether those
factors and conditions are assessed in isolation or in totality. Significant judgment is applied in determining whether we control
an entity, specifically, assessing whether we have substantive decision-making rights over the relevant activities and whether we
are exercising our power as a principal or an agent.
We consolidate all subsidiaries from the date we obtain control and cease consolidation when an entity is no longer
controlled by us. Our consolidation conclusions affect the classification and amount of assets, liabilities, revenues and expenses
reported in our Consolidated Financial Statements.
component of equity which is distinct from equity attributable to our shareholders. The net income attributable to
Our investments in associated corporations and limited partnerships over which we have significant influence are accounted for
using the equity method. The equity method is also applied to our interests in joint ventures over which we have joint control.
Under the equity method of accounting, investments are initially recorded at cost, and the carrying amount is increased or
decreased to recognize our share of the investee’s net profit or loss, including our proportionate share of the investee’s Other
Non-current assets (and disposal groups) are classified as held for sale if their carrying amounts will be recovered principally
through a sale transaction rather than through continuing use. This condition is satisfied when the asset is available for
immediate sale in its present condition, management is committed to the sale, and it is highly probable to occur within one year.
Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount
and fair value less costs to sell and if significant, are presented separately from other assets on our Consolidated Balance
Sheets.
A disposal group is classified as a discontinued operation if it meets the following conditions: (i) it is a component that can
be distinguished operationally and financially from the rest of our operations and (ii) it represents either a separate major line of
business or is part of a single coordinated plan to dispose of a separate major line of business or geographical area of
operations. Disposal groups classified as discontinued operations are presented separately from our continuing operations in
Financial assets are measured at initial recognition at fair value, and are classified and subsequently measured at fair value
through profit or loss (FVTPL), fair value through other comprehensive income (FVOCI) or amortized cost based on our business
model for managing the financial instruments and the contractual cash flow characteristics of the instrument.
Debt instruments are measured at amortized cost if both of the following conditions are met and the asset is not designated
as FVTPL: (a) the asset is held within a business model that is Held-to-Collect (HTC) as described below, and (b) the contractual
terms of the instrument give rise to cash flows that are solely payments of principal and interest on the principal amount
outstanding (SPPI).
Debt instruments are measured at FVOCI if both of the following conditions are met and the asset is not designated as
FVTPL: (a) the asset is held within a business model that is Held-to-Collect-and-Sell (HTC&S) as described below, and (b) the
contractual terms of the instrument give rise, on specified dates, to cash flows that are SPPI.
All other debt instruments are measured at FVTPL.
Equity instruments are measured at FVTPL, unless the asset is not held for trading purposes and we make an irrevocable
election to designate the asset as FVOCI. This election is made on an instrument-by-instrument basis.
Business model assessment
We determine our business models at the level that best reflects how we manage portfolios of financial assets to achieve our
business objectives. Judgment is used in determining our business models, which is supported by relevant, objective evidence
including:
•
How the economic activities of our businesses generate benefits, for example through trading revenue, enhancing yields
or hedging funding or other costs and how such economic activities are evaluated and reported to key management
personnel;
•
The significant risks affecting the performance of our businesses, for example, market risk, credit risk, or other risks as
described in the Risk Management section of the MD&A, and the activities undertaken to manage those risks;
•
Historical and future expectations of sales of the loans or securities portfolios managed as part of a business model;
and
•
The compensation structures for managers of our businesses, to the extent that these are directly linked to the
economic performance of the business model.
Our business models fall into three categories, which are indicative of the key strategies used to generate returns:
•
HTC: The objective of this business model is to hold loans and securities to collect contractual principal and interest
cash flows. Sales are incidental to this objective and are expected to be insignificant or infrequent.
•
HTC&S: Both collecting contractual cash flows and sales are integral to achieving the objective of the business model.
•
Other fair value business models: These business models are neither HTC nor HTC&S, and primarily represent business
models where assets are held-for-trading or managed on a fair value basis.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
147
SPPI assessment
Instruments held within a HTC or HTC&S business model are assessed to evaluate if their contractual cash flows are comprised
of solely payments of principal and interest. SPPI payments are those which would typically be expected from basic lending
arrangements. Principal amounts include par repayments from lending and financing arrangements, and interest primarily
relates to basic lending returns, including compensation for credit risk and the time value of money associated with the principal
amount outstanding over a period of time. Interest can also include other basic lending risks and costs (for example, liquidity
risk, servicing or administrative costs) associated with holding the financial asset for a period of time, and a profit margin.
Where the contractual terms introduce exposure to risk or variability of cash flows that are inconsistent with a basic lending
Trading securities include all securities that are classified as FVTPL by nature and securities designated as FVTPL. Obligations to
deliver trading securities sold but not yet purchased are recorded as liabilities and carried at fair value. Realized and unrealized
gains and losses on these securities are generally recorded in Non-interest income – Trading revenue or Non-interest income –
Other. Dividends and interest income accruing on Trading securities are recorded in Interest and dividend income. Interest and
dividends accrued on securities sold short are recorded in Interest expense.
Investment securities include all securities classified as FVOCI and amortized cost. All investment securities are initially
recorded at fair value and subsequently measured according to the respective classification.
Investment securities carried at amortized cost are measured using the effective interest method, and are presented net of
any allowance for credit losses, calculated in accordance with our policy for Allowance for credit losses, as described below.
Interest income, including the amortization of premiums and discounts on securities measured at amortized cost are recorded in
Interest and dividend income. Impairment gains or losses recognized on amortized cost securities are recorded in Provision for
credit losses (PCL). When a debt instrument measured at amortized cost is sold, the difference between the sale proceeds and
the amortized cost of the security at the time of the sale is recorded as Net gains on investment securities in Non-interest
income.
Debt securities carried at FVOCI are measured at fair value with unrealized gains and losses arising from changes in fair
value included in Other components of equity. Impairment gains and losses are included in PCL and correspondingly reduce the
accumulated changes in fair value included in Other components of equity. When a debt instrument measured at FVOCI is sold,
the cumulative gain or loss is reclassified from Other components of equity to Net gains on investment securities in Non-interest
income.
Equity securities carried at FVOCI are measured at fair value. Unrealized gains and losses arising from changes in fair value
are recorded in Other components of equity and not subsequently reclassified to profit or loss when realized. Dividends from
FVOCI equity securities are recognized in Interest and dividend income.
We account for all of our securities using settlement date accounting and changes in fair value between the trade date and
settlement date are reflected in income for securities measured at FVTPL, and changes in the fair value of securities measured at
FVOCI between the trade and settlement dates are recorded in OCI except for changes in foreign exchange rates on debt
A financial instrument with a reliably measurable fair value can be designated as FVTPL (the fair value option) on its initial
recognition even if the financial instrument was not acquired or incurred principally for the purpose of selling or repurchasing.
The fair value option can be used for financial assets if it eliminates or significantly reduces a measurement or recognition
inconsistency that would otherwise arise from measuring assets or liabilities, or recognizing related gains and losses on a
different basis (an accounting mismatch). The fair value option can be elected for financial liabilities if: (i) the election eliminates
an accounting mismatch; (ii) the financial liability is part of a portfolio that is managed on a fair value basis, in accordance with a
documented risk management or investment strategy; or (iii) there is an embedded derivative in the financial or non-financial
host contract and the derivative is not closely related to the host contract. These instruments cannot be reclassified out of the
FVTPL category while they are held or issued.
Financial assets designated as FVTPL are recorded at fair value and any unrealized gain or loss arising due to changes in fair value is
included in Non-interest income – Trading revenue or Non-interest income – Other, depending on our business purpose for holding the
financial asset.
Financial liabilities designated as FVTPL are recorded at fair value and fair value changes attributable to changes in our own
credit risk are recorded in OCI. Own credit risk amounts recognized in OCI will not be reclassified subsequently to net income.
The remaining fair value changes not attributable to changes in our own credit risk are recorded in Non-interest income – Trading
revenue or Non-interest income – Other, depending on our business purpose for holding the financial liability. Upon initial
recognition, if we determine that presenting the effects of own credit risk changes in OCI would create or enlarge an accounting
mismatch in net income, the full fair value change in our debt designated as FVTPL is recognized in net income. To make that
determination, we assess whether we expect that the effects of changes in the liability’s credit risk will be offset in profit or loss
by a change in the fair value of another financial instrument measured at FVTPL. Such an expectation is based on an economic
relationship between the characteristics of the liability and the characteristics of the other financial instrument. The
determination is made at initial recognition and is not reassessed. To determine the fair value adjustments on our debt
instruments designated as FVTPL, we calculate the present value of the instruments based on the contractual cash flows over the
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. We determine fair value by incorporating factors that
market participants would consider in setting a price, including commonly accepted valuation approaches.
The Board of Directors provides oversight on valuation of financial instruments, primarily through the Audit Committee and
Risk Committee. The Audit Committee reviews the presentation and disclosure of financial instruments that are measured at fair
value, while the Risk Committee assesses the adequacy of governance structures and control processes for the valuation of
these instruments.
We have established policies, procedures and controls for valuation methodologies and techniques to ensure that fair value
is reasonably estimated. Major valuation processes and controls include, but are not limited to, profit and loss decomposition,
independent price verification (IPV) and model validation standards. These control processes are managed by either Finance or
Group Risk Management and are independent of the relevant businesses and their trading functions. Profit and loss
decomposition is a process to explain the fair value changes of certain positions and is performed daily for trading portfolios. All
fair value instruments are subject to IPV, a process whereby trading function valuations are verified against external market
prices and other relevant market data. Market data sources include traded prices, brokers and price vendors. We give priority to
those third-party pricing services and prices having the highest and most consistent accuracy. The level of accuracy is
determined over time by comparing third-party price values to traders’ or system values, other pricing service values and, when
available, actual trade data. Quoted prices for identical instruments from pricing services or brokers are generally not adjusted
unless there are issues such as stale prices. If multiple quotes for identical instruments are received, fair value is based on an
average of the prices received or the quote from the most reliable vendor, after the outlier prices that fall outside of the pricing
range are removed. Other valuation techniques are used when a price or quote is not available. Some valuation processes use
models to determine fair value. We have a systematic and consistent approach to control the use of models. Valuation models
are approved for use within our model risk management framework. The framework addresses, among other things, model
development standards, validation processes and procedures and approval authorities. Model validation ensures that a model is
suitable for its intended use and sets parameters for its use. All models are revalidated regularly by qualified personnel who are
independent of the model design and development. Annually, our model risk profile is reported to the Board of Directors.
IFRS 13
Fair Value Measurement
permits an exception, through an accounting policy choice, to measure the fair value of a
portfolio of financial instruments on a net open risk position basis when certain criteria are met. We have elected to use this
policy choice to determine the fair value of certain portfolios of financial instruments, primarily derivatives, based on a net
exposure to market or credit risk.
We record valuation adjustments to appropriately reflect counterparty credit quality of our derivative portfolio, differences
between the actual counterparty collateral discount curve and standard overnight index swap (OIS) discounting for
collateralized derivatives, funding valuation adjustments (FVA) for uncollateralized and under-collateralized over-the-counter
(OTC) derivatives, unrealized gains or losses at inception of the transaction, bid-offer spreads, unobservable parameters and
model limitations. These adjustments may be subjective as they require significant judgment in the input selection, such as
implied probability of default (PD) and recovery rate, and are intended to arrive at a fair value that is determined based on
assumptions that market participants would use in pricing the financial instrument. The ultimate realized price for a transaction
may differ from its fair recorded value previously estimated using management judgment.
Valuation adjustments are recorded for the credit risk of our derivative portfolios in order to arrive at their fair values. Credit
valuation adjustments (CVA) take into account our counterparties’ creditworthiness, the current and potential future
mark-to-market of transactions and the effects of credit mitigants such as master netting and collateral agreements. CVA
amounts are derived from estimates of exposure at default (EAD), PD, recovery rates on a counterparty basis and market and
credit factor correlations. EAD is the value of expected derivative related assets and liabilities at the time of default, estimated
through modelling using underlying risk factors. PD is implied from the market prices for credit protection and the credit ratings
of the counterparty. When market data is unavailable, it is estimated by incorporating assumptions and adjustments that market
participants would use for determining fair value using these inputs. Correlation is the statistical measure of how credit and
market factors may move in relation to one another. Correlation is estimated using historical data. CVA is calculated daily and
changes are recorded in Non-interest income – Trading revenue.
FVA is also calculated to incorporate the cost and benefit of funding in the valuation of uncollateralized and under-
collateralized OTC derivatives. Future expected cash flows of these derivatives are discounted to reflect the cost and benefit of
funding the derivatives by using a funding curve, implied volatilities and correlations as inputs.
Where required, a valuation adjustment is made to reflect the unrealized gain or loss at inception of a financial instrument
contract where the fair value of that financial instrument is not obtained from a quoted market price or cannot be evidenced by
other observable market transactions based on a valuation technique incorporating observable market data.
A bid-offer valuation adjustment is required when a financial instrument is valued at the mid-market price, instead of the bid
or offer price for asset or liability positions, respectively. The valuation adjustment takes into account the spread from the
mid-market price to either the bid or offer price.
Some valuation models require parameter calibration from such factors as market observable option prices. The calibration
of parameters may be sensitive to factors such as the choice of instruments or optimization methodology. A valuation
adjustment is also estimated to mitigate the uncertainties of parameter calibration and model limitations.
In determining fair value, a hierarchy is used which prioritizes the inputs to valuation techniques. The fair value hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). Determination of fair value based on this hierarchy requires the use of observable
market data whenever available. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities
that we have the ability to access at the measurement date. Level 2 inputs include quoted prices for similar assets or liabilities in
active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model inputs that are
either observable, or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 inputs include one or more inputs that are unobservable and significant to the fair value of the asset or liability.
Unobservable inputs are used to measure fair value to the extent that observable inputs are not available at the measurement
date. The availability of inputs for valuation may affect the selection of valuation techniques. The classification of a financial
instrument in the fair value hierarchy for disclosure purposes is based upon the lowest level of input that is significant to the
measurement of fair value.
Where observable prices or inputs are not available, management judgment is required to determine fair values by
assessing other relevant sources of information such as historical data, proxy information from similar transactions, and through
extrapolation and interpolation techniques. For more complex or illiquid instruments, significant judgment is required 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. 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
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Consolidated Financial Statements
Note 2
Summary of significant accounting policies, estimates and judgments
(continued)
which to determine the level at which the transaction would occur under normal business circumstances. Appropriate parameter
uncertainty and market risk valuation adjustments for such inputs and other model risk valuation adjustments are assessed in all
Loans are debt instruments recognized initially at fair value and are subsequently measured in accordance with the
Classification of financial assets policy provided above. The majority of our loans are carried at amortized cost using the
effective interest method, which represents the gross carrying amount less allowance for credit losses.
Interest on loans is recognized in Interest income using the effective interest method. The estimated future cash flows used
in this calculation include those determined by the contractual term of the asset and all fees that are considered to be integral to
the effective interest rate. Also included in this amount are transaction costs and all other premiums or discounts. Fees that
relate to activities such as originating, restructuring or renegotiating loans are deferred and recognized as Interest income over
the expected term of such loans using the effective interest method. Where there is a reasonable expectation that a loan will be
originated, commitment and standby fees are also recognized as interest income over the expected term of the resulting loans
using the effective interest method. Otherwise, such fees are recorded as other liabilities and amortized into Non-interest income
over the commitment or standby period. Future prepayment fees on mortgage loans are not included as part of the effective
interest rate at origination. If prepayment fees are received on a renewal of a mortgage loan before maturity, the fee is included
as part of the effective interest rate, and if not renewed, the prepayment fee is recognized in interest income at the prepayment
date.
For loans carried at amortized cost or FVOCI, impairment losses are recognized at each balance sheet date in accordance
An allowance for credit losses (ACL) is established for all financial assets, except for financial assets classified or designated as
FVTPL and equity securities designated as FVOCI, which are not subject to impairment assessment. Assets subject to impairment
assessment include loans, debt securities, interest-bearing deposits with banks, customers’ liability under acceptances, accounts
and accrued interest receivable, and finance and operating lease receivables. ACL on loans measured at amortized cost is
presented in Allowance for loan losses. ACL on debt securities measured at FVOCI is presented in Other components of equity.
Other financial assets carried at amortized cost are presented net of ACL on our Consolidated Balance Sheets.
Off-balance sheet items subject to impairment assessment include financial guarantees and undrawn loan commitments.
ACL on off-balance sheet items is separately calculated and included in Other Liabilities – Provisions.
We measure the ACL on each balance sheet date according to a three-stage expected credit loss impairment model:
•
Performing financial assets
•
Stage 1 – From initial recognition of a financial asset to the date on which the asset has experienced a significant
increase in credit risk relative to its initial recognition, a loss allowance is recognized equal to the credit losses
expected to result from defaults occurring over the 12 months following the reporting date.
•
Stage 2 – Following a significant increase in credit risk relative to the initial recognition of the financial asset, a loss
allowance is recognized equal to the credit losses expected over the remaining lifetime of the asset.
•
Impaired financial assets
•
Stage 3 – When a financial asset is considered to be credit-impaired, a loss allowance is recognized equal to credit
losses expected over the remaining lifetime of the asset. Interest income is calculated based on the carrying
amount of the asset, net of the loss allowance, rather than on its gross carrying amount.
The ACL is a discounted probability-weighted estimate of the cash shortfalls expected to result from defaults over the relevant
time horizon. For loan commitments, credit loss estimates consider the portion of the commitment that is expected to be drawn
over the relevant time period. For financial guarantees, credit loss estimates are based on the expected payments required under
the guarantee contract. For finance lease receivables, credit loss estimates are based on cash flows consistent with the cash
flows used in measuring the lease receivable.
Increases or decreases in the required ACL attributable to model changes and new originations, sales or maturities, and
changes in risk, parameters and exposures due to changes in loss expectations or stage transfers are recorded in PCL. Write-offs
and recoveries of amounts previously written off are recorded against ACL.
The ACL represents an unbiased estimate of expected credit losses on our financial assets as at the balance sheet date.
Judgment is required in making assumptions and estimations when calculating the ACL, including movements between the three
stages and the application of forward-looking information. The underlying assumptions and estimates may result in changes to
the provisions from period to period that significantly affect our results of operations.
Measurement of expected credit losses
Expected credit losses are based on a range of possible outcomes and consider all available reasonable and supportable
information, including internal and external ratings, historical credit loss experience and expectations about future cash flows.
The measurement of expected credit losses is based primarily on the product of the instrument’s PD, loss given default (LGD),
and EAD discounted to the reporting date. The main difference between Stage 1 and Stage 2 expected credit losses for performing
financial assets is the respective calculation horizon. Stage 1 estimates project PD, LGD and EAD over a maximum period of
12 months while Stage 2 estimates project PD, LGD and EAD over the remaining lifetime of the instrument.
An expected credit loss estimate is produced for each individual exposure. Relevant parameters are modelled on a collective
basis using portfolio segmentation that allows for appropriate incorporation of forward-looking information. To reflect other
characteristics that are not already considered through modelling, expert credit judgment is exercised in determining the final
expected credit losses.
For a small percentage of our portfolios which lack detailed historical information and/or loss experience, we apply
simplified measurement approaches that may differ from what is described above. These approaches have been designed to
maximize the available information that is reliable and supportable for each portfolio and may be collective in nature.
Expected credit losses are discounted to the reporting period date using the effective interest rate.
(continued)
Note 2
Summary of significant accounting policies, estimates and judgments
Expected life
For instruments in Stage 2 or Stage 3, loss allowances reflect expected credit losses over the expected remaining lifetime of the
instrument. For most instruments, the expected life is limited to the remaining contractual life.
An exemption is provided for certain instruments with the following characteristics: (a) the instrument includes both a loan
and undrawn commitment component; (b) we have the contractual ability to demand repayment and cancel the undrawn
commitment; and (c) our exposure to credit losses is not limited to the contractual notice period. For products in scope of this
exemption, the expected life may exceed the remaining contractual life and is the period over which our exposure to credit losses
is not mitigated by our normal credit risk management actions. This period varies by product and risk category and is estimated
based on our historical experience with similar exposures and consideration of credit risk management actions taken as part of
our regular credit review cycle. Products in scope of this exemption include credit cards, overdraft balances and certain revolving
lines of credit. Judgment is required in determining the instruments in scope for this exemption and estimating the appropriate
remaining life based on our historical experience and credit risk mitigation practices.
Assessment of significant increase in credit risk
The assessment of significant increase in credit risk requires significant judgment. Movements between Stage 1 and Stage 2 are
based on whether an instrument’s credit risk as at the reporting date has increased significantly relative to the date it was
initially recognized. For the purposes of this assessment, credit risk is based on an instrument’s lifetime PD, not the losses we
expect to incur. The assessment is generally performed at the instrument level.
Our assessment of significant increases in credit risk is performed at least quarterly based on three factors. If any of the
following factors indicates that a significant increase in credit risk has occurred, the instrument is moved from Stage 1 to Stage 2:
(1)
We have established thresholds for significant increases in credit risk based on both a percentage and absolute change
in lifetime PD relative to initial recognition. For our wholesale portfolio, a decrease in the borrower’s risk rating is also
required to determine that credit risk has increased significantly.
(2)
Additional qualitative reviews may be performed, as necessary, to assess the staging results, which may lead to
adjustments to better reflect the positions whose credit risk has increased significantly. These reviews are completed at
both the individual borrower levels and the portfolio level and may result in an instrument, a portfolio or a portion of a
portfolio moving from Stage 1 to Stage 2.
(3)
Instruments which are 30 days past due are generally considered to have experienced a significant increase in credit
risk, even if our other metrics do not indicate that a significant increase in credit risk has occurred.
The thresholds for movement between Stage 1 and Stage 2 are symmetrical. After a financial asset has transferred to Stage 2, if
its credit risk is no longer considered to have significantly increased relative to its initial recognition, the financial asset will
move back to Stage 1.
For certain instruments with low credit risk as at the reporting date, it is presumed that credit risk has not increased
significantly relative to initial recognition. Credit risk is considered to be low if the instrument has a low risk of default, and the
borrower has the ability to fulfill their contractual obligations both in the near term and in the longer term, including periods of
adverse changes in the economic or business environment. Certain interest-bearing deposits with banks, assets purchased under
reverse repurchase agreements, insurance policy loans, and liquidity facilities extended to our multi-seller conduits have been
identified as having low credit risk.
Use of forward-looking information
The measurement of expected credit losses for each stage and the assessment of significant increase in credit risk considers
information about past events and current conditions as well as reasonable and supportable projections of future events and
economic conditions. The estimation and application of forward-looking information requires significant judgment.
The PD, LGD and EAD inputs used to estimate Stage 1 and Stage 2 credit loss allowances are modelled based on the
macroeconomic variables (or changes in macroeconomic variables) that are most closely correlated with credit losses in the
relevant portfolio. Each macroeconomic scenario used in our expected credit loss calculation includes a projection of all
relevant macroeconomic variables used in our models for a five-year period, subsequently reverting to long-run averages.
Macroeconomic variables used in our expected credit loss models include, but are not limited to, unemployment rates, gross
domestic product growth rates, equity return indices, commodity prices, and Canadian housing prices. Depending on their usage
in the models, macroeconomic variables may be projected at a country, province/state or more granular level.
Our estimation of expected credit losses in Stage 1 and Stage 2 is a discounted probability-weighted estimate that considers
a minimum of three future macroeconomic scenarios. Our base case scenario is based on macroeconomic forecasts published
by our internal economics group. The published forecasts are developed from models based on historical macroeconomic data,
derived from public sources and financial markets. Upside and downside scenarios vary relative to our base case scenario based
on reasonably possible alternative macroeconomic conditions. Additional and more severe downside scenarios are designed to
capture a broader range of potential credit losses in certain sectors. Scenario design, including the identification of additional
downside scenarios, occurs at least on an annual basis and more frequently if conditions warrant.
Scenarios are designed to capture a wide range of possible outcomes and weighted according to our best estimate of the
relative likelihood of the range of outcomes that each scenario represents. Scenario weights take into account historical
frequency, current trends, and forward-looking conditions and are updated on a quarterly basis. All scenarios considered are
applied to all portfolios subject to expected credit losses with the same probabilities.
Our assessment of significant increases in credit risk is based on changes in probability-weighted forward-looking lifetime
PDs as at the reporting date, using the same macroeconomic scenarios as the calculation of expected credit losses.
Definition of default
The definition of default used in the measurement of expected credit losses is consistent with the definition of default used for
our internal credit risk management purposes. Our definition of default may differ across products and consider both
quantitative and qualitative factors, such as the terms of financial covenants and days past due. For retail and wholesale
borrowers, except as detailed below, default occurs when the borrower is more than 90 days past due on any material obligation
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Consolidated Financial Statements
to us, and/or we consider the borrower unlikely to make their payments in full without recourse action on our part, such as taking
formal possession of any collateral held. For certain credit card balances, default occurs when payments are 180 days past due.
For these balances, the use of a period in excess of 90 days past due is reasonable and supported by observable data on write-off
and recovery rates experienced on historical credit card portfolios. The definition of default used is applied consistently from
period to period and to all financial instruments unless it can be demonstrated that circumstances have changed such that
another definition of default is more appropriate.
Credit-impaired financial assets (Stage 3)
Financial assets are assessed for credit-impairment at each balance sheet date and more frequently when circumstances
warrant further assessment. Evidence of credit-impairment may include indications that the borrower is experiencing significant
financial difficulty, probability of bankruptcy or other financial reorganization, as well as a measurable decrease in the estimated
future cash flows evidenced by the adverse changes in the payments status of the borrower or economic conditions that
correlate with defaults. An asset that is in Stage 3 will move back to Stage 2 when, as at the reporting date, it is no longer
considered to be credit-impaired. The asset will transfer back to Stage 1 when its credit risk at the reporting date is no longer
considered to have increased significantly from initial recognition, which could occur during the same reporting period as the
transfer from Stage 3 to Stage 2.
When a financial asset has been identified as credit-impaired, expected credit losses are measured as the difference
between the asset’s gross carrying amount and the present value of estimated future cash flows discounted at the instrument’s
original effective interest rate. For impaired financial assets with drawn and undrawn components, expected credit losses also
reflect any credit losses related to the portion of the loan commitment that is expected to be drawn down over the remaining life
of the instrument.
When a financial asset is credit-impaired, interest ceases to be recognized on the regular accrual basis, which accrues
income based on the gross carrying amount of the asset. Rather, interest income is calculated by applying the original effective
interest rate to the amortized cost of the asset, which is the gross carrying amount less the related ACL.
ACL for credit-impaired loans in Stage 3 are established at the borrower level, where losses related to impaired loans are
identified on individually significant loans, or collectively assessed and determined through the use of portfolio-based rates,
without reference to particular loans.
Individually assessed loans (Stage 3)
When individually significant loans are identified as impaired, we reduce the carrying value of the loans to their estimated
realizable value by recording an individually assessed ACL to cover identified credit losses. The individually assessed ACL
reflects the expected amount of principal and interest calculated under the terms of the original loan agreement that will not be
recovered, and the impact of time delays in collecting principal and/or interest (time value of money). The estimated realizable
value for each individually significant loan is the present value of expected future cash flows discounted using the original
effective interest rate for each loan. When the amounts and timing of future cash flows cannot be estimated with reasonable
reliability, the estimated realizable amount may be determined using observable market prices for comparable loans, the fair
value of collateral underlying the loans, and other reasonable and supported methods based on management judgment.
Individually-assessed allowances are established in consideration of a range of possible outcomes, which may include
macroeconomic or non-macroeconomic scenarios, to the extent relevant to the circumstances of the specific borrower being
assessed. Assumptions used in estimating expected future cash flows reflect current and expected future economic conditions
and are generally consistent with those used in Stage 1 and Stage 2 measurement.
Significant judgment is required in assessing evidence of credit-impairment and estimation of the amount and timing of
future cash flows when determining expected credit losses. Changes in the amount expected to be recovered would have a direct
impact on PCL and may result in a change in the ACL.
Collectively assessed loans (Stage 3)
Loans that are collectively assessed are grouped on the basis of similar risk characteristics, taking into account loan type,
industry, geographic location, collateral type, past due status and other relevant factors.
The collectively-assessed ACL reflects: (i) the expected amount of principal and interest calculated under the terms of the
original loan agreement that will not be recovered, and (ii) the impact of time delays in collecting principal and/or interest (time
value of money).
The expected principal and interest collection is estimated on a portfolio basis and references historical loss experience of
comparable portfolios with similar credit risk characteristics, adjusted for the current environment and expected future
conditions. A portfolio specific coverage ratio is applied against the impaired loan balance in determining the collectively-
assessed ACL. The time value of money component is calculated by using the discount factors applied to groups of loans sharing
common characteristics. The discount factors represent the expected recovery pattern of the comparable group of loans, and
reflect the historical experience of these groups adjusted for current and expected future economic conditions and/or industry
factors. Significant judgment is required in assessing evidence of impairment and estimation of the amount and timing of future
cash flows when determining expected credit losses. Changes in the amount expected to be recovered would have a direct
impact on PCL and may result in a change in the ACL.
Write-off of loans
Loans and the related ACL are written off, either partially or in full, when there is no realistic prospect of recovery. Where loans
are secured, they are generally written off after receipt of any proceeds from the realization of collateral. In circumstances where
the net realizable value of any collateral has been determined and there is no reasonable expectation of further recovery, write
off may be earlier. For credit cards, the balances and related ACL are generally written off when payment is 180 days past due.
Personal loans are generally written off at 150 days past due.
Modifications
The original terms of a financial asset may be renegotiated or otherwise modified, resulting in changes to the contractual terms
of the financial asset that affect the contractual cash flows. The treatment of such modifications is primarily based on the
process undertaken to execute the renegotiation and the nature and extent of the expected changes. In the normal course of
business, modifications which are performed for credit reasons, primarily related to troubled debt restructurings, are generally
Consolidated Financial Statements
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152
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 2
Summary of significant accounting policies, estimates and judgments
(continued)
treated as modifications of the original financial asset. Modifications which are performed for other than credit reasons are
generally considered to be an expiry of the original cash flows; accordingly, such renegotiations are treated as a derecognition of
the original financial asset and recognition of a new financial asset.
If a modification of terms does not result in derecognition of the financial asset, the carrying amount of the financial asset is
recalculated as the present value of the renegotiated or modified contractual cash flows, discounted at the original effective
interest rate and a gain or loss is recognized. The financial asset continues to be subject to the same assessments for significant
increase in credit risk relative to initial recognition and credit-impairment, as described above. A modified financial asset will
transfer out of Stage 3 if the conditions that led to it being identified as credit-impaired are no longer present and relate
objectively to an event occurring after the original credit-impairment was recognized. A modified financial asset will transfer out
of Stage 2 when it no longer satisfies the relative thresholds set to identify significant increases in credit risk, which are based on
changes in its lifetime PD, days past due and other qualitative considerations. The financial asset continues to be monitored for
significant increases in credit risk and credit-impairment.
If a modification of terms results in derecognition of the original financial asset and recognition of the new financial asset,
the new financial asset will generally be recorded in Stage 1, unless it is determined to be credit-impaired at the time of the
renegotiation. For the purposes of assessing for significant increases in credit risk, the date of initial recognition for the new
When derivatives are embedded in other financial instruments or host contracts, such combinations are known as hybrid
instruments. Some of the cash flows of a hybrid instrument vary in a way similar to a stand-alone derivative. If the host contract
is a financial asset within the scope of IFRS 9
Financial Instruments
(IFRS 9), the classification and measurement criteria are
applied to the entire hybrid instrument as described in the Classification of financial assets section of Note 2. If the host contract
is a financial liability or an asset that is not within the scope of IFRS 9, embedded derivatives are separately recognized if the
economic characteristics and risks of the embedded derivative are not clearly and closely related to the host contract, unless an
election has been made to elect the fair value option, as described above. The host contract is accounted for in accordance with
the relevant standards.
Derivatives are primarily used in trading activities. Derivatives are also used to manage our exposure to interest, currency,
credit and other market risks. The most frequently used derivative products are interest rate and foreign exchange swaps,
options, futures and forward rate agreements, equity swaps and credit derivatives. All derivative instruments are recorded on our
Consolidated Balance Sheets at fair value.
When derivatives are used in trading activities, the realized and unrealized gains and losses on these derivatives are
recognized in Trading revenue in Non-interest income. Derivatives with positive fair values are reported as Derivative assets and
derivatives with negative fair values are reported as Derivative liabilities. In accordance with our policy for offsetting financial
assets and financial liabilities, the net fair value of certain derivative assets and liabilities are reported as an asset or liability, as
appropriate. Valuation adjustments are included in the fair value of Derivative assets and Derivative liabilities. Premiums paid
and premiums received are shown in Derivative assets and Derivative liabilities, respectively.
When derivatives are used to manage our own exposures, we determine for each derivative whether hedge accounting can
Financial assets are derecognized from our Consolidated Balance Sheets when our contractual rights to the cash flows from the
assets have expired, when we retain the rights to receive the cash flows of the assets but assume an obligation to pay those cash
flows to a third party subject to certain pass-through requirements or when we transfer our contractual rights to receive the cash
flows and substantially all of the risks and rewards of the assets have been transferred. When we retain substantially all of the
risks and rewards of the transferred assets, the transferred assets are not derecognized from our Consolidated Balance Sheets
and are accounted for as secured financing transactions. When we neither retain nor transfer substantially all risks and rewards
of ownership of the assets, we derecognize the assets if control over the assets is relinquished. If we retain control over the
transferred assets, we continue to recognize the transferred assets to the extent of our continuing involvement.
Management judgment is applied in determining whether the contractual rights to the cash flows from the transferred assets
have expired or whether we retain the rights to receive cash flows on the assets but assume an obligation to pay for those cash
flows. We derecognize transferred financial assets if we transfer substantially all the risks and rewards of the ownership in the
assets. When assessing whether we have transferred substantially all of the risk and rewards of the transferred assets,
management considers the Bank’s exposure before and after the transfer with the variability in the amount and timing of the net
cash flows of the transferred assets. In transfers in which we retain the servicing rights, management has applied judgment in
assessing the benefits of servicing against market expectations. When the benefits of servicing are greater than fair value, a
servicing asset is recognized in Other assets in our Consolidated Balance Sheets. When the benefits of servicing are less than fair
value, a servicing liability is recognized in Other liabilities in our Consolidated Balance Sheets.
Derecognition of financial liabilities
We derecognize a financial liability from our Consolidated Balance Sheets when our obligation specified in the contract expires,
or is discharged or cancelled. We recognize the difference between the carrying amount of a financial liability transferred and the
Interest is recognized in Interest income and Interest expense in the Consolidated Statements of Income for all interest-bearing
financial instruments. The effective interest rate is the rate that discounts estimated future cash flows over the expected life of
the financial asset or liability to the net carrying amount upon initial recognition. Significant judgment is applied in determining
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
153
Dividend income is recognized when the right to receive payment is established. This is the ex-dividend date for listed equity
Transaction costs are expensed as incurred for financial instruments classified or designated as FVTPL. For other financial
instruments, transaction costs are capitalized on initial recognition. For financial assets and financial liabilities measured at
amortized cost and debt financial assets measured at FVOCI, capitalized transaction costs are amortized through net income
Financial assets and financial liabilities are offset on the Consolidated Balance Sheets when there exists both a legally
enforceable right to offset the recognized amounts and an intention to settle on a net basis, or realize the asset and settle the
We purchase securities under agreements to resell (reverse repurchase agreements) and take possession of these securities. We
monitor the market value of the securities purchased and additional collateral is obtained when appropriate. We have the right
to liquidate the collateral held in the event of counterparty default. Reverse repurchase agreements are treated as collateralized
lending transactions. We also sell securities under agreements to repurchase (repurchase agreements), which are treated as
collateralized borrowing transactions. The securities received under reverse repurchase agreements and securities delivered
under repurchase agreements are not recognized on, or derecognized from, our Consolidated Balance Sheets, respectively,
unless the risks and rewards of ownership are obtained or relinquished.
Reverse repurchase agreements and repurchase agreements are carried on our Consolidated Balance Sheets at the
amounts at which the securities were initially acquired or sold, except when they are classified or designated as FVTPL and are
recorded at fair value. Interest earned on reverse repurchase agreements is included in Interest income, and interest incurred on
repurchase agreements is included in Interest expense in our Consolidated Statements of Income. Changes in fair value for
reverse repurchase agreements and repurchase agreements classified or designated as FVTPL are included in Trading revenue or
We have elected to continue to apply the hedge accounting principles under IAS 39 instead of those under IFRS 9.
We use derivatives and non-derivatives in our hedging strategies to manage our exposure to interest rate, currency, credit
and other market risks. Where hedge accounting can be applied, a hedge relationship is designated and documented at inception
to detail the particular risk management objective and strategy for undertaking the hedge transaction. The documentation
identifies the specific asset, liability or anticipated cash flows being hedged, the risk that is being hedged, the type of hedging
instrument used and how effectiveness will be assessed. We assess, both at the inception of the hedge and on an ongoing basis,
whether the hedging instruments are ‘highly effective’ in offsetting changes in the fair value or cash flows of the hedged items. A
hedge is regarded as highly effective only if the following criteria are met: (i) at inception of the hedge and throughout its life, the
hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk,
and (ii) actual results of the hedge are within a pre-determined range. We perform effectiveness testing to demonstrate that the
relationship has been and is expected to be effective over the remaining term of the hedge. In the case of hedging a forecast
transaction, the transaction must have a high probability of occurring and must present an exposure to variations in cash flows
that could ultimately affect the reported net profit or loss. Hedge accounting is discontinued when it is determined that the
hedging instrument is no longer effective as a hedge, the hedging instrument or hedged item is terminated or sold, or the forecast
transaction is no longer deemed highly probable. Refer to Note 9 for the fair value of derivatives and non-derivative instruments
categorized by their hedging relationships, as well as derivatives that are not designated in hedging relationships.
Until the hedging relationships impacted by the Interest rate benchmark reform (the Reform) fully transition to alternative
benchmark rates (ABRs), our prospective effectiveness testing is based on existing hedged cash flows or hedged risks and any
ineffectiveness arising from retrospective testing does not result in a discontinuation of the hedge. Additionally, effectiveness
testing is applied separately to hedged items referencing ABRs and hedged items referencing interbank offered rates (IBORs),
which include USD London Interbank Offered Rate (USD LIBOR) and Canadian Dollar Offered Rate (CDOR), in accordance with
the Phase 2 amendments to IFRS 9
Financial Instruments
, IAS 39
Financial Instruments: Recognition and Measurement
, IFRS 7
Financial Instruments: Disclosures
, IFRS 4
Insurance contracts
, and IFRS 16
Leases
(the Amendments). Subsequently, when these
relationships fully transition to ABRs, and provided qualifying criteria are met, we will amend the related hedge documentation
for the ABR risk, including consequential changes to the description of the hedging instrument(s), the hedged item(s), and the
Fair value hedges
In a fair value hedging relationship, the carrying value of the hedged item is adjusted for changes in fair value attributable to the
hedged risk and recognized in Non-interest income. Changes in fair value of the hedged item, to the extent that the hedging
relationship is effective, are offset by changes in the fair value of the hedging derivative, which are also recognized in
Non-interest income. When hedge accounting is discontinued, the carrying value of the hedged item is no longer adjusted and the
cumulative fair value adjustments to the carrying value of the hedged items are amortized to Net income over the expected
remaining life of the hedged items.
We predominantly use interest rate swaps to hedge our exposure to changes in a fixed interest rate instrument’s fair value
caused by changes in interest rates. Until the hedging relationships impacted by the Reform fully transition to ABRs, we apply
hedge accounting to IBOR rates which may not be contractually specified when that rate is separately identifiable and reliably
measurable at inception of the hedge relationship.
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Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 2
Summary of significant accounting policies, estimates and judgments
(continued)
Cash flow hedges
In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging derivative, net of taxes, is
recognized in OCI and reclassified to profit or loss as the associated hedged forecast transaction occurs, while the ineffective
portion is recognized in Non-interest income. When hedge accounting is discontinued, the cumulative amounts previously
recognized in OCI are reclassified to Net interest income during the periods when the variability in the cash flows of the hedged
item affects Net interest income. Unrealized gains and losses on derivatives are reclassified immediately to Net income when the
hedged item is sold or terminated early, or when the forecast transaction is no longer expected to occur.
We predominantly use interest rate swaps to hedge the variability in cash flows related to a variable-rate asset or liability.
Until the hedging relationships impacted by the Reform fully transition to ABRs, we treat the highly probable hedged IBORs based
cash flows of groups of similar assets or liabilities with similar risk characteristics as unchanged as a result of the Reform. In
addition, associated cash flow hedge reserves are not recycled into net income solely due to changes related to the transition
from IBORs to ABRs. Subsequently, when some items in the group transition to ABRs before other items, the individual hedged
items are allocated to subgroups based on the benchmark interest rate being hedged. We test hedge effectiveness based on the
defined subgroups, in accordance with the Amendments, if eligibility requirements are met. If a subgroup fails the eligibility
requirements, we would discontinue hedge accounting prospectively for the hedging relationship in its entirety.
Net investment hedges
In hedging our foreign currency exposure to a net investment in a foreign operation, the effective portion of foreign exchange
gains and losses on the hedging instruments, net of applicable taxes, is recognized in OCI and the ineffective portion is
recognized in Non-interest income. The amounts, or a portion thereof, previously recognized in Other components of equity are
recognized in Net income on the disposal, or partial disposal, of the foreign operation.
We use foreign exchange contracts and foreign currency-denominated liabilities to manage our foreign currency exposures
Financial guarantee contracts are contracts that contingently require us to make specified payments (in cash, other assets, our
own shares or provision of services) to reimburse the holder for a loss it incurs because a specified debtor fails to make payment
when due in accordance with the original or modified terms of a debt instrument. Liabilities are recognized on our Consolidated
Balance Sheets at the inception of a guarantee for the fair value of the obligation undertaken in issuing the guarantee. Financial
guarantees are subsequently remeasured at the higher of (i) the amount of expected credit losses and (ii) the amount initially
recognized less, when appropriate, the cumulative amount of income recognized.
If the financial guarantee contract meets the definition of a derivative, it is measured at fair value at each balance sheet
Premiums from long-duration contracts, primarily life, health and annuity insurance (life insurance), are recognized when due in
Non-interest income – Insurance premiums, investment and fee income. Premiums from short-duration contracts, primarily
property and casualty, and fees for administrative services are recognized in Insurance premiums, investment and fee income
over the related contract period. Unearned premiums of the short-duration contracts, representing the unexpired portion of
premiums, are reported in Other liabilities. Investments made by our insurance operations are classified as FVOCI instruments
and amortized cost instruments, except for investments supporting the policy benefit liabilities on life insurance contracts and a
portion of property and casualty contracts. These are designated as FVTPL with changes in fair value reported in Insurance
premiums, investment and fee income.
Insurance claims and policy benefit liabilities represent current claims and estimates for future insurance policy benefits.
Liabilities for life insurance contracts are determined using the Canadian Asset Liability Method (CALM), which incorporates
assumptions for mortality, morbidity, policy lapses and surrenders, investment yields, policy dividends, operating and policy
maintenance expenses and provisions for adverse deviation. These assumptions are reviewed at least annually and updated in
response to actual experience and market conditions. Liabilities for property and casualty insurance represent estimated
provisions for reported and unreported claims. Liabilities for life and property and casualty insurance are included in Insurance
claims and policy benefit liabilities. Changes in Insurance claims and policy benefit liabilities are included in the Insurance
policyholder benefits, claims and acquisition expense in our Consolidated Statements of Income in the period in which the
estimates change.
Premiums ceded for reinsurance and reinsurance recoveries on policyholder benefits and claims incurred are reported in
income and expense as appropriate. Reinsurance recoverables, which relate to paid benefits and unpaid claims, are included in
Other assets.
Acquisition costs for new insurance contracts consist of commissions, premium taxes, certain underwriting costs and other
costs that vary with the acquisition of new contracts. Deferred acquisition costs for life insurance products are implicitly
recognized in Insurance claims and policy benefit liabilities by CALM. For property and casualty insurance, these costs are
classified as Other assets and amortized over the policy term.
Segregated funds are lines of business in which we issue an insurance contract where the benefit amount is directly linked to
the market value of the investments held in the underlying fund. The contractual arrangement is such that the underlying
segregated fund assets are registered in our name but the segregated fund policyholders bear the risks and rewards of the funds’
investment performance. Liabilities for these contracts are calculated based on contractual obligations using actuarial
assumptions and are at least equivalent to the surrender or transfer value calculated by reference to the value of the relevant
underlying funds or indices. Segregated funds’ assets and liabilities are separately presented on our Consolidated Balance
Sheets. As the segregated fund policyholders bear the risks and rewards of the funds’ performance, investment income earned by
the segregated funds and expenses incurred by the segregated funds are offset and are not separately presented in our
Consolidated Statements of Income. Fee income we earn from segregated funds includes management fees, mortality, policy
administration and surrender charges, and these fees are recorded in Non-interest income – Insurance premiums, investment
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
155
and fee income. We provide minimum death benefit and maturity value guarantees on segregated funds. The liability associated
with these minimum guarantees is recorded in Insurance claims and policy benefit liabilities.
Liability adequacy tests are performed for all insurance contract portfolios at each balance sheet date to ensure the
adequacy of insurance contract liabilities. Current best estimates of future contractual cash flows, claims handling and
administration costs, and investment returns from the assets backing the liabilities are taken into account in the tests. When the
test results indicate that there is a deficiency in liabilities, the deficiency is charged immediately to our Consolidated Statements
of Income by writing down the deferred acquisition costs in Other assets and/or increasing Insurance claims and policy benefit
Our defined benefit pension expense, which is included in Non-interest expense – Human resources, consists of the cost of
employee pension benefits for the current year’s service, net interest on the net defined benefit liability (asset), past service cost
and gains or losses on settlement. Remeasurements of the net defined benefit obligation, which comprise actuarial gains and
losses and return on plan assets (excluding amounts included in net interest on the net defined benefit liability), are recognized
immediately in OCI in the period in which they occur. Actuarial gains and losses comprise experience adjustments (the effects of
differences between the previous actuarial assumptions and what has actually occurred), as well as the effects of changes in
actuarial assumptions. Amounts recognized in OCI will not be reclassified subsequently to net income. Past service cost is the
change in the present value of the defined benefit obligation resulting from a plan amendment or curtailment and is charged
immediately to income.
For each defined benefit pension plan, we recognize the present value of our defined benefit obligations less the fair value of
the plan assets as a defined benefit liability reported in Other liabilities – Employee benefit liabilities on our Consolidated
Balance Sheets. For plans where there is a net defined benefit asset, the amount is reported as an asset in Other assets –
Employee benefit assets on our Consolidated Balance sheets.
The calculation of defined benefit expenses and obligations requires significant judgment as the recognition is dependent on
discount rates and various actuarial assumptions such as healthcare cost trend rates, projected salary increases, retirement age
and mortality and termination rates. Due to the long-term nature of these plans, such estimates and assumptions are subject to
inherent risks and uncertainties. For our pension and other post-employment benefit plans, the discount rate is determined by
reference to market yields on high quality corporate bonds. Since the discount rate is based on currently available yields, and
involves management’s assessment of market liquidity, it is only a proxy for future yields. Actuarial assumptions, set in
accordance with current practices in the respective countries of our plans, may differ from actual experience as country specific
statistics are only estimates of future employee behaviour. These assumptions are determined by management and are reviewed
by actuaries at least annually. Changes to any of the above assumptions may affect the amounts of benefits obligations,
expenses and remeasurements that we recognize.
Our contributions to defined contribution pension plans are expensed when employees have rendered services in exchange
We offer share-based compensation plans to certain key employees and to our non-employee directors.
To account for stock options granted to employees, compensation expense is recognized over the applicable vesting period
with a corresponding increase in equity. Fair value is determined by using option valuation models, which take into account the
exercise price of the option, the current share price, the risk free interest rate, the expected volatility of the share price over the
life of the option and other relevant factors. When the options are exercised, the exercise price proceeds together with the
amount initially recorded in equity are credited to common shares. Our other share-based compensation plans include
performance deferred share plans and deferred share unit plans for key employees (the Plans). The obligations for the Plans are
accrued over their vesting periods. The Plans are settled in cash.
For cash-settled awards, our accrued obligations are adjusted to their fair value at each balance sheet date. For share-
settled awards, our expected obligations recognized in equity are based on the fair value of our common shares at the date of
grant. Changes in our obligations, net of related hedges, are recorded as Non-interest expense – Human resources in our
Consolidated Statements of Income with a corresponding increase in Other liabilities for cash-settled awards and in Retained
earnings for share-settled awards. Compensation expense is recognized in the year the awards are earned by plan participants
based on the vesting schedule of the relevant plans, net of estimated forfeitures.
The compensation cost attributable to options and awards granted to employees who are eligible to retire or will become
eligible to retire during the vesting period, is recognized immediately if the employee is eligible to retire on the grant date or over
the period between the grant date and the date the employee becomes eligible to retire.
Income tax comprises current tax and deferred tax and is recognized in our Consolidated Statements of Income except to the
extent that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current income tax payable on profits is recognized as an expense based on the applicable tax laws in each jurisdiction in
the period in which profits arise, calculated using tax rates enacted or substantively enacted by the balance sheet date. Deferred
tax is recognized on temporary differences between the carrying amounts of assets and liabilities for accounting and tax
purposes. A deferred income tax asset or liability is determined for each temporary difference, except for earnings related to our
subsidiaries, branches, associates and interests in joint ventures where the temporary differences will not reverse in the
foreseeable future and we have the ability to control the timing of reversal. Deferred tax assets and liabilities are determined
based on the tax rates that are expected to be in effect in the period that the asset is realized or the liability is settled, based on
tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date. Current tax assets and
liabilities are offset when they are levied by the same taxation authority on either the same taxable entity or different taxable
entities within the same tax reporting group (which intends to settle on a net basis), and when there is a legal right to offset.
Deferred tax assets and liabilities are offset when the same conditions are satisfied. Our Consolidated Statements of Income
include items that are non-taxable or non-deductible for income tax purposes and, accordingly, this causes the income tax
provision to be different from what it would be if based on statutory rates.
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Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 2
Summary of significant accounting policies, estimates and judgments
(continued)
assets and Other liabilities. On a quarterly basis, we review our deferred income tax assets to determine whether it is probable
We are subject to income tax laws in various jurisdictions where we operate, and the complex tax laws are potentially subject
to different interpretations by us and the relevant taxation authorities. Significant judgment is required in the interpretation of the
relevant tax laws and in assessing the probability of acceptance of our tax positions to determine our tax provision, which includes
our best estimate of uncertain tax positions that are under audit or appeal by the relevant tax authorities. We perform a review on
a quarterly basis to incorporate our best assessment based on information available, but additional liability and income tax
expense could result based on the acceptance of our tax positions by the relevant tax authorities.
The determination of our deferred tax asset or liability also requires significant management judgment as the recognition is
dependent on our projection of future taxable profits and tax rates that are expected to be in effect in the period the asset is
realized or the liability is settled. Any changes in our projection will result in changes in deferred tax assets or liabilities on our
Consolidated Balance Sheets, and also deferred tax expense on our Consolidated Statements of Income.
The IASB issued amendments to IAS 12
Income Taxes (IAS 12)
in May 2023 to address the
Pillar Two Model Rules
for
International Tax Reform
, including a global 15% minimum tax. The amendments introduce, with immediate effect, a temporary
recognition exception in relation to accounting and disclosure for deferred taxes arising from the implementation of the
All business combinations are accounted for using the acquisition method. Non-controlling interests, if any, are recognized at
their proportionate share of the fair value of identifiable assets and liabilities, unless otherwise indicated. Identifiable intangible
assets are recognized separately from goodwill and included in Other intangibles. Goodwill represents the excess of the price
Goodwill is allocated to cash-generating units or groups of cash-generating units for the purpose of impairment testing, which is
undertaken at the lowest level at which goodwill is monitored for internal management purposes. Impairment testing is
performed annually as at August 1, or more frequently if there are objective indicators of impairment, by comparing the
recoverable amount of a cash-generating unit (CGU) with its carrying amount. The recoverable amount of a CGU is the higher of
its value in use (VIU) and its fair value less costs of disposal (FVLCD). VIU is the present value of the expected future cash flows
from a CGU. FVLCD is the amount obtainable from the sale of a CGU in an orderly transaction between market participants, less
disposal costs. The fair value of a CGU is estimated using valuation techniques such as a discounted cash flow method, adjusted
to reflect the considerations of a prospective third-party buyer. External evidence such as binding sale agreements or recent
transactions for similar businesses within the same industry is considered to the extent that it is available.
Significant judgment is involved in estimating the model inputs used to determine the recoverable amount of our CGUs, in
particular future cash flows, discount rates and terminal growth rates, due to the uncertainty in the timing and amount of cash
flows and the forward-looking nature of these inputs. Future cash flows are based on financial plans agreed by management which
are estimated based on forecast results, business initiatives, planned capital investments and returns to shareholders. Discount
rates are based on the bank-wide cost of capital, adjusted for CGU-specific risks and currency exposure as reflected by differences
in expected inflation. Bank-wide cost of capital is based on the Capital Asset Pricing Model, the Dividend Growth Model and peer
analysis. CGU-specific risks include country risk, business/operational risk, geographic risk (including political risk, devaluation
risk and government regulation), currency risk and price risk (including product pricing risk and inflation). Terminal growth rates
are based on the long-term steady state growth expectations in the countries within which the CGU operates. If the future cash
flows and other assumptions in future periods deviate significantly from the current amounts used in our impairment testing, the
value of our goodwill could become impaired, with any such impairment loss recognized in Non-interest expense.
The carrying amount of a CGU includes the carrying amount of assets, liabilities and goodwill allocated to the CGU. If the
recoverable amount is less than the carrying value, the impairment loss is allocated first to reduce the carrying amount of any
goodwill allocated to the CGU and then to the other non-financial assets of the CGU proportionately based on the carrying
amount of each asset. Any impairment loss is charged to income in the period in which the impairment is identified. Goodwill is
stated at cost less accumulated impairment losses. Subsequent reversals of goodwill impairment are prohibited.
Upon disposal of a portion of a CGU, the carrying amount of goodwill related to the portion of the CGU sold is included in the
determination of gains or losses on disposal. The carrying amount is determined based on the relative fair value of the disposed
Intangible assets represent identifiable non-monetary assets and are acquired either separately or through a business
combination, or generated internally. Intangible assets acquired through a business combination are recognized separately from
goodwill when they are separable or arise from contractual or other legal rights, and their fair value can be measured reliably.
The cost of a separately acquired intangible asset includes its purchase price and directly attributable costs of preparing the
asset for its intended use. In respect of internally generated intangible assets, cost includes all directly attributable costs
necessary to create, produce and prepare the asset to be capable of operating in the manner intended by management. Research
and development costs that are not eligible for capitalization are expensed. After initial recognition, an intangible asset is carried
at its cost less any accumulated amortization and accumulated impairment losses, if any. Intangible assets with a finite-life are
amortized on a straight-line basis over their estimated useful lives as follows: computer software – 3 to 10 years; and customer
list and relationships – 10 to 20 years. We do not have any intangible assets with indefinite lives.
Intangible assets are assessed for indicators of impairment at each reporting period. If there is an indication that an
intangible asset may be impaired, an impairment test is performed by comparing the carrying amount of the intangible asset to
its recoverable amount. Where it is not possible to estimate the recoverable amount of an individual asset, we estimate the
recoverable amount of the CGU to which the asset belongs. If the recoverable amount of the asset (or CGU) is less than its
carrying amount, the carrying amount of the intangible asset is written down to its recoverable amount as an impairment loss.
An impairment loss recognized previously is reversed if there is a change in the estimates used to determine the recoverable
amount of the asset (or CGU) since the last impairment loss was recognized. If an impairment loss is subsequently reversed, the
carrying amount of the asset (or CGU) is revised to the lower of its recoverable amount and the carrying amount that would have
been determined (net of amortization) had there been no prior impairment.
Due to the subjective nature of these estimates, significant judgment is required in determining the useful lives and
recoverable amounts of our intangible assets, and assessing whether certain events or circumstances constitute objective
evidence of impairment. Estimates of the recoverable amounts of our intangible assets rely on certain key inputs, including
future cash flows and discount rates. Future cash flows are based on sales projections and allocated costs which are estimated
based on forecast results and business initiatives. Discount rates are based on the bank-wide cost of capital, adjusted for asset-
Translation of foreign currencies
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at rates prevailing at the
balance sheet date. Foreign exchange gains and losses resulting from the translation and settlement of these items are
recognized in Non-interest income in the Consolidated Statements of Income.
Non-monetary assets and liabilities that are measured at historical cost are translated into Canadian dollars at historical
rates.
Assets and liabilities of our foreign operations with functional currencies other than Canadian dollars are translated into
Canadian dollars at rates prevailing at the balance sheet date, and income and expenses of these foreign operations are
translated at average rates of exchange for the reporting period.
Unrealized gains or losses arising as a result of the translation of our foreign operations along with the effective portion of
related hedges are reported in Other components of equity on an after-tax basis. Upon disposal or partial disposal of a foreign
Premises and equipment includes land, buildings, leasehold improvements, computer equipment, furniture, fixtures and other
equipment, and are stated at cost less accumulated depreciation, except for land which is not depreciated, and accumulated
impairment losses. Cost comprises the purchase price, any costs directly attributable to bringing the asset to the location and
condition necessary for its intended use, and the initial estimate of any disposal costs. Depreciation is recorded principally on a
straight–line basis over the estimated useful lives of the assets, which are 25 to 50 years for buildings, 3 to 10 years for computer
equipment, and 5 to 10 years for furniture, fixtures and other equipment. The amortization period for leasehold improvements is
the lesser of the useful life of the leasehold improvements or the lease term plus the first renewal period, if reasonably assured
of renewal. Depreciation methods, useful lives, and residual values are reassessed at each reporting period and adjusted as
Premises and equipment are assessed for indicators of impairment at each reporting period. If there is an indication that an
asset may be impaired, an impairment test is performed by comparing the asset’s carrying amount to its recoverable amount.
After the recognition of impairment, the depreciation charge is adjusted in future periods to reflect the asset’s revised
carrying amount. If an impairment is later reversed, the carrying amount of the asset is revised to the lower of the asset’s
recoverable amount and the carrying amount that would have been determined (net of depreciation) had there been no prior
impairment loss. The depreciation charge in future periods is adjusted to reflect the revised carrying amount.
At inception of a contract, we assess whether a contract is or contains a lease. A contract is, or contains, a lease if the contract
conveys the right to obtain substantially all of the economic benefits from, and direct the use of, an identified asset for a period
of time in return for consideration.
When we are the lessee in a lease arrangement, we initially record a right-of-use asset and corresponding lease liability,
except for short-term leases and leases of low-value assets. Short-term leases are leases with a lease term of 12 months or less.
Low-value assets are unspecialized, common, technologically unsophisticated, widely available and widely used
non-infrastructure assets. For short-term leases and leases of low-value assets, we record the lease payments as an operating
expense on a straight-line basis over the lease term.
Where we are reasonably certain to exercise extension and termination options, they are included in the lease term.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement
date, discounted at our incremental borrowing rate. The lease liability is subsequently measured at amortized cost using the
effective interest method, recorded in Interest expense.
The right-of-use asset is initially measured based on the initial amount of the lease liability, adjusted for lease payments
made on or before the commencement date, initial direct costs incurred, and an estimate of costs to dismantle, remove, or
restore the asset, less any lease incentives received. Costs related to dismantling and removing leasehold improvements are
capitalized as part of the leasehold improvement asset (rather than the right-of-use asset of the lease) when the leasehold
improvements are separately capitalized.
The right-of-use asset is depreciated to the earlier of the lease term and the useful life, unless ownership will transfer to RBC
or we are reasonably certain to exercise a purchase option, in which case the useful life of the right-of-use asset is used. We
apply IAS 36
Impairment of assets
to determine whether a right-of-use asset is impaired and account for any identified
Provisions are liabilities of uncertain timing or amount and are recognized when we have a present legal or constructive
obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a
reliable estimate can be made of the amount of the obligation. Provisions are measured as the best estimate of the consideration
required to settle the present obligation at the reporting date. Significant judgment is required in determining whether a present
obligation exists and in estimating the probability, timing and amount of any outflows. We record provisions related to litigation,
asset retirement obligations and other items.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
157
158
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 2
Summary of significant accounting policies, estimates and judgments
(continued)
We are required to estimate the results of ongoing legal proceedings, and expenses to be incurred to dispose of capital
assets. The forward-looking nature of these estimates requires us to use a significant amount of judgment in projecting the
timing and amount of future cash flows. We record our provisions on the basis of all available information at the end of the
reporting period and make adjustments on a quarterly basis to reflect current expectations. It may not be possible to predict the
resolution of these matters or the timing of their ultimate resolution. Should actual results differ from our expectations, we may
incur expenses in excess of the provisions recognized. Where appropriate, we apply judgment in limiting the extent of our
provisions-related disclosures as not to prejudice our positions in matters of dispute.
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party,
Commissions and fees primarily relate to Investment management and custodial fees, Mutual fund revenue, Securities brokerage
commissions, Services charges, Underwriting and other advisory fees, Card service revenue and Credit fees, and are recognized
based on the applicable service contracts with clients.
Investment management and custodial fees and Mutual fund revenue are generally calculated as a percentage of daily or
period-end net asset values (NAV) based on the terms of the contract with clients and are received monthly, quarterly,
semiannually or annually, depending on the terms of the contract. Investment management and custodial fees are generally
derived from assets under management (AUM) when our clients solicit the investment capabilities of an investment manager or
from assets under administration (AUA) where the investment strategy is directed by the client or a designated third-party
manager. Mutual fund revenue is generally derived from the daily NAV of the mutual funds. Investment management and
custodial fees and Mutual fund revenue are recognized over time when the service is provided to the client, provided that it is
highly probable that a significant reversal in the amount of revenue recognized will not occur.
Commissions earned on Securities brokerage services and Service charges that are related to the provision of specific
transaction-type services are recognized when the service is fulfilled. Where services are provided over time, revenue is
recognized as the services are provided.
Underwriting and other advisory fees primarily relate to underwriting of new issuances of debt or equity and various
advisory services. Underwriting fees are generally expressed as a percentage of the funds raised through issuance and are
recognized when the service has been completed. Advisory fees vary depending on the scope and type of engagement and can be
fixed in nature or contingent on a future event. Advisory fees are recognized over the period in which the service is provided and
are recognized only to the extent that it is highly probable that a significant reversal in the amount of revenue will not occur.
Card service revenue primarily includes interchange revenue and annual card fees. Interchange revenue is calculated as a
fixed percentage of the transaction amount and recognized when the card transaction is settled. Annual card fees are fixed fees
and are recognized over a 12 month period.
Credit fees are primarily earned for arranging syndicated loans and making credit available on undrawn facilities. The timing
of the recognition of credit fees varies based on the nature of the services provided.
When service fees and other costs are incurred in relation to commissions and fees earned, we record these costs on a gross
basis in either Non-interest expense – Other or Non-interest expense – Human resources based on our assessment of whether we
have primary responsibility to fulfill the contract with the client and have discretion in establishing the price for the commissions
Earnings per share is computed by dividing Net income available to common shareholders by the weighted average number of
common shares outstanding for the period. Net income available to common shareholders is determined after deducting
dividend entitlements of preferred shareholders and distributions on other equity instruments, any gains (losses) on redemption
of preferred shares and other equity instruments net of related income taxes and the net income attributable to non-controlling
interests.
Diluted earnings per share reflects the potential dilution that could occur if additional common shares are assumed to be
issued under securities or contracts that entitle their holders to obtain common shares in the future, to the extent such
entitlement is not subject to unresolved contingencies. For contracts that may be settled in cash or in common shares at our
option, diluted earnings per share is calculated based on the assumption that such contracts will be settled in shares. Income
and expenses associated with these types of contracts are excluded from the Net income available to common shareholders, and
the additional number of shares that would be issued is included in the diluted earnings per share calculation. For stock options
whose exercise price is less than the average market price of our common shares, using the treasury stock method, they are
assumed to be exercised and the proceeds are used to repurchase common shares at the average market price for the period.
The incremental number of common shares issued under stock options and repurchased from proceeds is included in the
We classify a financial instrument that we issue as a financial asset, financial liability or an equity instrument in accordance with
the substance of the contractual arrangement.
Our common shares held by us are classified as treasury shares in equity and accounted for at weighted average cost. Upon
the sale of treasury shares, the difference between the sale proceeds and the cost of the shares is recognized in Retained
earnings. Financial instruments issued by us are classified as equity instruments when there is no contractual obligation to
transfer cash or other financial assets. Incremental costs directly attributable to the issue of equity instruments are included in
equity as a deduction from the proceeds, net of tax. Financial instruments that will be settled by a variable number of our
common shares upon their conversion by the holders as well as the related accrued distributions are classified as liabilities on
our Consolidated Balance Sheets. Dividends and yield distributions on these instruments are classified as Interest expense in our
Consolidated Statements of Income. For compound instruments comprised of both liability and equity components, the liability
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
159
Insurance Contracts
(IFRS 17)
In May 2017, the IASB issued IFRS 17 to establish a comprehensive insurance standard which provides guidance on the
recognition, measurement, presentation and disclosure of insurance contracts issued and reinsurance contracts held and will
replace the existing IFRS 4
Insurance Contracts
(IFRS 4). In June 2020, the IASB issued amendments to IFRS 17, including deferral
of the effective date by two years. This new standard is effective for us on November 1, 2023 and is to be applied retrospectively
with comparatives restated beginning November 1, 2022.
Under IFRS 17, insurance contracts are contracts under which we accept significant insurance risk from a policyholder by
agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. Embedded
derivatives, investment components and promises to provide non-insurance services, provided specific criteria are met, are
separated from the measurement of insurance and reinsurance contracts. Insurance and reinsurance contracts are aggregated
into portfolios that are subject to similar risks and are managed together, and then divided into groups based on the period of
issuance and expected profitability. Groups are separately recognized and measured using one of three measurement models
depending on the characteristics of the contracts:
•
For insurance contracts with direct participating features, the contracts are measured using the variable fee approach
(VFA).
•
For insurance contracts and reinsurance contracts held with a short duration of one year or less, the premium allocation
approach (PAA) is elected.
•
The general measurement method (GMM) is applied to all remaining contracts.
Under the GMM and VFA, the liabilities for remaining coverage and incurred claims for groups of contracts are measured as
the sum of the fulfilment cash flows and the contractual service margin (CSM), which are recalculated at the end of each
reporting period. The fulfilment cash flows consist of the present value of future cash flows and a risk adjustment for
non-financial risk. For insurance contracts, the CSM represents the unearned profit for providing insurance coverage. For
reinsurance contracts held, the CSM represents the net cost or net gain of purchasing reinsurance. Under the PAA, the liability for
remaining coverage for each group is measured as the premiums received less insurance revenue recognized for services
provided, while the liability for incurred claims is measured as the fulfillment cash flows for incurred claims plus adjustment on
any financing components. Losses from the recognition of onerous groups of insurance contracts, regardless of the
measurement model applied, are recognized in the Consolidated Statements of Income immediately.
The following are key differences between IFRS 17 and IFRS 4:
•
New business profits are deferred and measured as the CSM of the insurance contract liabilities and amortized into income
as insurance contract services are provided, while losses are recognized into income immediately. Under IFRS 4, gains and
losses are recognized in income immediately. On July 18, 2023, OSFI released regulatory guidance to allow the inclusion of
the CSM in calculating CET1 capital and related ratios, therefore, there will be no impact on the capital metrics from such
reduction in retained earnings resulting from the CSM.
•
Discount rates used in calculating the present value of insurance contract liabilities are based on the characteristics of the
insurance contracts unlike IFRS 4 which is based on the assets supporting the liabilities.
•
Presentation and disclosure changes are expected due to the new requirements.
While IFRS 17 impacts the timing of profit recognition of insurance contracts, it will have no impact on total profit recognized over
the lifetime of these contracts.
Impact of IFRS 17 transition excluding the impact of reclassifications of financial assets
Upon the adoption of IFRS 17, we will apply IFRS 17 retrospectively by adjusting our Consolidated Balance Sheets as at
November 1, 2022 and restating comparative information. The full retrospective approach will be applied for all insurance and
reinsurance contracts unless it is impracticable to do so. The full retrospective approach is applied to all contracts measured
using the PAA and all new contracts issued on and after November 1, 2022 measured using the GMM and VFA as if IFRS 17 had
always been applied. Due to data availability and the inability to use hindsight, the fair value approach is applied to contracts
issued before November 1, 2022 that are measured under the GMM and VFA. Under the fair value approach, the CSM of the
liability for remaining coverage is calculated as the difference between the fair value of a group of contracts and the fulfillment
cash flows measured at the date of transition.
Based on current estimates, the adoption of IFRS 17 is expected to result in a reduction in retained earnings of approximately
$2.4 billion, net of taxes, as at November 1, 2022. This is attributable to the establishment of the CSM and other remeasurement
changes to insurance and reinsurance contracts and related tax effects. The estimated CSM of all insurance contracts net of
reinsurance contracts held as at November 1, 2022 was approximately $1.8 billion. These estimates are subject to change as we
finalize the quantitative impacts of the adoption in the first quarter of 2024.
Impact of reclassifications of financial assets
As permitted by IFRS 17, we will change the classification and measurement of certain eligible financial assets held in respect of
an activity that relates to insurance contracts upon the adoption of IFRS 17. We will apply these changes retrospectively by
adjusting our Consolidated Balance Sheets as at November 1, 2023 with no restatement of comparative information. We expect to
reclassify financial assets between fair value classification categories, which is not expected to have a net impact to total equity
nor the carrying amounts of those assets. This is subject to change as we finalize the quantitative impacts of these changes and
160
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 2
Summary of significant accounting policies, estimates and judgments
(continued)
Updates related to interest rate benchmark reform
Progress in and risks arising from the transition to ABRs
To manage our transition to ABRs, we have implemented a comprehensive enterprise-wide program and governance structure
that addresses the key areas of impact including contract remediation, funding and liquidity planning, risk management,
financial reporting and valuation, systems, processes and client education and communication. Transition activities are focused
on two broad streams of work: (i) developing new ABR linked products, and (ii) conversion of existing CDOR based contracts to
ABRs. Our program timelines are ultimately dependent on broader market acceptance of products that reference the new ABRs
and our clients’ readiness and ability to adopt the replacement products. Significant matters that we continue to evaluate
include client product offerings, short and long-term funding strategies, and our hedging programs. We continue to work towards
the recommended target date for the cessation of CDOR based products provided by our regulators and are on track with our
transition activities to move to ABRs.
The following tables show the Bank’s significant exposures to financial instruments referencing benchmark interest rates subject
to the Reform that have yet to transition to ABRs. As at October 31, 2023, this represents our financial instruments referencing
CDOR and maturing after June 28, 2024. In the normal course of business, our derivative notional amounts may fluctuate with
minimal impact to our IBOR conversion plans.
| As at | ||||||
| October 31, 2023 | October 31, 2022 | |||||
Non-derivative | Non-derivative | Derivative | Non-derivative | Non-derivative | Derivative | |
(Millions of Canadian dollars) | financial assets (1) | financial liabilities (2) | notional | financial assets (1) | financial liabilities (2) | notional (3) |
CDOR (4) | $ 29,496 | $ 24,735 | $ 2,154,345 | $ 18,493 | $ 18,572 | $ 2,226,700 |
(1)
Non-derivative assets represent the drawn outstanding balance of Loans and Customers’ liability under acceptances and the fair value of Securities.
(2)
Non-derivative liabilities represent Subordinated debentures, Deposits and Acceptances.
(3)
Amounts have been updated from those previously presented to reflect the cessation of USD LIBOR.
(4)
Includes our exposure to financial instruments referencing interest rates substantially similar to CDOR.
The following table presents the undrawn balances of loan commitments referencing benchmark interest rates subject to the
Reform.
As at | ||
(Millions of Canadian dollars) | October 31, 2023 | October 31, 2022 |
Authorized and committed undrawn commitments | ||
CDOR (1), (2) | $ 40,010 | $ 26,913 |
(1)
Includes our exposure to financial instruments referencing interest rates substantially similar to CDOR.
(2)
Undrawn commitments exclude amounts related to drawn outstanding balances, which in certain cases may exclude extension options.
As part of the interest rate benchmark reform, the publication of all remaining USD LIBOR settings ceased on June 30, 2023 and
consistent with our transition plan, our exposure to non-derivative financial assets, non-derivative financial liabilities, derivative
notional and undrawn balances of loan commitments referencing USD LIBOR interest rates is no longer material to our financial
statements (October 31, 2022 – $57.5 billion, $1.5 billion, $5,772.4 billion and $59.3 billion, respectively). We continue to manage
significant exposures to benchmarks that have no announced plans for cessation or further reform, including the EURO Interbank
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
161
Fair value of financial instruments
Carrying value and fair value of financial instruments
The following tables provide a comparison of the carrying and fair values for each classification of financial instruments.
Embedded derivatives are presented on a combined basis with the host contracts. For measurement purposes, they are carried
at fair value when conditions requiring separation are met.
| As at October 31, 2023 | |||||||||||
| Carrying value and fair value | Carrying value | Fair value | |||||||||
| Financial | Financial | Financial | Financial | Financial | Financial | ||||||
instruments | instruments | instruments | instruments | instruments | instruments | Total | |||||
classified as | designated as | classified as | designated as | measured at | measured at | carrying | Total | ||||
(Millions of Canadian dollars) | FVTPL | FVTPL | FVOCI | FVOCI | amortized cost | amortized cost | amount | fair value | |||
Financial assets | |||||||||||
Interest-bearing deposits with banks | $ – | $ 60,856 | $ – | $ – | $ 10,230 | $ 10,230 | $ 71,086 | $ 71,086 | |||
Securities | |||||||||||
Trading | 180,651 | 9,500 | – | – | – | – | 190,151 | 190,151 | |||
Investment, net of applicable allowance | – | – | 127,624 | 842 | 91,113 | 83,667 | 219,579 | 212,133 | |||
| 180,651 | 9,500 | 127,624 | 842 | 91,113 | 83,667 | 409,730 | 402,284 | ||||
Assets purchased under reverse repurchase | |||||||||||
agreements and securities borrowed | 285,869 | – | – | – | 54,322 | 54,322 | 340,191 | 340,191 | |||
Loans, net of applicable allowance | |||||||||||
Retail | 114 | 362 | 280 | – | 566,376 | 542,480 | 567,132 | 543,236 | |||
Wholesale | 5,629 | 3,619 | 597 | – | 275,796 | 268,843 | 285,641 | 278,688 | |||
| 5,743 | 3,981 | 877 | – | 842,172 | 811,323 | 852,773 | 821,924 | ||||
Other | |||||||||||
Derivatives | 142,450 | – | – | – | – | – | 142,450 | 142,450 | |||
Other assets (1) | 4,819 | 5 | – | – | 68,537 | 68,537 | 73,361 | 73,361 | |||
Financial liabilities | |||||||||||
Deposits | |||||||||||
Personal | $ 109 | $ 26,702 | $ 415,135 | $ 412,886 | $ 441,946 | $ 439,697 | |||||
Business and government (2) | 174 | 137,454 | 607,447 | 605,260 | 745,075 | 742,888 | |||||
Bank (3) | – | 11,462 | 33,204 | 33,160 | 44,666 | 44,622 | |||||
| 283 | 175,618 | 1,055,786 | 1,051,306 | 1,231,687 | 1,227,207 | ||||||
Other | |||||||||||
Obligations related to securities sold short | 33,651 | – | – | – | 33,651 | 33,651 | |||||
Obligations related to assets sold under | |||||||||||
repurchase agreements and securities | |||||||||||
loaned | – | 298,679 | 36,559 | 36,559 | 335,238 | 335,238 | |||||
Derivatives | 142,629 | – | – | – | 142,629 | 142,629 | |||||
Other liabilities (4) | (937) | 11 | 92,500 | 92,402 | 91,574 | 91,476 | |||||
Subordinated debentures | – | – | 11,386 | 11,213 | 11,386 | 11,213 | |||||
162
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 3
Fair value of financial instruments
(continued)
| As at October 31, 2022 | ||||||||
| Carrying value and fair value | Carrying value | Fair value | ||||||
| Financial | Financial | Financial | Financial | Financial | Financial | |||
instruments | instruments | instruments | instruments | instruments | instruments | Total | ||
classified as | designated as | classified as | designated as | measured at | measured at | carrying | Total | |
(Millions of Canadian dollars) | FVTPL | FVTPL | FVOCI | FVOCI | amortized cost | amortized cost | amount | fair value |
Financial assets | ||||||||
Interest-bearing deposits with banks | $ – | $ 84,468 | $ – | $ – | $ 23,543 | $ 23,543 | $ 108,011 | $ 108,011 |
Securities | ||||||||
Trading | 138,507 | 9,698 | – | – | – | – | 148,205 | 148,205 |
Investment, net of applicable allowance | – | – | 92,063 | 828 | 77,127 | 70,073 | 170,018 | 162,964 |
| 138,507 | 9,698 | 92,063 | 828 | 77,127 | 70,073 | 318,223 | 311,169 | |
Assets purchased under reverse repurchase | ||||||||
agreements and securities borrowed | 264,665 | – | – | – | 53,180 | 53,180 | 317,845 | 317,845 |
Loans, net of applicable allowance | ||||||||
Retail | 73 | 375 | 218 | – | 546,767 | 521,428 | 547,433 | 522,094 |
Wholesale | 6,914 | 3,222 | 563 | – | 261,833 | 253,816 | 272,532 | 264,515 |
| 6,987 | 3,597 | 781 | – | 808,600 | 775,244 | 819,965 | 786,609 | |
Other | ||||||||
Derivatives | 154,439 | – | – | – | – | – | 154,439 | 154,439 |
Other assets (1) | 3,377 | – | – | – | 73,084 | 73,084 | 76,461 | 76,461 |
Financial liabilities | ||||||||
Deposits | ||||||||
Personal | $ 298 | $ 21,959 | $ 382,675 | $ 380,396 | $ 404,932 | $ 402,653 | ||
Business and government (2) | 447 | 152,119 | 607,304 | 605,102 | 759,870 | 757,668 | ||
Bank (3) | – | 7,196 | 36,816 | 36,758 | 44,012 | 43,954 | ||
| 745 | 181,274 | 1,026,795 | 1,022,256 | 1,208,814 | 1,204,275 | |||
Other | ||||||||
Obligations related to securities sold short | 35,511 | – | – | – | 35,511 | 35,511 | ||
Obligations related to assets sold under | ||||||||
repurchase agreements and securities | ||||||||
loaned | – | 248,835 | 25,112 | 25,112 | 273,947 | 273,947 | ||
Derivatives | 153,491 | – | – | – | 153,491 | 153,491 | ||
Other liabilities (4) | (360) | 69 | 90,348 | 90,160 | 90,057 | 89,869 | ||
Subordinated debentures | – | – | 10,025 | 9,668 | 10,025 | 9,668 | ||
(1)
Includes Customers’ liability under acceptances and financial instruments recognized in Other assets.
(2)
Business and government deposits include deposits from regulated deposit-taking institutions other than banks.
(3)
Bank deposits refer to deposits from regulated banks and central banks.
(4)
Includes Acceptances and financial instruments recognized in Other liabilities.
For our financial assets designated as FVTPL, we measure the change in fair value attributable to changes in credit risk as the
difference between the total change in the fair value of the instrument during the period and the change in fair value calculated
using the appropriate risk-free yield curves. For the year ended October 31, 2023, the change in fair value during the period
attributable to changes in credit risk for positions still held was a gain of $360 million and the cumulative change in fair value
attributable to changes in credit risk for positions still held was a loss of $102 million. For the year ended October 31, 2022, the
change in fair value during the period attributable to changes in credit risk for positions still held was a loss of $662 million and
the cumulative change in fair value attributable to changes in credit risk for positions still held was a loss of $490 million. As at
October 31, 2023, the extent to which credit derivatives or similar instruments mitigate the maximum exposure to credit risk was
$692 million (October 31, 2022 – $589 million).
Financial liabilities designated as fair value through profit or loss
For our financial liabilities designated as FVTPL, we take into account changes in our own credit spread and the expected
duration of the instrument to measure the change in fair value attributable to changes in credit risk.
| As at or for the year ended October 31, 2023 (1) | |||||
Difference | |||||
between | Changes in fair value attributable | ||||
Contractual | carrying value | to changes in credit risk included | |||
maturity | and contractual | in OCI for positions still held | |||
(Millions of Canadian dollars) | amount | Carrying value | maturity amount | During the period | Cumulative (2) |
Term deposits | |||||
Personal | $ 27,131 | $ 26,702 | $ (429) | $ 112 | $ (57) |
Business and government (3) | 147,844 | 137,454 | (10,390) | 683 | (1,030) |
Bank (4) | 11,485 | 11,462 | (23) | – | – |
186,460 | 175,618 | (10,842) | 795 | (1,087) | |
Obligations related to assets sold under | |||||
repurchase agreements and securities loaned | 298,734 | 298,679 | (55) | 3 | 4 |
Other liabilities | 11 | 11 | – | – | – |
$ 485,205 | $ 474,308 | $ (10,897) | $ 798 | $ (1,083) | |
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
163
| As at or for the year ended October 31, 2022 (1) | |||||
Difference | |||||
between | Changes in fair value attributable | ||||
Contractual | carrying value | to changes in credit risk included | |||
maturity | and contractual | in OCI for positions still held | |||
(Millions of Canadian dollars) | amount | Carrying value | maturity amount | During the period | Cumulative (2) |
Term deposits | |||||
Personal | $ 22,328 | $ 21,959 | $ (369) | $ (238) | $ (166) |
Business and government (3) | 160,775 | 152,119 | (8,656) | (2,135) | (1,718) |
Bank (4) | 7,208 | 7,196 | (12) | – | – |
190,311 | 181,274 | (9,037) | (2,373) | (1,884) | |
Obligations related to assets sold under | |||||
repurchase agreements and securities loaned | 248,963 | 248,835 | (128) | 1 | 1 |
Other liabilities | 69 | 69 | – | – | – |
$ 439,343 | $ 430,178 | $ (9,165) | $ (2,372) | $ (1,883) | |
(1)
$29 million in changes in fair value attributable to changes in credit risk were recognized in income for the year ended October 31, 2023, and $17 million in cumulative
changes in credit risk were included in income for positions still held life-to-date (October 31, 2022 – $97 million and $97 million respectively).
(2)
The cumulative change is measured from the initial designation of the liabilities as FVTPL. For the year ended October 31, 2023, $2 million of fair value gains previously
included in OCI relate to financial liabilities derecognized during the year (October 31, 2022 – $3 million of fair value gains).
(3)
Business and government term deposits include amounts from regulated deposit-taking institutions other than regulated banks.
(4)
Bank term deposits refer to amounts from regulated banks and central banks.
Net gains (losses) from financial instruments classified and designated as fair value through profit or loss
Financial instruments classified as FVTPL, which includes mainly trading securities, derivatives, trading liabilities, and financial
assets and liabilities designated as FVTPL are measured at fair value with realized and unrealized gains and losses recognized in
Non-interest income.
For the year ended | ||
October 31 | October 31 | |
(Millions of Canadian dollars) | 2023 | 2022 |
Net gains (losses) (1) | ||
Classified as fair value through profit or loss (2) | $ 1,998 | $ (7,382) |
Designated as fair value through profit or loss (3) | 1,499 | 8,543 |
$ 3,497 | $ 1,161 | |
By product line (1) | ||
Interest rate and credit (4) | $ 3,515 | $ 1,251 |
Equities | (510) | (843) |
Foreign exchange and commodities | 492 | 753 |
$ 3,497 | $ 1,161 | |
(1)
Excludes the following amounts related to our insurance operations and included in Insurance premiums, investment and fee income in the Consolidated Statements of
Income: Net losses from financial instruments designated as FVTPL of $371 million (October 31, 2022 – losses of $2,805 million).
(2)
Excludes derivatives designated in a hedging relationship. Refer to Note 9 for net gains (losses) on these derivatives.
(3)
For the year ended October 31, 2023, $1,524 million of net fair value gains on financial liabilities designated as FVTPL, other than those attributable to changes in our own
credit risk, were included in Non-interest income (October 31, 2022 – gains of $8,536 million).
(4)
Interest and dividend income arising from financial assets and financial liabilities and the associated costs of funding are
reported in Net interest income.
For the year ended | ||
October 31 | October 31 | |
(Millions of Canadian dollars) | 2023 | 2022 |
Interest and dividend income (1), (2) | ||
Financial instruments measured at fair value through profit or loss | $ 31,464 | $ 10,999 |
Financial instruments measured at fair value through other comprehensive income | 5,127 | 1,177 |
Financial instruments measured at amortized cost | 50,400 | 28,595 |
86,991 | 40,771 | |
Interest expense (1) | ||
Financial instruments measured at fair value through profit or loss | $ 28,446 | $ 8,336 |
Financial instruments measured at amortized cost | 33,416 | 9,718 |
61,862 | 18,054 | |
Net interest income | $ 25,129 | $ 22,717 |
(1)
Excludes the following amounts related to our insurance operations and included in Insurance premiums, investment and fee income in the Consolidated Statements of
Income: Interest income of $451 million (October 31, 2022 – $601 million), and Interest expense of $35 million (October 31, 2022 – $6 million).
(2)
Includes dividend income for the year ended October 31, 2023 of $3,215 million (October 31, 2022 – $2,954 million), which is presented in Interest and dividend income in
Fee income arising from financial instruments
For the year ended October 31, 2023, we earned $6,112 million in fees from banking services (October 31, 2022 – $6,118 million). For
the year ended October 31, 2023, we also earned $15,319 million in fees from investment management, trust, custodial,
underwriting, brokerage and other similar fiduciary services to retail and institutional clients (October 31, 2022 – $14,932 million).
These fees are included in Non-interest income.
| As at | ||||||||||
| October 31, 2023 | October 31, 2022 | |||||||||
| Fair value | Fair value | |||||||||
measurements using | measurements using | |||||||||
| Netting | Netting | |||||||||
(Millions of Canadian dollars) | Level 1 | Level 2 | Level 3 | adjustments | Fair value | Level 1 | Level 2 | Level 3 | adjustments | Fair value |
Financial assets | ||||||||||
Interest-bearing deposits with banks | $ – | $ 60,856 | $ – | $ | $ 60,856 | $ – | $ 84,468 | $ – | $ | $ 84,468 |
Securities | ||||||||||
Trading | ||||||||||
Debt issued or guaranteed by: | ||||||||||
Canadian government (1) | ||||||||||
Federal | 26,675 | 2,581 | – | 29,256 | 15,024 | 3,779 | – | 18,803 | ||
Provincial and municipal | – | 16,389 | – | 16,389 | – | 13,257 | – | 13,257 | ||
U.S. federal, state, municipal and agencies (1), (2) | 2,249 | 50,439 | – | 52,688 | 1,254 | 35,570 | 4 | 36,828 | ||
Other OECD government (3) | 2,055 | 2,577 | – | 4,632 | 1,325 | 3,452 | – | 4,777 | ||
Mortgage-backed securities (1) | – | 2 | – | 2 | – | 2 | – | 2 | ||
Asset-backed securities | ||||||||||
Non-CDO securities (4) | – | 1,245 | – | 1,245 | – | 1,308 | 2 | 1,310 | ||
Corporate debt and other debt | – | 22,615 | – | 22,615 | – | 21,162 | 7 | 21,169 | ||
Equities | 58,826 | 2,232 | 2,266 | 63,324 | 46,592 | 3,593 | 1,874 | 52,059 | ||
89,805 | 98,080 | 2,266 | 190,151 | 64,195 | 82,123 | 1,887 | 148,205 | |||
Investment | ||||||||||
Debt issued or guaranteed by: | ||||||||||
Canadian government (1) | ||||||||||
Federal | 2,731 | 3,528 | – | 6,259 | 1,226 | 2,555 | – | 3,781 | ||
Provincial and municipal | – | 2,748 | – | 2,748 | – | 2,124 | – | 2,124 | ||
U.S. federal, state, municipal and agencies (1) | 275 | 73,020 | – | 73,295 | 440 | 43,918 | – | 44,358 | ||
Other OECD government | – | 6,192 | – | 6,192 | – | 5,144 | – | 5,144 | ||
Mortgage-backed securities (1) | – | 2,672 | 29 | 2,701 | – | 2,860 | 28 | 2,888 | ||
Asset-backed securities | ||||||||||
CDO | – | 8,265 | – | 8,265 | – | 7,524 | – | 7,524 | ||
Non-CDO securities | – | 441 | – | 441 | – | 524 | – | 524 | ||
Corporate debt and other debt | – | 27,574 | 149 | 27,723 | – | 25,569 | 151 | 25,720 | ||
Equities | 38 | 338 | 466 | 842 | 36 | 395 | 397 | 828 | ||
3,044 | 124,778 | 644 | 128,466 | 1,702 | 90,613 | 576 | 92,891 | |||
Assets purchased under reverse repurchase agreements and | ||||||||||
securities borrowed | – | 285,869 | – | 285,869 | – | 264,665 | – | 264,665 | ||
Loans | – | 8,742 | 1,859 | 10,601 | – | 9,673 | 1,692 | 11,365 | ||
Other | ||||||||||
Derivatives | ||||||||||
Interest rate contracts | – | 39,243 | 290 | 39,533 | – | 39,804 | 263 | 40,067 | ||
Foreign exchange contracts | – | 89,644 | 4 | 89,648 | – | 99,424 | 13 | 99,437 | ||
Credit derivatives | – | 224 | – | 224 | – | 388 | – | 388 | ||
Other contracts | 2,352 | 13,927 | 111 | 16,390 | 3,939 | 14,786 | 62 | 18,787 | ||
Valuation adjustments | – | (1,805) | 4 | (1,801) | – | (2,100) | 45 | (2,055) | ||
Total gross derivatives | 2,352 | 141,233 | 409 | 143,994 | 3,939 | 152,302 | 383 | 156,624 | ||
Netting adjustments | (1,544) | (1,544) | (2,185) | (2,185) | ||||||
Total derivatives | 142,450 | 154,439 | ||||||||
Other assets | 1,392 | 3,421 | 11 | 4,824 | 1,221 | 2,141 | 15 | 3,377 | ||
$96,593 | $722,979 | $ 5,189 | $ (1,544) | $ 823,217 | $71,057 | $685,985 | $ 4,553 | $ (2,185) | $ 759,410 | |
Financial liabilities | ||||||||||
Deposits | ||||||||||
Personal | $ – | $ 26,428 | $ 383 | $ | $ 26,811 | $ – | $ 22,016 | $ 241 | $ | $ 22,257 |
Business and government | – | 137,628 | – | 137,628 | – | 152,566 | – | 152,566 | ||
Bank | – | 11,462 | – | 11,462 | – | 7,196 | – | 7,196 | ||
Other | ||||||||||
Obligations related to securities sold short | 14,391 | 19,260 | – | 33,651 | 16,383 | 19,128 | – | 35,511 | ||
Obligations related to assets sold under repurchase agreements and | ||||||||||
securities loaned | – | 298,679 | – | 298,679 | – | 248,835 | – | 248,835 | ||
Derivatives | ||||||||||
Interest rate contracts | – | 41,249 | 952 | 42,201 | – | 39,592 | 1,122 | 40,714 | ||
Foreign exchange contracts | – | 81,750 | 53 | 81,803 | – | 94,310 | 145 | 94,455 | ||
Credit derivatives | – | 176 | – | 176 | – | 125 | – | 125 | ||
Other contracts | 3,119 | 17,306 | 549 | 20,974 | 3,847 | 16,663 | 847 | 21,357 | ||
Valuation adjustments | – | (982) | 1 | (981) | – | (967) | (8) | (975) | ||
Total gross derivatives | 3,119 | 139,499 | 1,555 | 144,173 | 3,847 | 149,723 | 2,106 | 155,676 | ||
Netting adjustments | (1,544) | (1,544) | (2,185) | (2,185) | ||||||
Total derivatives | 142,629 | 153,491 | ||||||||
Other liabilities | 370 | (1,296) | – | (926) | 341 | (632) | – | (291) | ||
$17,880 | $631,660 | $ 1,938 | $ (1,544) | $ 649,934 | $20,571 | $598,832 | $ 2,347 | $ (2,185) | $ 619,565 | |
(1)
As at October 31, 2023, residential and commercial mortgage-backed securities (MBS) included in all fair value levels of trading securities were $14,345 million and $nil
(October 31, 2022 – $12,273 million and $nil), respectively, and in all fair value levels of Investment securities were $24,365 million and $2,618 million (October 31, 2022
–
$23,362 million and $2,755 million), respectively.
(2)
United States (U.S.).
(3)
Organisation for Economic Co-operation and Development (OECD).
(4)
Collateralized debt obligations (CDO).
164
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 3
Fair value of financial instruments
(continued)
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
165
Fair values of our significant assets and liabilities measured on a recurring basis are determined and classified in the fair value
hierarchy table using the following valuation techniques and inputs.
Interest-bearing deposits with banks
The majority of our Interest-bearing deposits with banks are designated as FVTPL. These FVTPL deposits are composed of short-
dated deposits placed with banks, and are included in Interest-bearing deposits with banks in the fair value hierarchy table. The
fair values of these instruments are determined using the discounted cash flow method. The inputs to the valuation models
include interest rate swap curves and credit spreads, where applicable. They are classified as Level 2 instruments in the
hierarchy as the inputs are observable.
Government bonds (Canadian, U.S. and other OECD governments)
Government bonds are included in Canadian government debt, U.S. federal, state, municipal and agencies debt, Other OECD
government debt and Obligations related to securities sold short in the fair value hierarchy table. The fair values of government
issued or guaranteed debt securities in active markets are determined by reference to recent transaction prices, broker quotes,
or third-party vendor prices and are classified as Level 1 in the hierarchy. The fair values of securities that are not traded in
active markets are based on either security prices, or valuation techniques using implied yields and risk spreads derived from
prices of actively traded and similar government securities. Securities with observable prices or rate inputs as compared to
transaction prices, dealer quotes or vendor prices are classified as Level 2 in the hierarchy. Securities where inputs are
unobservable are classified as Level 3 in the hierarchy.
Corporate and U.S. municipal bonds
The fair values of corporate and U.S. municipal bonds, which are included in Corporate debt and other debt, U.S. federal, state,
municipal and agencies debt and Obligations related to securities sold short in the fair value hierarchy table, are determined
using either recently executed transaction prices, broker quotes, pricing services, or in certain instances, the discounted cash
flow method using rate inputs such as benchmark yields (CDOR, Secured Overnight Financing Rate (SOFR) and other similar
reference rates) and risk spreads of comparable securities. Securities with observable prices or rate inputs are classified as
Level 2 in the hierarchy. Securities where inputs are unobservable are classified as Level 3 in the hierarchy.
Asset-backed securities and Mortgage-backed securities
Asset-backed securities (ABS) and MBS are included in Asset-backed securities, Mortgage-backed securities, Canadian
government debt, U.S. federal, state, municipal and agencies debt, and Obligations related to securities sold short in the fair
value hierarchy table. Inputs for valuation of ABS and MBS are, when available, traded prices, dealer or lead manager quotes,
broker quotes and vendor prices of the identical securities. When prices of the identical securities are not readily available, we
use industry standard models with inputs such as discount margins, yields, default, prepayment and loss severity rates that are
implied from transaction prices, dealer quotes or vendor prices of comparable instruments. Where security prices and inputs are
observable, ABS and MBS are classified as Level 2 in the hierarchy. Otherwise, they are classified as Level 3 in the hierarchy.
Equities
Equities consist of listed and unlisted common shares, private equities, mutual funds and hedge funds with certain redemption
restrictions and are included in equities and obligations for securities sold short. The fair values of common shares are based on
quoted prices in active markets, where available, and are classified as Level 1 in the hierarchy. Where quoted prices in active
markets are not readily available, fair value is determined based on quoted market prices for similar securities or through
valuation techniques, such as multiples of earnings and the discounted cash flow method with forecasted cash flows and
discount rate as inputs. Private equities are classified as Level 3 in the hierarchy as their inputs are not observable. Hedge funds
are valued using Net Asset Values (NAV). If we can redeem a hedge fund at NAV prior to the next quarter end, the fund is
classified as Level 2 in the hierarchy. Otherwise, it is classified as Level 3 in the hierarchy.
Loans
Loans include base metal loans, corporate loans, banker acceptances and asset-backed financing loans. Fair values are
determined based on market prices, if available, or discounted cash flow method using the following inputs: market interest
rates, base metal commodity prices, market based spreads of assets with similar credit ratings and terms to maturity, LGD,
expected default frequency implied from credit derivative prices, if available, and relevant pricing information such as
contractual rate, origination and maturity dates, redemption price, coupon payment frequency and day count convention. Loans
with market prices or observable inputs are classified as Level 2 in the hierarchy and loans with unobservable inputs that have
significant impacts on the fair values are classified as Level 3 in the hierarchy.
Derivatives
The fair values of exchange-traded derivatives, such as interest rate and equity options and futures, are based on quoted market
prices and are typically classified as Level 1 in the hierarchy. OTC derivatives primarily consist of interest rate contracts, foreign
exchange contracts, commodity derivatives, equity derivatives and credit derivatives. The exchange-traded or OTC interest rate,
foreign exchange and commodity and equity derivatives are included in Interest rate contracts, Foreign exchange contracts and
Other contracts, respectively, in the fair value hierarchy table. The fair values of OTC derivatives are determined using valuation
models when quoted market prices or third-party consensus pricing information are not available. The valuation models, such as
discounted cash flow method or Black-Scholes option model, incorporate observable or unobservable inputs for interest and
foreign exchange rates, equity and commodity prices (including indices), credit spreads, corresponding market volatility levels,
and other market-based pricing factors. Other adjustments to fair value include bid-offer, CVA, FVA, OIS, parameter and model
uncertainties, and unrealized gain or loss at inception of a transaction. A derivative instrument is classified as Level 2 in the
hierarchy if observable market inputs are available or the unobservable inputs are not significant to the fair value. Otherwise, it
is classified as Level 3 in the hierarchy.
166
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 3
Fair value of financial instruments
(continued)
Securities borrowed or purchased under resale agreements and securities loaned or sold under repurchase agreements
In the fair value hierarchy table, these instruments are included in Assets purchased under reverse repurchase agreements and
securities borrowed, and Obligations related to assets sold under repurchase agreements and securities loaned. The fair values
of these contracts are determined using valuation techniques such as the discounted cash flow method using interest rate
curves as inputs. They are classified as Level 2 instruments in the hierarchy as the inputs are observable.
Deposits
A majority of our deposits are measured at amortized cost but certain deposits are designated as FVTPL. These FVTPL deposits
include deposits taken from clients, issuances of certificates of deposits and promissory notes, and interest rate and equity
linked notes. The fair values of these instruments are determined using the discounted cash flow method and derivative option
valuation models. The inputs to the valuation models include benchmark yield curves, credit spreads, interest rates, equity and
interest rate volatility, dividends and correlation, where applicable. They are classified as Level 2 or 3 instruments in the
hierarchy, depending on the significance of the unobservable credit spreads, volatility, dividend and correlation rates.
The following table presents fair values of our significant Level 3 financial instruments, valuation techniques used to determine
their fair values, ranges and weighted averages of unobservable inputs.
As at October 31, 2023 (Millions of Canadian dollars, except for prices, percentages and ratios)
| Fair value | Range of input values (1), (2) | |||||||
Weighted | ||||||||
Significant | average / | |||||||
Reporting line in the fair value | Valuation | unobservable | Inputs | |||||
Products | hierarchy table | Assets | Liabilities | techniques | inputs (3) | Low | High | distribution |
Corporate debt and related | Price-based | Prices | $ 9.88 | $ 107.13 | $ 87.66 | |||
derivatives | Corporate debt and other debt | $ | – | Discounted cash flows | Credit spread | 1.89% | 9.96% | 5.93% |
Loans | 1,859 | Credit enhancement | 11.70% | 15.60% | 13.00% | |||
Derivative related liabilities | $ 2 | |||||||
Government debt and | ||||||||
municipal bonds | Corporate debt and other debt | 149 | Discounted cash flows | Yields | 7.73% | 10.38% | 8.60% | |
Private equities, hedge fund | Market comparable | EV/EBITDA multiples | 4.16X | 14.90X | 6.93X | |||
investments and related | Equities | 2,732 | Price-based | P/E multiples | 6.60X | 22.60X | 8.60X | |
equity derivatives | Derivative related liabilities | – | Discounted cash flows | EV/Rev multiples | 1.00X | 5.00X | 3.00X | |
Liquidity discounts (4) | 10.00% | 40.00% | 16.91% | |||||
Discount rate | 8.50% | 13.30% | 10.70% | |||||
NAV / prices (5) | n.a. | n.a. | n.a. | |||||
Interest rate derivatives and | Discounted cash flows | Interest rates | 2.39% | 5.18% | High | |||
interest-rate-linked | Derivative related assets | 293 | Option pricing model | CPI swap rates | 1.84% | 2.35% | Even | |
structured notes (6), (7) | Derivative related liabilities | 995 | IR-IR correlations | 19.00% | 67.00% | Even | ||
FX-IR correlations | 29.00% | 56.00% | Even | |||||
FX-FX correlations | 68.00% | 68.00% | Even | |||||
Equity derivatives and equity- | ||||||||
linked structured | Discounted cash flows | Dividend yields | 0.14% | 10.71% | Lower | |||
notes (6), (7) | Derivative related assets | 111 | Option pricing model | Equity (EQ)-EQ correlations | 32.50% | 96.49% | Middle | |
Deposits | 383 | EQ-FX correlations | (83.15)% | 38.44% | Middle | |||
Derivative related liabilities | 485 | EQ volatilities | 6.70% | 110.72% | Lower | |||
Other (8) | ||||||||
Asset-backed securities | – | |||||||
Derivative related assets | 5 | |||||||
Other assets | 11 | |||||||
Mortgage-backed securities | 29 | |||||||
U.S. state, municipal and | ||||||||
agencies debt | – | |||||||
Derivative related liabilities | 73 | |||||||
Total | $ 5,189 | $ 1,938 | ||||||
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
167
As at October 31, 2022 (Millions of Canadian dollars, except for prices, percentages and ratios) | ||||||||
Fair value | Range of input values (1), (2) | |||||||
Weighted | ||||||||
Significant | average / | |||||||
Reporting line in the fair value | Valuation | unobservable | Inputs | |||||
Products | hierarchy table | Assets | Liabilities | techniques | inputs (3) | Low | High | distribution |
Corporate debt and related | Price-based | Prices | $ 1.00 | $ 111.90 | $ 85.64 | |||
derivatives | Corporate debt and other debt | $ 7 | Discounted cash flows | Credit spread | 1.67% | 10.73% | 6.20% | |
Loans | 1,692 | Credit enhancement | 11.70% | 15.60% | 13.00% | |||
Derivative related liabilities | $ 130 | |||||||
Government debt and | ||||||||
municipal bonds | Corporate debt and other debt | 151 | Discounted cash flows | Yields | 7.85% | 10.72% | 8.92% | |
Private equities, hedge fund | Market comparable | EV/EBITDA multiples | 3.97X | 14.31X | 8.59X | |||
investments and related | Equities | 2,271 | Price-based | P/E multiples | 8.47X | 24.04X | 12.46X | |
equity derivatives | Derivative related liabilities | 2 | Discounted cash flows | EV/Rev multiples | 0.35X | 5.77X | 3.88X | |
Liquidity discounts (4) | 10.00% | 40.00% | 17.35% | |||||
Discount rate | 10.80% | 10.80% | 10.80% | |||||
NAV / prices (5) | n.a. | n.a. | n.a. | |||||
Interest rate derivatives and | Discounted cash flows | Interest rates | 1.88% | 4.49% | High | |||
interest-rate-linked | Derivative related assets | 270 | Option pricing model | CPI swap rates | 1.98% | 2.59% | Even | |
structured notes (6), (7) | Derivative related liabilities | 1,216 | IR-IR correlations | 19.00% | 67.00% | Even | ||
FX-IR correlations | 29.00% | 56.00% | Even | |||||
FX-FX correlations | 68.00% | 68.00% | Even | |||||
Equity derivatives and equity- | ||||||||
linked structured | Discounted cash flows | Dividend yields | (0.63)% | 8.28% | Lower | |||
notes (6), (7) | Derivative related assets | 62 | Option pricing model | Equity (EQ)-EQ correlations | 33.00% | 94.90% | Middle | |
Deposits | 241 | EQ-FX correlations | (83.15)% | 38.44% | Middle | |||
Derivative related liabilities | 655 | EQ volatilities | 7.00% | 129.00% | Upper | |||
Other (8) | ||||||||
Asset-backed securities | 2 | |||||||
Derivative related assets | 51 | |||||||
Other assets | 15 | |||||||
Mortgage-backed securities | 28 | |||||||
U.S. state, municipal and agencies | ||||||||
debt | 4 | |||||||
Derivative related liabilities | 103 | |||||||
Total | $ 4,553 | $ 2,347 | ||||||
(1)
The low and high input values represent the actual highest and lowest level inputs used to value a group of financial instruments in a particular product category. These
input ranges do not reflect the level of input uncertainty, but are affected by the different underlying instruments within the product category. The input ranges will
therefore vary from period to period based on the characteristics of the underlying instruments held at each balance sheet date. Where provided, the weighted average
of the input values is calculated based on the relative fair values of the instruments within the product category. The weighted averages for derivatives are not presented
in the table as they would not provide a comparable metric; instead, distribution of significant unobservable inputs within the range for each product category is
indicated in the table.
(2)
Price-based inputs are significant for certain debt securities and are based on external benchmarks, comparable proxy instruments or pre-quarter-end trade data. For
these instruments, the price input is expressed in dollars for each $100 par value. For example, with an input price of $105, an instrument is valued at a premium over its
par value.
(3)
The significant unobservable inputs include the following: (i) Enterprise Value (EV); (ii) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA);
(iii) Price / Earnings (P/E); (iv) Revenue (Rev); (v) Consumer Price Index (CPI); (vi) Interest Rate (IR); (vii) Foreign Exchange (FX); and (viii) Equity (EQ).
(4)
Fair value of securities with liquidity discount inputs totalled $483 million (October 31, 2022 – $373 million).
(5)
NAV of a hedge fund is total fair value of assets less liabilities divided by the number of fund units. Private equities are valued based on NAV or valuation techniques. The
range for NAV per unit or price per share has not been disclosed for the hedge funds or private equities due to the dispersion of prices given the diverse nature of the
investments.
(6)
The level of aggregation and diversity within each derivative instrument category may result in certain ranges of inputs being wide and inputs being unevenly distributed
across the range. In the table, we indicated whether the majority of the inputs are concentrated toward the upper, middle, or lower end of the range, or evenly distributed
throughout the range.
(7)
The structured notes contain embedded equity or interest rate derivatives with unobservable inputs that are similar to those of the equity or interest rate derivatives.
(8)
Other primarily includes certain insignificant instruments such as auction rate securities, commodity derivatives, foreign exchange derivatives, contingent
considerations, bank-owned life insurance and retractable shares.
n.a.
not applicable
Sensitivity to unobservable inputs and interrelationships between unobservable inputs
Yield, credit spreads/discount margins
A financial instrument’s yield is the interest rate used to discount future cash flows in a valuation model. An increase in the yield,
in isolation, would result in a decrease in a fair value measurement and vice versa. A credit spread/discount margin is the
difference between a debt instrument’s yield and a benchmark instrument’s yield. Benchmark instruments have high credit
quality ratings, similar maturities and are often government bonds. The credit spread/discount margin therefore represents the
discount rate used to determine the present value of future cash flows of an asset to reflect the market return required for
uncertainty in the estimated cash flows. The credit spread/discount margin for an instrument forms part of the yield used in a
discounted cash flow method.
Funding spread
Funding spreads are credit spreads specific to funding or deposit rates. A decrease in funding spreads, on its own, will increase
the fair value of our liabilities, and vice versa.
Default rates
A default rate is the rate at which borrowers fail to make scheduled loan payments. A decrease in the default rate will typically
increase the fair value of the loan, and vice versa. This effect will be significantly more pronounced for a non-government
guaranteed loan than a government guaranteed loan.
168
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 3
Fair value of financial instruments
(continued)
A prepayment rate is the rate at which a loan will be repaid in advance of its expected amortization schedule. Prepayments
change the future cash flows of a loan. An increase in the prepayment rate in isolation will result in an increase in fair value when
the loan interest rate is lower than the current reinvestment rate, and a decrease in the prepayment rate in isolation will result in
a decrease in fair value when the loan interest rate is lower than the current reinvestment rate. Prepayment rates are generally
Recovery and loss severity rates
A recovery rate is an estimation of the amount that can be collected in a loan default scenario. The recovery rate is the recovered
amount divided by the loan balance due, expressed as a percentage. The inverse concept of recovery is loss severity. Loss
severity rate is an estimation of the loan amount not collected when a loan defaults. The loss severity rate is the loss amount
divided by the loan balance due, expressed as a percentage. Generally, an increase in the recovery rate or a decrease in the loss
severity rate will increase the loan fair value, and vice versa.
Volatility rates
Volatility measures the potential variability of future prices and is often measured as the standard deviation of price movements.
Volatility is an input to option pricing models used to value derivatives and issued structured notes. Volatility is used in valuing
equity, interest rate, commodity and foreign exchange options. A higher volatility rate means that the underlying price or rate
movements are more likely to occur. Higher volatility rates may increase or decrease an option’s fair value depending on the
option’s terms. The determination of volatility rates is dependent on various factors, including but not limited to, the underlying’s
market price, the strike price and maturity.
Dividend yields
A dividend yield is the underlying equity’s expected dividends expressed as an annual percentage of its price. Dividend yield is
used as an input for forward equity price and option models. Higher dividend yields will decrease the forward price, and vice
versa. A higher dividend yield will increase or decrease an option’s value, depending on the option’s terms.
Correlation rates
Correlation is the linear relationship between the movements in two different variables. Correlation is an input to the valuation of
derivative contracts and issued structured notes when an instrument’s payout is determined by correlated variables. When
variables are positively correlated, an increase in one variable will result in an increase in the other variable. When variables are
negatively correlated, an increase in one variable will result in a decrease in the other variable. The referenced variables can be
within a single asset class or market (equity, interest rate, commodities, credit and foreign exchange) or between variables in
different asset classes (equity to foreign exchange, or interest rate to foreign exchange). Changes in correlation will either
increase or decrease a financial instrument’s fair value depending on the terms of the instrument.
Interest rates
An interest rate is the percentage amount charged on a principal or notional amount. Increasing interest rates will decrease the
discounted cash flow value of a financial instrument, and vice versa.
Consumer Price Index swap rates
A CPI swap rate is expressed as a percentage of an increase in the average price of a basket of consumer goods and services,
such as transportation, food and medical care. An increase in the CPI swap rate will cause inflation swap payments to be larger,
and vice versa.
EV/EBITDA multiples, P/E multiples, EV/Rev multiples, and liquidity discounts
Private equity valuation inputs include EV/EBITDA multiples, P/E multiples and EV/Rev multiples. These are used to calculate
either enterprise value or share value of a company based on a multiple of earnings or revenue estimates. Higher multiples
equate to higher fair values for all multiple types, and vice versa. A liquidity discount may be applied when few or no transactions
exist to support the valuations.
Credit Enhancement
Credit enhancement is an input to the valuation of securitized transactions and is the amount of loan loss protection for a senior
tranche. Credit enhancement is expressed as a percentage of the transaction sizes. An increase in credit enhancement will cause
the credit spread to decrease and the tranche fair value to increase, and vice versa.
Interrelationships between unobservable inputs
Unobservable inputs, including the above discount margin, default rate, prepayment rate, and recovery and loss severity rates,
may not be independent of each other. For example, the discount margin can be affected by a change in default rate, prepayment
rate, or recovery and loss severity rates. Discount margins will generally decrease when default rates decline or when recovery
rates increase.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
169
Changes in fair value measurement for instruments measured on a recurring basis and categorized in Level 3 | ||||||||||||||||
| For the year ended October 31, 2023 | ||||||||||||||||
| Gains | Gains | Gains | ||||||||||||||
Fair value | (losses) | (losses) | Settlement | Transfers | Transfers | Fair value | (losses) included | |||||||||
at beginning | included in | included | Purchases | (sales) and | into | out of | at end of | in earnings for | ||||||||
(Millions of Canadian dollars) | of period | earnings | in OCI (1) | (issuances) | other (2) | Level 3 | Level 3 | period | positions still held | |||||||
Assets | ||||||||||||||||
Securities | ||||||||||||||||
Trading | ||||||||||||||||
Debt issued or guaranteed by: | ||||||||||||||||
U.S. state, municipal and agencies | $ 4 | $ – | $ – | $ – | $ (4) | $ – | $ – | $ – | $ – | |||||||
Asset-backed securities | ||||||||||||||||
Non-CDO securities | 2 | – | – | – | (2) | – | – | – | – | |||||||
Corporate debt and other debt | 7 | – | – | 2 | (16) | 17 | (10) | – | – | |||||||
Equities | 1,874 | (196) | 21 | 586 | (67) | 48 | – | 2,266 | (154) | |||||||
| 1,887 | (196) | 21 | 588 | (89) | 65 | (10) | 2,266 | (154) | ||||||||
Investment | ||||||||||||||||
Mortgage-backed securities | 28 | – | – | 1 | – | – | – | 29 | n.a. | |||||||
Corporate debt and other debt | 151 | – | 9 | – | (11) | – | – | 149 | n.a. | |||||||
Equities | 397 | – | 70 | 1 | (2) | – | – | 466 | n.a. | |||||||
| 576 | – | 79 | 2 | (13) | – | – | 644 | n.a. | ||||||||
Loans | 1,692 | (95) | 33 | 1,443 | (868) | 30 | (376) | 1,859 | (44) | |||||||
Other | ||||||||||||||||
Net derivative balances (3) | ||||||||||||||||
Interest rate contracts | (859) | (63) | 5 | (48) | 235 | 42 | 26 | (662) | (43) | |||||||
Foreign exchange contracts | (132) | 10 | 10 | (14) | 44 | – | 33 | (49) | 8 | |||||||
Other contracts | (785) | 83 | 4 | (143) | 78 | (159) | 484 | (438) | 152 | |||||||
Valuation adjustments | 53 | – | – | – | (50) | – | – | 3 | – | |||||||
Other assets | 15 | – | 1 | – | (5) | – | – | 11 | – | |||||||
$ 2,447 | $ (261) | $ 153 | $ 1,828 | $ (668) | $ (22) | $ 157 | $ 3,634 | $ (81) | ||||||||
Liabilities | ||||||||||||||||
Deposits | $ (241) | $ 5 | $ – | $ (260) | $ 23 | $ (134) | $ 224 | $ (383) | $ 24 | |||||||
Other | ||||||||||||||||
Other liabilities | – | – | – | – | – | – | – | – | – | |||||||
$ (241) | $ 5 | $ – | $ (260) | $ 23 | $ (134) | $ 224 | $ (383) | $ 24 | ||||||||
| For the year ended October 31, 2022 | |||||||||
Gains | Gains | Gains | |||||||
Fair value | (losses) | (losses) | Settlement | Transfers | Transfers | Fair value | (losses) included | ||
at beginning | included in | included | Purchases | (sales) and | into | out of | at end of | in earnings for | |
(Millions of Canadian dollars) | of period | earnings | in OCI (1) | (issuances) | other (2) | Level 3 | Level 3 | period positions still held | |
Assets | |||||||||
Securities | |||||||||
Trading | |||||||||
Debt issued or guaranteed by: | |||||||||
U.S. state, municipal and agencies | $ 25 | $ – | $ 2 | $ – | $ (23) | $ – | $ – | $ 4 | $ – |
Asset-backed securities | |||||||||
Non-CDO securities | 2 | – | – | – | – | – | – | 2 | – |
Corporate debt and other debt | 25 | (3) | – | – | (6) | 9 | (18) | 7 | – |
Equities | 1,530 | 14 | 100 | 314 | (82) | 1 | (3) | 1,874 | 43 |
| 1,582 | 11 | 102 | 314 | (111) | 10 | (21) | 1,887 | 43 | |
Investment | |||||||||
Mortgage-backed securities | 20 | – | 8 | – | – | – | – | 28 | n.a. |
Corporate debt and other debt | 152 | – | 2 | – | – | – | (3) | 151 | n.a. |
Equities | 334 | – | 51 | 11 | (1) | 37 | (35) | 397 | n.a. |
| 506 | – | 61 | 11 | (1) | 37 | (38) | 576 | n.a. | |
Loans | 1,077 | (25) | (37) | 407 | (466) | 802 | (66) | 1,692 | (78) |
Other | |||||||||
Net derivative balances (3) | |||||||||
Interest rate contracts | (635) | (187) | (5) | 17 | 64 | (13) | (100) | (859) | (16) |
Foreign exchange contracts | 47 | (103) | (2) | (22) | 3 | 5 | (60) | (132) | (90) |
Other contracts | (393) | 165 | (34) | (245) | 70 | (406) | 58 | (785) | 271 |
Valuation adjustments | 20 | – | – | 25 | (11) | 19 | – | 53 | – |
Other assets | – | – | 1 | 15 | (1) | – | – | 15 | – |
$ 2,204 | $ (139) | $ 86 | $ 522 | $ (453) | $ 454 | $ (227) | $ 2,447 | $ 130 | |
Liabilities | |||||||||
Deposits | $ (151) | $ 2 | $ (3) | $ (120) | $ 26 | $ (143) | $ 148 | $ (241) | $ 19 |
Other | |||||||||
Other liabilities | (7) | (1) | – | – | 8 | – | – | – | – |
$ (158) | $ 1 | $ (3) | $ (120) | $ 34 | $ (143) | $ 148 | $ (241) | $ 19 | |
(1)
These amounts include the foreign currency translation gains or losses arising on consolidation of foreign subsidiaries relating to the Level 3 instruments, where
applicable. The unrealized gains on Investment securities recognized in OCI were $65 million for the year ended October 31, 2023 (October 31, 2022 – gains of $50 million)
excluding the translation gains or losses arising on consolidation.
(2)
Other includes amortization of premiums or discounts recognized in net income.
(3)
Net derivatives as at October 31, 2023 included derivative assets of $409 million (October 31, 2022 – $383 million) and derivative liabilities of $1,555 million (October 31, 2022 –
$2,106 million).
n.a.
not applicable
170
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 3
Fair value of financial instruments
(continued)
Transfers between fair value hierarchy levels for instruments carried at fair value on a recurring basis
Transfers between Level 1 and Level 2, and transfers into and out of Level 3 are assumed to occur at the end of the period. For an
asset or a liability that transfers into Level 3 during the period, the entire change in fair value for the period is excluded from the
Gains (losses) included in earnings for positions still held column of the above reconciliation, whereas for transfers out of Level 3
during the period, the entire change in fair value for the period is included in the same column of the above reconciliation.
Transfers between Level 1 and 2 are dependent on whether fair value is obtained on the basis of quoted market prices in active
markets (Level 1).
During the year ended October 31, 2023, significant transfers out of Level 1 to Level 2 included Trading U.S. federal, state,
municipal and agencies debt of $763 million, Investment U.S. federal, state, municipal and agencies debt of $435 million and
Obligations related to securities sold short of $151 million. During the year ended October 31, 2022, there were no significant
transfers out of Level 1 to Level 2.
During the year ended October 31, 2023 and October 31, 2022, there were no significant transfers out of Level 2 to Level 1.
Transfers between Level 2 and Level 3 are primarily due to either a change in the market observability for an input, or a change in
an unobservable input’s significance to a financial instrument’s fair value.
During the year ended October 31, 2023, significant transfers out of Level 2 to Level 3 included Other contracts and Deposits
due to changes in the significance of unobservable inputs and changes in the market observability of inputs. During the year
ended October 31, 2022, significant transfers out of Level 2 to Level 3 included Loans and Other contracts due to changes in the
market observability of inputs and changes in the significance of unobservable inputs.
During the year ended October 31, 2023, significant transfers out of Level 3 to Level 2 included Other contracts, Loans and
Deposits due to changes in the market observability of inputs and changes in the significance of unobservable inputs. During the
year ended October 31, 2022, there were no significant transfers out of Level 3 to Level 2.
Positive and negative fair value movements of Level 3 financial instruments from using reasonably possible alternative
assumptions
A financial instrument is classified as Level 3 in the fair value hierarchy if one or more of its unobservable inputs may
significantly affect the measurement of its fair value. In preparing the financial statements, appropriate levels for these
unobservable input parameters are chosen so that they are consistent with prevailing market evidence or management
judgment. Due to the unobservable nature of the prices or rates, there may be uncertainty about the valuation of these Level 3
financial instruments.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
171
The following table summarizes the impacts to fair values of Level 3 financial instruments using reasonably possible
alternative assumptions. This sensitivity disclosure is intended to illustrate the potential impact of the relative uncertainty in the
fair value of Level 3 financial instruments. In reporting the sensitivities below, we offset balances in instances where: (i) the move
in valuation factors cause an offsetting positive and negative fair value movement, (ii) both offsetting instruments are in Level 3,
and (iii) exposures are managed and reported on a net basis. With respect to overall sensitivity, it is unlikely in practice that all
reasonably possible alternative assumptions would simultaneously be realized.
| As at | ||||||
October 31, 2023 | October 31, 2022 | |||||
Positive fair value | Negative fair value | Positive fair value | Negative fair value | |||
movement from | movement from | movement from | movement from | |||
using reasonably | using reasonably | using reasonably | using reasonably | |||
Level 3 | possible | possible | Level 3 | possible | possible | |
(Millions of Canadian dollars) | fair value | alternatives | alternatives | fair value | alternatives | alternatives |
Securities | ||||||
Trading | ||||||
Debt issued or guaranteed by: | ||||||
U.S. state, municipal and | ||||||
agencies | $ – | $ – | $ – | $ 4 | $ – | $ – |
Asset-backed securities | – | – | – | 2 | – | – |
Corporate debt and other debt | – | – | – | 7 | – | – |
Equities | 2,266 | 50 | (43) | 1,874 | 27 | (23) |
Investment | ||||||
Mortgage-backed securities | 29 | 4 | (4) | 28 | 4 | (4) |
Corporate debt and other debt | 149 | 11 | (10) | 151 | 12 | (10) |
Equities | 466 | 48 | (47) | 397 | 38 | (39) |
Loans | 1,859 | 33 | (37) | 1,692 | 60 | (62) |
Derivatives | 409 | 10 | (7) | 383 | 5 | (3) |
Other assets | 11 | – | – | 15 | – | – |
$ 5,189 | $ 156 | $ (148) | $ 4,553 | $ 146 | $ (141) | |
Deposits | $ (383) | $ 26 | $ (26) | $ (241) | $ 9 | $ (9) |
Derivatives | (1,555) | 59 | (66) | (2,106) | 55 | (57) |
Other | ||||||
Other liabilities | – | – | – | – | – | – |
$ (1,938) | $ 85 | $ (92) | $ (2,347) | $ 64 | $ (66) | |
Sensitivity results
As at October 31, 2023, the effects of applying other reasonably possible alternative assumptions to the Level 3 asset positions
would be an increase of $156 million and a reduction of $148 million in fair value, of which $63 million and $61 million would be
recorded in Other components of equity, respectively. The effects of applying these assumptions to the Level 3 liability positions
would result in a decrease of $85 million and an increase of $92 million in fair value.
Level 3 valuation inputs and approaches to developing reasonably possible alternative assumptions
The following is a summary of the unobservable inputs used in the valuation of the Level 3 instruments and our approaches to
developing reasonably possible alternative assumptions used to determine sensitivity.
Financial assets or | Sensitivity methodology |
liabilities | |
Asset-backed securities, | Sensitivities are determined based on adjusting, plus or minus one standard deviation, the |
corporate debt, government | bid-offer spreads or input prices if a sufficient number of prices are received, adjusting input |
debt, municipal bonds and | parameters such as credit spreads or using high and low vendor prices as reasonably possible |
loans | alternative assumptions. |
Private equities, hedge fund | Sensitivity of direct private equity investments is determined by (i) adjusting the discount rate |
investments and related | by 2% when the discounted cash flow method is used to determine fair value, (ii) adjusting the |
equity derivatives | price multiples based on the range of multiples of comparable companies when price-multiples- |
based models are used, or (iii) using an alternative valuation approach. The private equity fund, | |
hedge fund and related equity derivative NAVs are provided by the fund managers, and as a | |
result, there are no other reasonably possible alternative assumptions for these investments. | |
Interest rate derivatives | Sensitivities of interest rate and cross currency swaps are derived using plus or minus one |
standard deviation of the inputs, and an amount representing model and parameter uncertainty, | |
where applicable. | |
Equity derivatives | Sensitivity of the Level 3 position is determined by shifting the unobservable model inputs by |
plus or minus one standard deviation of the pricing service market data including volatility, | |
dividends or correlations, as applicable. | |
Bank funding and deposits | Sensitivities of deposits are calculated by shifting the funding curve by plus or minus certain |
basis points. | |
Structured notes | Sensitivities for interest-rate-linked and equity-linked structured notes are derived by adjusting |
inputs by plus or minus one standard deviation, and for other deposits, by estimating a | |
reasonable move in the funding curve by plus or minus certain basis points. |
172
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 3
Fair value of financial instruments
(continued)
| As at October 31, 2023 | ||||||
Fair value | Fair value may not approximate carrying value | |||||
approximates | Fair value measurements using | Total | ||||
(Millions of Canadian dollars) | carrying value (1) | Level 1 | Level 2 | Level 3 | Total | fair value |
Interest-bearing deposits with banks | $ 10,230 | $ – | $ – | $ – | $ – | $ 10,230 |
Amortized cost securities (2) | – | 34 | 83,633 | – | 83,667 | 83,667 |
Assets purchased under reverse | ||||||
repurchase agreements and | ||||||
securities borrowed | 39,528 | – | 14,794 | – | 14,794 | 54,322 |
Loans | ||||||
Retail | 70,606 | – | 466,962 | 4,912 | 471,874 | 542,480 |
Wholesale | 8,231 | – | 254,342 | 6,270 | 260,612 | 268,843 |
78,837 | – | 721,304 | 11,182 | 732,486 | 811,323 | |
Other assets | 67,400 | – | 914 | 223 | 1,137 | 68,537 |
195,995 | 34 | 820,645 | 11,405 | 832,084 | 1,028,079 | |
Deposits | ||||||
Personal | 252,779 | – | 159,669 | 438 | 160,107 | 412,886 |
Business and government | 385,727 | – | 218,761 | 772 | 219,533 | 605,260 |
Bank | 16,902 | – | 16,251 | 7 | 16,258 | 33,160 |
655,408 | – | 394,681 | 1,217 | 395,898 | 1,051,306 | |
Obligations related to assets sold | ||||||
under repurchase agreements and | ||||||
securities loaned | 36,559 | – | – | – | – | 36,559 |
Other liabilities | 76,982 | – | 1,856 | 13,564 | 15,420 | 92,402 |
Subordinated debentures | – | – | 11,213 | – | 11,213 | 11,213 |
$ 768,949 | $ – | $ 407,750 | $ 14,781 | $ 422,531 | $ 1,191,480 | |
| As at October 31, 2022 | ||||||
Fair value | Fair value may not approximate carrying value | |||||
approximates | Fair value measurements using | Total | ||||
(Millions of Canadian dollars) | carrying value (1) | Level 1 | Level 2 | Level 3 | Total | fair value |
Interest-bearing deposits with banks | $ 23,543 | $ – | $ – | $ – | $ – | $ 23,543 |
Amortized cost securities (2) | – | – | 70,073 | – | 70,073 | 70,073 |
Assets purchased under reverse | ||||||
repurchase agreements and | ||||||
securities borrowed | 42,224 | – | 10,956 | – | 10,956 | 53,180 |
Loans | ||||||
Retail | 70,162 | – | 446,809 | 4,457 | 451,266 | 521,428 |
Wholesale | 17,943 | – | 230,880 | 4,993 | 235,873 | 253,816 |
88,105 | – | 677,689 | 9,450 | 687,139 | 775,244 | |
Other assets | 72,198 | – | 716 | 170 | 886 | 73,084 |
226,070 | – | 759,434 | 9,620 | 769,054 | 995,124 | |
Deposits | ||||||
Personal | 271,414 | – | 108,549 | 433 | 108,982 | 380,396 |
Business and government | 406,045 | – | 198,265 | 792 | 199,057 | 605,102 |
Bank | 22,638 | – | 14,120 | – | 14,120 | 36,758 |
700,097 | – | 320,934 | 1,225 | 322,159 | 1,022,256 | |
Obligations related to assets sold | ||||||
under repurchase agreements and | ||||||
securities loaned | 25,112 | – | – | – | – | 25,112 |
Other liabilities | 77,801 | – | 1,554 | 10,805 | 12,359 | 90,160 |
Subordinated debentures | – | – | 9,608 | 60 | 9,668 | 9,668 |
$ 803,010 | $ – | $ 332,096 | $ 12,090 | $ 344,186 | $ 1,147,196 | |
(1)
Certain financial instruments have not been assigned to a level as the carrying amount approximates their fair values.
(2)
Included in Securities – Investment, net of applicable allowance on the Consolidated Balance Sheets.
Fair values of financial assets and liabilities carried at amortized cost and disclosed in the table above are determined using the
following valuation techniques and inputs.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
173
Amortized cost securities
Fair values of government bonds, corporate bonds, and ABS are based on quoted prices. Fair values of certain Non-OECD
government bonds are based on vendor prices or the discounted cash flow method with yield curves of other countries’
government bonds as inputs. For ABS, where market prices are not available, the fair value is determined using the discounted
cash flow method. The inputs to the valuation model generally include market interest rates, spreads and yields derived from
comparable securities, prepayment, and LGD.
under repurchase agreements and securities loaned
Valuation methods used for the long-term instruments are described in the Fair value of assets and liabilities measured on a
recurring basis and classified using the fair value hierarchy section of this note. The carrying values of short-term instruments
Loans – Retail
Retail loans include residential mortgages, personal and small business loans and credit cards. For residential mortgages, and
personal and small business loans, we segregate the portfolio based on certain attributes such as product type, contractual
interest rate, term to maturity and credit scores, if applicable. Fair values of these loans are determined by the discounted cash
flow method using applicable inputs such as prevailing interest rates, contractual and posted client rates, client discounts, credit
spreads, prepayment rates and loan-to-value (LTV) ratios. Fair values of credit card receivables are also calculated based on a
discounted cash flow method with portfolio yields, write-offs and monthly payment rates as inputs. The carrying values of short-
term and variable rate loans generally approximate their fair values.
Loans – Wholesale
Where market prices are available, wholesale loans are valued based on market prices. Otherwise, fair value is determined by
the discounted cash flow method using the following inputs: market interest rates and market based spreads of assets with
similar credit ratings and terms to maturity, LGD, expected default frequency implied from credit default swap prices, if available,
and relevant pricing information such as contractual rate, origination and maturity dates, redemption price, coupon payment
frequency and date convention.
Deposits
Deposits are comprised of demand, notice, and term deposits which include senior deposit notes we have issued to provide us
with long-term funding. Fair values of term deposits are determined by one of several valuation techniques: (i) for term deposits
and similar instruments, we segregate the portfolio based on term to maturity. Fair values of these instruments are determined
by the discounted cash flow method using inputs such as client rates for new sales of the corresponding terms; and (ii) for senior
deposit notes, we use actual traded prices, vendor prices or the discounted cash flow method using a market interest rate curve
and our funding spreads as inputs. The carrying values of demand, notice, and short-term term deposits generally approximate
their fair values.
Other assets and Other liabilities
Other assets and Other liabilities include receivables and payables relating to certain commodities. Fair values of the commodity
receivables and payables are calculated by the discounted cash flow method using applicable inputs such as market interest
rates, counterparties’ credit spreads, our funding spreads, commodity forward prices and spot prices.
Subordinated debentures
Fair values of Subordinated debentures are based on market prices, dealer quotes or vendor prices when available. Where prices
cannot be observed, fair value is determined using the discounted cash flow method, with applicable inputs such as market
Securities
Carrying value of securities
| As at October 31, 2023 | |||||||
| Term to maturity (1) | |||||||
With no | |||||||
Within | 3 months | 1 year to | 5 years to | Over | specific | ||
(Millions of Canadian dollars) | 3 months | to 1 year | 5 years | 10 years | 10 years | maturity | Total |
Trading (2) | |||||||
Debt issued or guaranteed by: | |||||||
Canadian government | $ 9,867 | $ 17,244 | $ 8,687 | $ 2,932 | $ 6,915 | $ – | $ 45,645 |
U.S. federal, state, municipal and | |||||||
agencies | 15,507 | 8,136 | 15,864 | 4,375 | 8,806 | – | 52,688 |
Other OECD government | 566 | 1,117 | 815 | 1,040 | 1,094 | – | 4,632 |
Mortgage-backed securities | – | – | – | – | 2 | – | 2 |
Asset-backed securities | 452 | 151 | 234 | 307 | 101 | – | 1,245 |
Corporate debt and other debt | |||||||
Bankers’ acceptances | 143 | – | – | – | – | – | 143 |
Other (3) | 1,207 | 2,219 | 6,681 | 3,656 | 8,709 | – | 22,472 |
Equities | 63,324 | 63,324 | |||||
27,742 | 28,867 | 32,281 | 12,310 | 25,627 | 63,324 | 190,151 | |
Fair value through other | |||||||
comprehensive income (2) | |||||||
Debt issued or guaranteed by: | |||||||
Canadian government | |||||||
Federal | |||||||
Amortized cost | 2,479 | 1,247 | 1,726 | 640 | 517 | – | 6,609 |
Fair value | 2,479 | 1,242 | 1,707 | 515 | 316 | – | 6,259 |
Yield (4) | 4.5% | 3.2% | 2.6% | 1.2% | 3.4% | – | 3.4% |
Provincial and municipal | |||||||
Amortized cost | 469 | 8 | 1,159 | 52 | 1,708 | – | 3,396 |
Fair value | 469 | 8 | 1,158 | 52 | 1,061 | – | 2,748 |
Yield (4) | 4.9% | 3.7% | 2.8% | 4.5% | 4.4% | – | 3.8% |
U.S. federal, state, municipal and | |||||||
agencies | |||||||
Amortized cost | 846 | 8,595 | 33,044 | 16,355 | 16,486 | – | 75,326 |
Fair value | 856 | 8,572 | 33,050 | 16,193 | 14,624 | – | 73,295 |
Yield (4) | 7.4% | 2.1% | 2.7% | 4.0% | 3.6% | – | 3.2% |
Other OECD government | |||||||
Amortized cost | 160 | 1,009 | 5,030 | 1 | – | – | 6,200 |
Fair value | 160 | 1,009 | 5,022 | 1 | – | – | 6,192 |
Yield (4) | 6.3% | 4.0% | 3.0% | 4.6% | – | – | 3.3% |
Mortgage-backed securities | |||||||
Amortized cost | – | – | 32 | 28 | 2,702 | – | 2,762 |
Fair value | – | – | 31 | 25 | 2,645 | – | 2,701 |
Yield (4) | – | – | 7.5% | 6.7% | 6.8% | – | 6.8% |
Asset-backed securities | |||||||
Amortized cost | – | – | 16 | 7,542 | 1,194 | – | 8,752 |
Fair value | – | – | 17 | 7,503 | 1,186 | – | 8,706 |
Yield (4) | – | – | 6.4% | 6.9% | 7.0% | – | 6.9% |
Corporate debt and other debt | |||||||
Amortized cost | 4,928 | 1,759 | 18,798 | 2,248 | 41 | – | 27,774 |
Fair value | 4,928 | 1,755 | 18,761 | 2,243 | 36 | – | 27,723 |
Yield (4) | 3.9% | 4.2% | 3.9% | 5.4% | 4.7% | – | 4.1% |
Equities | |||||||
Cost | 493 | 493 | |||||
Fair value (5) | 842 | 842 | |||||
Amortized cost | 8,882 | 12,618 | 59,805 | 26,866 | 22,648 | 493 | 131,312 |
Fair value | 8,892 | 12,586 | 59,746 | 26,532 | 19,868 | 842 | 128,466 |
Amortized cost (2) | |||||||
Debt issued or guaranteed by: | |||||||
Canadian government | 997 | 1,931 | 17,448 | 6,468 | – | – | 26,844 |
Yield (4) | 2.8% | 3.0% | 2.1% | 2.0% | – | – | 2.2% |
U.S. federal, state, municipal and | |||||||
agencies | 424 | 1,427 | 14,536 | 5,156 | 23,025 | – | 44,568 |
Yield (4) | 5.0% | 4.1% | 3.3% | 2.9% | 2.5% | – | 2.9% |
Other OECD government | 375 | 723 | 4,362 | 66 | – | – | 5,526 |
Yield (4) | 2.0% | 0.8% | 2.9% | 1.1% | – | – | 2.5% |
Asset-backed securities | – | – | 424 | – | 1 | – | 425 |
Yield (4) | – | – | 4.9% | – | 1.4% | – | 4.9% |
Corporate debt and other debt | 838 | 1,443 | 11,256 | 190 | 23 | – | 13,750 |
Yield (4) | 2.3% | 2.9% | 3.4% | 3.1% | 5.6% | – | 3.3% |
Amortized cost, net of allowance | 2,634 | 5,524 | 48,026 | 11,880 | 23,049 | – | 91,113 |
Fair value | 2,627 | 5,447 | 46,258 | 10,276 | 19,059 | – | 83,667 |
Total carrying value of securities
$ 39,268
$ 46,977
$ 140,053
$
50,722
$ 68,544
$ 64,166
$ 409,730
174
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
| As at October 31, 2022 | |||||||
| Term to maturity (1) | |||||||
With no | |||||||
Within | 3 months | 1 year to | 5 years to | Over | specific | ||
(Millions of Canadian dollars) | 3 months | to 1 year | 5 years | 10 years | 10 years | maturity | Total |
Trading (2) | |||||||
Debt issued or guaranteed by: | |||||||
Canadian government | $ 2,255 | $ 14,181 | $ 6,907 | $ 2,706 | $ 6,011 | $ – | $ 32,060 |
U.S. federal, state, municipal and | |||||||
agencies | 7,151 | 10,107 | 7,043 | 4,507 | 8,020 | – | 36,828 |
Other OECD government | 1,343 | 233 | 606 | 241 | 2,354 | – | 4,777 |
Mortgage-backed securities | – | – | – | – | 2 | – | 2 |
Asset-backed securities | 779 | 49 | 67 | 207 | 208 | – | 1,310 |
Corporate debt and other debt | |||||||
Bankers’ acceptances | 252 | 3 | – | – | – | – | 255 |
Other (3) | 3,055 | 1,837 | 4,813 | 3,037 | 8,172 | – | 20,914 |
Equities | 52,059 | 52,059 | |||||
14,835 | 26,410 | 19,436 | 10,698 | 24,767 | 52,059 | 148,205 | |
Fair value through other comprehensive | |||||||
income (2) | |||||||
Debt issued or guaranteed by: | |||||||
Canadian government | |||||||
Federal | |||||||
Amortized cost | 780 | 1,010 | 1,024 | 745 | 522 | – | 4,081 |
Fair value | 778 | 1,009 | 1,012 | 635 | 347 | – | 3,781 |
Yield (4) | 2.3% | 2.3% | 2.8% | 1.6% | 3.1% | – | 2.4% |
Provincial and municipal | |||||||
Amortized cost | 237 | 215 | 616 | 56 | 1,561 | – | 2,685 |
Fair value | 237 | 216 | 616 | 56 | 999 | – | 2,124 |
Yield (4) | 2.0% | 2.7% | 2.0% | 3.8% | 4.1% | – | 3.0% |
U.S. federal, state, municipal and | |||||||
agencies | |||||||
Amortized cost | 802 | 2,613 | 13,586 | 9,104 | 19,929 | – | 46,034 |
Fair value | 802 | 2,615 | 13,554 | 9,061 | 18,326 | – | 44,358 |
Yield (4) | 4.9% | 0.4% | 1.9% | 3.4% | 3.0% | – | 2.6% |
Other OECD government | |||||||
Amortized cost | 1,105 | 642 | 3,406 | 1 | – | – | 5,154 |
Fair value | 1,105 | 642 | 3,396 | 1 | – | – | 5,144 |
Yield (4) | 2.4% | 1.2% | 1.7% | 4.4% | – | – | 1.8% |
Mortgage-backed securities | |||||||
Amortized cost | – | – | – | 41 | 2,944 | – | 2,985 |
Fair value | – | – | – | 37 | 2,851 | – | 2,888 |
Yield (4) | – | – | – | 4.5% | 4.7% | – | 4.7% |
Asset-backed securities | |||||||
Amortized cost | – | – | 46 | 6,331 | 1,911 | – | 8,288 |
Fair value | – | – | 46 | 6,172 | 1,830 | – | 8,048 |
Yield (4) | – | – | 4.6% | 5.3% | 5.4% | – | 5.3% |
Corporate debt and other debt | |||||||
Amortized cost | 5,922 | 4,793 | 12,420 | 2,666 | 51 | – | 25,852 |
Fair value | 5,919 | 4,792 | 12,307 | 2,656 | 46 | – | 25,720 |
Yield (4) | 3.2% | 2.8% | 2.6% | 3.1% | 5.1% | – | 2.8% |
Equities | |||||||
Cost | 551 | 551 | |||||
Fair value (5) | 828 | 828 | |||||
Amortized cost | 8,846 | 9,273 | 31,098 | 18,944 | 26,918 | 551 | 95,630 |
Fair value | 8,841 | 9,274 | 30,931 | 18,618 | 24,399 | 828 | 92,891 |
Amortized cost (2) | |||||||
Debt issued or guaranteed by: | |||||||
Canadian government | 929 | 1,734 | 16,655 | 6,101 | – | – | 25,419 |
Yield (4) | 2.4% | 2.8% | 2.0% | 2.3% | – | – | 2.1% |
U.S. federal, state, municipal and | |||||||
agencies | 161 | 784 | 3,885 | 3,784 | 25,518 | – | 34,132 |
Yield (4) | 4.4% | 3.0% | 1.7% | 2.3% | 2.4% | – | 2.3% |
Other OECD government | 235 | 1,574 | 3,645 | 64 | – | – | 5,518 |
Yield (4) | 1.3% | 1.3% | 1.9% | 1.3% | – | – | 1.7% |
Asset-backed securities | – | – | 573 | 135 | 3 | – | 711 |
Yield (4) | – | – | 3.0% | 3.5% | 1.5% | – | 3.1% |
Corporate debt and other debt | 574 | 2,434 | 7,574 | 741 | 24 | – | 11,347 |
Yield (4) | 0.8% | 1.7% | 2.6% | 2.4% | 4.9% | – | 2.0% |
Amortized cost, net of allowance | 1,899 | 6,526 | 32,332 | 10,825 | 25,545 | – | 77,127 |
Fair value | 1,899 | 6,455 | 30,579 | 9,433 | 21,707 | – | 70,073 |
Total carrying value of securities | $ 25,575 | $ 42,210 | $ 82,699 | $ 40,141 | $ 74,711 | $ 52,887 | $ 318,223 |
(1)
Actual maturities may differ from contractual maturities shown above as borrowers may have the right to extend or prepay obligations with or without penalties.
(2)
Trading securities and FVOCI securities are recorded at fair value. Amortized cost securities, included in Investment securities, are recorded at amortized cost and
presented net of allowance for credit losses.
(3)
Primarily composed of corporate debt, supra-national debt, and commercial paper.
(4)
The weighted average yield is derived using the contractual interest rate and the carrying value at the end of the year for the respective securities.
(5)
Certain equity securities that are not held-for-trading purposes are designated as FVOCI.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
175
176
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 4
Securities
(continued)
Unrealized gains and losses on securities at FVOCI
(1), (2)
| As at | ||||||||
| October 31, 2023 | October 31, 2022 | |||||||
Cost/ | Gross | Gross | Cost/ | Gross | Gross | |||
Amortized | unrealized | unrealized | Amortized | unrealized | unrealized | Fair | ||
(Millions of Canadian dollars) | cost | gains | losses | Fair value | cost | gains | losses | value |
Debt issued or guaranteed by: | ||||||||
Canadian government | ||||||||
Federal | $ 6,609 | $ 1 | $ (351) | $ 6,259 | $ 4,081 | $ 1 | $ (301) | $ 3,781 |
Provincial and municipal | 3,396 | 2 | (650) | 2,748 | 2,685 | 6 | (567) | 2,124 |
U.S. federal, state, municipal and | ||||||||
agencies | 75,326 | 343 | (2,374) | 73,295 | 46,034 | 343 | (2,019) | 44,358 |
Other OECD government | 6,200 | 1 | (9) | 6,192 | 5,154 | 7 | (17) | 5,144 |
Mortgage-backed securities | 2,762 | – | (61) | 2,701 | 2,985 | 1 | (98) | 2,888 |
Asset-backed securities | ||||||||
CDO | 8,308 | 3 | (46) | 8,265 | 7,741 | 3 | (220) | 7,524 |
Non-CDO securities | 444 | 2 | (5) | 441 | 547 | – | (23) | 524 |
Corporate debt and other debt | 27,774 | 44 | (95) | 27,723 | 25,852 | 51 | (183) | 25,720 |
Equities | 493 | 357 | (8) | 842 | 551 | 284 | (7) | 828 |
$ 131,312 | $ 753 | $ (3,599) | $ 128,466 | $ 95,630 | $ 696 | $ (3,435) | $ 92,891 | |
(1)
Excludes $91,113 million of held-to-collect securities as at October 31, 2023 that are carried at amortized cost, net of allowance for credit losses (October 31, 2022 –
$77,127 million).
(2)
Gross unrealized gains and losses includes $(33) million of allowance for credit losses on debt securities at FVOCI as at October 31, 2023 (October 31, 2022 – $(19) million)
recognized in income and Other components of equity.
The following tables reconcile the opening and closing allowance for debt securities at FVOCI and amortized cost by stage.
Reconciling items include the following:
•
Transfers between stages, which are presumed to occur before any corresponding remeasurement of the allowance.
•
Purchases, which reflect the allowance related to assets newly recognized during the period, including those assets that
were derecognized following a modification of terms.
•
Sales and maturities, which reflect the allowance related to assets derecognized during the period without a credit loss
being incurred, including those assets that were derecognized following a modification of terms.
•
Changes in risk, parameters and exposures, which comprise the impact of changes in model inputs or assumptions, including
changes in forward-looking macroeconomic conditions; partial repayments; changes in the measurement following a
transfer between stages; and unwinding of the time value discount due to the passage of time.
Allowance for credit losses – securities at FVOCI
(1)
| For the year ended | |||||||||
| October 31, 2023 | October 31, 2022 | ||||||||
| Performing | Impaired | Performing | Impaired | ||||||
(Millions of Canadian dollars) | Stage 1 | Stage 2 | Stage 3 (2) | Total | Stage 1 | Stage 2 | Stage 3 (2) | Total | |
Balance at beginning of period | $ 3 | $ 1 | $ (23) | $ (19) | $ 2 | $ 1 | $ (12) | $ (9) | |
Provision for credit losses | |||||||||
Transfers to stage 1 | 1 | (1) | – | – | 1 | (1) | – | – | |
Transfers to stage 2 | – | – | – | – | – | – | – | – | |
Transfers to stage 3 | – | – | – | – | – | – | – | – | |
Purchases | 7 | – | – | 7 | 3 | – | – | 3 | |
Sales and maturities | (2) | – | – | (2) | (1) | – | – | (1) | |
Changes in risk, parameters and | |||||||||
exposures | (5) | – | (17) | (22) | (2) | 1 | (10) | (11) | |
Exchange rate and other | – | – | 3 | 3 | – | – | (1) | (1) | |
Balance at end of period | $ | 4 $ | – | $ (37) | $ (33) | $ 3 | $ 1 | $ (23) | $ (19) |
(1)
Expected credit losses on debt securities at FVOCI are not separately recognized on the Consolidated Balance Sheets as the related securities are recorded at fair value.
The cumulative amount of credit losses recognized in income is presented in Other components of equity.
(2)
Reflects changes in the allowance for purchased credit impaired securities.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
177
Allowance for credit losses – securities at amortized cost
| For the year ended | ||||||||||
| October 31, 2023 | October 31, 2022 | |||||||||
| Performing | Impaired | Performing | Impaired | |||||||
(Millions of Canadian dollars) | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | ||
Balance at beginning of period | $ 8 | $ 14 | $ – | $ 22 | $ 5 $ | 18 $ | – | $ 23 | ||
Provision for credit losses | ||||||||||
Transfers to stage 1 | – | – | – | – | – | – | – | – | ||
Transfers to stage 2 | – | – | – | – | – | – | – | – | ||
Transfers to stage 3 | – | – | – | – | – | – | – | – | ||
Purchases | 10 | – | – | 10 | 11 | – | – | 11 | ||
Sales and maturities | (1) | – | – | (1) | (1) | – | – | (1) | ||
Changes in risk, parameters and | ||||||||||
exposures | (9) | – | – | (9) | (7) | (6) | – | (13) | ||
Exchange rate and other | – | 1 | – | 1 | – | 2 | – | 2 | ||
Balance at end of period | $ 8 | $ 15 | $ – | $ 23 | $ 8 | $ 14 | $ – | $ 22 | ||
Credit risk exposure by internal risk rating
The following table presents the fair value of debt securities at FVOCI and gross carrying amount of securities at amortized cost.
Risk ratings are based on internal ratings used in the measurement of expected credit losses, as at the reporting date, as outlined
in the internal ratings maps in the Credit risk section of Management’s Discussion and Analysis.
| As at | ||||||||||||
| October 31, 2023 | October 31, 2022 | |||||||||||
Performing | Impaired | Performing | Impaired | |||||||||
(Millions of Canadian dollars) | Stage 1 | Stage 2 | Stage 3 (1) | Total | Stage 1 | Stage 2 | Stage 3 (1) | Total | ||||
Investment securities | ||||||||||||
Securities at FVOCI | ||||||||||||
Investment grade | $ 126,732 | $ 1 | $ – | $ 126,733 | $ 91,177 | $ 56 | $ – | $ 91,233 | ||||
Non-investment grade | 742 | – | – | 742 | 680 | – | – | 680 | ||||
Impaired | – | – | 149 | 149 | – | – | 150 | 150 | ||||
| 127,474 | 1 | 149 | 127,624 | 91,857 | 56 | 150 | 92,063 | |||||
Items not subject to impairment (2) | 842 | 828 | ||||||||||
$ 128,466 | $ 92,891 | |||||||||||
Securities at amortized cost | ||||||||||||
Investment grade | $ 89,947 $ | – | $ – | $ 89,947 | $ 76,035 | $ – | $ – | $ 76,035 | ||||
Non-investment grade | 990 | 199 | – | 1,189 | 898 | 216 | – | 1,114 | ||||
Impaired | – | – | – | – | – | – | – | – | ||||
| 90,937 | 199 | – | 91,136 | 76,933 | 216 | – | 77,149 | |||||
Allowance for credit losses | 8 | 15 | – | 23 | 8 | 14 | – | 22 | ||||
$ 90,929 | $ 184 | $ – | $ 91,113 | $ 76,925 | $ 202 | $ – | $ 77,127 | |||||
(1)
Reflects $149 million of purchased credit impaired securities (October 31, 2022 – $150 million).
(2)
178
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Loans and allowance for credit losses
Loans by geography and portfolio net of allowance
| As at October 31, 2023 | ||||||
United | Other | Allowance for | Total net | |||
(Millions of Canadian dollars) | Canada | States | International | Total | loan losses (1) | of allowance |
Retail (2) | ||||||
Residential mortgages | $ 397,605 | $ 33,683 | $ 3,213 | $ 434,501 | $ (481) | $ 434,020 |
Personal | 79,705 | 15,751 | 3,278 | 98,734 | (1,145) | 97,589 |
Credit cards (3) | 22,140 | 624 | 271 | 23,035 | (1,013) | 22,022 |
Small business (4) | 13,681 | – | – | 13,681 | (180) | 13,501 |
Wholesale (2), (5) | 121,762 | 119,067 | 46,997 | 287,826 | (2,185) | 285,641 |
Total loans | $ 634,893 | $ 169,125 | $ 53,759 | $ 857,777 | $ (5,004) | $ 852,773 |
Undrawn loan commitments – Retail | 277,863 | 5,054 | 3,173 | 286,090 | (152) | |
Undrawn loan commitments – Wholesale | 128,967 | 247,881 | 84,633 | 461,481 | (136) | |
| As at October 31, 2022 |
||||||
United |
Other |
Allowance for |
Total net |
|||
(Millions of Canadian dollars) |
Canada |
States |
International |
Total |
loan losses (1) |
of allowance |
Retail (2) |
||||||
Residential mortgages |
$ 383,797 |
$ 31,956 |
$ 3,043 |
$ 418,796 |
$ (432) |
$ 418,364 |
Personal |
79,422 |
14,888 |
3,399 |
97,709 |
(856) |
96,853 |
Credit cards (3) |
19,778 |
558 |
241 |
20,577 |
(849) |
19,728 |
Small business (4) |
12,669 |
– |
– |
12,669 |
(181) |
12,488 |
Wholesale (2), (5) |
108,916 |
114,795 |
50,256 |
273,967 |
(1,435) |
272,532 |
Total loans |
$ 604,582 |
$ 162,197 |
$ 56,939 |
$ 823,718 |
$ (3,753) |
$ 819,965 |
Undrawn loan commitments – Retail |
258,115 |
4,630 |
2,212 |
264,957 |
(243) |
|
Undrawn loan commitments – Wholesale |
118,928 |
225,113 |
81,194 |
425,235 |
(135) |
|
(1)
Excludes allowance for loans measured at FVOCI of $6 million (October 31, 2022 – $5 million).
(2)
Geographic information is based on residence of the borrower.
(3)
The credit cards business is managed as a single portfolio and includes both consumer and business cards.
(4)
Includes small business exposure managed on a pooled basis.
(5)
Includes small business exposure managed on an individual client basis.
Loans maturity and rate sensitivity
| As at October 31, 2023 |
||||||||
| Maturity term (1) |
Rate sensitivity |
|||||||
Under |
1 to 5 |
Over 5 |
Fixed |
Non-rate- |
||||
(Millions of Canadian dollars) |
1 year (2) |
years |
years |
Total |
Floating |
Rate |
sensitive |
Total |
Retail |
$ 276,720 |
$ 249,210 |
$ 44,021 |
$ 569,951 |
$ 183,604 |
$ 378,656 |
$ 7,691 |
$ 569,951 |
Wholesale |
236,126 |
39,358 |
12,342 |
287,826 |
53,655 |
232,024 |
2,147 |
287,826 |
Total loans |
$ 512,846 |
$ 288,568 |
$ 56,363 |
$ 857,777 |
$ 237,259 |
$ 610,680 |
$ 9,838 |
$ 857,777 |
Allowance for loan losses |
(5,004) |
(5,004) |
||||||
Total loans net of allowance for loan losses |
$ 852,773 |
$ 852,773 |
||||||
| As at October 31, 2022 |
||||||||
| Maturity term (1) |
Rate sensitivity |
|||||||
Under 1 |
1 to 5 |
Over 5 |
Fixed |
Non-rate- |
||||
(Millions of Canadian dollars) |
year (2) |
years |
years |
Total |
Floating |
Rate |
sensitive |
Total |
Retail |
$ 277,302 |
$ 226,793 |
$ 45,656 |
$ 549,751 |
$ 199,414 |
$ 342,087 |
$ 8,250 |
$ 549,751 |
Wholesale |
226,813 |
35,802 |
11,352 |
273,967 |
46,660 |
225,123 |
2,184 |
273,967 |
Total loans |
$ 504,115 |
$ 262,595 |
$ 57,008 |
$ 823,718 |
$ 246,074 |
$ 567,210 |
$ 10,434 |
$ 823,718 |
Allowance for loan losses |
(3,753) |
(3,753) |
||||||
Total loans net of allowance for loan losses |
$ 819,965 |
$ 819,965 |
||||||
(1)
Generally, based on the earlier of contractual repricing or maturity date.
(2)
Includes variable rate loans that can be repriced at the clients’ discretion without penalty.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
179
Allowance for credit losses
| For the year ended |
||||||||||
| October 31, 2023 |
October 31, 2022 |
|||||||||
Balance at |
Provision |
Exchange |
Balance |
Balance at |
Provision |
Exchange |
Balance |
|||
beginning |
for credit |
Net |
rate and |
at end |
beginning |
for credit |
Net |
rate and |
at end |
|
(Millions of Canadian dollars) |
of period |
losses |
write-offs (1) |
other |
of period |
of period |
losses |
write-offs (1) |
other |
of period |
Retail |
||||||||||
Residential mortgages |
$ 432 |
$ 74 |
$ (17) |
$ (8) |
$ 481 |
$ 416 |
$ 27 |
$ (24) |
$ 13 |
$ 432 |
Personal |
1,043 |
593 |
(404) |
(4) |
1,228 |
1,079 |
211 |
(248) |
1 |
1,043 |
Credit cards |
893 |
636 |
(460) |
– |
1,069 |
875 |
348 |
(332) |
2 |
893 |
Small business |
194 |
43 |
(39) |
(4) |
194 |
177 |
31 |
(23) |
9 |
194 |
Wholesale |
1,574 |
1,145 |
(293) |
(100) |
2,326 |
1,797 |
(90) |
(136) |
3 |
1,574 |
Customers’ liability under |
||||||||||
acceptances |
45 |
5 |
– |
– |
50 |
75 |
(30) |
– |
– |
45 |
$ 4,181 |
$ 2,496 |
$ (1,213) |
$ (116) |
$ 5,348 |
$ 4,419 |
$ 497 |
$ (763) |
$ 28 |
$ 4,181 |
|
Presented as: |
||||||||||
Allowance for loan losses |
$ 3,753 |
$ 5,004 |
$ 4,089 |
$ 3,753 |
||||||
Other liabilities – Provisions |
378 |
288 |
241 |
378 |
||||||
Customers’ liability under |
||||||||||
acceptances |
45 |
50 |
75 |
45 |
||||||
Other components of equity |
5 |
6 |
14 |
5 |
||||||
(1)
Loans written-off are generally subject to continued collection efforts for a period of time following write-off. The contractual amount outstanding on loans written-off
during the year ended October 31, 2023 that are no longer subject to enforcement activity was $139 million (October 31, 2022 – $53 million).
The following table reconciles the opening and closing allowance for each major product of loans and commitments as
determined by our modelled, scenario-weighted allowance and the application of expert credit judgment as applicable.
Reconciling items include the following:
•
Model changes, which generally comprise the impact of significant changes to the quantitative models used to estimate
expected credit losses and any staging impacts that may arise.
•
Transfers between stages, which are presumed to occur before any corresponding remeasurements of the allowance.
•
Originations, which reflect the allowance related to assets newly recognized during the period, including those assets that
were derecognized following a modification of terms.
•
Maturities, which reflect the allowance related to assets derecognized during the period without a credit loss being incurred,
including those assets that were derecognized following a modification of terms.
•
Changes in risk, parameters and exposures, which comprise the impact of changes in model inputs or assumptions, including
changes in forward-looking macroeconomic conditions; partial repayments and additional draws on existing facilities;
changes in the measurement following a transfer between stages; and unwinding of the time value discount due to the
passage of time in Stage 1 and Stage 2.
(continued)
Note 5
Loans and allowance for credit losses
Allowance for credit losses – Retail and wholesale loans
| For the year ended | ||||||||
| October 31, 2023 | October 31, 2022 | |||||||
Performing | Impaired | Performing | Impaired | |||||
(Millions of Canadian dollars) | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total |
Residential mortgages | ||||||||
Balance at beginning of period | $ 235 | $ 65 | $ 132 | $ 432 | $ 186 | $ 92 | $ 138 | $ 416 |
Provision for credit losses | ||||||||
Model changes | – | – | – | – | (21) | 10 | – | (11) |
Transfers to stage 1 | 95 | (95) | – | – | 113 | (98) | (15) | – |
Transfers to stage 2 | (26) | 38 | (12) | – | (14) | 23 | (9) | – |
Transfers to stage 3 | (2) | (13) | 15 | – | (2) | (25) | 27 | – |
Originations | 89 | – | – | 89 | 159 | – | – | 159 |
Maturities | (17) | (9) | – | (26) | (23) | (9) | – | (32) |
Changes in risk, parameters and | ||||||||
exposures | (152) | 103 | 60 | 11 | (167) | 68 | 10 | (89) |
Write-offs | – | – | (30) | (30) | – | – | (38) | (38) |
Recoveries | – | – | 13 | 13 | – | – | 14 | 14 |
Exchange rate and other | 1 | 1 | (10) | (8) | 4 | 4 | 5 | 13 |
Balance at end of period | $ 223 | $ 90 | $ 168 | $ 481 | $ 235 | $ 65 | $ 132 | $ 432 |
Personal | ||||||||
Balance at beginning of period | $ 285 | $ 661 | $ 97 | $ 1,043 | $ 422 | $ 569 | $ 88 | $ 1,079 |
Provision for credit losses | ||||||||
Model changes | – | – | – | – | (3) | – | – | (3) |
Transfers to stage 1 | 696 | (695) | (1) | – | 609 | (607) | (2) | – |
Transfers to stage 2 | (88) | 90 | (2) | – | (120) | 121 | (1) | – |
Transfers to stage 3 | (1) | (57) | 58 | – | (2) | (47) | 49 | – |
Originations | 103 | – | – | 103 | 106 | – | – | 106 |
Maturities | (45) | (112) | – | (157) | (70) | (99) | – | (169) |
Changes in risk, parameters and | ||||||||
exposures | (671) | 906 | 412 | 647 | (660) | 724 | 213 | 277 |
Write-offs | – | – | (518) | (518) | – | – | (374) | (374) |
Recoveries | – | – | 114 | 114 | – | – | 126 | 126 |
Exchange rate and other | 1 | – | (5) | (4) | 3 | – | (2) | 1 |
Balance at end of period | $ 280 | $ 793 | $ 155 | $ 1,228 | $ 285 | $ 661 | $ 97 | $ 1,043 |
Credit cards | ||||||||
Balance at beginning of period | $ 177 | $ 716 | $ – | $ 893 | $ 233 | $ 642 | $ – | $ 875 |
Provision for credit losses | ||||||||
Model changes | – | – | – | – | (2) | – | – | (2) |
Transfers to stage 1 | 539 | (539) | – | – | 495 | (495) | – | – |
Transfers to stage 2 | (101) | 101 | – | – | (95) | 95 | – | – |
Transfers to stage 3 | (2) | (394) | 396 | – | (2) | (325) | 327 | – |
Originations | 13 | – | – | 13 | 10 | – | – | 10 |
Maturities | (6) | (33) | – | (39) | (5) | (29) | – | (34) |
Changes in risk, parameters and | ||||||||
exposures | (417) | 1,015 | 64 | 662 | (458) | 826 | 6 | 374 |
Write-offs | – | – | (650) | (650) | – | – | (503) | (503) |
Recoveries | – | – | 190 | 190 | – | – | 171 | 171 |
Exchange rate and other | – | – | – | – | 1 | 2 | (1) | 2 |
Balance at end of period | $ 203 | $ 866 | $ – | $ 1,069 | $ 177 | $ 716 | $ – | $ 893 |
Small business | ||||||||
Balance at beginning of period | $ 73 | $ 73 | $ 48 | $ 194 | $ 88 | $ 55 | $ 34 | $ 177 |
Provision for credit losses | ||||||||
Model changes | – | – | – | – | – | – | – | – |
Transfers to stage 1 | 39 | (39) | – | – | 27 | (27) | – | – |
Transfers to stage 2 | (14) | 14 | – | – | (17) | 17 | – | – |
Transfers to stage 3 | (1) | (10) | 11 | – | (1) | (4) | 5 | – |
Originations | 36 | – | – | 36 | 32 | – | – | 32 |
Maturities | (18) | (21) | – | (39) | (22) | (24) | – | (46) |
Changes in risk, parameters and | ||||||||
exposures | (48) | 44 | 50 | 46 | (43) | 50 | 38 | 45 |
Write-offs | – | – | (50) | (50) | – | – | (32) | (32) |
Recoveries | – | – | 11 | 11 | – | – | 9 | 9 |
Exchange rate and other | 3 | 5 | (12) | (4) | 9 | 6 | (6) | 9 |
Balance at end of period | $ 70 | $ 66 | $ 58 | $ 194 | $ 73 | $ 73 | $ 48 | $ 194 |
Wholesale | ||||||||
Balance at beginning of period | $ 597 | $ 585 | $ 392 | $ 1,574 | $ 566 | $ 794 | $ 437 | $ 1,797 |
Provision for credit losses | ||||||||
Model changes | – | – | – | – | (14) | (3) | – | (17) |
Transfers to stage 1 | 216 | (215) | (1) | – | 415 | (411) | (4) | – |
Transfers to stage 2 | (87) | 89 | (2) | – | (78) | 80 | (2) | – |
Transfers to stage 3 | (10) | (60) | 70 | – | (3) | (62) | 65 | – |
Originations | 651 | – | – | 651 | 641 | – | – | 641 |
Maturities | (448) | (270) | – | (718) | (439) | (345) | – | (784) |
Changes in risk, parameters and | ||||||||
exposures | (153) | 647 | 718 | 1,212 | (504) | 503 | 71 | 70 |
Write-offs | – | – | (324) | (324) | – | – | (202) | (202) |
Recoveries | – | – | 31 | 31 | – | – | 66 | 66 |
Exchange rate and other | 8 | 9 | (117) | (100) | 13 | 29 | (39) | 3 |
Balance at end of period | $ 774 | $ 785 | $ 767 | $ 2,326 | $ 597 | $ 585 | $ 392 | $ 1,574 |
180
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
181
Key inputs and assumptions
The measurement of expected credit losses is a complex calculation that involves a significant number of interrelated inputs and
assumptions and the allowance is not sensitive to any one single factor. The key drivers of changes in expected credit losses
include the following:
•
Changes in the credit quality of the borrower or instrument, primarily reflected in changes in internal risk ratings;
•
Changes in forward-looking macroeconomic conditions, specifically the macroeconomic variables to which our models are
calibrated, which are those most closely correlated with credit losses in the relevant portfolio;
•
Changes in scenario design and the weight assigned to each scenario; and
•
Transfers between stages, which can be triggered by changes to any of the above inputs.
To reflect relevant risk factors not captured in our modelled results, we applied expert credit judgment in determining the
measurement of our weighted allowance for credit losses. The measurement of expected credit losses, including scenario design
and weightings, determining significant increases in credit risk since origination and application of expert credit judgment, is
overseen by a senior management committee that includes representation from Finance, Group Risk Management and
Economics.
Internal risk ratings
Internal risk ratings are assigned according to the risk management framework outlined under the headings Wholesale credit risk
and Retail credit risk of the Credit risk section of Management’s Discussion and Analysis. Changes in internal risk ratings are
primarily reflected in the PD parameters, which are estimated based on our historical loss experience at the relevant risk
segment or risk rating level, adjusted for forward-looking information.
Scenario design and weightings
Our estimation of expected credit losses in Stage 1 and Stage 2 considers five distinct future macroeconomic scenarios.
Scenarios are designed to capture a wide range of possible outcomes and are weighted according to our expectation of the
relative likelihood of the range of outcomes that each scenario represents at the reporting date. We weight each scenario to take
into account historical frequency, current trends, and forward-looking conditions which will change over time. Scenario
weightings take into consideration the extent to which the base case scenario includes both favourable and unfavourable
economic expectations, and upside and downside risks to the base scenario materializing in the future. The base case scenario is
based on forecasts of the expected rate, value or yield for each relevant macroeconomic variable. The upside and downside
scenarios are set by adjusting our base projections to construct reasonably possible scenarios and weightings that are more
optimistic and pessimistic, respectively, than the base case. Two additional downside scenarios capture the non-linear nature of
potential credit losses across our portfolios. When the economy is at or near equilibrium, the severity of the downside scenario
generally reflects an adverse event typical for a business cycle and both the non-linear downside scenarios reflect an outcome
that is materially more adverse than the downside scenario.
The impact of each of our five scenarios varies across our portfolios given the portfolios have different sensitivities to
movements in each macroeconomic variable. Our scenario weights are unchanged relative to October 31, 2022 to reflect
continued uncertainty and downside risks that may drive recession outcomes that are more severe than contemplated in our
base scenario.
The impact of weighting these multiple scenarios increased our ACL on performing loans, relative to our base scenario, by
$868 million at October 31, 2023 (October 31, 2022 – $738 million).
Forward looking macroeconomic variables
The PD, LGD and EAD inputs used to estimate Stage 1 and Stage 2 credit loss allowances are modelled based on the
macroeconomic variables (or changes in macroeconomic variables) that are most closely correlated with credit losses in the
relevant portfolio. Each macroeconomic scenario used in our expected credit loss calculation includes a projection of all
relevant macroeconomic variables used in our models for a five year horizon, reverting to long-run averages generally within the
2 to 5 year period. Depending on their usage in the models, macroeconomic variables are projected at a country, province/state
or more granular level. These include one or more of the variables described below, which differ by portfolio and region.
Our allowance for credit losses reflects our economic outlook as at October 31, 2023. Subsequent changes to this forecast and
related estimates will be reflected in our allowance for credit losses in future periods.
Our base scenario reflects rising unemployment rates, high central bank policy interest rates and elevated but declining
inflation, which result in mild recessions in Canada in the second half of calendar 2023 and the U.S. in the first half of calendar
2024. Expectations are that there will be no further increases in central bank interest rates in Canada and the U.S. Our base
scenario also reflects commercial real estate price declines in the near term.
Downside scenarios, including two additional and more severe downside scenarios designed for the energy and real estate
sectors, reflect the possibility of a more severe macroeconomic shock beginning in calendar Q1 2024 relative to our base
scenario. In these scenarios, conditions are expected to deteriorate from calendar Q4 2023 levels for up to 18 months, followed by
a recovery for the remainder of the period. These scenarios assume monetary policy responses that return the economy to a
long-run, sustainable growth rate within the forecast period. The possibility of a deeper recession and a more prolonged recovery
as compared to our base scenario, including further monetary policy responses to elevated inflation rates which may increase
credit risk, is reflected in our general downside scenario.
The upside scenario reflects slightly stronger economic growth than the base scenario, without prompting a further
offsetting monetary policy response as compared to our base scenario, followed by a return to a long-run sustainable growth
rate within the forecast period.
182
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 5
Loans and allowance for credit losses
(continued)
The following provides additional detail about our calendar quarter forecasts for certain key macroeconomic variables used in
the models to estimate ACL:
•
Unemployment
– In our base forecast, calendar Q4 2023 unemployment rates are expected to rise to 5.9% in Canada and
4.0% in the U.S., peaking in Q2 2024 at 6.6% in Canada and in Q3 2024 at 4.7% in the U.S., then reverting to long run
equilibrium levels by calendar Q2 and Q3 2026, respectively.
4
5
6
7
8
10
9
Range of alternative scenarios (October 31, 2023)
Q4-2026
Q1-2027
Q2-2027
Q3-2027
Q4-2027
Q1-2028
Q2-2028
Q3-2028
Q4-2022
Q1-2023
Q2-2023
Q3-2023
Q4-2023
Q1-2024
Q2-2024
Q3-2024
Q4-2024
Q1-2025
Q2-2025
Q3-2025
Q4-2025
Q1-2026
Q2-2026
Q3-2026
Base scenario (October 31, 2023)
Base scenario (October 31, 2022)
%
Canada Unemployment Rate
(1)
(1)
Represents the average quarterly unemployment level over the calendar quarters presented.
3
5
4
7
6
8
9
Range of alternative scenarios (October 31, 2023)
Base scenario (October 31, 2023)
Base scenario (October 31, 2022)
%
U.S. Unemployment Rate
(1)
(1)
Represents the average quarterly unemployment level over the calendar quarters presented.
Q4-2026
Q1-2027
Q2-2027
Q3-2027
Q4-2027
Q1-2028
Q2-2028
Q3-2028
Q4-2022
Q1-2023
Q2-2023
Q3-2023
Q4-2023
Q1-2024
Q2-2024
Q3-2024
Q4-2024
Q1-2025
Q2-2025
Q3-2025
Q4-2025
Q1-2026
Q2-2026
Q3-2026
•
Gross Domestic Product (GDP)
– In our base forecast, we expect Canadian GDP to continuously grow in calendar Q1 2024
and thereafter, while U.S. GDP growth is expected to experience a mild recession during the first half of calendar 2024
followed by continuous growth. GDP in calendar Q4 2024 is expected to be 1.6% and 0.1% above Q4 2023 levels in Canada and
the U.S., respectively.
2.0
2.1
2.2
2.3
2.4
2.5
Range of alternative scenarios (October 31, 2023)
Base scenario (October 31, 2023)
Base scenario (October 31, 2022)
Trillions of Canadian dollars
Canada Real GDP
(1)
(1)
Represents the seasonally adjusted annual rate indexed to 2012 Canadian dollars over the calendar
quarters presented.
Q4-2026
Q1-2027
Q2-2027
Q3-2027
Q4-2027
Q1-2028
Q2-2028
Q3-2028
Q4-2022
Q1-2023
Q2-2023
Q3-2023
Q4-2023
Q1-2024
Q2-2024
Q3-2024
Q4-2024
Q1-2025
Q2-2025
Q3-2025
Q4-2025
Q1-2026
Q2-2026
Q3-2026
18.0
19.0
20.0
23.0
22.0
21.0
24.0
Range of alternative scenarios (October 31, 2023)
Base scenario (October 31, 2023)
Base scenario (October 31, 2022)
(1)
Represents the seasonally adjusted annual rate indexed to 2012 U.S. dollars over the calendar
quarters presented.
Q4-2026
Q1-2027
Q2-2027
Q3-2027
Q4-2027
Q1-2028
Q2-2028
Q3-2028
Q4-2022
Q1-2023
Q2-2023
Q3-2023
Q4-2023
Q1-2024
Q2-2024
Q3-2024
Q4-2024
Q1-2025
Q2-2025
Q3-2025
Q4-2025
Q1-2026
Q2-2026
Q3-2026
Trillions of U.S. dollars
U.S. Real GDP
(1)
•
Oil price (West Texas Intermediate in US$)
– In our base forecast, we expect oil prices to average $81 per barrel over the
next 12 months from calendar Q4 2023 and $67 per barrel in the following 2 to 5 years. The range of average prices in our
alternative downside and upside scenarios is $28 to $103 per barrel for the next 12 months and $43 to $74 per barrel for the
following 2 to 5 years. As at October 31, 2022, our base forecast included an average price of $88 per barrel for the next
12 months and $72 per barrel for the following 2 to 5 years.
•
Canadian housing price
index
– In our base forecast, we expect housing prices to increase by 1.6% over the next 12 months
from calendar Q4 2023, with a compound annual growth rate of 5.0% for the following 2 to 5 years. The range of annual
housing price growth (contraction) in our alternative real estate downside and upside scenarios is (30.0)% to 10.9% over the
next 12 months and 4.2% to 9.6% for the following 2 to 5 years. As at October 31, 2022 our base forecast included housing
price contraction of (1.0)% from calendar Q4 2022 for the next 12 months and housing price growth of 5.2% for the following 2
to 5 years.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
183
The primary variables driving credit losses in our retail portfolios are Canadian unemployment rates, Canadian housing price
index and Canadian GDP. The Canadian overnight interest rate also impacts our retail portfolios. Our wholesale portfolios are
affected by all of the variables discussed above; however, the specific variables differ by sector. Other variables also impact our
wholesale portfolios including, but not limited to, Canadian and U.S. 10 year BBB corporate bond credit spreads, Canadian and
U.S. 10 year government bond yields, U.S. 10 year BBB corporate bond yield, Canadian consumer confidence index, Canadian and
U.S. commercial real estate price indices, U.S. housing price index, and natural gas prices (Henry Hub).
Increases in the following macroeconomic variables will generally correlate with higher expected credit losses: Canadian
and U.S. unemployment rates, Canadian overnight interest rates, Canadian and U.S. 10 year BBB corporate bond credit spreads,
Canadian and U.S. 10 year government bond yields, and U.S. 10 year BBB corporate bond yield.
Increases in the following macroeconomic variables will generally correlate with lower expected credit losses: Canadian and
U.S. housing price indices, Canadian and U.S. GDP, Canadian consumer confidence index, Canadian and U.S. commercial real
estate price indices, and oil and natural gas prices.
Transfers between stages
Transfers between Stage 1 and Stage 2 are based on the assessment of significant increases in credit risk relative to initial
recognition, as described in Note 2. The impact of moving from 12 months expected credit losses to lifetime expected credit
losses, or vice versa, varies by product and is dependent on the expected remaining life at the date of the transfer. Stage
transfers may result in significant fluctuations in expected credit losses.
The following table illustrates the impact of staging on our ACL by comparing our allowance if all performing loans were in
Stage 1 to the actual ACL recorded on these assets.
| As at |
||||||
| October 31, 2023 |
October 31, 2022 |
|||||
ACL – All performing |
Impact of |
Stage 1 and 2 |
ACL – All performing |
Impact of |
Stage 1 and 2 |
|
(Millions of Canadian dollars) |
loans in Stage 1 |
staging |
ACL |
loans in Stage 1 |
staging |
ACL |
Performing loans (1) |
$ 2,893 |
$ 1,257 |
$ 4,150 |
$ 2,373 |
$ 1,094 |
$ 3,467 |
(1)
Represents loans and commitments in Stage 1 and Stage 2.
184
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 5
Loans and allowance for credit losses
(continued)
Credit risk exposure by internal risk rating
The following table presents the gross carrying amount of loans measured at amortized cost, and the full contractual amount of
undrawn loan commitments subject to the impairment requirements of IFRS 9. Risk ratings are based on internal ratings used in
the measurement of expected credit losses as at the reporting date, as outlined in the internal ratings maps for Wholesale and
Retail facilities in the Credit risk section of Management’s Discussion and Analysis.
| As at | ||||||||||
| October 31, 2023 | October 31, 2022 | |||||||||
(Millions of Canadian dollars) | Stage 1 | Stage 2 | Stage 3 (1) | Total | Stage 1 | Stage 2 | Stage 3 (1) | Total | ||
Retail | ||||||||||
Loans outstanding – Residential | ||||||||||
mortgages | ||||||||||
Low risk | $ 349,001 | $ 1,630 | $ – | $ 350,631 | $ 340,716 | $ 2,573 | $ – | $ 343,289 | ||
Medium risk | 19,126 | 1,610 | – | 20,736 | 15,035 | 1,932 | – | 16,967 | ||
High risk | 1,582 | 4,927 | – | 6,509 | 1,188 | 3,125 | – | 4,313 | ||
Not rated (2) | 54,247 | 1,220 | – | 55,467 | 51,915 | 1,304 | – | 53,219 | ||
Impaired | – | – | 682 | 682 | – | – | 560 | 560 | ||
423,956 | 9,387 | 682 | 434,025 | 408,854 | 8,934 | 560 | 418,348 | |||
Items not subject to impairment (3) | 476 | 448 | ||||||||
Total | $ 434,501 | $ 418,796 | ||||||||
Loans outstanding – Personal | ||||||||||
Low risk | $ 75,572 | $ 1,676 | $ – | $ 77,248 | $ 73,339 | $ 2,575 | $ – | $ 75,914 | ||
Medium risk | 5,587 | 2,915 | – | 8,502 | 5,482 | 3,780 | – | 9,262 | ||
High risk | 477 | 2,088 | – | 2,565 | 836 | 1,660 | – | 2,496 | ||
Not rated (2) | 9,982 | 157 | – | 10,139 | 9,733 | 104 | – | 9,837 | ||
Impaired | – | – | 280 | 280 | – | – | 200 | 200 | ||
Total | $ 91,618 | $ 6,836 | $ 280 | $ 98,734 | $ 89,390 | $ 8,119 | $ 200 | $ 97,709 | ||
Loans outstanding – Credit cards | ||||||||||
Low risk | $ 16,331 | $ 135 | $ – | $ 16,466 | $ 15,088 | $ 83 | $ – | $ 15,171 | ||
Medium risk | 1,771 | 2,132 | – | 3,903 | 1,418 | 1,911 | – | 3,329 | ||
High risk | 41 | 1,734 | – | 1,775 | 39 | 1,255 | – | 1,294 | ||
Not rated (2) | 856 | 35 | – | 891 | 751 | 32 | – | 783 | ||
Total | $ 18,999 | $ 4,036 | $ – | $ 23,035 | $ 17,296 | $ 3,281 | $ – | $ 20,577 | ||
Loans outstanding – Small business | ||||||||||
Low risk | $ 8,641 | $ 920 | $ – | $ 9,561 | $ 8,571 | $ 838 | $ – | $ 9,409 | ||
Medium risk | 2,238 | 936 | – | 3,174 | 1,512 | 1,130 | – | 2,642 | ||
High risk | 99 | 592 | – | 691 | 102 | 375 | – | 477 | ||
Not rated (2) | 11 | – | – | 11 | 3 | – | – | 3 | ||
Impaired | – | – | 244 | 244 | – | – | 138 | 138 | ||
Total | $ 10,989 | $ 2,448 | $ 244 | $ 13,681 | $ 10,188 | $ 2,343 | $ 138 | $ 12,669 | ||
Undrawn loan commitments – Retail | ||||||||||
Low risk | $ 266,209 | $ 610 | $ – | $ 266,819 | $ 247,620 | $ 1,041 | $ – | $ 248,661 | ||
Medium risk | 10,759 | 298 | – | 11,057 | 9,021 | 246 | – | 9,267 | ||
High risk | 956 | 434 | – | 1,390 | 876 | 367 | – | 1,243 | ||
Not rated (2) | 6,686 | 138 | – | 6,824 | 5,668 | 118 | – | 5,786 | ||
Total | $ 284,610 | $ 1,480 | $ – | $ 286,090 | $ 263,185 | $ 1,772 | $ – | $ 264,957 | ||
Wholesale – Loans outstanding | ||||||||||
Investment grade | $ 89,037 | $ 416 | $ – | $ 89,453 | $ 88,513 | $ 202 | $ – | $ 88,715 | ||
Non-investment grade | 156,211 | 19,210 | – | 175,421 | 145,908 | 15,758 | – | 161,666 | ||
Not rated (2) | 10,968 | 238 | – | 11,206 | 11,789 | 360 | – | 12,149 | ||
Impaired | – | – | 2,498 | 2,498 | – | – | 1,301 | 1,301 | ||
Items not subject to impairment (3) | 9,248 | 10,136 | ||||||||
Total | $ 287,826 | $ 273,967 | ||||||||
Undrawn loan commitments – | ||||||||||
Wholesale | ||||||||||
Investment grade | $ 312,178 | $ 186 | $ – | $ 312,364 | $ 284,481 | $ 179 | $ – | $ 284,660 | ||
Non-investment grade | 130,994 | 13,947 | – | 144,941 | 126,225 | 10,657 | – | 136,882 | ||
Not rated (2) | 4,176 | – | – | 4,176 | 3,692 | 1 | – | 3,693 | ||
Total | $ 447,348 | $ 14,133 | $ – | $ 461,481 | $ 414,398 | $ 10,837 | $ – | $ 425,235 | ||
(1)
As at October 31, 2023, 88% of credit-impaired loans were either fully or partially collateralized (October 31, 2022 – 88%). For details on the types of collateral held against
credit-impaired assets and our policies on collateral, refer to the Credit risk mitigation section of Management’s Discussion and Analysis.
(2)
In certain cases where an internal risk rating is not assigned, we use other approved credit risk assessments or rating methodologies, policies and tools to manage our
credit risk.
(3)
Items not subject to impairment are loans held at FVTPL.
Loans past due but not impaired
(1), (2)
As at | ||||||||||
October 31, 2023 | October 31, 2022 | |||||||||
90 days | 90 days | |||||||||
(Millions of Canadian dollars) | 30 to 89 days | and greater | Total | 30 to 89 days | and greater | Total | ||||
Retail | $ 1,840 | $ 208 | $ 2,048 | $ 1,328 | $ 168 | $ 1,496 | ||||
Wholesale | 1,823 | 49 | 1,872 | 1,279 | 2 | 1,281 | ||||
$ 3,663 | $ 257 | $ 3,920 | $ 2,607 | $ 170 | $ 2,777 | |||||
(1)
Excludes loans less than 30 days past due as they are not generally representative of the borrowers’ ability to meet their payment obligations.
(2)
Amounts presented may include loans past due as a result of administrative processes, such as mortgage loans on which payments are restrained pending payout due to
Significant acquisitions and disposition
HSBC Bank Canada
On November 29, 2022, we entered into an agreement to acquire 100% of the common shares of HSBC Bank Canada (HSBC
Canada) for an all-cash purchase price of $13.5 billion. HSBC Canada is a premier Canadian personal and commercial bank
focused on globally connected clients. We will also purchase all of the existing preferred shares and subordinated debt of HSBC
Canada held directly or indirectly by HSBC Holdings plc at par value ($2.1 billion as of September 30, 2023).
The agreement includes a locked box mechanism under which HSBC Canada’s earnings from June 30, 2022 to the closing date
accrue to RBC and will be reflected in the acquired net assets on closing. Relatedly, we will pay an additional amount that
accrues from August 30, 2023 to the closing date, which is calculated based on the all-cash purchase price for the common
shares of HSBC Canada and the Canadian Overnight Repo Rate Average.
The transaction is expected to close in the first calendar quarter of 2024 and is subject to the satisfaction of customary
closing conditions, including regulatory approvals. The results of the acquired business will be consolidated from the date of close.
Wealth Management
On September 27, 2022, we completed the acquisition of 100% of the issued share capital of Brewin Dolphin Holdings PLC
(RBC Brewin Dolphin) via our subsidiary, RBC Wealth Management (Jersey) Holdings Limited. RBC Brewin Dolphin provides
discretionary wealth management services in the U.K., Ireland and the Channel Islands. RBC Brewin Dolphin’s business gives us a
platform to significantly transform our wealth management business in the U.K., Ireland and the Channel Islands, and provides us
with the opportunity to position the combined businesses as a premier integrated wealth management provider to private and
institutional clients.
Total consideration of £1,591 million ($2,341 million) as of the date of close consisted of £1,564 million ($2,302 million) in cash, as
well as amounts related to share based compensation. Our purchase price allocation assigned $3,279 million to assets and $938
million to liabilities, including customer relationship intangible assets of $1,292 million and goodwill of $913 million, which is allocated
to our International Wealth Management and Global Asset Management CGUs and is not deductible for tax purposes. Goodwill
reflects the expected synergies from the combined businesses and the expected growth of the Wealth Management segment.
The results of the acquisition have been consolidated from the date of close and included in our Wealth Management
Disposition
Wealth Management
On July 3, 2023, we completed the previously announced sale of the European asset servicing activities of RBC Investor Services
®
and its associated Malaysian centre of excellence to CACEIS, the asset servicing banking group of Crédit Agricole S.A. and Banco
Santander, S.A. As a result of the transaction, we recorded a pre-tax gain on disposal of $69 million in Non-Interest income within
the Wealth Management segment ($77 million after-tax). The completion of the sale of the business of the U.K. branch of RBC
Investor Services Trust and the RBC Investor Services business in Jersey remains subject to customary closing conditions,
including regulatory approvals. The disposal group consists of $2.6 billion of assets, primarily consisting of cash and due from
banks, and $2.6 billion of liabilities, primarily consisting of deposits, and remains classified as held-for-sale, presented in Other
Derecognition of financial assets
We enter into transactions in which we transfer financial assets such as loans or securities to structured entities or other third
parties. The majority of assets transferred under repurchase agreements, securities lending agreements, and in our Canadian
residential mortgage securitization transactions do not qualify for derecognition as we continue to be exposed to substantially
all of the risks and rewards of the transferred assets, such as prepayment, credit, price, interest rate and foreign exchange risks.
Transferred financial assets not derecognized
Securitization of Canadian residential mortgage loans
We periodically securitize insured Canadian residential mortgage loans through the creation of MBS pools under the National
Housing Act MBS (NHA MBS) program. All loans securitized under the NHA MBS program are required to be insured by the
Canadian Mortgage and Housing Corporation (CMHC) or a third-party insurer. We require the borrower to pay for mortgage
insurance when the loan amount is greater than 80% of the original appraised value of the property (LTV ratio). For residential
mortgage loans securitized under this program with LTV ratios less than 80%, we are required to insure the mortgages at our own
expense. Under the NHA MBS program, we are responsible for making all payments due on our issued MBS, regardless of whether
we collect the necessary funds from the mortgagor or the insurer. When a borrower defaults on a mortgage, we submit a claim to
the insurer if the amount recovered from the collection or foreclosure process is lower than the sum of the principal balance,
accrued interest and collection costs on the outstanding loan. The insurance claim process is managed by the insurance provider
in accordance with the insurer’s policies and covers the entire unpaid loan balance plus generally up to 12 months of interest,
selling costs and other eligible expenses. If an insurance claim is denied, a loss is recognized in Provision for credit losses in our
Consolidated Statements of Income. The amount recorded as a loss is not significant to our Consolidated Financial Statements
and no significant losses were incurred due to legal action arising from mortgage defaults during 2023 and 2022.
We sell the NHA MBS pools primarily to Canada Housing Trust, a government-sponsored structured entity under the Canada
Mortgage Bond (CMB) program. The entity periodically issues CMBs, which are guaranteed by the government, and sells them to
third-party investors. Proceeds of the CMB issuances are used by the entity to purchase the NHA MBS pools from eligible NHA
MBS issuers who participate in the issuance of a particular CMB series. Our continuing involvement includes servicing the
underlying residential mortgage loans we have securitized, either ourselves or through a third-party servicer. We also act as
counterparty in interest rate swap agreements where we pay the entity the interest due to CMB investors and receive the interest
on the underlying MBS and reinvested assets. As part of the swaps, we are also required to maintain a principal reinvestment
account for principal payments received on the underlying mortgage loans to meet the repayment obligation upon maturity of
the CMB. We reinvest the collected principal payments in permitted investments as outlined in the swap agreements.
We have determined that certain of the NHA MBS program loans transferred to the entity do not qualify for derecognition as
we have not transferred substantially all of the risks and rewards of ownership. As a result, these transferred MBS continue to be
classified as residential mortgage loans and recognized on our Consolidated Balance Sheets. The cash received for these
transferred MBS is treated as a secured borrowing and a corresponding liability is recorded in Deposits – Business and
government on our Consolidated Balance Sheets.
Securities sold under repurchase agreements and securities loaned
We also enter into transactions such as repurchase agreements and securities lending agreements where we transfer assets
under agreements to repurchase them at a future date and retain substantially all of the risks and rewards associated with the
assets. These transferred assets remain on our Consolidated Balance Sheets and are accounted for as collateralized borrowing
transactions.
The following table provides information on the carrying amount and fair value of the transferred assets that did not qualify for
derecognition, and their associated liabilities.
| As at | ||||||||||||
| October 31, 2023 | October 31, 2022 | |||||||||||
Canadian | Securities | Canadian | Securities | |||||||||
residential | sold under | residential | sold under | |||||||||
mortgage | repurchase | Securities | mortgage | repurchase | Securities | |||||||
(Millions of Canadian dollars) | loans (1), (2) | agreements (3) | loaned (3) | Total | loans (1), (2) | agreements (3) | loaned (3) | Total | ||||
Carrying amount of transferred | ||||||||||||
assets that do not qualify for | ||||||||||||
derecognition | $ 28,312 | $ 313,558 | $ 21,680 | $ 363,550 | $ 32,812 | $ 258,615 | $ 15,332 | $ 306,759 | ||||
Carrying amount of associated | ||||||||||||
liabilities | 28,007 | 313,558 | 21,680 | 363,245 | 32,177 | 258,615 | 15,332 | 306,124 | ||||
Fair value of transferred assets | $ 26,472 | $ 313,558 | $ 21,680 | $ 361,710 | $ 31,174 | $ 258,615 | $ 15,332 | $ 305,121 | ||||
Fair value of associated | ||||||||||||
liabilities | 26,780 | 313,558 | 21,680 | 362,018 | 30,900 | 258,615 | 15,332 | 304,847 | ||||
Fair value of net position | $ (308) | $ – | $ – | $ (308) | $ 274 | $ – | $ – | $ 274 | ||||
(1)
Includes Canadian residential mortgage loans transferred primarily to Canada Housing Trust at the initial securitization and other permitted investments used for
funding requirements after the initial securitization.
(2)
CMB investors have legal recourse only to the transferred assets, and do not have recourse to our general assets.
(3)
Structured entities
In the normal course of business, we engage in a variety of financial transactions with structured entities to support our
financing and investing needs as well as those of our clients. A structured entity is an entity in which voting or similar rights are
not the dominant factor in deciding control. Structured entities are generally created to achieve a narrow and well defined
objective with restrictions around their ongoing activities. We consolidate a structured entity when we control the entity in
accordance with our accounting policy as described in Note 2. In other cases, we may sponsor or have an interest in such an
entity but may not consolidate it.
Consolidated structured entities
We consolidate the following structured entities, whose assets and liabilities are recorded on our Consolidated Balance Sheets.
Third-party investors in these structured entities generally have recourse only to the assets of the related entity and do not have
recourse to our general assets unless we breach our contractual obligations to those entities. In the ordinary course of business,
the assets of each consolidated structured entity can generally only be used to settle the obligations of that entity.
Multi-seller conduits
We generally do not maintain ownership in the multi-seller conduits that we administer and generally do not have rights to, or
control of, their assets. However, we issue asset-backed commercial paper (ABCP) through a multi-seller conduit that does not
have an expected loss investor with substantive power to direct the significant operating activities of the conduit. This conduit is
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Consolidated Financial Statements
Note 7
Derecognition of financial assets
(continued)
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
187
consolidated because we have exposure to variability of returns from performance in the multi-seller arrangements through
providing transaction-specific and program-wide liquidity, credit and loan facilities to the conduit and have decision-making
power over the relevant activities. As of October 31, 2023, $1,316 million of financial assets held by the conduit were included in
Loans (October 31, 2022 – $1,826 million) and $1,194 million of ABCP issued by the conduit was included in Deposits
(October 31, 2022 – $1,284 million) on our Consolidated Balance Sheets.
Credit card securitization vehicle
We securitize a portion of our credit card receivables through a structured entity on a revolving basis. The entity purchases
co-ownership interests in a pool of credit card receivables and issues senior and subordinated term notes collateralized by that
co-ownership interest in the underlying pool of credit card receivables. Investors who purchase the term notes have recourse
only to that co-ownership interest in the underlying pool of credit card receivables.
We continue to service the credit card receivables and perform an administrative role for the entity. We also retain risk in
the underlying pool of credit card receivables through our retained interest in the transferred assets, the cash reserve balance
we fund from time to time, and also through certain subordinated notes which we retain. Additionally, we may own some senior
notes as investments or for market-making activities and we act as counterparty to interest rate and cross currency swap
agreements which hedge the entity’s interest rate and currency risk exposure.
We consolidate the structured entity because we have decision-making power over the timing and size of future issuances
and other relevant activities which were predetermined by us at inception. We also obtain significant funding benefits and are
exposed to variability from the performance of the underlying credit card receivables through our retained interest. As at
October 31, 2023, $7 billion of notes issued by our credit card securitization vehicle were included in Deposits on our Consolidated
Balance Sheets (October 31, 2022 – $6 billion).
We established a funding vehicle that provides loans to us and finances those loans by issuing commercial paper to third-party
investors. The structured entity’s commercial paper carries an equivalent credit rating to RBC because we are obligated to
advance funds to the entity in the event there are insufficient funds from other sources to settle maturing commercial paper. We
pledge collateral to secure the loans and are exposed to the market and credit risks of the pledged securities.
We consolidate the structured entity because we have decision-making power over the relevant activities, are the sole
borrower from the structure, and are exposed to a majority of the residual ownership risks through the credit support provided.
As at October 31, 2023, $17 billion of commercial paper issued by the vehicle was included in Deposits on our Consolidated
Covered bonds
We periodically transfer mortgages to RBC Covered Bond Guarantor Limited Partnership (the Guarantor LP) to support funding
activities and asset coverage requirements under our covered bonds program. The Guarantor LP was created to guarantee
interest and principal payments under the covered bond program. The covered bonds guaranteed by the Guarantor LP are direct,
unsecured and unconditional obligations of RBC; therefore, investors have a claim against the Bank which will continue if the
covered bonds are not paid by the Bank and the mortgage assets in the Guarantor LP are insufficient to satisfy the obligations
owing on the covered bonds. We act as general partner, limited partner, swap counterparty, lender and liquidity provider to the
Guarantor LP, servicer for the underlying mortgages as well as the registered issuer of the covered bonds.
We consolidate the Guarantor LP as we have the decision-making power over the relevant activities through our role as
general partner and are exposed to variability from the performance of the underlying mortgages. As at October 31, 2023, the
total amount of mortgages transferred and outstanding was $100 billion (October 31, 2022 – $121 billion) and $50 billion of covered
bonds were recorded as Deposits on our Consolidated Balance Sheets (October 31, 2022 – $43 billion).
Structured finance
We sell taxable and tax-exempt municipal bonds into Tender Option Bond (TOB) structures, which consist of a bond that is credit
enhanced by us and purchased by a TOB trust. The TOB trust finances the purchase from us by issuing floating-rate certificates to
short-term investors and a residual certificate that is purchased by us. We are the remarketing agent for the floating-rate
certificates and provide a liquidity facility to the short-term investors which requires us to purchase any certificates tendered but
not successfully remarketed. We credit enhance the bond purchased by the TOB trust with a letter of credit under which we are
required to extend funding if there are any losses on the underlying bonds. We earn interest on the residual certificate and
receive market-based fees for acting as remarketing agent and providing the liquidity facility and letter of credit.
We consolidate the TOB trust when we are the holder of the residual certificate as we have decision-making power over the
relevant activities, including the selection of the underlying municipal bonds and the ability to terminate the structure, and are
exposed to variability from the performance of the underlying municipal bonds. As at October 31, 2023, $5 billion of municipal
bonds were included in Securities related to consolidated TOB structures (October 31, 2022 – $6 billion) and a corresponding
$5 billion of floating-rate certificates were included in Deposits on our Consolidated Balance Sheets (October 31, 2022 – $7 billion).
We establish structured entities to acquire loans for the purposes of issuing term collateralized loan obligation (CLO)
transactions and act as collateral manager. During the warehouse phase, we provide subordinated financing and, for certain
term CLO transactions, act as the arranger and placement agent, and may provide senior warehouse financing. Proceeds from
the sale of the term CLO are used to repay our warehouse financing. During the term CLO phase, we continue to provide
subordinated financing, which serves as the first loss tranche that absorbs losses prior to the senior tranches, and may also
directly invest in the other tranches.
We consolidate these CLO structures as we have decision-making power over the relevant activities of the entity, which
include the initial selection and subsequent management of the underlying debt portfolio, and when our interests, including
direct investment plus collateral management fees, indicate that we are acting as a principal. As at October 31, 2023, $493 million
of Cash and due from banks and $1,675 million of Loans related to consolidated CLO structures (October 31, 2022 – $108 million
and $1,410 million, respectively) and $1,706 million of Deposits representing the subordinated and senior tranches held by third
parties (October 31, 2022 – $1,314 million) were recorded on our Consolidated Balance Sheets.
(continued)
Note 8
Structured entities
RBC managed investment funds
We are sponsors and investment managers of mutual and pooled funds, which give us the ability to direct the investment
decisions of the funds. We consolidate those mutual and pooled funds in which our interests, which include direct investment in
seed capital plus management or performance fees, indicate that we are acting as a principal. As at October 31, 2023,
$400 million of Trading securities held in the consolidated funds (October 31, 2022 – $524 million) and $331 million of Other
liabilities representing the fund units held by third parties (October 31, 2022 – $363 million) were recorded on our Consolidated
Balance Sheets.
Unconsolidated structured entities
We have interests in certain structured entities that we do not consolidate but have recorded assets and liabilities on our
Consolidated Balance Sheets related to our transactions and involvement with these entities.
The following table presents the assets and liabilities recorded on our Consolidated Balance Sheets and our maximum
exposure to loss related to our interests in unconsolidated structured entities. It also presents the size of each class of
unconsolidated structured entity, as measured by the total assets of the entities in which we have an interest.
| As at October 31, 2023 | ||||||||||
| Non-RBC | ||||||||||
| managed | Third-party | |||||||||
| Multi-seller | Structured | investment | securitization | |||||||
(Millions of Canadian dollars) | conduits (1) | finance | funds | vehicles | Other | Total | ||||
On-balance sheet assets | ||||||||||
Securities | $ 4 | $ – | $ 2,411 | $ – | $ 743 | $ 3,158 | ||||
Loans | – | 5,790 | – | 8,451 | 2,403 | 16,644 | ||||
Derivatives | 2 | – | 26 | – | 91 | 119 | ||||
Other assets | – | – | – | – | 365 | 365 | ||||
$ 6 | $ 5,790 | $ 2,437 | $ 8,451 | $ 3,602 | $ 20,286 | |||||
On-balance sheet liabilities | ||||||||||
Deposits | $ – | $ – | $ – | $ – | $ 166 | $ 166 | ||||
Derivatives | 245 | – | 1 | – | – | 246 | ||||
Other liabilities | – | – | – | – | 7 | 7 | ||||
$ 245 | $ – | $ 1 | $ – | $ 173 | $ 419 | |||||
Maximum exposure to loss (2) | $ 54,715 | $ 10,580 | $ 3,068 | $ 14,863 | $ 5,595 | $ 88,821 | ||||
Total assets of unconsolidated structured entities | $ 53,641 | $ 31,037 | $ 440,924 | $ 81,028 | $ 461,919 | $ 1,068,549 | ||||
| As at October 31, 2022 | ||||||||||||
Non-RBC | ||||||||||||
managed | Third-party | |||||||||||
| Multi-seller | Structured | investment | securitization | |||||||||
(Millions of Canadian dollars) | conduits (1) | finance | funds | vehicles | Other | Total | ||||||
On-balance sheet assets | ||||||||||||
Securities | $ 255 | $ – | $ 3,089 | $ – | $ 595 | $ 3,939 | ||||||
Loans | – | 5,334 | – | 8,494 | 2,487 | 16,315 | ||||||
Derivatives | 25 | – | – | – | 100 | 125 | ||||||
Other assets | – | 6 | – | – | 568 | 574 | ||||||
$ 280 | $ 5,340 | $ 3,089 | $ 8,494 | $ 3,750 | $ 20,953 | |||||||
On-balance sheet liabilities | ||||||||||||
Deposits | $ – | $ – | $ – | $ – | $ – | $ – | ||||||
Derivatives | 171 | – | – | – | – | 171 | ||||||
Other liabilities | – | – | – | – | – | – | ||||||
$ 171 | $ – | $ – | $ – | $ – | $ 171 | |||||||
Maximum exposure to loss (2) | $ 48,260 | $ 8,658 | $ 3,758 | $ 14,339 | $ 5,523 | $ 80,538 | ||||||
Total assets of unconsolidated structured entities | $ 47,289 | $ 26,543 | $ 548,320 | $ 64,361 | $ 554,573 | $ 1,241,086 | ||||||
(1)
Total assets of unconsolidated structured entities represent the maximum assets that may have to be purchased by the conduits under purchase commitments
outstanding. Of the purchase commitments outstanding, the conduits have purchased financial assets totalling $37 billion as at October 31, 2023 (October 31, 2022 –
$32 billion).
(2)
The maximum exposure to loss resulting from our interests in these entities consists mostly of investments, loans, fair value of derivatives, liquidity and credit
enhancement facilities. The maximum exposure to loss of the multi-seller conduits is higher than the on-balance sheet assets primarily because of the notional amounts
of the backstop liquidity and credit enhancement facilities. Refer to Note 24 for further details.
Below is a description of our involvement with each significant class of unconsolidated structured entity.
Multi-seller conduits
We administer multi-seller ABCP conduit programs. Multi-seller conduits primarily purchase financial assets from clients and
finance those purchases by issuing ABCP.
In certain multi-seller conduit arrangements, we do not maintain any ownership of the multi-seller conduits that we
administer and have no rights to, or control of, its assets. As the administrative agent, we earn a residual fee for providing
services such as coordinating funding activities, transaction structuring, documentation, execution and monitoring. The ABCP
issued by each multi-seller conduit is in the conduit’s own name with recourse to the financial assets owned by the multi-seller
conduit, and is non-recourse to us except through our participation in liquidity and/or credit enhancement facilities.
We provide transaction-specific and program-wide liquidity facilities to the multi-seller conduits. In addition, we provide
program-wide credit enhancement to the multi-seller conduits which obligate us to purchase assets or advance funds in the
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event the multi-seller conduit does not otherwise have funds from other sources, such as from the liquidity facilities, to settle
maturing ABCP. In some cases, we or another third party may provide transaction-specific credit enhancement which can take
various forms. We receive market-based fees for providing these liquidity and credit facilities.
For certain transactions, we act as counterparty to various hedging contracts to facilitate our clients’ securitization of fixed
rate and/or foreign currency denominated assets through the conduits. These may take the form of forward contracts, interest
rate swaps or cross currency swaps. These derivatives expose us to foreign exchange and interest rate risks that are centrally
managed by our foreign exchange trading and swap desks, respectively, and credit risk on the underlying assets that is mitigated
by the credit enhancement described below.
Each transaction is structured with transaction-specific first loss protection provided by the third-party seller. This
enhancement can take various forms, including but not limited to overcollateralization, excess spread, subordinated classes of
financial assets, guarantees or letters of credit. The amount of this enhancement varies but is generally designed to cover a
multiple of historical losses.
An unrelated third party (expected loss investor) absorbs losses, up to a maximum contractual amount, that may occur in
the future on the assets in the multi-seller conduits before the multi-seller conduits’ debt holders and us. In return for assuming
this multi-seller conduit first-loss position, each multi-seller conduit pays the expected loss investor a return commensurate with
its risk position. The expected loss investor has substantive power to direct the majority of the activities which significantly
impact the conduit’s economic performance, including initial selection and approval of the asset purchase commitments and
liquidity facilities, approval of renewal and amendment of these transactions and facilities, sale or transfer of assets, ongoing
monitoring of asset performance, mitigation of losses, and management of the ABCP liabilities.
We do not consolidate these multi-seller conduits as we do not control the conduits as noted above.
Structured finance
We participate in certain municipal bond TOB structures that we do not consolidate. These structures are similar to those
consolidated municipal bond TOB structures described above; however, the residual certificates are held by third parties. We provide
liquidity facilities for the benefit of floating-rate certificate holders which may be drawn if certificates are tendered but not able to be
remarketed. For a portion of these trusts, we also provide a letter of credit for the underlying bonds held in the trust. We do not have
decision-making power over the relevant activities of the structures; therefore, we do not consolidate these structures.
We provide senior warehouse financing to unaffiliated structured entities that are established by third parties to acquire
loans for the purposes of issuing a term CLO transaction. Subordinated financing is provided during the warehouse phase by
either the collateral manager or third-party investors. Subordinated financing serves as the first loss tranche which absorbs
losses prior to ourselves as the senior lender. We act as the arranger and placement agent for the term CLO transaction.
Proceeds from the sale of the term CLO are used to repay our senior warehouse financing, at which point we have no further
involvement with the transaction. We do not consolidate these CLO structures as we do not have decision-making power over the
relevant activities of the entity, which include the initial selection and subsequent management of the underlying debt portfolio.
We provide senior financing to unaffiliated structured entities that are established by third parties to acquire loans.
Subordinated financing is provided by either the collateral manager or third-party investors. Subordinated financing serves as
the first loss tranche which absorbs losses prior to ourselves as the senior lender. These facilities tend to be longer in term than
the CLO warehouse facilities and benefit from credit enhancement generally designed to cover a multiple of historical losses. We
do not consolidate these structures as we do not have decision-making power over the relevant activities of the entity, which
include the initial selection and subsequent management of the underlying debt portfolio.
Non-RBC managed investment funds
We enter into fee-based equity derivative transactions with third parties including mutual funds, unit investment trusts and other
investment funds. These transactions provide their investors with the desired exposure to reference funds, and we economically
hedge our exposure to these derivatives by investing in those reference funds. We also act as custodian for several funds. We do not
consolidate those reference funds that are managed by third parties as we do not have power to direct their investing activities.
We provide liquidity facilities to certain third-party investment funds. The funds issue unsecured variable-rate preferred
shares and invest in portfolios of tax-exempt municipal bonds. Undrawn liquidity commitments expose us to the liquidity risk of
the preferred shares and drawn commitments expose us to the credit risk of the underlying municipal bonds. We do not
consolidate these third-party managed funds as we do not have power to direct their investing activities.
Third-party securitization vehicles
We hold interests in securitization vehicles that provide funding to certain third parties on whose behalf the entities were created. The
activities of these entities are limited to the purchase and sale of specified financial assets from the sponsor. We, as well as other
financial institutions, are obligated to provide funding up to our maximum commitment level and are exposed to credit losses on the
underlying assets after various credit enhancements. Enhancements can take various forms, including but not limited to
overcollateralization, excess spread, subordinated classes of financial assets, guarantees or letters of credit. The amount of this
enhancement varies but is generally designed to cover a multiple of historical losses. We do not consolidate these entities as we do
not have decision-making power over the relevant activities, including the entities’ investing and financing activities.
Other
Other unconsolidated structured entities include managed investment funds, arrangements to pass credit risk to third parties,
credit investment products and tax credit funds.
We are sponsors and investment managers of mutual and pooled funds, which gives us the ability to direct the investment
decisions of the funds. We do not consolidate those mutual and pooled funds if we exercise our decision-making power as an
agent on behalf of other unit holders.
We use structured entities to generally transform credit derivatives into cash instruments, to distribute credit risk and to
create customized credit products to meet investors’ specific requirements. We enter into derivative contracts, including credit
derivatives, to purchase protection from these entities (credit protection) and convert various risk factors such as yield, currency
or credit risk of underlying assets to meet the needs of the investors. We act as sole arranger and swap provider for certain
entities and, in some cases, fulfill other administrative functions for the entities. We do not consolidate these credit investment
product entities as we do not have decision-making power over the relevant activities, which include selection of the collateral
and reference portfolio, and are not exposed to a majority of the benefits or risks of the entities.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
189
We created certain funds to pass through tax credits received from underlying low-income housing, historic rehabilitation
real estate projects to third parties, new market tax credits or renewable energy tax credits to third parties (tax credit funds). We
are sponsors of the tax credit funds as a result of our responsibility to manage the funds, arrange the financing, and perform the
administrative duties of these tax credit funds. We do not consolidate the tax credit funds as the third-party investors in these
funds have the decision-making power to select the underlying investments and are exposed to the majority of the residual
ownership and tax risks of the funds.
We also purchase passive interests in renewable energy tax credit entities created and controlled by third parties. We do not
consolidate these third-party funds as we do not have decision-making power over the relevant activities and our investments
are managed as part of larger portfolios which are held for trading purposes.
Other interests in unconsolidated structured entities
In the normal course of business, we buy and sell passive interests in certain third-party structured entities, including mutual
funds, exchange traded funds, and government-sponsored ABS vehicles. Our investments in these entities are managed as part of
larger portfolios which are held for trading, liquidity or hedging purposes. We did not create or sponsor these entities and do not
have any decision-making power over their ongoing activities. Our maximum exposure to loss is limited to our on-balance sheet
investments in these entities, which are not included in the table above. As at October 31, 2023 and 2022, our investments in these
entities were included in Trading and Investment securities on our Consolidated Balance Sheets. Refer to Note 3 and Note 4 for
further details on our Trading and Investment securities.
Sponsored entities
We are a sponsor of certain structured entities in which we have interests but do not consolidate. In determining whether we are
a sponsor of a structured entity, we consider both qualitative and quantitative factors, including the purpose and nature of the
entity, our initial and continuing involvement and whether we hold subordinated interests in the entity. We are considered to be
the sponsor of certain credit investment products, tax credit entities, RBC managed mutual funds and a commercial mortgage
securitization vehicle. During the year ended October 31, 2023, we did not transfer any commercial mortgages (October 31, 2022 –
$450 million) to a sponsored securitization vehicle in which we did not have any interests as at the end of the reporting period.
Financial support provided to structured entities
During the years ended October 31, 2023 and 2022, we have not provided any financial or non-financial support to any
consolidated or unconsolidated structured entities when we were not contractually obligated to do so. Furthermore, we have no
Derivative financial instruments and hedging activities
Derivative instruments are categorized as either financial or non-financial derivatives. Financial derivatives are financial
contracts whose value is derived from an underlying interest rate, foreign exchange rate, credit risk, and equity or equity index.
Non-financial derivatives are contracts whose value is derived from a precious metal, commodity instrument or index. The
notional amount of derivatives represents the contract amount used as a reference point to calculate payments. Notional
amounts are generally not exchanged by counterparties, and do not reflect our EAD.
Financial derivatives
Forwards and futures
Forward contracts are non-standardized agreements that are transacted between counterparties in the OTC market, whereas
futures are standardized contracts with respect to amounts and settlement dates, and are traded on regular futures exchanges.
Examples of forwards and futures are described below.
Interest rate forwards (forward rate agreements) and futures are contractual obligations to buy or sell an interest-rate
sensitive financial instrument on a predetermined future date at a specified price.
Foreign exchange forwards and futures are contractual obligations to exchange one currency for another at a specified price
for settlement at a predetermined future date.
Equity forwards and futures are contractual obligations to buy or sell at a fixed value (the specified price) of an equity index,
a basket of stocks or a single stock at a predetermined future date.
Swaps
Swaps are OTC contracts in which two counterparties exchange a series of cash flows based on agreed upon rates applied to a
notional amount. Examples of swap agreements are described below.
Interest rate swaps are agreements where two counterparties exchange a series of payments based on different interest
rates applied to a notional amount in a single currency. Certain interest rate swaps are transacted and settled through clearing
houses which act as central counterparties. Cross currency swaps involve the exchange of fixed payments in one currency for the
receipt of fixed payments in another currency. Cross currency interest rate swaps involve the exchange of both interest and
notional amounts in two different currencies.
Equity swaps are contracts in which one counterparty agrees to pay or receive from the other cash flows based on changes
in the value of an equity index, a basket of stocks or a single stock.
Options
Options are contractual agreements under which the seller (writer) grants the purchaser the right, but not the obligation, either
to buy (call option) or sell (put option) a security, exchange rate, interest rate, or other financial instrument or commodity at a
specified price, at or by a predetermined future date. The seller (writer) of an option can also settle the contract by paying the
cash settlement value of the purchaser’s right. The seller (writer) receives a premium from the purchaser for this right. The
various option agreements that we enter into include but are not limited to interest rate options, foreign currency options, equity
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Consolidated Financial Statements
options and index options.
Note 8
Structured entities
(continued)
Credit derivatives
Credit derivatives are OTC contracts that transfer credit risk related to an underlying financial instrument (referenced asset)
from one counterparty to another. Credit derivatives include credit default swaps, credit default baskets and total return swaps.
Credit default swaps provide protection against the decline in the value of the referenced asset as a result of specified credit
events such as default or bankruptcy. They are similar in structure to an option, whereby the purchaser pays a premium to the
seller of the credit default swap in return for payment contingent on a credit event affecting the referenced asset.
Credit default baskets are similar to credit default swaps except that the underlying referenced financial instrument is a
group of assets instead of a single asset.
Total return swaps are contracts where one counterparty agrees to pay or receive from the other cash amounts based on
changes in the value of a referenced asset or group of assets, including any returns such as interest earned on these assets, in
exchange for amounts that are based on prevailing market funding rates.
Other derivative products
Other contracts are stable value and equity derivative contracts.
Non-financial derivatives
Other contracts also include non-financial derivative products such as precious metal and commodity derivative contracts in
both the OTC and exchange markets.
Most of our derivative transactions relate to client-driven sales and trading activities, and associated market risk hedging. Sales
activities include the structuring and marketing of derivative products to clients, enabling them to modify or reduce risks. Trading
involves market-making, positioning and arbitrage activities. Market-making involves quoting bid and offer prices to other market
participants with the intention of generating revenue based on spread and volume. Positioning involves the active management of
derivative transactions with the expectation of profiting from favourable movements in prices, rates, or indices. Arbitrage
activities involve identifying and profiting from price differentials between markets and product types. Any realized and unrealized
Derivatives issued for other-than-trading purposes
We also use derivatives for purposes other than trading, primarily for hedging, in conjunction with the management of interest
rate, credit, equity and foreign exchange risk related to our funding, lending, investment activities and asset/liability
management.
Interest rate swaps are used to manage our exposure to interest rate risk by modifying the repricing or maturity
characteristics of existing and/or forecasted assets and liabilities, including funding and investment activities. Purchased options
are used to hedge redeemable deposits and other options embedded in consumer products. We manage our exposure to foreign
currency risk with cross currency swaps and foreign exchange forward contracts. We predominantly use credit derivatives to
manage our credit exposures. We mitigate industry sector concentrations and single-name exposures related to our credit
portfolio by purchasing credit derivatives to transfer credit risk to third parties.
Certain derivatives and cash instruments are specifically designated and qualify for hedge accounting. We also enter into
derivative transactions to economically hedge certain exposures that do not otherwise qualify for hedge accounting, or where
hedge accounting is not considered economically feasible to implement. In such circumstances, changes in fair value are
reflected in Non-interest income – Other income.
Notional amount of derivatives by term to maturity (absolute amounts) (1) | ||||||||||||
As at October 31, 2023 | ||||||||||||
Term to maturity | ||||||||||||
Within | 1 through | Over | Other than | |||||||||
(Millions of Canadian dollars) | 1 year | 5 years | 5 years | Total | Trading | Trading | ||||||
Over-the-counter contracts | ||||||||||||
Interest rate contracts | ||||||||||||
Forward rate agreements | $ 1,008,978 | $ 691,397 | $ 358 | $ 1,700,733 | $ 1,700,733 | $ – | ||||||
Swaps | 4,220,675 | 6,651,849 | 4,418,165 | 15,290,689 | 14,169,938 | 1,120,751 | ||||||
Options purchased | 162,845 | 420,341 | 166,275 | 749,461 | 749,257 | 204 | ||||||
Options written | 144,138 | 412,239 | 179,532 | 735,909 | 735,562 | 347 | ||||||
Foreign exchange contracts | ||||||||||||
Forward contracts | 2,336,565 | 106,069 | 4,082 | 2,446,716 | 2,363,796 | 82,920 | ||||||
Cross currency swaps | 30,098 | 88,625 | 74,538 | 193,261 | 189,100 | 4,161 | ||||||
Cross currency interest rate swaps | 972,658 | 2,055,058 | 1,141,295 | 4,169,011 | 4,107,125 | 61,886 | ||||||
Options purchased | 244,721 | 73,407 | 2,663 | 320,791 | 320,791 | – | ||||||
Options written | 254,534 | 71,039 | 2,305 | 327,878 | 327,878 | – | ||||||
Credit derivatives (2) | 11,709 | 108,637 | 114,463 | 234,809 | 234,066 | 743 | ||||||
Other contracts (3) | 261,528 | 140,225 | 13,088 | 414,841 | 401,373 | 13,468 | ||||||
Exchange-traded contracts | ||||||||||||
Interest rate contracts | ||||||||||||
Futures – long positions | 103,195 | 24,283 | 1 | 127,479 | 126,879 | 600 | ||||||
Futures – short positions | 99,792 | 54,817 | 1 | 154,610 | 154,445 | 165 | ||||||
Options purchased | 12,801 | 3 | – | 12,804 | 12,804 | – | ||||||
Options written | 11,206 | 1,468 | – | 12,674 | 12,674 | – | ||||||
Foreign exchange contracts | ||||||||||||
Futures – long positions | 124 | – | – | 124 | 124 | – | ||||||
Other contracts | 571,970 | 154,677 | 4,586 | 731,233 | 731,233 | – | ||||||
$ 10,447,537 | $ 11,054,134 | $ 6,121,352 | $ 27,623,023 | $ 26,337,778 | $ 1,285,245 | |||||||
As at October 31, 2022 | ||||||
Term to maturity | ||||||
Within | 1 through | Over | Other than | |||
(Millions of Canadian dollars) | 1 year | 5 years | 5 years | Total | Trading | Trading |
Over-the-counter contracts | ||||||
Interest rate contracts | ||||||
Forward rate agreements | $ 763,398 | $ 44,188 | $ 353 | $ 807,939 | $ 806,576 | $ 1,363 |
Swaps | 4,994,006 | 6,934,996 | 4,781,148 | 16,710,150 | 16,001,414 | 708,736 |
Options purchased | 100,504 | 577,780 | 151,084 | 829,368 | 829,368 | – |
Options written | 108,770 | 556,652 | 182,841 | 848,263 | 848,263 | – |
Foreign exchange contracts | ||||||
Forward contracts | 2,187,124 | 86,136 | 2,648 | 2,275,908 | 2,230,901 | 45,007 |
Cross currency swaps | 87,942 | 67,345 | 82,659 | 237,946 | 233,617 | 4,329 |
Cross currency interest rate swaps | 518,244 | 1,572,490 | 879,541 | 2,970,275 | 2,918,063 | 52,212 |
Options purchased | 58,075 | 18,061 | 3,199 | 79,335 | 79,335 | – |
Options written | 62,266 | 16,623 | 3,274 | 82,163 | 82,163 | – |
Credit derivatives (2) | 1,143 | 35,621 | 6,751 | 43,515 | 42,785 | 730 |
Other contracts (3) | 228,709 | 93,431 | 19,392 | 341,532 | 327,860 | 13,672 |
Exchange-traded contracts | ||||||
Interest rate contracts | ||||||
Futures – long positions | 148,032 | 50,869 | – | 198,901 | 197,251 | 1,650 |
Futures – short positions | 233,941 | 98,763 | 65 | 332,769 | 332,320 | 449 |
Options purchased | 56,353 | 12,173 | – | 68,526 | 68,526 | – |
Options written | 16,394 | 6,168 | – | 22,562 | 22,562 | – |
Foreign exchange contracts | ||||||
Futures – long positions | 164 | – | – | 164 | 164 | – |
Other contracts | 539,103 | 89,147 | 2,094 | 630,344 | 630,344 | – |
$ 10,104,168 | $ 10,260,443 | $ 6,115,049 | $ 26,479,660 | $ 25,651,512 | $ 828,148 | |
(1)
The derivative notional amounts are determined using the standardized approach for measuring counterparty credit risk (SA-CCR) in accordance with the Capital
Adequacy Requirements (CAR).
(2)
Credit derivatives with a notional value of $1 billion (October 31, 2022 – $1 billion) are economic hedges. Trading credit derivatives comprise protection purchased of
$119 billion (October 31, 2022 – $26 billion) and protection sold of $115 billion (October 31, 2022 – $17 billion).
(3)
Other contracts exclude loan underwriting commitments of $2 billion (October 31, 2022 – $6 billion), which are not classified as derivatives under CAR guidelines.
Fair value of derivative instruments (1) | ||||||
As at | ||||||
October 31, 2023 | October 31, 2022 | |||||
(Millions of Canadian dollars) | Positive | Negative | Positive | Negative | ||
Held or issued for trading purposes | ||||||
Interest rate contracts | ||||||
Forward rate agreements | $ 76 | $ 24 | $ 77 | $ 25 | ||
Swaps | 26,320 | 22,965 | 25,690 | 21,608 | ||
Options purchased | 11,230 | – | 12,056 | – | ||
Options written | – | 11,776 | – | 12,201 | ||
37,626 | 34,765 | 37,823 | 33,834 | |||
Foreign exchange contracts | ||||||
Forward contracts | 22,972 | 22,655 | 37,734 | 37,631 | ||
Cross currency swaps | 7,370 | 5,815 | 8,680 | 9,087 | ||
Cross currency interest rate swaps | 55,268 | 46,550 | 49,758 | 38,230 | ||
Options purchased | 2,623 | – | 2,623 | – | ||
Options written | – | 1,790 | – | 2,571 | ||
88,233 | 76,810 | 98,795 | 87,519 | |||
Credit derivatives | 175 | 176 | 388 | 125 | ||
Other contracts | 16,319 | 20,865 | 18,474 | 21,084 | ||
142,353 | 132,616 | 155,480 | 142,562 | |||
Held or issued for other-than-trading purposes | ||||||
Interest rate contracts | ||||||
Swaps | 1,907 | 7,436 | 2,244 | 6,880 | ||
1,907 | 7,436 | 2,244 | 6,880 | |||
Foreign exchange contracts | ||||||
Forward contracts | 860 | 509 | 268 | 237 | ||
Cross currency swaps | – | – | – | 22 | ||
Cross currency interest rate swaps | 555 | 4,484 | 374 | 6,677 | ||
1,415 | 4,993 | 642 | 6,936 | |||
Credit derivatives | 49 | – | – | – | ||
Other contracts | 71 | 109 | 313 | 273 | ||
3,442 | 12,538 | 3,199 | 14,089 | |||
Total gross fair values before: | 145,795 | 145,154 | 158,679 | 156,651 | ||
Valuation adjustments determined on a pooled basis | (1,801) | (981) | (2,055) | (975) | ||
Impact of netting agreements that qualify for balance sheet offset | (1,544) | (1,544) | (2,185) | (2,185) | ||
$ 142,450 | $ 142,629 | $ 154,439 | $ 153,491 | |||
(1)
The fair value reflects the impact of characterizing the daily variation margin as settlement of the related derivative fair values as permitted by certain central
counterparties.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
193
Fair value of derivative instruments by term to maturity
(1)
| As at | ||||||||
| October 31, 2023 | October 31, 2022 | |||||||
Less than | 1 through | Over | Less than | 1 through | Over | |||
(Millions of Canadian dollars) | 1 year | 5 years | 5 years | Total | 1 year | 5 years | 5 years | Total |
Derivative assets | $ 46,148 | 52,165 | 44,137 | $ 142,450 | $ 56,050 | 56,792 | 41,597 | $ 154,439 |
Derivative liabilities | 47,707 | 51,690 | 43,232 | 142,629 | 58,504 | 54,361 | 40,626 | 153,491 |
(1)
The fair value reflects the impact of characterizing the daily variation margin as settlement of the related derivative fair values as permitted by certain central
counterparties.
Interest rate benchmark reform
(1)
We use interest rate contracts in fair value hedges and cash flow hedges to manage our exposure to interest rate risk from our
existing and/or forecast assets and liabilities. We also use foreign denominated deposit liabilities in net investment hedges to
manage the foreign exchange risk arising from our investments in foreign operations. The hedging instruments designated to
manage these risks reference IBORs in multiple jurisdictions and will be affected by the Reform as the markets transition to ABRs
as discussed in Note 2.
The following table presents the notional or principal amount of our hedging instruments which reference IBORs and are
affected by the Reform as discussed in Note 2. The notional or principal amounts of our hedging instruments also approximates
the extent of the risk exposure we manage through hedging relationships:
| As at | |||
October 31, 2023 | October 31, 2022 | ||
Notional/Principal | Notional/Principal | ||
(Millions of Canadian dollars) | amounts | amounts | |
Interest rate contracts | |||
USD LIBOR | $ – | $ 40,208 | |
CDOR | 115,048 | 114,159 | |
Total Return Swaps | |||
CDOR | 736 | 801 | |
Non-derivative instruments | |||
USD LIBOR | – | 237 | |
$ 115,784 | $ 155,405 | ||
(1)
Excludes interest rate contracts and non-derivative instruments which reference rates in multi-rate jurisdictions, including EURO Interbank Offered Rate and Australian
Bank Bill Swap Rate (BBSW).
Derivative-related credit risk
Credit risk from derivative transactions is generated by the potential for the counterparty to default on its contractual
obligations when one or more transactions have a positive market value to us. Therefore, derivative-related credit risk is
represented by the positive fair value of the instrument and is normally a small fraction of the contract’s notional amount.
We subject our derivative transactions to the same credit approval, limit and monitoring standards that we use for managing
other transactions that create credit exposure. This includes evaluating the creditworthiness of counterparties, and managing
the size, diversification and maturity structure of the portfolio. Credit utilization for all products is compared with established
limits on a continual basis and is subject to a standard exception reporting process. We use a single internal rating system for all
credit risk exposure, as outlined in the internal ratings maps in the Credit risk section of Management’s Discussion and Analysis.
Offsetting is a technique that can reduce credit exposure from derivatives and is generally facilitated through the use of
master netting agreements and achieved when specific criteria are met in accordance with our accounting policy in Note 2. A
master netting agreement provides for a single net settlement of all financial instruments covered by the agreement in the event
of default. However, credit risk is reduced only to the extent that our financial obligations to the same counterparty can be set off
against obligations of the counterparty to us. We maximize the use of master netting agreements to reduce derivative-related
credit exposure. Our overall exposure to credit risk that is reduced through master netting agreements may change substantially
following the reporting date as the exposure is affected by each transaction subject to the agreement as well as by changes in
underlying market rates. Measurement of our credit exposure arising out of derivative transactions is reduced to reflect the
effects of netting in cases where the enforceability of that netting is supported by appropriate legal analysis as documented in
our trading credit risk policies.
The use of collateral is another significant credit mitigation technique for managing derivative-related counterparty credit
risk. Mark-to-market provisions in our agreements with some counterparties, typically in the form of a Credit Support Annex,
provide us with the right to request that the counterparty pay down or collateralize the current market value of its derivatives
positions when the value exceeds a specified threshold amount.
Replacement cost and credit equivalent amounts are determined in accordance with OSFI’s non-modelled regulatory SA-CCR
under the CAR guidelines. The replacement cost represents the total fair value of all outstanding contracts in a gain position after
factoring in the master netting agreements and applicable margins. The credit equivalent amount is defined as the replacement
cost plus an additional amount for potential future credit exposure, scaled by a regulatory factor. The risk-weighted equivalent is
determined by applying appropriate risk-weights to the credit equivalent amount, including those risk weights reflective of model
approval under the internal ratings based approach.
Derivative-related credit risk
(1)
As at | ||||||
October 31, 2023 | October 31, 2022 | |||||
Credit | Credit | |||||
Replacement | equivalent | Risk-weighted | Replacement | equivalent | Risk-weighted | |
(Millions of Canadian dollars) | cost | amount | equivalent (2) | cost | amount | equivalent (2) |
Over-the-counter contracts | ||||||
Interest rate contracts | ||||||
Forward rate agreements | $ 58 | $ 94 | $ 6 | $ 46 | $ 76 | $ 5 |
Swaps | 9,613 | 24,448 | 3,721 | 9,699 | 21,698 | 5,187 |
Options purchased | 610 | 1,547 | 353 | 108 | 426 | 119 |
Options written | 123 | 564 | 152 | 15 | 543 | 164 |
Foreign exchange contracts | ||||||
Forward contracts | 5,655 | 27,862 | 5,611 | 8,772 | 29,565 | 5,940 |
Swaps | 4,261 | 21,483 | 4,274 | 6,072 | 22,188 | 4,556 |
Options purchased | 841 | 1,742 | 383 | 536 | 1,111 | 340 |
Options written | 95 | 441 | 109 | 28 | 313 | 86 |
Credit derivatives | 356 | 1,834 | 219 | 299 | 766 | 114 |
Other contracts | 1,933 | 16,002 | 4,929 | 5,196 | 20,457 | 7,520 |
Exchange-traded contracts | 7,186 | 16,191 | 324 | 11,098 | 19,870 | 397 |
$ 30,731 | $ 112,208 | $ 20,081 | $ 41,869 | $ 117,013 | $ 24,428 | |
(1)
The amounts presented are net of master netting agreements in accordance with CAR guidelines.
(2)
The risk-weighted balances are calculated in accordance with CAR guidelines and exclude CVA of $13 billion (October 31, 2022 – $16 billion).
Replacement cost of derivative instruments by risk rating and by counterparty type
As at October 31, 2023 | |||||||||
Risk rating (1) | Counterparty type (2) | ||||||||
OECD | |||||||||
(Millions of Canadian dollars) | AAA, AA | A | BBB | BB or lower | Total | Banks | governments | Other | Total |
Gross positive fair values | $ 36,224 | $ 70,010 | $ 28,956 | $ 10,605 | $ 145,795 | $ 69,841 | $ 20,268 | $ 55,686 | $ 145,795 |
Impact of master netting agreements and | |||||||||
applicable margins | 24,025 | 60,556 | 22,765 | 7,718 | 115,064 | 68,151 | 20,237 | 26,676 | 115,064 |
Replacement cost (after netting | |||||||||
agreements) | $ 12,199 | $ 9,454 | $ 6,191 | $ 2,887 | $ 30,731 | $ 1,690 | $ 31 | $ 29,010 | $ 30,731 |
As at October 31, 2022 | |||||||||
Risk rating (1) | Counterparty type (2) | ||||||||
OECD | |||||||||
(Millions of Canadian dollars) | AAA, AA | A | BBB | BB or lower | Total | Banks | governments | Other | Total |
Gross positive fair values | $ 39,001 | $ 72,983 | $ 29,690 | $ 17,005 | $ 158,679 | $ 73,616 | $ 22,727 | $ 62,336 | $ 158,679 |
Impact of master netting agreements and | |||||||||
applicable margins | 21,552 | 62,614 | 21,818 | 10,826 | 116,810 | 71,582 | 22,597 | 22,631 | 116,810 |
Replacement cost (after netting | |||||||||
agreements) | $ 17,449 | $ 10,369 | $ 7,872 | $ 6,179 | $ 41,869 | $ 2,034 | $ 130 | $ 39,705 | $ 41,869 |
(1)
Our internal risk ratings of AAA, AA, A and BBB represent investment grade ratings and ratings of BB or lower represent non-investment grade ratings, as outlined in the
internal ratings maps in the Credit risk section of Management’s Discussion and Analysis.
(2)
Counterparty type is defined in accordance with CAR guidelines.
Derivatives in hedging relationships
We apply hedge accounting to minimize volatility in earnings and capital caused by changes in interest rates or foreign exchange
rates. Interest rate and currency fluctuations will either cause assets and liabilities to appreciate or depreciate in market value
or cause variability in forecasted cash flows. When a hedging relationship is effective, gains, losses, revenue and expenses of the
hedging instrument will offset the gains, losses, revenue and expenses of the hedged item.
Derivatives used in hedging relationships are recorded in Other Assets – Derivatives or Other Liabilities – Derivatives on our
Consolidated Balance Sheets. Foreign currency-denominated liabilities used in net investment hedging relationships are
recorded in Deposits – Business and Government and Subordinated debentures on our Consolidated Balance Sheets. Gains and
losses relating to hedging ineffectiveness are recorded in Non-Interest income and amounts reclassified from hedge reserves in
OCI to income are recorded in Net-interest income for cash flow hedges and Non-interest income for net investment hedges.
We assess and measure the effectiveness of a hedging relationship based on the change in the fair value or cash flows of the
derivative hedging instrument relative to the change in the fair value or cash flows of the hedged item attributable to the hedged
risk. When cash instruments are designated as hedges of foreign exchange risks, only changes in their value due to foreign
exchange risk are included in the assessment and measurement of hedge effectiveness.
Potential sources of ineffectiveness can be attributed to differences between hedging instruments and hedged items:
•
Mismatches in the terms of hedged items and hedging instruments, for example the frequency and timing of when
interest rates are reset and frequency of payment.
•
Difference in the discounting factors between the hedged item and the hedging instrument, taking into consideration the
different reset frequency of the hedged item and hedging instrument.
•
Hedging derivatives with a non-zero fair value at inception date of the hedging relationship, resulting in mismatch in
terms with the hedged item.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
195
Below is a description of our risk management strategy for each risk exposure that we decide to hedge:
Interest rate risk
We use interest rate contracts to manage our exposure to interest rate risk by modifying the repricing characteristics of existing
and/or forecasted assets and liabilities, including funding and investment activities. The swaps are designated in either a fair
value hedge or a cash flow hedge and predominantly reference IBORs across multiple jurisdictions. Certain swaps will be
affected by the Reform as the market transitions to ABRs.
For fair value hedges, we use interest rate contracts to manage the fair value movements of our fixed rate instruments due
to changes in benchmark interest. The interest rate swaps are entered into on a one-to-one basis to manage the benchmark
interest rate risk, and its terms are critically matched to the specified fixed rate instruments.
We also use interest rate swaps in fair value hedges to manage interest rate risk from residential mortgage assets and
funding liabilities. Our exposure from this portfolio changes with the origination of new loans, repayments of existing loans and
sale of securitized mortgages. Accordingly, we have adopted dynamic hedging for that portfolio, in which the hedge relationship
is rebalanced on a more frequent basis, such as on a bi-weekly or on a monthly basis.
For cash flow hedges, we use interest rate contracts to manage the exposure to cash flow variability of our variable rate
instruments as a result of changes in benchmark interest rates. The variable rate instruments and forecast transactions which
reference certain IBORs and will be affected by the Reform. Whilst some of the interest rate swaps are entered into on a one-to-
one basis to manage a specific exposure, other interest rate swaps may be entered into for managing interest rate risks of a
portfolio of assets and liabilities.
We manage our exposure to foreign currency risk with cross currency swaps in a cash flow hedge, and foreign exchange forward
contracts in a net investment hedge. Certain cash instruments may also be designated in a net investment hedge, where
applicable.
For cash flow hedges, we use cross currency swaps and forward contracts to manage the cash flow variability arising from
fluctuations in foreign exchange rates on our issued foreign denominated fixed rate liabilities and highly probable forecasted
transactions. The maturity profile and repayment terms of these swaps are matched to those of our foreign denominated
exposures to limit our cash flow volatility from changes in foreign exchange rates.
For net investment hedges, we use a combination of foreign exchange forwards and cash instruments, such as foreign
denominated deposit liabilities, to manage our foreign exchange risk arising from our investments in foreign operations. Our
most significant exposures include USD, GBP and Euro. When hedging net investments in foreign operations using foreign
exchange forwards, only the undiscounted spot element of the foreign exchange forward is designated as the hedging
instrument. Accordingly, changes in the fair value of the hedging instrument as a result of changes in forward rates and the
effects of discounting are not included in the hedging effectiveness assessment. Foreign operations are only hedged to the extent
of the principal of the foreign denominated deposit liabilities or notional amount of the derivative; we generally do not expect to
Equity price risk
We use total return swaps in cash flow hedges to mitigate the cash flow variability of the expected payment associated with our
cash settled share-based compensation plan for certain key employees by exchanging interest payments for indexed RBC share
price change and dividend returns.
Credit risk
We predominantly use credit derivatives to economically hedge our credit exposures. We mitigate industry sector concentrations
and single-name exposures related to our credit portfolio by purchasing credit derivatives to transfer credit risk to third parties.
Derivative instruments designated in hedging relationships
(1)
The following table presents the fair values of the derivative instruments and the principal amounts of the non-derivative
liabilities, categorized by their hedging relationships, as well as derivatives that are not designated in hedging relationships.
| As at | ||||||||
| October 31, 2023 | October 31, 2022 | |||||||
Designated as hedging instruments | Designated as hedging instruments | |||||||
| in hedging relationships | Not designated | in hedging relationships | Not designated | |||||
Net | in a hedging | Net | in a hedging | |||||
(Millions of Canadian dollars) | Fair value | Cash flow | investment | relationship | Fair value | Cash flow | investment | relationship |
Assets | ||||||||
Derivative instruments | $ 156 | $ 19 | $ 13 | $ 142,262 | $ 247 | $ 57 | $ 36 | $ 154,099 |
Liabilities | ||||||||
Derivative instruments | 50 | 100 | 409 | 142,070 | 27 | – | 126 | 153,338 |
Non-derivative instruments | – | – | 25,427 | n.a. | – | – | 25,798 | n.a. |
(1)
The fair value reflects the impact of characterizing the daily variation margin as settlement of the related derivative fair values as permitted by certain central
counterparties.
n.a.
not applicable
196
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 9
Derivative financial instruments and hedging activities
(continued)
The following tables provide the remaining term to maturity analysis of the notional amounts and the weighted average rates of
the hedging instruments and their carrying amounts by types of hedging relationships:
Fair value hedges
| As at October 31, 2023 | |||||||
| Notional amounts | Carrying amount (1) | ||||||
Within | 1 through | Over | |||||
(Millions of Canadian dollars, except average rates) | 1 year | 5 years | 5 years | Total | Assets | Liabilities | |
Interest rate risk | |||||||
Interest rate contracts | |||||||
Hedge of fixed rate assets | $ 8,853 | $ 62,948 | $ 21,702 | $ 93,503 | $ 156 | $ – | |
Hedge of fixed rate liabilities | 23,592 | 75,130 | 10,236 | 108,958 | – | 50 | |
Weighted average fixed interest rate | |||||||
Hedge of fixed rate assets | 4.3% | 3.6% | 3.2% | 3.6% | |||
Hedge of fixed rate liabilities | 2.1% | 2.4% | 2.6% | 2.3% | |||
| As at October 31, 2022 | ||||||
| Notional amounts | Carrying amount (1) | |||||
Within | 1 through | Over | ||||
(Millions of Canadian dollars, except average rates) | 1 year | 5 years | 5 years | Total | Assets | Liabilities |
Interest rate risk | ||||||
Interest rate contracts | ||||||
Hedge of fixed rate assets | $ 9,083 | $ 32,173 | $ 15,516 | $ 56,772 | $ 247 | $ 3 |
Hedge of fixed rate liabilities | 13,231 | 69,419 | 10,094 | 92,744 | – | 24 |
Weighted average fixed interest rate | ||||||
Hedge of fixed rate assets | 1.1% | 2.5% | 2.8% | 2.3% | ||
Hedge of fixed rate liabilities | 1.9% | 1.8% | 2.0% | 1.9% | ||
(1)
The carrying amount reflects the impact of characterizing the daily variation margin as settlement of the related derivative fair values as permitted by certain central
counterparties.
Cash flow hedges
| As at October 31, 2023 | ||||||||
| Notional amounts | Carrying amount (1) | |||||||
Within | 1 through | Over | ||||||
(Millions of Canadian dollars, except average rates) | 1 year | 5 years | 5 years | Total | Assets | Liabilities | ||
Interest rate risk | ||||||||
Interest rate contracts | ||||||||
Hedge of variable rate assets | $ 63,927 | $ 68,470 | $ 1,097 | $ 133,494 | $ – | $ – | ||
Hedge of variable rate liabilities | 16,696 | 63,527 | 32,802 | 113,025 | – | – | ||
Weighted average fixed interest rate | ||||||||
Hedge of variable rate assets | 4.5% | 3.4% | 3.7% | 4.0% | ||||
Hedge of variable rate liabilities | 4.9% | 3.8% | 2.8% | 3.7% | ||||
Foreign exchange risk | ||||||||
Cross currency swaps | $ 63 $ | 916 $ | – | $ 979 | $ 19 | $ 14 | ||
Weighted average CAD-EUR exchange rate | 1.48 | 1.44 | n.a. | 1.45 | ||||
Weighted average CAD-USD exchange rate | n.a. | 1.34 | n.a. | 1.34 | ||||
| As at October 31, 2022 | ||||||
| Notional amounts | Carrying amount (1) | |||||
Within | 1 through | Over | ||||
(Millions of Canadian dollars, except average rates) | 1 year | 5 years | 5 years | Total | Assets | Liabilities |
Interest rate risk | ||||||
Interest rate contracts | ||||||
Hedge of variable rate assets | $ 50,436 | $ 74,726 | $ 1,023 | $ 126,185 | $ – | $ – |
Hedge of variable rate liabilities | 6,221 | 42,830 | 24,024 | 73,075 | – | – |
Weighted average fixed interest rate | ||||||
Hedge of variable rate assets | 3.3% | 2.8% | 2.5% | 3.0% | ||
Hedge of variable rate liabilities | 2.0% | 1.5% | 2.0% | 1.7% | ||
Foreign exchange risk | ||||||
Cross currency swaps | $ – | $ 314 | $ – | $ 314 | $ 32 | $ – |
Weighted average CAD-EUR exchange rate | n.a. | 1.44 | n.a. | 1.44 | ||
Weighted average CAD-USD exchange rate | n.a. | n.a. | n.a. | n.a. | ||
(1)
The carrying amount reflects the impact of characterizing the daily variation margin as settlement of the related derivative fair values as permitted by certain central
counterparties.
n.a.
not applicable
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
197
Net investment hedges
| As at October 31, 2023 | |||||||
| Notional/Principal | Carrying amount | ||||||
Within | 1 through | Over | |||||
(Millions of Canadian dollars, except average rates) | 1 year | 5 years | 5 years | Total | Assets | Liabilities | |
Foreign exchange risk | |||||||
Foreign currency liabilities | $ 6,061 | $ 14,653 | $ 6,413 | $ 27,127 | n.a. | $25,427 | |
Weighted average CAD-USD exchange rate | 1.28 | 1.29 | 1.33 | 1.30 | |||
Weighted average CAD-EUR exchange rate | n.a. | n.a. | n.a. | n.a. | |||
Weighted average CAD-GBP exchange rate | – | 1.71 | – | 1.71 | |||
Forward contracts | $ 18,920 | $ – | $ – | $ 18,920 | $ 13 | $ 409 | |
Weighted average CAD-USD exchange rate | 1.36 | n.a. | n.a. | 1.36 | |||
Weighted average CAD-EUR exchange rate | 1.45 | n.a. | n.a. | 1.45 | |||
Weighted average CAD-GBP exchange rate | 1.68 | n.a. | n.a. | 1.68 | |||
| As at October 31, 2022 | ||||||
| Notional/Principal | Carrying amount | |||||
Within | 1 through | Over | ||||
(Millions of Canadian dollars, except average rates) | 1 year | 5 years | 5 years | Total | Assets | Liabilities |
Foreign exchange risk | ||||||
Foreign currency liabilities | $ 5,462 | $ 20,851 | $ 1,025 | $ 27,338 | n.a. | $ 25,798 |
Weighted average CAD-USD exchange rate | 1.31 | 1.28 | 1.28 | 1.29 | ||
Weighted average CAD-EUR exchange rate | – | 1.51 | 1.48 | 1.51 | ||
Weighted average CAD-GBP exchange rate | – | 1.71 | – | 1.71 | ||
Forward contracts | $ 6,089 | $ – | $ – | $ 6,089 | $ 36 | $ 126 |
Weighted average CAD-USD exchange rate | 1.34 | n.a. | n.a. | 1.34 | ||
Weighted average CAD-EUR exchange rate | 1.36 | n.a. | n.a. | 1.36 | ||
Weighted average CAD-GBP exchange rate | 1.55 | n.a. | n.a. | 1.55 | ||
n.a.
not applicable
The following tables present the details of the hedged items categorized by their hedging relationships:
Fair value hedges – Assets and liabilities designated as hedged items
| As at and for the year ended October 31, 2023 | ||||||
| Accumulated amount of fair | ||||||
| value adjustments on the | ||||||
| hedged item included in the | ||||||
Carrying amount | carrying amount | |||||
Changes in fair | ||||||
values used for | ||||||
calculating hedge | ||||||
(Millions of Canadian dollars) | Assets | Liabilities | Assets | Liabilities | Consolidated Balance Sheet items: | ineffectiveness |
Interest rate risk | ||||||
Fixed rate assets (1) | Securities – Investment, net of | |||||
applicable allowance; Loans – Retail; | ||||||
$86,734 | $ – | $ (3,911) $ | – | Loans – Wholesale | $ (1,445) | |
Fixed rate liabilities (1) | Deposits – Business and government; | |||||
Subordinated debentures; | ||||||
– | 102,535 | – | (6,340) | Deposits – Bank | 276 | |
| As at and for the year ended October 31, 2022 | ||||||
| Accumulated amount of fair | ||||||
| value adjustments on the | ||||||
| hedged item included in the | ||||||
Carrying amount | carrying amount | |||||
Changes in fair | ||||||
values used for | ||||||
calculating hedge | ||||||
(Millions of Canadian dollars) | Assets | Liabilities | Assets | Liabilities | Consolidated Balance Sheet items: | ineffectiveness |
Interest rate risk | ||||||
Fixed rate assets (1) | Securities – Investment, net of | |||||
applicable allowance; Loans – Retail; | ||||||
$ 52,216 | $ – | $ (3,285) | $ – | Loans – Wholesale | $ (3,695) | |
Fixed rate liabilities (1) | Deposits – Business and government; | |||||
Subordinated debentures; | ||||||
– | 86,738 | – | (5,924) | Deposits – Bank | 5,742 | |
(1)
As at October 31, 2023, the accumulated amount of fair value hedge adjustments remaining on our Consolidated Balance Sheets for hedged items that have ceased to be
adjusted for hedging gains and losses is a of loss of $539 million for fixed rate assets and a gain of $259 million for fixed rate liabilities (October 31, 2022 – loss of
$486 million and loss of $25 million, respectively).
198
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 9
Derivative financial instruments and hedging activities
(continued)
Cash flow and net investment hedges – Assets and liabilities designated as hedged items
As at and for the year ended October 31, 2023 | ||||
Changes in fair | Cash flow hedge/foreign | |||
values used for | currency translation reserve | |||
calculating hedge | Continuing | Discontinued | ||
(Millions of Canadian dollars) | Consolidated Balance Sheet items: | ineffectiveness | hedges | hedges |
Cash flow hedges | ||||
Interest rate risk | ||||
Variable rate assets | Securities – Investment, net of | |||
applicable allowance; Loans – Retail; | $ 2,248 | $ (2,115) | $ (3,126) | |
Interest bearing deposits with banks; | ||||
Assets purchased under reverse | ||||
repurchase agreements and securities borrowed | ||||
Variable rate liabilities | Deposits – Business and government; | |||
Deposits – Personal; | (2,558) | 3,535 | 5,607 | |
Obligations related to assets sold under | ||||
repurchase agreements and securities loaned | ||||
Foreign exchange risk | ||||
Fixed rate assets | Securities – Investment, net of | |||
applicable allowance | 50 | – | – | |
Net investment hedges | ||||
Foreign exchange risk | ||||
Foreign subsidiaries | n.a. | 1,513 | (7,297) | (382) |
As at and for the year ended October 31, 2022 | ||||
Changes in fair | Cash flow hedge/foreign | |||
values used for | currency translation reserve | |||
calculating hedge | Continuing | Discontinued | ||
(Millions of Canadian dollars) | Consolidated Balance Sheet items: | ineffectiveness | hedges | hedges |
Cash flow hedges | ||||
Interest rate risk | ||||
Variable rate assets | Securities – Investment, net of | |||
applicable allowance; Loans – Retail; | $ 4,720 | $ (1,777) | $ (2,668) | |
Interest bearing deposits with banks; | ||||
Assets purchased under reverse | ||||
repurchase agreements and securities borrowed | ||||
Variable rate liabilities | Deposits – Business and government; | (6,895) | 5,471 | 2,231 |
Deposits – Personal; | ||||
Obligations related to assets sold under | ||||
repurchase agreements and securities loaned | ||||
Foreign exchange risk | ||||
Fixed rate assets | Securities – Investment, net of | |||
applicable allowance | (17) | 7 | – | |
Net investment hedges | ||||
Foreign exchange risk | ||||
Foreign subsidiaries | n.a. | 1,927 | (5,936) | (421) |
n.a.
not applicable
Effectiveness of designated hedging relationships
| For the year ended October 31, 2023 | ||||
Hedge | ||||
Change in fair value | ineffectiveness | Changes in the value of | Amount reclassified | |
of hedging | recognized in | the hedging instrument | from hedge reserves | |
(Millions of Canadian dollars) | instrument | income (1) | recognized in OCI | to income |
Fair value hedges | ||||
Interest rate risk | ||||
Interest rate contracts – fixed rate assets | $ 1,385 | $ (60) | n.a. | n.a. |
Interest rate contracts – fixed rate liabilities | (205) | 71 | n.a. | n.a. |
Cash flow hedges | ||||
Interest rate risk | ||||
Interest rate contracts – variable rate assets | (2,232) | 7 | $ (3,930) | $ (3,121) |
Interest rate contracts – variable rate liabilities | 2,416 | (11) | 4,498 | 3,045 |
Foreign exchange risk | ||||
Cross currency swap – fixed rate assets | (50) | – | (44) | (37) |
Net investment hedges | ||||
Foreign exchange risk | ||||
Foreign currency liabilities | (684) | – | (684) | – |
Forward contracts | (828) | – | (828) | (191) |
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
199
| For the year ended October 31, 2022 | ||||
Hedge | ||||
Change in fair value | ineffectiveness | Changes in the value of | Amount reclassified | |
of hedging | recognized in | the hedging instrument | from hedge reserves | |
(Millions of Canadian dollars) | instrument | income (1) | recognized in OCI | to income |
Fair value hedges | ||||
Interest rate risk | ||||
Interest rate contracts – fixed rate assets | $ 3,650 | $ (45) | n.a. | n.a. |
Interest rate contracts – fixed rate liabilities | (5,713) | 29 | n.a. | n.a. |
Cash flow hedges | ||||
Interest rate risk | ||||
Interest rate contracts – variable rate assets | (4,698) | (36) | $ (4,432) | $ (185) |
Interest rate contracts – variable rate liabilities | 6,713 | 37 | 6,673 | (118) |
Foreign exchange risk | ||||
Cross currency swap – fixed rate assets | 17 | – | 23 | 17 |
Net investment hedges | ||||
Foreign exchange risk | ||||
Foreign currency liabilities | (1,771) | (3) | (1,768) | – |
Forward contracts | (159) | – | (159) | (23) |
(1)
Hedge ineffectiveness recognized in income included gains of $3 million that are excluded from the assessment of hedge effectiveness and are offset by economic
hedges (October 31, 2022 – losses of $19 million).
n.a.
not applicable
Reconciliation of components of equity
The following table provides a reconciliation by risk category of each component of equity and an analysis of other
comprehensive income relating to hedge accounting:
For the year ended October 31, 2023 | For the year ended October 31, 2022 | |||
Cash flow hedge | Foreign currency | Cash flow hedge | Foreign currency | |
(Millions of Canadian dollars) | reserve | translation reserve | reserve | translation reserve |
Balance at the beginning of the year | $ 2,394 | $ 5,688 | $ 566 | $ 2,055 |
Cash flow hedges | ||||
Effective portion of changes in fair value: | ||||
Interest rate risk | 568 | 2,241 | ||
Foreign exchange risk | (44) | 23 | ||
Equity price risk | (119) | (1) | ||
Net amount reclassified to profit or loss: | ||||
Ongoing hedges: | ||||
Interest rate risk | (377) | (227) | ||
Foreign exchange risk | 37 | (17) | ||
Equity price risk | 93 | (23) | ||
De-designated hedges: | ||||
Interest rate risk | 453 | 530 | ||
Hedges of net investment in foreign operations | ||||
Foreign exchange denominated debt | (684) | (1,768) | ||
Forward foreign exchange contracts | (828) | (159) | ||
Foreign currency translation differences for | ||||
foreign operations | 2,164 | 5,085 | ||
Reclassification of losses (gains) on foreign | ||||
currency translation to income | (160) | (18) | ||
Reclassification of losses (gains) on net | ||||
investment hedging activities to income | 191 | 23 | ||
Tax on movements on reserves during the | ||||
period | (249) | 241 | (698) | 470 |
Balance at the end of the year | $ 2,756 | $ 6,612 | $ 2,394 | $ 5,688 |
200
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Premises and equipment
| For the year ended October 31, 2023 | |||||||||
| Owned by the Bank (1) | Right-of-use lease assets | ||||||||
Furniture, | |||||||||
fixtures | |||||||||
Computer | and other | Leasehold | Work in | ||||||
(Millions of Canadian dollars) | Land | Buildings | equipment | equipment | improvements | process | Buildings | Equipment | Total |
Cost | |||||||||
Balance at beginning of period | $ 141 | $ 1,261 | $ 1,169 | $ 836 | $ 2,845 | $ 120 | $ 5,748 | $ 299 | $ 12,419 |
Additions | – | – | 32 | 12 | 29 | 511 | 385 | 80 | 1,049 |
Acquisition through business | |||||||||
combination | – | – – | – | – | – | – | – | – | |
Transfers from work in | |||||||||
process | – | 19 | 246 | 62 | 187 | (514) | – | – | – |
Disposals | – | (53) | (216) | (96) | (78) | (2) | (331) | (31) | (807) |
Foreign exchange translation | 1 | 6 | 22 | 9 | 32 | 1 | 103 | – | 174 |
Other | (2) | 18 | 30 | 12 | (8) | (8) | (12) | (31) | (1) |
Balance at end of period | $ 140 | $ 1,251 | $ 1,283 | $ 835 | $ 3,007 | $ 108 | $ 5,893 | $ 317 | $ 12,834 |
Accumulated depreciation | |||||||||
Balance at beginning of period | $ – | $ 627 | $ 640 $ | 525 $ | 1,656 $ | – | $ 1,643 | $ 114 | $ 5,205 |
Depreciation | – | 51 | 247 | 91 | 235 | – | 559 | 92 | 1,275 |
Disposals | – | (50) | (216) | (88) | (70) | – | (112) | (31) | (567) |
Foreign exchange translation | – | 3 | 16 | 6 | 16 | – | 31 | – | 72 |
Other | – | 15 | 36 | 16 | 26 | – | 28 | (21) | 100 |
Balance at end of period | $ – | $ 646 | $ 723 | $ 550 | $ 1,863 | $ – | $ 2,149 | $ 154 | $ 6,085 |
Net carrying amount at end of | |||||||||
period | $ 140 | $ 605 | $ 560 | $ 285 | $ 1,144 | $ 108 | $ 3,744 | $ 163 | $ 6,749 |
For the year ended October 31, 2022
| Owned by the Bank (1) | Right-of-use lease assets | ||||||||
Furniture, | |||||||||
fixtures | |||||||||
Computer | and other | Leasehold | Work in | ||||||
(Millions of Canadian dollars) | Land | Buildings | equipment | equipment | improvements | process | Buildings | Equipment | Total |
Cost | |||||||||
Balance at beginning of period | $ 145 | $ 1,308 | $ 1,126 | $ 773 | $ 2,754 | $ 170 | $ 5,394 | $ 308 | $ 11,978 |
Additions | – | – | 24 | 3 | 28 | 397 | 270 | 138 | 860 |
Acquisition through business | |||||||||
combination | – | – | 4 | 1 | 6 | 1 | 55 | – | 67 |
Transfers from work in process | – | 15 | 195 | 49 | 206 | (465) | – | – | – |
Disposals | (10) | (83) | (195) | (5) | (205) | (1) | (153) | (146) | (798) |
Foreign exchange translation | 7 | 24 | 17 | 15 | 67 | 6 | 58 | (1) | 193 |
Other | (1) | (3) | (2) | – | (11) | 12 | 124 | – | 119 |
Balance at end of period | $ 141 | $ 1,261 | $ 1,169 | $ 836 | $ 2,845 | $ 120 | $ 5,748 | $ 299 | $ 12,419 |
Accumulated depreciation | |||||||||
Balance at beginning of period | $ – | $ 664 | $ 584 $ | 427 $ | 1,589 $ | – | $ 1,133 | $ 157 | $ 4,554 |
Depreciation | – | 48 | 234 | 94 | 233 | – | 569 | 87 | 1,265 |
Disposals | – | (80) | (192) | (4) | (204) | – | (106) | (146) | (732) |
Foreign exchange translation | – | 11 | 12 | 6 | 38 | – | 2 | (1) | 68 |
Other | – | (16) | 2 | 2 | – | – | 45 | 17 | 50 |
Balance at end of period | $ – | $ 627 | $ 640 | $ 525 | $ 1,656 | $ – | $ 1,643 | $ 114 | $ 5,205 |
Net carrying amount at end of | |||||||||
period | $ 141 | $ 634 | $ 529 | $ 311 | $ 1,189 | $ 120 | $ 4,105 | $ 185 | $ 7,214 |
(1)
As at October 31, 2023, we had total contractual commitments of $120 million to purchase premises and equipment (October 31, 2022 – $185 million).
Total lease payments for the year ended October 31, 2023 were $1,326 million, of which $655 million or 49% relates to variable
payments and $671 million or 51% relates to fixed payments. Total lease payments for the year ended October 31, 2022 were
$1,213 million, of which $578 million or 48% relates to variable payments and $635 million or 52% relates to fixed payments.
Total variable lease payments not included in the measurement of lease liabilities were $647 million for the year ended
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
201
Goodwill and other intangible assets
| For the year ended October 31, 2023 | ||||||||||
U.S. Wealth | ||||||||||
Canadian | Management | International | ||||||||
(Millions of | Canadian | Caribbean | Wealth | Global Asset | (including | Wealth | Investor | Capital | ||
Canadian dollars) | Banking | Banking | Management | Management | City National) | Management | Services | Insurance | Markets | Total |
Balance at beginning | ||||||||||
of period | $ 2,574 | $ 1,759 | $ 589 | $ 1,928 | $ 3,027 | $ 1,042 | $ 59 | $ 112 | $ 1,187 | $ 12,277 |
Acquisitions | 70 | – | – | – | – | – | – | – | – | 70 |
Dispositions | – | – | – | – | – | – | (30) | – | – | (30) |
Currency translations | – | 32 | 4 | 88 | 53 | 82 | – | – | 18 | 277 |
Balance at end of | ||||||||||
period | $ 2,644 | $ 1,791 | $ 593 | $ 2,016 | $ 3,080 | $ 1,124 | $ 29 | $ 112 | $ 1,205 | $ 12,594 |
| For the year ended October 31, 2022 | ||||||||||
U.S. Wealth | ||||||||||
Canadian | Management | International | ||||||||
(Millions of | Canadian | Caribbean | Wealth | Global Asset | (including | Wealth | Investor | Capital | ||
Canadian dollars) | Banking | Banking | Management | Management | City National) | Management | Services (1) | Insurance | Markets (1) | Total |
Balance at beginning | ||||||||||
of period | $ 2,557 | $ 1,600 | $ 577 | $ 1,964 | $ 2,768 | $ 115 | $ 60 | $ 112 | $ 1,101 | $ 10,854 |
Acquisitions | 17 | – | – | 33 | – | 880 | – | – | – | 930 |
Dispositions | – | – | – | – | (19) | – | – | – | – | (19) |
Currency translations | – | 159 | 12 | (69) | 278 | 47 | (1) | – | 86 | 512 |
Balance at end of | ||||||||||
period | $ 2,574 | $ 1,759 | $ 589 | $ 1,928 | $ 3,027 | $ 1,042 | $ 59 | $ 112 | $ 1,187 | $ 12,277 |
(1)
Amounts have been revised from those previously presented to conform to our new basis of segment presentation. Refer to Note 27 for further details of our business
segments.
We perform our annual impairment test by comparing the carrying amount of each CGU to its recoverable amount. The
recoverable amount of a CGU is represented by its VIU, except in circumstances where the carrying amount of a CGU exceeds its
VIU. In such cases, the greater of the CGU’s FVLCD and its VIU is the recoverable amount. Our annual impairment test is
performed as at August 1.
In our 2023 annual impairment tests, the recoverable amount of our Caribbean Banking CGU was based on its FVLCD and the
recoverable amounts of all other CGUs tested were based on their VIU. In our 2022 annual impairment tests, the recoverable
amounts of the Caribbean Banking CGU and International Wealth Management CGU were based on their FVLCD and the
recoverable amounts of all other CGUs tested were based on their VIU.
Value in use
We calculate VIU using a five-year discounted cash flow method, with the exception of our International Wealth Management
CGU where cash flow projections covering a seven-year period were used, which more closely aligns with the strategic growth
plan resulting from the acquisition of RBC Brewin Dolphin. Future cash flows are based on financial plans agreed by
management, estimated based on forecast results, business initiatives, capital required to support future cash flows and returns
to shareholders. Key drivers of future cash flows include net interest margins and average interest-earning assets. The values
assigned to these drivers over the forecast period are based on past experience, external and internal economic forecasts, and
management’s expectations of the impact of economic conditions on our financial results. Beyond the initial cash flow projection
period, cash flows are assumed to increase at a constant rate using a nominal long-term growth rate (terminal growth rate).
Terminal growth rates are based on the long-term steady state growth expectations in the countries within which the CGU
operates. The discount rates used to determine the present value of each CGU’s projected future cash flows are based on the
bank-wide cost of capital, adjusted for the risks to which each CGU is exposed. CGU-specific risks include: country risk, business/
operational risk, geographic risk (including political risk, devaluation risk, and government regulation), currency risk, and price
risk (including product pricing risk and inflation).
The estimation of VIU involves significant judgment in the determination of inputs to the discounted cash flow model and is
most sensitive to changes in future cash flows, discount rates and terminal growth rates applied to cash flows beyond the
forecast period. The sensitivity of the VIU to key inputs and assumptions used was tested by recalculating the recoverable
amount using reasonably possible changes to those parameters. As at August 1, 2023, no reasonably possible change in an
individual key input or assumption, as described, would result in a CGU’s carrying amount exceeding its recoverable amount
based on VIU.
202
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 11
Goodwill and other intangible assets
(continued)
The terminal growth rates and pre-tax discount rates used in our discounted cash flow models are summarized below.
| As at | ||||
August 1, 2023 | August 1, 2022 | |||
Terminal | Terminal | |||
Discount | growth | Discount | growth | |
rate (1) | rate | rate (1) | rate | |
Group of cash generating units | ||||
Canadian Banking | 11.7% | 3.0% | 11.0% | 3.0% |
Caribbean Banking | 12.9 | 3.5 | 12.6 | 3.5 |
Canadian Wealth Management | 12.5 | 3.0 | 11.8 | 3.0 |
Global Asset Management | 12.5 | 3.0 | 11.8 | 3.0 |
U.S. Wealth Management (including City National) | 12.5 | 3.0 | 12.8 | 3.0 |
International Wealth Management (2) | 12.5 | 3.0 | n.m. | n.m. |
Investor Services | 12.4 | 3.0 | 11.8 | 3.0 |
Insurance | 12.4 | 3.0 | 11.6 | 3.0 |
Capital Markets | 12.7 | 3.0 | 12.4 | 3.0 |
(1)
Pre-tax discount rates are determined implicitly based on post-tax discount rates.
(2)
The recoverable amount for our International Wealth Management CGU was determined using a multiples-based approach in 2022.
n.m. not meaningful
Fair value less costs of disposal – Caribbean Banking
As at August 1, 2023, the recoverable amount of our Caribbean Banking CGU, based on FVLCD, was 109% of its carrying amount
(August 1, 2022 – 109%). We calculated FVLCD using a discounted cash flow method that projects future cash flows over a 5-year
period. Cash flows are based on management forecasts, adjusted to approximate the considerations of a prospective third-party
buyer. Cash flows beyond the initial 5-year period are assumed to increase at a constant rate using a nominal long-term growth
rate. Future cash flows, terminal growth rates, and discount rates are based on the same factors noted above. The forecast
future cash flows were discounted using a pre-tax rate of 12.9% (August 1, 2022 – 12.6%), reflecting a higher interest rate
environment. This fair value measurement is categorized as level 3 in the fair value hierarchy as certain significant inputs are not
observable. We use significant judgment to determine inputs to the discounted cash flow model, which is most sensitive to
changes in future cash flows, discount rates and terminal growth rates.
We considered reasonably possible alternative scenarios, including market comparable transactions, which yielded
valuations ranging from an immaterial deficit to an immaterial surplus. The sensitivity of the FVLCD to key inputs and
assumptions was tested by recalculating the recoverable amount using reasonably possible changes to those parameters. A
50 bps change in the terminal growth rate would increase and decrease the recoverable amount by $235 million and $209 million,
respectively. A 50 bps increase in the discount rate would decrease the recoverable amount by $278 million. A reduction in the
forecasted cash flows of 10% per annum would reduce the recoverable amount by $485 million. If future cash flows were reduced
by 8%, the recoverable amount would approximate the carrying amount. Changes in these assumptions have been applied
holding other individual factors constant. However, changes in one factor may be magnified or offset by related changes in other
assumptions as impacts to the recoverable amount are highly interdependent and changes in assumptions may not have a linear
effect on the recoverable amount of the CGU. In aggregate, the range of reasonably possible outcomes would not materially
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
203
| For the year ended October 31, 2023 | |||||||
Internally | Core | Customer | |||||
generated | Other | deposit | list and | In process | |||
(Millions of Canadian dollars) | software | software | intangibles | relationships | software | Total | |
Gross carrying amount | |||||||
Balance at beginning of period | $ 5,076 | $ 908 | $ 1,630 | $ 2,472 | $ 1,535 | $ 11,621 | |
Additions | 81 | 179 | – | – | 1,134 | 1,394 | |
Acquisition through business combination | – | 31 | – | – | – | 31 | |
Transfers | 1,067 | 78 | – | – | (1,145) | – | |
Dispositions | (509) | (145) | – | (160) | 8 | (806) | |
Impairment losses | (73) | – | – | (9) | (5) | (87) | |
Currency translations | 68 | 17 | 28 | 144 | 38 | 295 | |
Other changes | (115) | 29 | – | 9 | (33) | (110) | |
Balance at end of period | $ 5,595 | $ 1,097 | $ 1,658 | $ 2,456 | $ 1,532 | $ 12,338 | |
Accumulated amortization | |||||||
Balance at beginning of period | $ (3,031) $ | (612) $ | (1,146) $ | (749) $ | – | $ (5,538) | |
Amortization charge for the year | (1,009) | (146) | (160) | (172) | – | (1,487) | |
Dispositions | 506 | 157 | – | 114 | – | 777 | |
Impairment losses | (19) | – | – | – | – | (19) | |
Currency translations | (37) | (13) | (24) | (33) | – | (107) | |
Other changes | (7) | (44) | – | (6) | – | (57) | |
Balance at end of period | $ (3,597) | $ (658) | $ (1,330) | $ (846) | $ – | $ (6,431) | |
Net balance at end of period | $ 1,998 | $ 439 | $ 328 | $ 1,610 | $ 1,532 | $ 5,907 | |
For the year ended October 31, 2022 | ||||||
Internally | Core | Customer | ||||
generated | Other | deposit | list and | In process | ||
(Millions of Canadian dollars) | software | software | intangibles | relationships | software | Total |
Gross carrying amount | ||||||
Balance at beginning of period | $ 4,886 | $ 894 | $ 1,474 | $ 1,414 | $ 1,236 | $ 9,904 |
Additions | 25 | 16 | – | – | 1,256 | 1,297 |
Acquisition through business combination | – | 14 | – | 1,292 | 148 | 1,454 |
Transfers | 1,121 | 76 | – | – | (1,197) | – |
Dispositions | (960) | (111) | – | (329) | (5) | (1,405) |
Impairment losses | (16) | – | – | – | (11) | (27) |
Currency translations | 71 | 48 | 149 | 113 | 30 | 411 |
Other changes | (51) | (29) | 7 | (18) | 78 | (13) |
Balance at end of period | $ 5,076 | $ 908 | $ 1,630 | $ 2,472 | $ 1,535 | $ 11,621 |
Accumulated amortization | ||||||
Balance at beginning of period | $ (2,979) | $ (572) | $ (885) | $ (997) | $ – | $ (5,433) |
Amortization charge for the year | (976) | (137) | (153) | (103) | – | (1,369) |
Dispositions | 959 | 109 | – | 315 | – | 1,383 |
Impairment losses | 9 | – | – | – | – | 9 |
Currency translations | (36) | (31) | (98) | 13 | – | (152) |
Other changes | (8) | 19 | (10) | 23 | – | 24 |
Balance at end of period | $ (3,031) | $ (612) | $ (1,146) | $ (749) | $ – | $ (5,538) |
Net balance at end of period | $ 2,045 | $ 296 | $ 484 | $ 1,723 | $ 1,535 | $ 6,083 |
Joint ventures and associated companies
We do not have any joint ventures or associated companies that are individually material to our financial results. The following
table summarizes the carrying value of our interests in joint ventures and associated companies accounted for under the equity
method as well as our share of the income of those entities.
Joint ventures | Associated companies | |||
| As at and for the year ended | ||||
October 31 | October 31 | October 31 | October 31 | |
(Millions of Canadian dollars) | 2023 | 2022 | 2023 | 2022 |
Carrying amount | $ 215 | $ 248 | $ 286 | $ 463 |
Share of: | ||||
Net income (1) | $ 18 | $ 103 | $ 5 | $ 7 |
(1)
Excludes impairment losses recognized on our interests in joint ventures and associated companies. During the year ended October 31, 2023, we recognized impairment
losses of $242 million in Non-interest income – Income (loss) from joint ventures and associates with respect to our interest in an associated company in our Wealth
204
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Other assets
As at | ||
October 31 | October 31 | |
(Millions of Canadian dollars) | 2023 | 2022 |
Accounts receivable and prepaids | $ 4,373 | $ 4,250 |
Accrued interest receivable | 7,775 | 4,703 |
Cash collateral | 20,104 | 25,634 |
Commodity trading receivables | 5,979 | 7,054 |
Deferred income tax asset | 2,446 | 1,472 |
Employee benefit assets | 2,826 | 3,331 |
Held-for-sale assets | 2,562 | 11 |
Insurance-related assets | ||
Collateral loans | 528 | 524 |
Policy loans | 87 | 85 |
Reinsurance assets | 1,127 | 1,084 |
Other | 13 | 12 |
Investments in joint ventures and associates | 501 | 711 |
Margin deposits | 8,849 | 14,684 |
Precious metals | 2,753 | 1,772 |
Receivable from brokers, dealers and clients | 2,834 | 3,299 |
Taxes receivable | 8,908 | 6,933 |
Other | 5,403 | 4,741 |
$ 77,068 | $ 80,300 | |
Deposits
| As at | ||||||||
| October 31, 2023 | October 31, 2022 | |||||||
(Millions of Canadian dollars) | Demand (1) | Notice (2) | Term (3) | Total | Demand (1) | Notice (2) | Term (3) | Total |
Personal | $ 186,530 | $ 57,614 | $ 197,802 | $ 441,946 | $ 203,645 | $ 64,743 | $ 136,544 | $ 404,932 |
Business and government | 316,200 | 19,056 | 409,819 | 745,075 | 348,004 | 17,855 | 394,011 | 759,870 |
Bank | 7,996 | 769 | 35,901 | 44,666 | 10,458 | 490 | 33,064 | 44,012 |
$ 510,726 | $ 77,439 | $ 643,522 | $ 1,231,687 | $ 562,107 | $ 83,088 | $ 563,619 | $ 1,208,814 | |
Non-interest-bearing (4) | ||||||||
Canada | $ 132,994 | $ 6,107 | $ 168 | $ 139,269 | $ 149,737 | $ 7,797 | $ 466 | $ 158,000 |
United States | 40,646 | – | – | 40,646 | 52,702 | – | – | 52,702 |
Europe (5) | 17 | – | – | 17 | 620 | – | – | 620 |
Other International | 7,265 | – | – | 7,265 | 7,840 | – | – | 7,840 |
Interest-bearing (4) | ||||||||
Canada | 302,746 | 14,641 | 493,347 | 810,734 | 305,779 | 17,982 | 409,586 | 733,347 |
United States | 16,210 | 55,895 | 78,837 | 150,942 | 11,410 | 57,055 | 85,111 | 153,576 |
Europe (5) | 5,353 | 726 | 51,812 | 57,891 | 28,276 | 254 | 52,144 | 80,674 |
Other International | 5,495 | 70 | 19,358 | 24,923 | 5,743 | – | 16,312 | 22,055 |
$ 510,726 | $ 77,439 | $ 643,522 | $ 1,231,687 | $ 562,107 | $ 83,088 | $ 563,619 | $ 1,208,814 | |
(1)
Demand deposits are deposits for which we do not have the right to require notice of withdrawal, which include both savings and chequing accounts.
(2)
Notice deposits are deposits for which we can legally require notice of withdrawal. These deposits are primarily savings accounts.
(3)
Term deposits are deposits payable on a fixed date, and include term deposits, guaranteed investment certificates and similar instruments.
(4)
The geographical splits of the deposits are based on the point of origin of the deposits and where the revenue is recognized. As at October 31, 2023, deposits
denominated in U.S. dollars, British pounds, Euro and other foreign currencies were $445 billion, $34 billion, $49 billion and $32 billion, respectively (October 31, 2022 –
$465 billion, $35 billion, $50 billion and $30 billion, respectively).
(5)
Europe includes the United Kingdom, the Channel Islands, France and Luxembourg.
Contractual maturities of term deposits
As at | ||
October 31 | October 31 | |
(Millions of Canadian dollars) | 2023 | 2022 |
Within 1 year: | ||
less than 3 months | $ 182,373 | $ 159,602 |
3 to 6 months | 69,868 | 61,996 |
6 to 12 months | 151,079 | 156,531 |
1 to 2 years | 76,232 | 49,225 |
2 to 3 years | 49,965 | 42,809 |
3 to 4 years | 36,774 | 27,609 |
4 to 5 years | 36,506 | 33,835 |
Over 5 years | 40,725 | 32,012 |
$ 643,522 | $ 563,619 | |
Aggregate amount of term deposits in denominations of one hundred thousand dollars or more | $ 586,000 | $ 521,000 |
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
205
Average deposit balances and average rates of interest
| For the year ended | ||||
October 31, 2023 | October 31, 2022 | |||
Average | Average | Average | Average | |
(Millions of Canadian dollars, except for percentage amounts) | balances | rates | balances | rates |
Canada | $ 913,669 | 3.02% | $ 847,052 | 1.02% |
United States | 196,490 | 2.74 | 207,436 | 0.50 |
Europe | 70,426 | 4.22 | 81,824 | 1.03 |
Other International | 31,035 | 2.26 | 28,613 | 0.72 |
$ 1,211,620 | 3.03% | $ 1,164,925 | 0.92% | |
Insurance
Insurance risk is the risk of fluctuations in the timing, frequency or severity of insured events, relative to our expectations at the
time of underwriting. We do not have a high degree of concentration risk due to our geographic diversity and business mix.
Concentration risk is not a major concern for the life insurance business as it does not have a material level of region-specific
characteristics. Reinsurance is also used for a majority of our Canadian insurance business to lower our risk profile and limit the
liability on a single claim. We manage underwriting and pricing risk through the use of underwriting guidelines which detail the
class, nature and type of business that may be accepted, pricing policies by product line and controls over policy wordings. The
risk that claims are handled or paid inappropriately is mitigated by using a range of information technology (IT) system controls
and manual processes conducted by experienced staff. These, together with a range of detailed policies and procedures, ensure
In the ordinary course of business, our insurance operations reinsure risks to other insurance and reinsurance companies in
order to lower our risk profile, limit loss exposure to large risks, and provide additional capacity for future growth. These ceding
reinsurance arrangements do not relieve our insurance subsidiaries from our direct obligations to the insured parties. We
evaluate the financial condition of the reinsurers and monitor our concentrations of credit risks to minimize our exposure to
losses from reinsurer insolvency. Reinsurance amounts (ceded premiums) included in Non-interest income are shown in the
For the year ended | ||
October 31 | October 31 | |
(Millions of Canadian dollars) | 2023 | 2022 |
Gross premiums | $ 5,428 | $ 4,913 |
Premiums ceded to reinsurers | (297) | (260) |
Net premiums | $ 5,131 | $ 4,653 |
Gross claims and benefits (1) | $ 3,960 | $ 1,741 |
Reinsurers’ share of claims and benefits | (261) | (273) |
Net claims | $ 3,699 | $ 1,468 |
(1)
Includes the change in fair value of investments backing our policyholder liabilities.
Insurance claims and policy benefit liabilities
All actuarial assumptions are set in conjunction with Canadian Institute of Actuaries Standards of Practice and OSFI
requirements. The assumptions that have the greatest effect on the measurement of insurance liabilities, the processes used to
determine them and the assumptions used as at October 31, 2023 are as follows:
Mortality and morbidity – Mortality estimates are based on standard industry insured mortality tables, adjusted where
appropriate to reflect our own experience. Morbidity assumptions are made with respect to the rates of claim incidence and
claim termination for health insurance policies and are based on a combination of industry and our own experience.
Future investment yield – Assumptions are based on the current yield rate, a reinvestment assumption and an allowance for
future credit losses for each line of business, and are developed using interest rate scenario testing, including prescribed
scenarios for determination of minimum liabilities as set out in the actuarial standards.
Policyholder behaviour
– Under certain policies, the policyholder has a contractual right to change benefits and premiums, as
well as convert policies to permanent forms of insurance. All policyholders have the right to terminate their policies through
lapse. Lapses represent the termination of policies due to non-payment of premiums. Lapse assumptions are primarily based on
206
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 15
Insurance
(continued)
Significant insurance assumptions
As at | ||
October 31 | October 31 | |
2023 | 2022 | |
Life Insurance | ||
Canadian Insurance | ||
Mortality rates (1) | 0.11% | 0.11% |
Morbidity rates (2) | 1.79 | 1.81 |
Future reinvestment yield (3) | 3.73 | 3.75 |
Lapse rates (4) | 0.50 | 0.50 |
International Insurance | ||
Mortality rates (1) | 0.83 | 0.80 |
Future reinvestment yield (3) | 2.90 | 2.90 |
(1)
Average annual death rate for the largest portfolio of insured policies.
(2)
Average net termination rate for the individual and group disability insurance portfolio.
(3)
Ultimate reinvestment rate of the insurance operations.
(4)
Ultimate policy termination rate (lapse rate) for the largest permanent life insurance portfolio that relies on a higher termination rate to maintain its profitability
(lapse-supported policies).
Insurance claims and policy benefit liabilities
The following table summarizes our gross and reinsurers’ share of insurance liabilities at the end of the year.
| As at | |||||||
October 31, 2023 | October 31, 2022 | ||||||
(Millions of Canadian dollars) | Gross | Ceded | Net | Gross | Ceded | Net | |
Life insurance policyholder liabilities | |||||||
Life, health and annuity | $ 11,934 | $ 968 | $ 10,966 | $ 11,481 | $ 902 | $ 10,579 | |
Investment contracts (1) | 38 | – | 38 | 41 | – | 41 | |
$ 11,972 | $ 968 | $ 11,004 | $ 11,522 | $ 902 | $ 10,620 | ||
Non-life insurance policyholder liabilities | |||||||
Unearned premium provision (1) | $ 9 | $ – | $ 9 | $ 7 | $ – | $ 7 | |
Unpaid claims provision | 32 | 1 | 31 | 30 | 1 | 29 | |
$ 41 | $ 1 | $ 40 | $ 37 | $ 1 | $ 36 | ||
$ 12,013 | $ 969 | $ 11,044 | $ 11,559 | $ 903 | $ 10,656 | ||
(1)
Liabilities for investment contracts and unearned premium provision are reported in Other liabilities on the Consolidated Balance Sheets.
Reconciliation of life insurance policyholder liabilities
| For the year ended | ||||||
| October 31, 2023 | October 31, 2022 | |||||
(Millions of Canadian dollars) | Gross | Ceded | Net | Gross | Ceded | Net |
Balances at beginning of period | $ 11,522 | $ 902 | $ 10,620 | $ 12,817 | $ 861 | $ 11,956 |
New and in-force policies (1) | 552 | 30 | 522 | (1,288) | (130) | (1,158) |
Changes in assumption and methodology | (99) | 36 | (135) | (6) | 171 | (177) |
Net change in investment contracts | (3) | – | (3) | (1) | – | (1) |
Balances at end of period | $ 11,972 | $ 968 | $ 11,004 | $ 11,522 | $ 902 | $ 10,620 |
(1)
Includes the change in fair value of investments backing our policyholder liabilities.
The net increase in life insurance policyholder liabilities over the prior year was primarily attributable to business growth
partially offset by asset and liability matching activities and market movements on assets backing life insurance policyholder
liabilities. During the year, we reviewed all key actuarial methods and assumptions which are used in determining the life
insurance policyholder liabilities resulting in a $135 million net decrease to such liabilities. This is primarily comprised of a
decrease of $170 million arising from insurance risk related assumption updates largely due to mortality assumptions, partially
offset by increases of $15 million due to changes to valuation models and related data and $14 million due to an increase in the
crediting rate on universal life insurance policies.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
207
The following table presents the sensitivity of the level of insurance policyholder liabilities disclosed in this note to reasonably
possible changes in the actuarial assumptions used to calculate them. The percentage change in each variable is applied to a
range of existing actuarial modelling assumptions to derive the possible impact on net income. The analyses are performed
where a single assumption is changed while holding other assumptions constant, which is unlikely to occur in practice.
Net income impact for the year ended |
|||
Change in |
October 31 |
October 31 |
|
(Millions of Canadian dollars, except for percentage amounts) |
variable |
2023 |
2022 |
Increase in market interest rates (1) |
1% |
$ 1 |
$ (10) |
Decrease in market interest rates (1) |
1 |
7 |
5 |
Increase in equity market values (2) |
10 |
2 |
6 |
Decrease in equity market values (2) |
10 |
(8) |
(10) |
Increase in maintenance expenses (3) |
5 |
(32) |
(33) |
Life Insurance (3) |
|||
Adverse change in annuitant mortality rates |
2 |
(177) |
(166) |
Adverse change in assurance mortality rates |
2 |
(54) |
(59) |
Adverse change in morbidity rates |
5 |
(177) |
(181) |
Adverse change in lapse rates |
10 |
(192) |
(199) |
(1)
Sensitivities for market interest rates include the expected current period earnings impact of a 100 basis points shift in the yield curve by increasing the current
reinvestment rates while holding the assumed ultimate rates constant. The sensitivity consists of both the impact on assumed reinvestment rates in the actuarial
liabilities and any changes in fair value of assets and liabilities from the yield curve shift.
(2)
Sensitivities to changes in equity market values are composed of the expected current period earnings impact from differences in the changes in fair value of the equity
asset holdings and the partially offsetting impact on the actuarial liabilities.
(3)
Sensitivities to changes in maintenance expenses and life insurance actuarial assumptions include the expected current period earnings impact from recognition of
Segregated funds
We offer certain individual variable insurance contracts that allow policyholders to invest in segregated funds. The investment
returns on these funds are passed directly to the policyholders. Amounts invested are at the policyholders’ risk, except where the
policyholders have selected options providing maturity and death benefit guarantees. A liability for the guarantees is recorded in
Insurance claims and policy benefit liabilities.
Segregated fund net assets are recorded at fair value. All of our segregated fund net assets are categorized as Level 1 in the
fair value hierarchy. The fair value of the segregated fund liabilities is equal to the fair value of the segregated fund net assets.
Segregated fund net assets and segregated fund liabilities are presented on separate lines on the Consolidated Balance Sheets.
The following tables present the composition of net assets and the changes in net assets for the year.
Segregated fund net assets
As at |
||
October 31 |
October 31 |
|
(Millions of Canadian dollars) |
2023 |
2022 |
Cash |
$ 40 |
$ 39 |
Investment in mutual funds |
2,719 |
2,598 |
Other assets (liabilities), net |
1 |
1 |
$ 2,760 |
$ 2,638 |
|
Changes in net assets
For the year ended |
||
October 31 |
October 31 |
|
(Millions of Canadian dollars) |
2023 |
2022 |
Net assets at beginning of period |
$ 2,638 |
$ 2,666 |
Additions (deductions): |
||
Deposits from policyholders |
734 |
859 |
Net realized and unrealized gains (losses) |
52 |
(301) |
Interest and dividends |
76 |
56 |
Payment to policyholders |
(668) |
(573) |
Management and administrative fees |
(72) |
(69) |
Net assets at end of period |
$ 2,760 |
$ 2,638 |
208
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Employee benefits – Pension and other post-employment benefits
Plan characteristics
We sponsor a number of programs that provide pension and post-employment benefits to eligible employees. The majority of
beneficiaries of the pension plans are located in Canada and other beneficiaries of the pension plans are primarily located in the
U.S., the U.K. and the Caribbean. The pension arrangements including investment, plan benefits and funding decisions are
governed by local pension committees or trustees, who are legally segregated from the Bank, or management. Significant plan
changes require the approval of the Board of Directors.
Our defined benefit pension plans provide pension benefits based on years of service, contributions and average earnings at
retirement. Our primary defined benefit pension plans are closed to new members. New employees are generally eligible to join
defined contribution pension plans. The specific features of these plans vary by location. We also provide supplemental
non-registered (non-qualified) pension plans for certain executives and senior management that are typically unfunded or
partially funded.
Our defined contribution pension plans provide pension benefits based on accumulated employee and Bank contributions.
The Bank contributions are based on a percentage of an employee’s annual earnings and a portion of the Bank contribution may
be dependent on the amount being contributed by the employee and their years of service.
Our primary other post-employment benefit plans provide health, dental, disability and life insurance coverage and cover a
number of current and retired employees who are mainly located in Canada. These plans are unfunded unless required by
legislation.
We measure our benefit obligations and pension assets as at October 31 each year. All plans are valued using the projected
unit-credit method. We fund our registered defined benefit pension plans in accordance with actuarially determined amounts
required to satisfy employee benefit obligations under current pension regulations. For our principal pension plan, the most
recent funding actuarial valuation was completed on January 1, 2023, and the next valuation is required no later than
January 1, 2026.
For the year ended October 31, 2023, total contributions to our pension plans (defined benefit and defined contribution
plans) and other post-employment benefit plans were $346 million and $80 million (October 31, 2022 – $427 million and
$79 million), respectively. For 2024, total contributions to our pension plans and other post-employment benefit plans are
expected to be $408 million and $86 million, respectively.
Risks
By their design, the defined benefit pension and other post-employment benefit plans expose the Bank to various risks such as
investment performance, reductions in discount rates used to value the obligations, increased longevity of plan members, future
inflation levels impacting future salary increases as well as future increases in healthcare costs. These risks will reduce over time
due to the membership closure of our primary defined benefit pension plans and migration to defined contribution pension plans.
The following table presents the financial position related to all of our material pension and other post-employment benefit plans
worldwide, including executive retirement arrangements.
| As at |
||||
| October 31, 2023 |
October 31, 2022 |
|||
Other post- |
Other post- |
|||
Defined benefit | employment | Defined benefit | employment | |
(Millions of Canadian dollars) | pension plans | benefit plans | pension plans | benefit plans |
Canada |
||||
Fair value of plan assets |
$ 13,704 |
$ – |
$ 14,310 |
$ – |
Present value of defined benefit obligation |
11,142 |
1,348 |
11,271 |
1,387 |
Net surplus (deficit) |
$ 2,562 |
$ (1,348) |
$ 3,039 |
$ (1,387) |
International |
||||
Fair value of plan assets |
$ 664 |
$ – |
$ 716 |
$ – |
Present value of defined benefit obligation |
585 |
69 |
622 |
75 |
Net surplus (deficit) |
$ 79 |
$ (69) |
$ 94 |
$ (75) |
Total |
||||
Fair value of plan assets |
$ 14,368 |
$ – |
$ 15,026 |
$ – |
Present value of defined benefit obligation |
11,727 |
1,417 |
11,893 |
1,462 |
Total net surplus (deficit) |
$ 2,641 |
$ (1,417) |
$ 3,133 |
$ (1,462) |
Effect of asset ceiling |
(9) |
– |
(8) |
– |
Total net surplus (deficit), net of effect of asset ceiling |
$ 2,632 |
$ (1,417) |
$ 3,125 |
$ (1,462) |
Amounts recognized in our Consolidated Balance Sheets |
||||
Employee benefit assets |
$ 2,826 |
$ – |
$ 3,331 |
$ – |
Employee benefit liabilities |
(194) |
(1,417) |
(206) |
(1,462) |
Total net surplus (deficit), net of effect of asset ceiling |
$ 2,632 |
$ (1,417) |
$ 3,125 |
$ (1,462) |
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
209
The following table presents an analysis of the movement in the financial position related to all of our material pension and other
post-employment benefit plans worldwide, including executive retirement arrangements.
| As at or for the year ended |
||||
October 31, 2023 |
October 31, 2022 |
|||
Other post- |
Other post- |
|||
Defined benefit | employment | Defined benefit | employment | |
(Millions of Canadian dollars) | pension plans (1) | benefit plans | pension plans (1) | benefit plans |
Fair value of plan assets at beginning of period |
$ 15,026 |
$ – |
$ 17,703 |
$ – |
Interest income |
786 |
– |
580 |
– |
Remeasurements |
||||
Return on plan assets (excluding interest income) |
(895) |
– |
(2,931) |
– |
Change in foreign currency exchange rate |
55 |
– |
(62) |
– |
Contributions – Employer |
23 |
80 |
177 |
79 |
Contributions – Plan participant |
44 |
22 |
45 |
20 |
Payments |
(645) |
(102) |
(610) |
(99) |
Payments – amount paid in respect of settlements |
– |
– |
3 |
– |
Business combinations/Disposals |
(17) |
– |
135 |
– |
Other |
(9) |
– |
(14) |
– |
Fair value of plan assets at end of period |
$ 14,368 |
$ – |
$ 15,026 |
$ – |
Benefit obligation at beginning of period |
$ 11,893 |
$ 1,462 |
$ 15,315 |
$ 1,780 |
Current service costs |
195 |
33 |
308 |
42 |
Past service costs |
– |
(2) |
(1) |
2 |
Gains and losses on settlements |
– |
– |
(3) |
– |
Interest expense |
624 |
77 |
496 |
63 |
Remeasurements |
||||
Actuarial losses (gains) from demographic assumptions |
(2) |
(24) |
(2) |
(1) |
Actuarial losses (gains) from financial assumptions |
(480) |
(46) |
(3,797) |
(341) |
Actuarial losses (gains) from experience adjustments |
70 |
(1) |
83 |
(9) |
Change in foreign currency exchange rate |
45 |
1 |
(47) |
6 |
Contributions – Plan participant |
44 |
22 |
45 |
20 |
Payments |
(645) |
(102) |
(610) |
(99) |
Payments – amount paid in respect of settlements |
– |
– |
3 |
– |
Business combinations/Disposals |
(17) |
(3) |
103 |
(1) |
Benefit obligation at end of period |
$ 11,727 |
$ 1,417 |
$ 11,893 |
$ 1,462 |
Unfunded obligation |
$ 18 |
$ 1,417 |
$ 23 |
$ 1,462 |
Wholly or partly funded obligation |
11,709 |
– |
11,870 |
– |
Total benefit obligation |
$ 11,727 |
$ 1,417 |
$ 11,893 |
$ 1,462 |
(1)
For pension plans with funding deficits, the benefit obligations and fair value of plan assets as at October 31, 2023 were $300 million and $106 million, respectively
(October 31, 2022 – $323 million and $117 million, respectively).
Pension and other post-employment benefit expense
The following table presents the composition of our pension and other post-employment benefit expense related to our material
pension and other post-employment benefit plans worldwide.
| For the year ended | ||||
Other post-employment | ||||
Pension plans | benefit plans | |||
October 31 | October 31 | October 31 | October 31 | |
(Millions of Canadian dollars) | 2023 | 2022 | 2023 | 2022 |
Current service costs | $ 195 | $ 308 | $ 33 | $ 42 |
Past service costs | – | (1) | (2) | 2 |
Gains and losses on settlements | – | (3) | – | – |
Net interest expense (income) | (162) | (84) | 77 | 63 |
Remeasurements of other long term benefits | – | – | (1) | (26) |
Administrative expense | 9 | 14 | – | – |
Defined benefit pension expense | $ 42 | $ 234 | $ 107 | $ 81 |
Defined contribution pension expense | 323 | 250 | – | – |
$ 365 | $ 484 | $ 107 | $ 81 | |
Service costs for the year ended October 31, 2023 totalled $193 million (October 31, 2022 – $305 million) for pension plans in
Canada and $2 million (October 31, 2022 – $2 million) for International plans. Net interest expense (income) for the year ended
October 31, 2023 totalled $(157) million (October 31, 2022 – $(83) million) for pension plans in Canada and $(5) million
(October 31, 2022 – $(1) million) for International plans.
210
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 17
Employee benefits – Pension and other post-employment benefits
(continued)
Pension and other post-employment benefit remeasurements
The following table presents the composition of our remeasurements recorded in OCI related to our material pension and other
post-employment benefit plans worldwide.
| For the year ended | ||||
Defined benefit pension | Other post-employment | |||
plans | benefit plans | |||
October 31 | October 31 | October 31 | October 31 | |
(Millions of Canadian dollars) | 2023 | 2022 | 2023 | 2022 |
Actuarial (gains) losses: | ||||
Changes in demographic assumptions | $ (2) | $ (2) | $ (27) | $ (1) |
Changes in financial assumptions | (480) | (3,797) | (45) | (319) |
Experience adjustments | 70 | 83 | 2 | (5) |
Return on plan assets (excluding interest based on discount rate) | 895 | 2,931 | – | – |
Change in asset ceiling (excluding interest income) | 1 | 2 | – | – |
$ 484 | $ (783) | $ (70) | $ (325) | |
Remeasurements recorded in OCI for the year ended October 31, 2023 were losses of $440 million (October 31, 2022 – gains of
$798 million) for pension plans in Canada and losses of $44 million (October 31, 2022 – losses of $15 million) for International
plans.
Investment policy and strategies
Defined benefit pension plan assets are invested prudently in order to meet our longer-term pension obligations. The pension
plans’ investment strategy is to hold a diversified mix of investments by asset class and geographic location in order to reduce
investment-specific risk to the funded status while maximizing the expected returns to meet pension obligations. Investment of
the plan’s assets follows an asset/liability framework as investment is conducted with careful consideration of the pension
obligation’s sensitivity to interest rates and credit spreads which are key risk factors impacting the obligation’s value. Factors
taken into consideration in developing our asset mix include but are not limited to the following:
•
the nature of the underlying benefit obligations, including the duration and term profile of the liabilities;
•
the member demographics, including expectations for normal retirements, terminations, and deaths;
•
the financial position of the pension plans;
•
the diversification benefits obtained by the inclusion of multiple asset classes; and
•
expected asset returns, including asset and liability correlations, along with liquidity requirements of the plan.
To implement our asset mix policy, we may invest in debt securities, equity securities, and alternative investments. Our holdings
in certain investments, including common shares, debt securities rated lower than BBB and residential and commercial
mortgages, cannot exceed a defined percentage of the market value of our defined benefit pension plan assets. We may use
derivative instruments as either a synthetic investment to more efficiently replicate the performance of an underlying security, or
as a hedge against financial risks within the plan. To manage our credit risk exposure, where derivative instruments are not
centrally cleared, counterparties are required to meet minimum credit ratings and enter into collateral agreements.
Our defined benefit pension plan assets are primarily comprised of debt and equity securities and alternative investments.
Our equity securities generally have unadjusted quoted market prices in an active market (Level 1) and our debt securities
generally have quoted market prices for similar assets in an active market (Level 2). Alternative investments and other includes
cash, hedge funds, and private fund investments including infrastructure equity, real estate, private debt and private equity. In
the case of private fund investments, no quoted market prices are usually available (Level 2 or Level 3). These fund assets are
either valued by an independent valuator or priced using observable market inputs.
During the year ended October 31, 2023, the management of defined benefit pension investments focused on increased
allocation to risk reducing investments and strategies, improving diversification, while striving to maintain expected investment
return. Over time, an increasing allocation to debt securities is being used to reduce asset/liability duration mismatch and hence
variability of the plan’s funded status due to interest rate movement. Longer maturity debt securities, given their price sensitivity
to movements in interest rates, are considered to be a good economic hedge to risk associated with the plan’s liabilities, which
are discounted using predominantly long maturity bond interest rates as inputs.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
211
Asset allocation of defined benefit pension plans
(1), (2)
| As at |
||||||
| October 31, 2023 |
October 31, 2022 |
|||||
Percentage |
Quoted |
Percentage |
Quoted |
|||
of total |
in active |
of total |
in active |
|||
(Millions of Canadian dollars, except percentages) |
Fair value |
plan assets |
market (3) |
Fair value |
plan assets |
market (3) |
Equity securities |
||||||
Domestic |
$ 723 |
5% |
100% |
$ 1,469 |
10% |
100% |
Foreign |
1,726 |
12 |
100 |
2,799 |
19 |
100 |
Debt securities |
||||||
Domestic government bonds (4) |
4,343 |
30 |
– |
3,489 |
23 |
– |
Foreign government bonds |
128 |
1 |
– |
114 |
1 |
– |
Corporate and other bonds |
3,296 |
23 |
– |
3,171 |
21 |
– |
Alternative investments and other |
4,152 |
29 |
6 |
3,984 |
26 |
8 |
$ 14,368 |
100% |
19% |
$ 15,026 |
100% |
30% |
|
(1)
The asset allocation is based on the underlying investments held directly and indirectly through the funds as this is how we manage our investment policy and strategies.
(2)
Represents the total plan assets held in our Canadian and International pension plans.
(3)
If our assessment of whether or not an asset was quoted in an active market was based on direct investments, 22% of our total plan assets would be classified as quoted
in an active market (October 31, 2022 – 34%).
(4)
Amounts are net of securities sold under repurchase agreements.
As at October 31, 2023, the plan assets include 0.3 million (October 31, 2022 – 0.7 million) of our common shares with a fair
value of $37 million (October 31, 2022 – $89 million) and $62 million (October 31, 2022 – $48 million) of our debt securities. For the
year ended October 31, 2023, dividends received on our common shares held in the plan assets were $3 million (October 31, 2022 –
$4 million).
Maturity profile
The following table presents the maturity profile of our defined benefit pension plan obligation.
| As at October 31, 2023 | |||
(Millions of Canadian dollars, except participants and years) | Canada | International | Total |
Number of plan participants | 65,890 | 5,963 | 71,853 |
Actual benefit payments 2023 | $ 604 | $ 41 | $ 645 |
Benefits expected to be paid 2024 | 670 | 44 | 714 |
Benefits expected to be paid 2025 | 694 | 40 | 734 |
Benefits expected to be paid 2026 | 717 | 42 | 759 |
Benefits expected to be paid 2027 | 738 | 42 | 780 |
Benefits expected to be paid 2028 | 757 | 42 | 799 |
Benefits expected to be paid 2029-2033 | 4,013 | 226 | 4,239 |
Weighted average duration of defined benefit payments | 12.2 years | 15.1 years | 12.3 years |
Significant assumptions
Our methodologies to determine significant assumptions used in calculating the defined benefit pension and other post-
employment benefit expense are as follows:
Discount rate
For the Canadian pension and other post-employment benefit plans, all future expected benefit payments at each measurement
date are discounted at spot rates from a derived Canadian AA corporate bond yield curve. The derived curve is based on actual
short and mid-maturity corporate AA rates and extrapolated longer term rates. The extrapolated corporate AA rates are derived
from observed corporate A, corporate AA and provincial AA yields. For the International pension and other post-employment
benefit plans, all future expected benefit payments at each measurement date are discounted at spot rates from a local AA
corporate bond yield curve. Spot rates beyond 30 years are set to equal the 30-year spot rate. The discount rate is the equivalent
single rate that produces the same discounted value as that determined using the entire discount curve. This valuation
methodology does not rely on assumptions regarding reinvestment returns.
Rate of increase in future compensation
The assumptions for increases in future compensation are developed separately for each plan, where relevant. Each assumption
is set based on the price inflation assumption and compensation policies in each market, as well as relevant local statutory and
plan-specific requirements.
Healthcare cost trend rates
Healthcare cost calculations are based on both short and long term trend assumptions established using the plan’s recent
experience as well as market expectations.
212
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 17
Employee benefits – Pension and other post-employment benefits
(continued)
Weighted average assumptions to determine benefit obligation
| As at | ||||
Defined benefit pension | Other post-employment | |||
plans | benefit plans | |||
October 31 | October 31 | October 31 | October 31 | |
2023 | 2022 | 2023 | 2022 | |
Discount rate | 5.7% | 5.4% | 5.8% | 5.5% |
Rate of increase in future compensation | 3.0% | 3.0% | n.a. | n.a. |
Healthcare cost trend rates (1) | ||||
– Medical | n.a. | n.a. | 3.4% | 3.5% |
– Dental | n.a. | n.a. | 3.1% | 3.1% |
(1)
For our other post-employment benefit plans, the assumed trend rates used to measure the expected benefit costs of the defined benefit obligations are also the
ultimate trend rates.
n.a.
not applicable
Mortality assumptions
Mortality assumptions are significant in measuring our obligations under the defined benefit pension plans. These assumptions
have been set based on country specific statistics. Future longevity improvements have been considered and included where
appropriate. The following table summarizes the mortality assumptions used for material plans.
| As at | ||||||||
| October 31, 2023 | October 31, 2022 | |||||||
Life expectancy at 65 for a member currently at | Life expectancy at 65 for a member currently at | |||||||
Age 65 | Age 45 | Age 65 | Age 45 | |||||
(In years) | Male | Female | Male | Female | Male | Female | Male | Female |
Country | ||||||||
Canada | 23.9 | 24.3 | 24.8 | 25.2 | 23.9 | 24.2 | 24.8 | 25.1 |
United Kingdom | 23.5 | 25.4 | 24.7 | 26.8 | 23.4 | 25.4 | 24.7 | 26.8 |
Sensitivity analysis
Assumptions adopted can have a significant effect on the value of the obligations for defined benefit pension and other post-
employment benefit plans and are based on historical experience and market inputs. The increase (decrease) in obligation in the
following table has been determined for key assumptions assuming all other assumptions are held constant. In practice, this is
unlikely to occur, as changes in some of the assumptions may be correlated. The following table presents the sensitivity analysis
of key assumptions for 2023.
Increase (decrease) in obligation | ||
Other post- | ||
Defined benefit | employment | |
(Millions of Canadian dollars) | pension plans | benefit plans |
Discount rate | ||
Impact of 100 bps increase in discount rate | $ (1,228) | $ (149) |
Impact of 100 bps decrease in discount rate | 1,536 | 184 |
Rate of increase in future compensation | ||
Impact of 50 bps increase in rate of increase in future compensation | 23 | – |
Impact of 50 bps decrease in rate of increase in future compensation | (25) | – |
Mortality rate | ||
Impact of an increase in longevity by one additional year | 289 | 18 |
Healthcare cost trend rate | ||
Impact of 100 bps increase in healthcare cost trend rate | n.a. | 50 |
Impact of 100 bps decrease in healthcare cost trend rate | n.a. | (42) |
n.a.
Other liabilities
As at | ||
October 31 | October 31 | |
(Millions of Canadian dollars) | 2023 | 2022 |
Accounts payable and accrued expenses | $ 1,599 | $ 1,292 |
Accrued interest payable | 10,936 | 5,019 |
Cash collateral | 23,365 | 26,143 |
Commodity liabilities | 11,716 | 10,038 |
Deferred income | 3,830 | 3,660 |
Deferred income taxes | 426 | 439 |
Dividends payable | 1,975 | 1,856 |
Employee benefit liabilities | 1,611 | 1,668 |
Held-for-sale liabilities | 2,560 | – |
Insurance related liabilities | 342 | 324 |
Lease liabilities | 4,764 | 5,110 |
Negotiable instruments | 1,684 | 1,715 |
Payable to brokers, dealers and clients | 8,065 | 10,974 |
Payroll and related compensation | 9,088 | 8,991 |
Precious metals certificates | 775 | 557 |
Provisions | 644 | 627 |
Short-term borrowings of subsidiaries | 4,507 | 9,609 |
Taxes payable | 2,959 | 2,136 |
Other | 5,324 | 5,077 |
$ 96,170 | $ 95,235 | |
Subordinated debentures
The debentures are unsecured obligations and are subordinated in right of payment to the claims of depositors and certain other
creditors. The amounts presented below are net of our own holdings in these debentures, and include the impact of fair value
hedges used for managing interest rate risk.
(Millions of Canadian dollars, except percentage and foreign currency) | As at | ||||
Denominated in | |||||
Earliest par value | Interest | foreign currency | October 31 | October 31 | |
Maturity | redemption date | rate | (millions) | 2023 | 2022 |
June 8, 2023 (1) | 9.30% | $ | – | $ 110 | |
January 27, 2026 (2) | 4.65% | US$1,500 | 1,939 | 1,884 | |
November 1, 2027 (3) | November 1, 2022 | 4.75% | TT$300 | – | 60 |
July 25, 2029 (2) | July 25, 2024 | 2.74% (4) | 1,459 | 1,415 | |
December 23, 2029 (2) | December 23, 2024 | 2.88% (5) | 1,442 | 1,412 | |
February 1, 2033 (2) | February 1, 2028 | 5.01% (6) | 1,418 | – | |
June 30, 2030 (2) | June 30, 2025 | 2.09% (7) | 1,249 | 1,250 | |
November 3, 2031 (2) | November 3, 2026 | 2.14% (8) | 1,637 | 1,637 | |
May 3, 2032 (2) | May 3, 2027 | 2.94% (9) | 919 | 932 | |
January 28, 2033 (2) | January 28, 2028 | 1.67% (10) | 868 | 875 | |
October 1, 2083 | Any interest payment date | (11) | 224 | 224 | |
June 29, 2085 | Any interest payment date | (12) | US$174 | 241 | 237 |
$ 11,396 | $ 10,036 | ||||
Deferred financing costs | (10) | (11) | |||
$ 11,386 | $ 10,025 | ||||
(1)
On June 8, 2023, all $110 million of outstanding 9.30% subordinated debentures matured. The principal plus accrued interest were paid to noteholders on the maturity date.
(2)
The notes include NVCC provisions, necessary for the notes to qualify as Tier 2 regulatory capital under Basel III. NVCC provisions require the conversion of the
instrument into a variable number of common shares in the event that OSFI deems the Bank non-viable or a federal or provincial government in Canada publicly
announces that the Bank has accepted or agreed to accept a capital injection. In such an event, each note is convertible into common shares pursuant to an automatic
conversion formula with a multiplier of 1.5 and a conversion price based on the greater of: (i) a floor price of $5.00 and (ii) the current market price of our common shares
based on the volume weighted average trading price of our common shares on the Toronto Stock Exchange. The number of shares issued is determined by dividing the
par value of the note (including accrued and unpaid interest on such note) by the conversion price and then times the multiplier.
(3)
On November 1, 2022, we redeemed all TT$300 million of outstanding 4.75% subordinated debentures due on November 1, 2027 for 100% of their principal amount plus
interest accrued to, but excluding, the redemption date.
(4)
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.98% above the 3-month CDOR.
(5)
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.89% above the 3-month CDOR.
(6)
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 2.12% above the Daily Compounded CORRA.
(7)
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.31% above the 3-month CDOR.
(8)
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.61% above the 3-month CDOR.
(9)
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.76% above the 3-month CDOR.
(10)
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.55% above the 3-month CDOR.
(11)
Interest at a rate of 0.40% above the 30-day Bankers’ Acceptance rate.
(12)
Interest at a rate of 0.25% above the U.S. dollar 3-month London Interbank Mean Rate (LIMEAN) under a synthetic methodology. In the event of a reduction of the annual
dividend we declare on our common shares, the interest payable on the debentures is reduced pro rata to the dividend reduction and the interest reduction is payable
with the proceeds from the sale of newly issued common shares.
All redemptions, cancellations and exchanges of subordinated debentures are subject to the consent and approval of OSFI.
Maturity schedule
The aggregate maturities of subordinated debentures, based on the maturity dates under the terms of issue, are as follows:
As at | |
October 31 | |
(Millions of Canadian dollars) | 2023 |
Within 1 year | $ – |
1 to 5 years | 1,939 |
5 to 10 years | 8,992 |
Thereafter | 465 |
$
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
213
Equity
Authorized share capital
Preferred – An unlimited number of First Preferred Shares and Second Preferred Shares without nominal or par value, issuable in
series; provided that the maximum aggregate consideration for all First Preferred Shares outstanding at any time may not exceed
$30 billion, and for all Second Preferred Shares that may be issued may not exceed $5 billion.
Common – An unlimited number of shares without nominal or par value may be issued.
Outstanding share capital
The following table details our common and preferred shares and other equity instruments outstanding.
| As at and for the year ended | ||||||
| October 31, 2023 | October 31, 2022 | |||||
Number of | Dividends | Number of | Dividends | |||
(Millions of Canadian dollars, except the number | shares | declared | shares | declared | ||
of shares and as otherwise noted) | (thousands) | Amount | per share | (thousands) | Amount | per share |
Common shares issued | ||||||
Balance at beginning of period | 1,385,591 | $ 17,318 | 1,425,187 | $ 17,728 | ||
Issued in connection with share-based | ||||||
compensation plans (1) | 740 | 68 | 1,270 | 99 | ||
Issued in connection with dividend | ||||||
reinvestment plan | 16,042 | 2,012 | – | – | ||
Purchased for cancellation (2) | – | – | (40,866) | (509) | ||
Balance at end of period | 1,402,373 | $ | $ | 1,385,591 | $ | $ |
Treasury – common shares | ||||||
Balance at beginning of period (3) | (2,680) | $ (334) | (662) | $ (73) | ||
Purchases | (30,195) | (3,556) | (48,437) | (5,183) | ||
Sales | 31,013 | 3,659 | 46,419 | 4,922 | ||
Balance at end of period (3) | (1,862) | $ (231) | (2,680) | $ (334) | ||
Common shares outstanding | 1,400,511 | $ 19,167 | 1,382,911 | $ 16,984 | ||
Preferred shares and other equity | ||||||
instruments issued | ||||||
First preferred (4) | ||||||
Non-cumulative, fixed rate | ||||||
Series BH | 6,000 | $ 150 | $ 1.23 | 6,000 | $ 150 | $ 1.23 |
Series BI | 6,000 | 150 | 1.23 | 6,000 | 150 | 1.23 |
Non-cumulative, 5-Year Rate Reset | ||||||
Series AZ | 20,000 | 500 | 0.93 | 20,000 | 500 | 0.93 |
Series BB | 20,000 | 500 | 0.91 | 20,000 | 500 | 0.91 |
Series BD | 24,000 | 600 | 0.80 | 24,000 | 600 | 0.80 |
Series BF | 12,000 | 300 | 0.75 | 12,000 | 300 | 0.75 |
Series BO | 14,000 | 350 | 1.20 | 14,000 | 350 | 1.20 |
Series BT | 750 | 750 | 4.20% | 750 | 750 | 4.20% |
Non-cumulative, fixed rate/floating rate | ||||||
Series C-2 (5) | 15 | 23 | US$ 67.50 | 15 | 23 | US$ 67.50 |
Other equity instruments | ||||||
Limited recourse capital notes (LRCNs) (6) | ||||||
Series 1 (7) | 1,750 | 1,750 | 4.50% | 1,750 | 1,750 | 4.50% |
Series 2 (7) | 1,250 | 1,250 | 4.00% | 1,250 | 1,250 | 4.00% |
Series 3 (7) | 1,000 | 1,000 | 3.65% | 1,000 | 1,000 | 3.65% |
106,765 | $ 7,323 | 106,765 | $ 7,323 | |||
Treasury – preferred shares and other | ||||||
equity instruments | ||||||
Balance at beginning of period (3) | (12) | $ (5) | (164) | $ (39) | ||
Purchases | (1,924) | (519) | (2,811) | (518) | ||
Sales | 1,927 | 515 | 2,963 | 552 | ||
Balance at end of period (3) | (9) | $ (9) | (12) | $ (5) | ||
Preferred shares and other equity | ||||||
instruments outstanding | 106,756 | $ 7,314 | 106,753 | $ 7,318 | ||
(1)
Includes fair value adjustments to stock options of $6 million (October 31, 2022 – $6 million).
(2)
During the year ended October 31, 2023, we did not purchase for cancellation any common shares. During the year ended October 31, 2022, we purchased for cancellation
common shares at a total fair value of $5,426 million (average cost of $132.80 per share), with a book value of $509 million (book value of $12.47 per share).
(3)
Positive amounts represent a short position and negative amounts represent a long position.
(4)
First Preferred Shares were issued at $25 per share with the exception of Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BT (Series BT) and
Non-Cumulative Fixed Rate/Floating Rate First Preferred Shares Series C-2 (Series C-2) which were issued at $1,000 and US$1,000 per share (equivalent to US$25 per
depositary share), respectively.
(5)
On November 7, 2023, we redeemed all of our issued and outstanding Non-Cumulative Fixed Rate/Floating Rate First Preferred Shares Series C-2 for cash at a redemption
price of US$1,000 per share (equivalent to US$25 per depositary share).
(6)
Each series of LRCNs (LRCN Series) were issued at a $1,000 per note. The number of shares represent the number of notes issued and the dividends declared per share
represent the annual interest rate percentage applicable to the notes issued as at the reporting date.
(7)
In connection with the issuance of LRCN Series 1, we issued $1,750 million of Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BQ (Series BQ); in
connection with the issuance of LRCN Series 2, we issued $1,250 million of Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BR (Series BR); in connection
with the issuance of LRCN Series 3, we issued $1,000 million of Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BS (Series BS). The Series BQ, BR and BS
preferred shares were issued at a price of $1,000 per share and were issued to a consolidated trust to be held as trust assets in connection with each respective
214
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
LRCN Series.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
215
Significant terms and conditions of preferred shares and other equity instruments
Current |
Earliest |
|||||
Current |
dividend |
redemption |
Redemption |
|||
As at October 31, 2023 |
annual yield |
Premium |
per share (1) |
date (2) |
Issue date |
price (2), (3) |
Preferred shares |
||||||
First preferred |
||||||
Non-cumulative, fixed rate |
||||||
Series BH (4) |
4.90% |
$ .306250 |
November 24, 2020 |
June 5, 2015 |
$ 26.00 |
|
Series BI (4) |
4.90% |
.306250 |
November 24, 2020 |
July 22, 2015 |
26.00 |
|
Non-cumulative, 5-Year |
||||||
Rate Reset (5) |
||||||
Series AZ (4) |
3.70% |
2.21% |
.231250 |
May 24, 2019 |
January 30, 2014 |
25.00 |
Series BB (4) |
3.65% |
2.26% |
.228125 |
August 24, 2019 |
June 3, 2014 |
25.00 |
Series BD (4) |
3.20% |
2.74% |
.200000 |
May 24, 2020 |
January 30, 2015 |
25.00 |
Series BF (4) |
3.00% |
2.62% |
.187500 |
November 24, 2020 |
March 13, 2015 |
25.00 |
Series BO (4) |
4.80% |
2.38% |
.300000 |
February 24, 2024 |
November 2, 2018 |
25.00 |
Series BT (4) |
4.20% |
2.71% |
21.000000 |
February 24, 2027 |
November 5, 2021 |
1,000.00 |
Non-cumulative, fixed rate/ |
||||||
floating rate |
||||||
Series C-2 (6) |
6.75% |
4.052% |
US$16.875000 |
November 7, 2023 |
November 2, 2015 |
US$1,000.00 |
Other equity instruments |
||||||
Limited recourse capital |
||||||
notes (7) |
||||||
Series 1 (8) |
4.50% |
4.137% |
n.a. |
October 24, 2025 |
July 28, 2020 |
$1,000.00 |
Series 2 (9) |
4.00% |
3.617% |
n.a. |
January 24, 2026 |
November 2, 2020 |
1,000.00 |
Series 3 (10) |
3.65% |
2.665% |
n.a. |
October 24, 2026 |
June 8, 2021 |
1,000.00 |
(1)
With the exception of Series BT, non-cumulative preferential dividends of each Series are payable quarterly, as and when declared by the Board of Directors, on or about
the 24th day (7th day for Series C-2) of February, May, August and November. In the case of Series BT, non-cumulative preferential dividends are payable semi-annually,
as and when declared by the Board of Directors.
(2)
Subject to the consent of OSFI and the requirements of the
Bank Act
(Canada), we may, on or after the dates specified above, redeem First Preferred Shares. In the case
of Series AZ, BB, BD, BF, and BO, these may be redeemed for cash at a price per share of $25 if redeemed on the earliest redemption date and on the same date every
fifth year thereafter. In the case of BH and BI, these may be redeemed for cash at a price per share of $26 if redeemed during the 12 months commencing on the earliest
redemption date and decreasing by $0.25 each 12-month period thereafter to a price per share of $25 if redeemed four years from the earliest redemption date or
thereafter. Series BT may be redeemed for cash at a price per share of $1,000 if redeemed on the earliest redemption date and on the same date every fifth year
thereafter. Series C-2 may be redeemed at a price of US$1,000 on the earliest redemption date and any dividend payment date thereafter.
(3)
Subject to the consent of OSFI and the requirements of the
Bank Act
(Canada), we may purchase the First Preferred Shares of each Series for cancellation at the lowest
price or prices at which, in the opinion of the Board of Directors, such shares are obtainable.
(4)
The preferred shares include NVCC provisions, necessary for the shares to qualify as Tier 1 regulatory capital under Basel III. NVCC provisions require the conversion of
the instrument into a variable number of common shares in the event that OSFI deems the Bank non-viable or a federal or provincial government in Canada publicly
announces that the Bank has accepted or agreed to accept a capital injection. In such an event, each preferred share is convertible into common shares pursuant to an
automatic conversion formula with a multiplier of 1 and with a conversion price based on the greater of: (i) a floor price of $5 and (ii) the current market price of our
common shares based on the volume weighted average trading price of our common shares on the Toronto Stock Exchange. The number of shares issued is determined
by dividing the preferred share value by the conversion price.
(5)
The dividend rate will reset on the earliest redemption date and every fifth year thereafter at a rate equal to the 5-year Government of Canada bond yield plus the
premium indicated. The holders have the option to convert their shares into non-cumulative floating rate First Preferred Shares subject to certain conditions on the
earliest redemption date and every fifth year thereafter at a rate equal to the three-month Government of Canada Treasury Bill rate plus the premium indicated.
(6)
The dividend rate will change on the earliest redemption date at a rate equal to the 3-month LIBOR plus the premium indicated. Series C-2 do not qualify as Tier 1
regulatory capital. On November 7, 2023, we redeemed all of our issued and outstanding Non-Cumulative Fixed Rate/Floating Rate First Preferred Shares Series C-2 for
cash at a redemption price of US$1,000 per share (equivalent to US$25 per depositary share).
(7)
The current annual yield on each LRCN Series represents the annual interest rate applicable to the notes issued as at the reporting date. The payments of interest and
principal in cash on the LRCN Series are made at our discretion, and non-payment of interest and principal in cash does not constitute an event of default. In the event of
(i) non-payment of interest on any interest payment date, (ii) non-payment of the redemption price in case of a redemption of a LRCN Series, (iii) non-payment of
principal at the maturity of a LRCN Series, or (iv) an event of default on a LRCN Series, holders of such LRCN Series will have recourse only to the assets (Trust Assets)
held by a third-party trustee in a consolidated trust in respect of such LRCN Series and each such noteholder will be entitled to receive its pro rata share of the Trust
Assets. In such an event, the delivery of the Trust Assets for each LRCN Series will represent the full and complete extinguishment of our obligations under the related
LRCN Series. The LRCNs include NVCC provisions, necessary for the shares to qualify as Tier 1 regulatory capital under Basel III. NVCC provisions require the conversion
of the instrument into a variable number of common shares in the event that OSFI deems the Bank non-viable or a federal or provincial government in Canada publicly
announces that the Bank has accepted or agreed to accept a capital injection. In such an event, each note is automatically redeemed and the redemption price will be
satisfied by the delivery of Trust Assets, which will consist of common shares pursuant to an automatic conversion of the series of preferred shares that were issued
concurrently with the related LRCN Series. Each series of preferred shares include an automatic conversion formula with a conversion price based on the greater of: (i) a
floor price of $5 and (ii) the current market price of our common shares based on the volume weighted average trading price of our common shares on the Toronto Stock
Exchange. The number of common shares issued in respect of each series of preferred shares will be determined by dividing the preferred share value ($1,000 plus
declared and unpaid dividends) by the conversion price. The number of common shares delivered to each noteholder will be based on such noteholder’s pro rata interest
in the Trust Assets. Subject to the consent of OSFI, we may purchase LRCNs for cancellation at such price or prices and upon such terms and conditions as we in our
absolute discretion may determine, subject to any applicable law restricting the purchase of notes.
(8)
LRCN Series 1 bear interest at a fixed rate of 4.5% per annum until November 24, 2025, and thereafter at a rate per annum, reset every fifth year, equal to the 5-Year
Government of Canada Yield plus 4.137% until maturity on November 24, 2080. The interest is paid semi-annually on or about the 24
th
day of May and November. LRCN
Series 1 is redeemable during the period from October 24 to and including November 24, commencing in 2025 and every fifth year thereafter to the extent we redeem
Series BQ pursuant to their terms and subject to the consent of OSFI and requirements of the
Bank Act
(Canada).
(9)
LRCN Series 2 bear interest at a fixed rate of 4.0% per annum until February 24, 2026, and thereafter at a rate per annum, reset every fifth year, equal to the 5-Year
Government of Canada Yield plus 3.617% until maturity on February 24, 2081. The interest is paid semi-annually on or about the 24th day of February and August. LRCN
Series 2 is redeemable during the period from January 24 to and including February 24, commencing in 2026 and every fifth year thereafter to the extent we redeem
Series BR pursuant to their terms and subject to the consent of OSFI and requirements of the
Bank Act
(Canada).
(10)
LRCN Series 3 bear interest at a fixed rate of 3.65% per annum until November 24, 2026, and thereafter at a rate per annum, reset every fifth year, equal to the 5-Year
Government of Canada Yield plus 2.665% until maturity on November 24, 2081. The interest is paid semi-annually on or about the 24th day of May and November. LRCN
Series 3 is redeemable during the period from October 24 to and including November 24, commencing in 2026 and every fifth year thereafter to the extent we redeem
Series BS pursuant to their terms and subject to the consent of OSFI and requirements of the
Bank Act
(Canada).
n.a.
Restrictions on the payment of dividends
We are prohibited by the
Bank Act
(Canada) from declaring any dividends on our preferred or common shares when we are, or
would be placed as a result of the declaration, in contravention of the capital adequacy and liquidity regulations or any
regulatory directives issued under the Act. We may not pay dividends on our common shares at any time unless all dividends to
which preferred shareholders are then entitled have been declared and paid or set apart for payment.
Currently, these limitations do not restrict the payment of dividends on our preferred or common shares.
Dividend reinvestment plan
Our dividend reinvestment plan (DRIP) provides common and preferred shareholders with a means to receive additional
common shares rather than cash dividends. The plan is only open to shareholders residing in Canada or the U.S. The
requirements of our DRIP are satisfied through either open market share purchases or shares issued from treasury. During the
second, third and fourth quarters of 2023, the requirements of our DRIP were satisfied through shares issued from treasury.
During the first quarter of 2023 and the year ended October 31, 2022, the requirements of our DRIP were satisfied through open
Shares available for future issuances
As at October 31, 2023, 26.9 million common shares are available for future issue relating to our DRIP and potential exercise of
stock options and awards outstanding. In addition, we may issue up to 38.9 million common shares from treasury under the RBC
Share-based compensation
Stock option plans
We have stock option plans for certain key employees. Under the plans, options are periodically granted to purchase common
shares. The exercise price for the majority of the grants is determined as the higher of the volume-weighted average of the
trading prices per board lot (100 shares) of our common shares on the Toronto Stock Exchange (i) on the day preceding the day
of grant; and (ii) the five consecutive trading days immediately preceding the day of grant. The exercise price for the remaining
grants is the closing market share price of our common shares on the New York Stock Exchange on the date of grant. All options
vest over a four-year period, and are exercisable for a period not exceeding 10 years from the grant date.
The compensation expense recorded for the year ended October 31, 2023, in respect of the stock option plans was $11 million
(October 31, 2022 – $8 million). The compensation expense related to non-vested options was $5 million at October 31, 2023
(October 31, 2022 – $4 million), to be recognized over the weighted average period of 1.9 years (October 31, 2022 – 2.0 years).
Analysis of the movement in the number and weighted average exercise price of options is set out below:
A summary of our stock option activity and related information
| For the year ended | ||||
| October 31, 2023 | October 31, 2022 | |||
Number of | Weighted | Number of | Weighted | |
options | average | options | average | |
(Canadian dollars per share except share amounts) | (thousands) | exercise price (1) | (thousands) | exercise price (1) |
Outstanding at beginning of period | 7,509 | $ 100.07 | 7,055 | $ 92.27 |
Granted | 1,088 | 131.64 | 1,184 | 129.99 |
Exercised (2), (3) | (740) | 84.76 | (684) | 73.98 |
Forfeited in the period | (90) | 113.55 | (46) | 104.28 |
Outstanding at end of period | 7,767 | $ 106.01 | 7,509 | $ 100.07 |
Exercisable at end of period | 3,830 | $ 91.84 | 3,502 | $ 87.15 |
(1)
The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rates as of October 31, 2023 and October 31, 2022.
For foreign currency-denominated options exercised during the year, the weighted average exercise prices are translated using exchange rates as at the settlement date.
(2)
Cash received for options exercised during the year was $63 million (October 31, 2022 – $51 million) and the weighted average share price at the date of exercise was
$130.94 (October 31, 2022 – $134.10).
(3)
New shares were issued for all stock options exercised in 2023 and 2022.
Options outstanding as at October 31, 2023 by range of exercise price
| Options outstanding | Options exercisable | ||||
Weighted | |||||
average | |||||
Number | Weighted | remaining | Number | Weighted | |
(Canadian dollars per share except | outstanding | average | contractual | exercisable | average |
share amounts and years) | (thousands) | exercise price (1) | life (years) | (thousands) | exercise price (1) |
$64.73 – $79.65 | 936 | $ 74.96 | 1.58 | 936 | $ 74.96 |
$90.23 – $96.55 | 1,779 | 93.48 | 3.82 | 1,779 | 93.48 |
$102.33 – $104.70 | 1,633 | 103.81 | 5.22 | 1,115 | 103.39 |
$106.00 – $106.00 | 1,202 | 106.00 | 7.12 | – | – |
$129.99 – $131.64 | 2,217 | 130.78 | 8.60 | – | – |
7,767 | $ 106.01 | 5.72 | 3,830 | $ 91.84 | |
(1)
The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rate as of October 31, 2023.
216
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 20
Equity
(continued)
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
217
The weighted average fair value of options granted during the year ended October 31, 2023 was estimated at $11.51 (October 31,
2022 – $7.80). This was determined by applying the Black-Scholes model on the date of grant, taking into account the specific
terms and conditions under which the options are granted, such as the vesting period and expected share price volatility
estimated by considering the historic average share price volatility over a historical period corresponding to the expected option
life. The following assumptions were used to determine the fair value of options granted:
Weighted average assumptions
For the year ended |
||
October 31 |
October 31 |
|
(Canadian dollars per share except percentages and years) |
2023 |
2022 |
Share price at grant date |
$ 130.16 |
$ 128.48 |
Risk-free interest rate |
2.89% |
1.25% |
Expected dividend yield |
3.79% |
3.66% |
Expected share price volatility |
14% |
13% |
Expected life of option |
6 Years |
6 Years |
Employee savings and share ownership plans
We offer many employees an opportunity to own our common shares through savings and share ownership plans. Under these
plans, the employees can generally contribute between 1% and 10% of their annual salary or benefit base for commission-based
employees. For each contribution between 1% and 6%, we will match 50% of the employee contributions in our common shares.
For the RBC Dominion Securities Savings Plan, our maximum annual contribution is $4,500 per employee. For the RBC U.K. Share
Incentive Plan, our maximum annual contribution is £1,500 per employee. For the year ended October 31, 2023, we contributed
$139 million (October 31, 2022 – $128 million), under the terms of these plans, towards the purchase of our common shares. As at
October 31, 2023, an aggregate of 36 million common shares were held under these plans (October 31, 2022 – 36 million common
shares).
Deferred share and other plans
We offer deferred share unit plans to executives, certain key employees and non-employee directors of the Bank. Under these
plans, participants may choose to receive all or a percentage of their annual variable short-term incentive bonus, commission, or
directors’ fee in the form of deferred share units (DSUs). The participants must elect to participate in the plan prior to the
beginning of the year. DSUs earn dividend equivalents in the form of additional DSUs at the same rate as dividends on common
shares. The participant is not allowed to convert the DSUs until retirement or termination of employment/directorship. The cash
value of the DSUs is equivalent to the market value of common shares when conversion takes place.
We also offer unit awards for certain key employees within Capital Markets. The bonus is invested as RBC share units and a
specified percentage vests on a specified number of anniversary dates each year. Each vested amount is paid in cash and is
based on the original number of share units granted plus accumulated dividends, valued using the average closing price of RBC
common shares during the five trading days immediately preceding the vesting date.
We offer performance deferred share award plans to certain key employees, all of which vest at the end of three years. Upon
vesting, the award is paid in cash and is based on the original number of RBC share units granted plus accumulated dividends
valued using the average closing price of RBC common shares during the five trading days immediately preceding the vesting
date. A portion of the award under certain plans may be increased or decreased up to 25%, depending on our total shareholder
return compared to a defined peer group of global financial institutions.
We maintain non-qualified deferred compensation plans for certain key employees in the U.S. These plans allow eligible
employees to defer a portion of their annual income and a variety of productivity and recruitment bonuses and allocate the
deferrals among specified fund choices, including a RBC Share Account fund that tracks the value of our common shares.
The following table presents the units granted under the deferred share and other plans for the year.
Units granted under deferred share and other plans
| For the year ended |
||||
October 31, 2023 |
October 31, 2022 |
|||
Weighted |
Weighted |
|||
Units |
average |
Units |
average |
|
granted |
fair value |
granted |
fair value |
|
(Units and per unit amounts) |
(thousands) |
per unit |
(thousands) |
per unit |
Deferred share unit plans |
466 |
$ 130.61 |
469 |
$ 131.49 |
Capital Markets compensation plan unit awards |
4,231 |
110.32 |
3,794 |
125.22 |
Performance deferred share award plans |
2,362 |
131.41 |
2,220 |
129.65 |
Deferred compensation plans |
103 |
126.81 |
92 |
135.44 |
Other share-based plans |
1,506 |
130.12 |
1,083 |
128.50 |
8,668 |
$ 120.79 |
7,658 |
$ 127.48 |
|
Our liabilities for the awards granted under the deferred share and other plans are measured at fair value, determined based on
the quoted market price of our common shares and specified fund choices as applicable. Annually, our obligation is increased by
additional units earned by plan participants, and is reduced by forfeitures, cancellations, and the settlement of vested units. In
addition, our obligation is impacted by fluctuations in the market price of our common shares and specified fund units. For
performance deferred share award plans, the estimated outcome of meeting the performance conditions also impacts our
obligation.
(continued)
Note 21
Share-based compensation
The following tables present the units that have been earned by the participants, our obligations for these earned units
under the deferred share and other plans, and the related compensation expenses (recoveries) recognized for the year.
Obligations under deferred share and other plans
| As at | ||||
October 31, 2023 | October 31, 2022 | |||
Units | Carrying | Units | Carrying | |
(Millions of Canadian dollars except units) | (thousands) | amount | (thousands) | amount |
Deferred share unit plans | 5,786 | $ 641 | 5,429 | $ 684 |
Capital Markets compensation plan unit awards | 9,934 | 1,098 | 9,398 | 1,182 |
Performance deferred share award plans | 5,808 | 643 | 6,006 | 757 |
Deferred compensation plans (1) | 2,654 | 294 | 2,537 | 319 |
Other share-based plans | 2,135 | 234 | 1,772 | 218 |
26,317 | $ 2,910 | 25,142 | $ 3,160 | |
(1)
Excludes obligations not determined based on the quoted market price of our common shares.
Compensation expenses recognized under deferred share and other plans
For the year ended | ||
October 31 | October 31 | |
(Millions of Canadian dollars) | 2023 | 2022 |
Deferred share unit plans | $ (51) | $ 20 |
Capital Markets compensation plan unit awards | 126 | 210 |
Performance deferred share award plans | 216 | 273 |
Deferred compensation plans | 213 | (261) |
Other share-based plans | 104 | 91 |
$ 608 | $ 333 | |
Income taxes
Components of tax expense
For the year ended | ||
October 31 | October 31 | |
(Millions of Canadian dollars) | 2023 | 2022 |
Income taxes (recoveries) in Consolidated Statements of Income | ||
Current tax | ||
Tax expense for current year | $ 4,081 | $ 4,151 |
Adjustments for prior years | 851 | (230) |
Recoveries arising from previously unrecognized tax loss, tax credit or temporary difference of | ||
a prior period | (100) | – |
4,832 | 3,921 | |
Deferred tax | ||
Origination and reversal of temporary difference | (1,286) | 232 |
Effects of changes in tax rates | (47) | 4 |
Adjustments for prior years | 125 | 231 |
Recoveries arising from previously unrecognized tax loss, tax credit or temporary difference of | ||
a prior period, net | (24) | (86) |
(1,232) | 381 | |
3,600 | 4,302 | |
Income taxes (recoveries) in Consolidated Statements of Comprehensive Income and Changes in | ||
Equity | ||
Other comprehensive income | ||
Net unrealized gains (losses) on debt securities and loans at fair value through other | ||
comprehensive income | (10) | (633) |
Provision for credit losses recognized in income | – | (2) |
Reclassification of net losses (gains) on debt securities and loans at fair value through other | ||
comprehensive income to income | (39) | 2 |
Unrealized foreign currency translation gains (losses) | 20 | 2 |
Net foreign currency translation gains (losses) from hedging activities | (306) | (478) |
Reclassification of losses (gains) on net investment hedging activities to income | 45 | 6 |
Net gains (losses) on derivatives designated as cash flow hedges | 190 | 628 |
Reclassification of losses (gains) on derivatives designated as cash flow hedges to income | 59 | 70 |
Remeasurement gains(losses) on employee benefit plans | (68) | 287 |
Net gains(losses) from fair value change due to credit risk on financial liabilities designated at fair | ||
value through profit or loss | (222) | 622 |
Net gains (losses) on equity securities designated at fair value through other comprehensive | ||
income | 24 | (3) |
Share-based compensation awards | 2 | 10 |
Distributions on other equity instruments and issuance costs | (59) | (45) |
(364) | 466 | |
Total income taxes
$
3,236
$
4,768
218
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
219
The following is an analysis of the differences between the income tax expense reflected in the Consolidated Statements of
Income and the amounts calculated at the Canadian statutory tax rate.
Reconciliation to statutory tax rate
| For the year ended |
||||
(Millions of Canadian dollars, except for percentage amounts) |
October 31, 2023 |
October 31, 2022 |
||
Income taxes at Canadian statutory tax rate |
$ 5,115 |
27.7% |
$ 5,269 |
26.2% |
Increase (decrease) in income taxes resulting from: |
||||
Lower average tax rate applicable to subsidiaries |
(2,130) |
(11.5) |
(428) |
(2.1) |
Tax-exempt income from securities |
(337) |
(1.8) |
(437) |
(2.2) |
Tax rate change |
1,050 |
5.7 |
4 |
– |
Other |
(98) |
(0.6) |
(106) |
(0.5) |
Income taxes in Consolidated Statements of Income / effective tax rate |
$ 3,600 |
19.5% |
$ 4,302 |
21.4% |
The effective income tax rate of 19.5% decreased 190 bps, primarily due to lower average tax rate applicable to subsidiaries. This
factor was partially offset by the impact of the Canada Recovery Dividend (CRD) and the 1.5% increase in the Canadian corporate
tax rate in the current year.
Deferred tax assets and liabilities result from tax loss and tax credit carryforwards and temporary differences between the tax
basis of assets and liabilities and their carrying amounts on our Consolidated Balance Sheets.
| As at and for the year ended October 31, 2023 |
|||||||
Net asset |
Change |
Change |
Exchange |
Net asset |
|||
beginning of | through | through | rate | Acquisitions/ | end of | ||
(Millions of Canadian dollars) | period | equity | profit or loss | differences | disposals | Other | period |
Net deferred tax asset/(liability) |
|||||||
Allowance for credit losses |
$ 987 |
$ – |
$ 185 |
$ 2 |
$ – |
$– |
$ 1,174 |
Deferred compensation |
1,504 |
(2) |
(2) |
22 |
– |
– |
1,522 |
Business realignment charges |
12 |
– |
11 |
– |
– |
– |
23 |
Tax loss and tax credit carryforwards |
322 |
– |
(57) |
1 |
(5) |
– |
261 |
Deferred (income) expense |
6 |
(3) |
661 |
(11) |
(2) |
– |
651 |
Financial instruments measured at |
|||||||
fair value through other |
|||||||
comprehensive income |
(16) |
(330) |
– |
25 |
– |
– |
(321) |
Premises and equipment and |
|||||||
intangibles |
(1,234) |
– |
302 |
(27) |
(8) |
– |
(967) |
Pension and post-employment |
|||||||
related |
(435) |
68 |
37 |
1 |
(4) |
– |
(333) |
Other |
(113) |
4 |
95 |
24 |
– |
– |
10 |
$ 1,033 |
$ (263) |
$ 1,232 |
$ 37 |
$ (19) |
$– |
$ 2,020 |
|
Comprising |
|||||||
Deferred tax assets |
$ 1,472 |
$ 2,446 |
|||||
Deferred tax liabilities |
(439) |
(426) |
|||||
$ 1,033 |
$ 2,020 |
||||||
| As at and for the year ended October 31, 2022 |
|||||||
Net asset |
Change |
Change |
Exchange |
Net asset |
|||
beginning of | through | through | rate | Acquisitions/ | end of | ||
(Millions of Canadian dollars) | period | equity | profit or loss | differences | disposals | Other | period |
Net deferred tax asset/(liability) |
|||||||
Allowance for credit losses |
$ 974 |
$ – |
$ 2 |
$ 11 |
$ – |
$– |
$ 987 |
Deferred compensation |
1,614 |
(10) |
(211) |
101 |
10 |
– |
1,504 |
Business realignment charges |
11 |
– |
1 |
– |
– |
– |
12 |
Tax loss and tax credit carryforwards |
242 |
– |
67 |
2 |
8 |
3 |
322 |
Deferred (income) expense |
110 |
(1) |
(126) |
23 |
– |
– |
6 |
Financial instruments measured at |
|||||||
fair value through other |
|||||||
comprehensive income |
(19) |
(2) |
– |
5 |
– |
– |
(16) |
Premises and equipment and |
|||||||
intangibles |
(836) |
– |
4 |
(57) |
(345) |
– |
(1,234) |
Pension and post-employment |
|||||||
related |
(163) |
(287) |
19 |
4 |
(8) |
– |
(435) |
Other |
4 |
22 |
(137) |
(6) |
4 |
– |
(113) |
$ 1,937 |
$ (278) |
$ (381) |
$ 83 |
$ (331) |
$3 |
$ 1,033 |
|
Comprising |
|||||||
Deferred tax assets |
$ 2,011 |
$ 1,472 |
|||||
Deferred tax liabilities |
(74) |
(439) |
|||||
$ 1,937 |
$ 1,033 |
||||||
The tax loss and tax credit carryforwards amount of deferred tax assets primarily relates to losses and tax credits in our
Canadian, U.S., and Caribbean operations. Deferred tax assets of $261 million were recognized at October 31, 2023 (October 31,
2022 – $322 million) in respect of tax losses and tax credits incurred in current or preceding years for which recognition is
dependent on the projection of future taxable profits. Management’s forecasts support the assumption that it is probable that
the results of future operations will generate sufficient taxable income to utilize the deferred tax assets. The forecasts rely on
continued liquidity and capital support to our business operations, including tax planning strategies implemented in relation to
such support.
As at October 31, 2023, unused tax losses and tax credits of $417 million and $18 million (October 31, 2022 – $429 million and
$130 million) available to be offset against potential tax adjustments or future taxable income were not recognized as deferred
tax assets. There are no unused tax losses that will expire within one year (October 31, 2022 – $nil), or in two to four years
(October 31, 2022 – $nil) and there are $417 million of unused tax losses that will expire after four years (October 31, 2022 – $429
million). There are no tax credits that will expire in one year (October 31, 2022 – $nil), or in two to four years (October 31, 2022 –
$93 million) and there are $18 million that will expire after four years (October 31, 2022 – $37 million).
The amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in
joint ventures for which deferred tax liabilities have not been recognized in the parent bank is $22 billion as at October 31, 2023
(October 31, 2022 – $26 billion).
Government of Canada Budget 2022
On December 15, 2022, Bill C-32, Fall Economic Statement Implementation Act, 2022 (the Bill), tabled by the Government of
Canada, received royal assent. The Bill amends the Income Tax Act (Canada) to implement a CRD and a permanent increase in
the Canadian corporate tax rate on banks and life insurer groups.
The CRD is a one-time 15% tax for 2022 determined based on the average taxable income above $1 billion for taxation years
2020 and 2021 and payable in equal installments over five years. The CRD resulted in an increase in income taxes of $1.2 billion for
the year ended October 31, 2023, of which $1 billion was recognized in net income and $0.2 billion was recognized in other
comprehensive income.
The permanent increase in the Canadian corporate tax rate is 1.5% on taxable income above $100 million and applies to
taxation years that end after April 7, 2022, resulting in an increase in the Canadian statutory tax rate from 26.2% to 27.7% for the
year ended October 31, 2023.
Tax examinations and assessments
During the year, we received proposal letters (the Proposals) from the Canada Revenue Agency (CRA) in respect of the 2018
taxation year, which suggested that Royal Bank of Canada owes additional taxes of approximately $228 million as they denied
the deductibility of certain dividends. On November 28, 2023, we received a reassessment in respect of the 2018 taxation year,
consistent with the Proposals received during the year. The reassessment received is consistent with the reassessments received
for taxation years 2012 to 2017 of approximately $1,628 million of additional income taxes and the reassessments received for
taxation years 2009 to 2011 of approximately $434 million of additional income taxes and interest in respect of the same matter.
These amounts represent the maximum additional taxes owing for those years.
Legislative amendments introduced in the 2015 Canadian Federal Budget resulted in disallowed deduction of dividends from
transactions with Taxable Canadian Corporations including those hedged with Tax Indifferent Investors, namely pension funds
and non-resident entities with prospective application effective May 1, 2017. The dividends to which the reassessments relate
include both dividends in transactions similar to those which are the target of the 2015 legislative amendments and dividends
which are unrelated to the legislative amendments.
It is possible that the CRA will reassess us for significant additional income tax for subsequent years on the same basis. In all
Earnings per share
For the year ended | ||
October 31 | October 31 | |
(Millions of Canadian dollars, except share and per share amounts) | 2023 | 2022 |
Basic earnings per share | ||
Net income | $ 14,866 | $ 15,807 |
Dividends on preferred shares and distributions on other equity instruments | (236) | (247) |
Net income attributable to non-controlling interests | (7) | (13) |
Net income available to common shareholders | $ 14,623 | $ 15,547 |
Weighted average number of common shares (in thousands) | 1,391,020 | 1,403,654 |
Basic earnings per share (in dollars) | $ 10.51 | $ 11.08 |
Diluted earnings per share | ||
Net income available to common shareholders | $ 14,623 | $ 15,547 |
Weighted average number of common shares (in thousands) | 1,391,020 | 1,403,654 |
Stock options (1) | 1,483 | 1,918 |
Issuable under other share-based compensation plans | 26 | 462 |
Average number of diluted common shares (in thousands) | 1,392,529 | 1,406,034 |
Diluted earnings per share (in dollars) | $ 10.50 | $ 11.06 |
(1)
The dilutive effect of stock options was calculated using the treasury stock method. When the exercise price of options outstanding is greater than the average market
price of our common shares, the options are excluded from the calculation of diluted earnings per share. For the year ended October 31, 2023, an average of 2,119,045
outstanding options with an average exercise price of $130.73 were excluded from the calculation of diluted earnings per share. For the year ended October 31, 2022, no
220
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
221
Guarantees, commitments, pledged assets and contingencies
Guarantees and commitments
We use guarantees and other off-balance sheet credit instruments to meet the financing needs of our clients.
The table below summarizes our maximum exposure to credit losses related to our guarantees and commitments provided
to third parties. The maximum exposure to credit risk relating to a guarantee is the maximum risk of loss if there was a total
default by the guaranteed parties, without consideration of possible recoveries under recourse provisions, insurance policies or
from collateral held or pledged. The maximum exposure to credit risk relating to a commitment to extend credit is the full amount
of the commitment. In both cases, the maximum risk exposure is significantly greater than the amount recognized as a liability in
our Consolidated Balance Sheets.
Maximum exposure to credit losses As at |
||
October 31 |
October 31 |
|
(Millions of Canadian dollars) |
2023 |
2022 |
Financial guarantees |
||
Financial standby letters of credit |
$ 23,314 |
$ 20,291 |
Commitments to extend credit |
||
Backstop liquidity facilities |
51,544 |
45,336 |
Credit enhancements |
3,226 |
2,960 |
Documentary and commercial letters of credit |
291 |
318 |
Other commitments to extend credit |
301,132 |
284,602 |
Other credit-related commitments |
||
Securities lending indemnifications |
95,055 |
90,693 |
Performance guarantees |
7,503 |
7,333 |
Sponsored member guarantees |
14,043 |
1,241 |
Other |
203 |
360 |
Our credit review process, our policy for requiring collateral security, and the types of collateral security held are generally the
same for guarantees and commitments as for loans. Our clients generally have the right to request settlement of, or draw on, our
guarantees and commitments within one year. However, certain guarantees can only be drawn if specified conditions are met.
These conditions, along with collateral requirements, are described below. We believe that it is highly unlikely that all or
substantially all of the guarantees and commitments will be drawn or settled within one year, and contracts may expire without
being drawn or settled.
Financial guarantees
Financial standby letters of credit
Financial standby letters of credit represent irrevocable assurances that we will make payments in the event that a client cannot
meet its payment obligations to the third party. For certain guarantees, the guaranteed party can request payment from us even
though the client has not defaulted on its obligations. These guarantees generally have a term of five to seven years.
Our policy for requiring collateral security with respect to these instruments and the types of collateral security held is generally
the same as for loans. When collateral security is taken, it is determined on an account-by-account basis according to the risk of the
borrower and the specifics of the transaction. Collateral security may include cash, securities and other assets pledged.
Commitments to extend credit
Backstop liquidity facilities
Backstop liquidity facilities are provided to ABCP conduit programs administered by us and third parties as an alternative source
of financing in the event that such programs are unable to access commercial paper markets, or in limited circumstances, when
predetermined performance measures of the financial assets acquired or financed by these programs are not met. We also
provide backstop liquidity facilities to certain third-party commercial mortgage securitization vehicles. The average remaining
term of these liquidity facilities is approximately four years.
The terms of the backstop liquidity facilities do not require us to advance money to these programs in the event of
bankruptcy or insolvency and generally do not require us to purchase non-performing or defaulted assets.
Credit enhancements
We provide partial credit enhancement to multi-seller ABCP programs administered by us to protect commercial paper investors
in the event that the collections on the underlying assets together with the transaction-specific credit enhancements or the
liquidity facilities prove to be insufficient to pay for maturing commercial paper. Each of the asset pools is structured to achieve
a high investment grade credit profile through credit enhancements required to be provided by the third-party sellers related to
each transaction. The average remaining term of these credit facilities is approximately three years.
Documentary and commercial letters of credit
Documentary and commercial letters of credit, which are written undertakings by us on behalf of a client authorizing a third party
to draw drafts on us up to a stipulated amount under specific terms and conditions, where some are collateralized based on the
underlying agreement with the client and others are collateralized by cash deposits or other assets of the client.
Other commitments to extend credit
Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, reverse
repurchase agreements, bankers’ acceptances or letters of credit where we do not have the ability to unilaterally withdraw the
credit extended to the borrower.
222
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 24
Guarantees, commitments, pledged assets and contingencies
(continued)
Other credit-related commitments
Securities lending indemnifications
In securities lending transactions, we act as an agent for the owner of a security, who agrees to lend the security to a borrower
for a fee, under the terms of a pre-arranged contract. The borrower must fully collateralize the security loaned at all times. As
part of this custodial business, an indemnification may be provided to securities lending customers to ensure that the fair value
of securities loaned will be returned in the event that the borrower fails to return the borrowed securities and the collateral held
is insufficient to cover the fair value of those securities. These indemnifications normally terminate without being drawn upon.
The term of these indemnifications varies, as the securities loaned are recallable on demand. Collateral held for our securities
lending transactions typically includes cash, securities that are issued or guaranteed by the Canadian government, U.S.
government or other OECD countries or high quality debt or equity instruments.
Performance guarantees
Performance guarantees represent irrevocable assurances that we will make payments to third-party beneficiaries in the event
that a client fails to perform under a specified non-financial contractual obligation. Such obligations typically include works and
service contracts, performance bonds, and warranties related to international trade. The term of these guarantees can range up
to three to seven years.
Our policy for requiring collateral security with respect to these instruments and the types of collateral security held is generally
the same as for loans. When collateral security is taken, it is determined on an account-by-account basis according to the risk of the
borrower and the specifics of the transaction. Collateral security may include cash, securities and other assets pledged.
Sponsored member guarantees
For certain overnight repurchase and reverse repurchase transactions, we act as a sponsoring member to eligible clients to clear
transactions through the Fixed Income Clearing Corporation (FICC). We also provide a guarantee to FICC for the prompt and full
payment and performance of our sponsored member clients’ respective obligations under the FICC rules. The guarantees are
fully collateralized by cash and securities issued or guaranteed by the U.S. government.
Indemnifications
In the normal course of our operations, we provide indemnifications which are often standard contractual terms to
counterparties in transactions such as purchase and sale contracts, fiduciary, agency, licensing, custodial and service
agreements, clearing system arrangements, participation as a member of exchanges, director/officer contracts and leasing
transactions. These indemnification agreements may require us to compensate the counterparties for costs incurred as a result
of changes in laws and regulations (including tax legislation) or as a result of litigation claims or statutory sanctions that may be
suffered by the counterparty as a consequence of the transaction. The terms of these indemnification agreements vary based on
the contract. The nature of the indemnification agreements prevents us from making a reasonable estimate of the maximum
potential amount we could be required to pay to counterparties. Historically, we have not made any significant payments under
such indemnifications.
Uncommitted amounts
Uncommitted amounts represent undrawn credit facilities for which we have the ability to unilaterally withdraw the credit
extended to the borrower at any time. These include both retail and commercial commitments. As at October 31, 2023, the total
balance of uncommitted amounts was $398 billion (October 31, 2022 – $363 billion).
Other commitments
We invest in private companies, directly or through third-party investment funds, including venture capital funds, private equity
funds, Small Business Investment Companies, real estate funds and Low Income Housing Tax Credit funds. These funds are
generally structured as closed-end limited partnerships wherein we hold a limited partner interest. For the year ended
October 31, 2023, we have unfunded commitments of $1,832 million (October 31, 2022 – $1,421 million) representing the aggregate
amount of cash we are obligated to contribute as capital to these partnerships under the terms of the relevant contracts.
In the ordinary course of business, we pledge assets and enter into collateral agreements with terms and conditions that are
usual and customary to our regular lending, borrowing and trading activities recorded on our Consolidated Balance Sheets. The
following are examples of our general terms and conditions on pledged assets and collateral:
•
The risks and rewards of the pledged assets reside with the pledgor.
•
The pledged asset is returned to the pledgor when the necessary conditions have been satisfied.
•
The right of the pledgee to sell or re-pledge the asset is dependent on the specific agreement under which the collateral
is pledged.
•
If there is no default, the pledgee must return the comparable asset to the pledgor upon satisfaction of the obligation.
We are also required to provide intraday pledges to the Bank of Canada when we use a real-time electronic wire transfer system
that continuously processes all Canadian dollar large-value or time-critical payments throughout the day. The pledged assets
earmarked for our Canadian dollar large-value or time-critical payments are normally released back to us at the end of the
settlement cycle each day. Therefore, the pledged assets amount is not included in the following table. For the year ended
October 31, 2023, we had on average $1 billion of assets pledged intraday to the Bank of Canada on a daily basis (October 31,
2022 – $2 billion). There are infrequent occasions where we are required to take an overnight advance from the Bank of Canada
to cover a settlement requirement, in which case an equivalent value of the pledged assets would be used to secure the advance.
There were no overnight advances taken on October 31, 2023 and October 31, 2022.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
223
Assets pledged against liabilities and collateral assets held or re-pledged
As at |
||
October 31 |
October 31 |
|
(Millions of Canadian dollars) |
2023 |
2022 |
Sources of pledged assets and collateral |
||
Bank assets |
||
Loans |
$ 102,944 |
$ 97,178 |
Securities |
107,122 |
70,334 |
Other assets |
28,953 |
40,318 |
239,019 |
207,830 |
|
Client assets (1) |
||
Collateral received and available for sale or re-pledging |
502,109 |
465,484 |
Less: not sold or re-pledged |
(6,876) |
(9,192) |
495,233 |
456,292 |
|
$ 734,252 |
$ 664,122 |
|
Uses of pledged assets and collateral |
||
Securities borrowing and lending |
$ 168,681 |
$ 158,748 |
Obligations related to securities sold short |
46,260 |
45,288 |
Obligations related to securities lent or sold under repurchase agreements |
331,784 |
274,392 |
Securitization |
38,686 |
40,438 |
Covered bonds |
69,802 |
62,905 |
Derivative transactions |
40,352 |
49,556 |
Foreign governments and central banks |
9,111 |
9,503 |
Clearing systems, payment systems and depositories |
10,709 |
8,263 |
Other |
18,867 |
15,029 |
$ 734,252 |
$ 664,122 |
|
(1)
Legal and regulatory matters
We are a large global institution that is subject to many different complex legal and regulatory requirements that continue to
evolve. We are and have been subject to a variety of legal proceedings, including civil claims and lawsuits, regulatory
examinations, investigations, audits and requests for information by various governmental regulatory agencies and law
enforcement authorities in various jurisdictions. Some of these matters may involve novel legal theories and interpretations and
may be advanced under criminal as well as civil statutes, and some proceedings could result in the imposition of civil, regulatory
enforcement or criminal penalties. We review the status of all proceedings on an ongoing basis and will exercise judgment in
resolving them in such manner as we believe to be in our best interest. In many proceedings, it is inherently difficult to determine
whether any loss is probable or to reliably estimate the amount of any loss. This is an area of significant judgment and
uncertainty and the extent of our financial and other exposure to these proceedings after taking into account current provisions
could be material to our results of operations in any particular period though we do not believe that the ultimate resolution of
any such matter will have a material effect on our consolidated financial condition. The following is a description of our
significant legal proceedings. Based on the facts currently known, except as may otherwise be noted, it is not possible at this
time for us to predict the ultimate outcome of these proceedings or the timing of their resolution.
London interbank offered rate (LIBOR) litigation
Royal Bank of Canada and other U.S. dollar panel banks have been named as defendants in private lawsuits filed in the U.S. with
respect to the setting of U.S. dollar LIBOR including a number of class action lawsuits which have been consolidated before the
U.S. District Court for the Southern District of New York. The complaints in those private lawsuits assert claims against us and
other panel banks under various U.S. laws, including U.S. antitrust laws, the U.S. Commodity Exchange Act, and state law. On
December 30, 2021, the U.S. Court of Appeals for the Second Circuit issued an opinion affirming in part and reversing in part certain
district court rulings that had dismissed a substantial portion of the consolidated class action on jurisdictional grounds and lack of
standing. The Second Circuit remanded the matter to the district court for further proceedings consistent with its decision.
On July 21, 2023, Royal Bank of Canada and several other defendants executed a settlement agreement resolving one of the
LIBOR class actions brought on behalf of certain plaintiffs that purchased U.S. dollar LIBOR-based instruments. The settlement
was preliminarily approved on August 1, 2023 and remains subject to final court approval.
Royal Bank of Canada Trust Company (Bahamas) Limited proceedings
On April 13, 2015, a French investigating judge notified Royal Bank of Canada Trust Company (Bahamas) Limited (RBC Bahamas)
of the issuance of an
ordonnance de renvoi
referring RBC Bahamas and other unrelated persons to the French
tribunal
correctionnel
to face the charge of complicity in estate tax fraud relating to actions taken relating to a trust for which RBC
Bahamas serves as trustee. RBC Bahamas believes that its actions did not violate French law and contested the charge in the
French court. On January 12, 2017, the French court acquitted all parties including RBC Bahamas and on June 29, 2018, the French
appellate court affirmed the acquittals. The acquittals were appealed and on January 6, 2021, the French Supreme Court issued a
judgment reversing the decision of the French Court of Appeal and sent the case back to the French Court of Appeal for
rehearing. The retrial before the Court of Appeal commenced on September 18, 2023 and has concluded. The Court of Appeal’s
decision is expected to be issued on March 5, 2024.
224
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 25
Legal and regulatory matters
(continued)
On October 28, 2016, Royal Bank of Canada was granted an exemption by the U.S. Department of Labor that allows Royal
Bank of Canada and its current and future affiliates to continue to qualify for the Qualified Professional Asset Manager (QPAM)
exemption under the Employee Retirement Income Security Act despite any potential conviction of RBC Bahamas in the French
proceeding for a temporary one year period from the date of conviction. We expect the Department of Labor to publish a
technical correction to the prior one-year exemption in advance of the Court of Appeals decision. The anticipated technical
correction will reflect the fact that the decision will be rendered by an appellate court, and not the district court. In addition, the
Department of Labor has proposed amendments to the QPAM exemption. If the amendments are finalized as proposed, it is
unclear how they would affect Royal Bank of Canada’s ability to obtain relief beyond the one-year temporary exemption period.
RBC Bahamas continues to review the trustee’s and the trust’s legal obligations, including liabilities and potential liabilities
under applicable tax and other laws.
Foreign exchange matters
Beginning in 2015, putative class actions were brought against Royal Bank of Canada and/or RBC Capital Markets, LLC in the U.S.,
Canada, the United Kingdom and Brazil. These actions were each brought against multiple foreign exchange dealers and alleged,
among other things, collusive behaviour in global foreign exchange trading. By May 2023 all of the U.S., Canadian and U.K. actions
were settled or dismissed, and while the Brazilian actions have not been resolved, our exposure to these actions is de minimis to
Royal Bank of Canada.
U.S. communications recordkeeping inquiry
In October 2022, our subsidiary RBC Capital Markets, LLC received a request for information and documents from the Securities
and Exchange Commission (SEC) concerning compliance with records preservation requirements relating to business
communications exchanged on electronic channels that have not been approved by RBC Capital Markets, LLC. RBC Capital
Markets, LLC is cooperating with the SEC’s inquiry. As has been publicly reported, the SEC is conducting similar inquiries into
recordkeeping practices at multiple other financial institutions.
U.K. Competition and Markets Authority investigation
In November 2018, the U.K. Competition and Markets Authority (CMA) started an investigation of Royal Bank of Canada and RBC
Europe Limited relating to alleged anti-competitive conduct between 2009 and 2013, involving U.K. government bonds and related
derivatives. In May 2023, the CMA issued a statement of objections to Royal Bank of Canada and RBC Europe Limited, and certain
other financial institutions. Royal Bank of Canada and RBC Europe Limited are contesting the CMA’s case.
In June 2023, RBC Europe Limited and RBC Capital Markets, LLC, among other financial institutions, were named as
defendants in a putative class action filed in the U.S. by plaintiffs alleging anti-competitive conduct in the U.K. government bonds
market. In September 2023, the defendants filed a motion to dismiss the complaint.
Vacation pay class action
On December 29, 2022, the Ontario Superior Court of Justice certified a class in an action against RBC Dominion Securities
Limited and RBC Dominion Securities Inc. (together, RBC DS). The action commenced in July 2020, asserting claims relating to
statutory vacation pay and public holiday pay for investment advisors, associates and assistants in our Canadian Wealth
Management business, with the exception of those employed in Alberta and British Columbia.
Other matters
We are a defendant in a number of other actions alleging that certain of our practices and actions were improper. The lawsuits
involve a variety of complex issues and the timing of their resolution is varied and uncertain. Management believes that we will
ultimately be successful in resolving these lawsuits, to the extent that we are able to assess them, without material financial
impact to the Bank. This is, however, an area of significant judgment and the potential liability resulting from these lawsuits
could be material to our results of operations in any particular period.
Various other legal proceedings are pending that challenge certain of our other practices or actions. While this is an area of
significant judgment and some matters are currently inestimable, we consider that the aggregate liability, to the extent that we
are able to assess it, resulting from these other proceedings will not be material to our consolidated financial position or results
Related party transactions
Related parties
Related parties include associated companies over which we have direct or indirect control or have significant influence and
post-employment benefit plans for the benefit of our employees. Related parties also include key management personnel (KMP),
the Board of Directors (Directors), close family members of KMP and Directors, and entities which are, directly or indirectly,
controlled by or jointly controlled by KMP, Directors or their close family members.
KMP are defined as those persons having authority and responsibility for planning, directing and controlling our activities,
directly or indirectly. They include the senior members of our organization called the Group Executive (GE). The GE is comprised
of the President and Chief Executive Officer, and the Chief Officers and Group Heads, who report directly to him. The Directors do
not plan, direct, or control the activities of the entity; they oversee the management of the business and provide stewardship.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
225
Compensation of Key management personnel and Directors
For the year ended |
||
October 31 |
October 31 |
|
(Millions of Canadian dollars) |
2023 |
2022 (1) |
Salaries and other short-term employee benefits (2) |
$ 23 |
$ 27 |
Post-employment benefits (3) |
2 |
2 |
Share-based payments |
39 |
40 |
$ 64 |
$ 69 |
|
(1)
During the year ended October 31, 2022 certain executives, who were members of the Bank’s GE as at October 31, 2021, left the Bank and therefore were no longer part of
KMP. Compensation for the year ended October 31, 2022 attributable to the former executives, including benefits and share-based payments relating to awards granted in
prior years was $14 million.
(2)
Includes the portion of the annual variable short-term incentive bonus that certain executives elected to receive in the form of DSUs. Refer to Note 21 for further details.
Directors receive retainers but do not receive salaries and other short-term employee benefits.
(3)
Directors do not receive post-employment benefits.
Stock options, share-based awards and shares held by Key management personnel, Directors and their close family
members
| As at |
||||
October 31, 2023 (1) |
October 31, 2022 (2) |
|||
No. of |
No. of |
|||
(Millions of Canadian dollars, except number of units) |
units held |
Value |
units held |
Value |
Stock options (3) |
2,805,471 |
$ 26 |
2,409,294 |
$ 59 |
Other non-option share-based awards (3) |
991,909 |
110 |
914,496 |
115 |
RBC common and preferred shares |
181,648 |
20 |
170,312 |
22 |
3,979,028 |
$ 156 |
3,494,102 |
$ 196 |
|
(1)
During the year ended October 31, 2023, certain directors, who were members of the Board of Directors as at October 31, 2022, retired. Total shareholdings held upon
their retirement was 32,958 units with a value of $4 million.
(2)
During the year ended October 31, 2022 certain executives, who were members of the Bank’s GE as at October 31, 2021, left the Bank and therefore were no longer KMP.
Total shareholdings and options held upon their departure was 569,470 units with a value of $34 million.
(3)
Directors do not receive stock options or any other non-option share-based awards.
Transactions, arrangements and agreements involving Key management personnel, Directors and their close family
members
In the normal course of business, we provide certain banking services to KMP, Directors, and their close family members. These
transactions were made on substantially the same terms, including interest rates and security, as for comparable transactions
with persons of a similar standing and did not involve more than the normal risk of repayment or present other unfavourable
features.
As at October 31, 2023, total loans to KMP, Directors and their close family members were $18 million (October 31, 2022 –
$14 million). We have no Stage 3 allowance or provision for credit losses relating to these loans as at and for the years ended
October 31, 2023 and October 31, 2022. No guarantees, pledges or commitments have been given to KMP, Directors or their close
Joint ventures and associates
In the normal course of business, we provide certain banking and financial services to our joint ventures and associates,
including loans, interest and non-interest bearing deposits. These transactions meet the definition of related party transactions
and were made on substantially the same terms as for comparable transactions with third parties.
As at October 31, 2023, loans to joint ventures and associates were $217 million (October 31, 2022 – $251 million) and deposits
from joint ventures and associates were $77 million (October 31, 2022 – $20 million). We have no stage 3 allowance or provision
for credit losses relating to loans to joint ventures and associates as at and for the years ended October 31, 2023 and October 31,
2022. $1 million of guarantees have been given to joint ventures and associates for the year ended October 31, 2023 (October 31,
2022 – $1 million).
Other transactions, arrangements or agreements involving joint ventures and associates
As at or for the year ended |
||
October 31 |
October 31 |
|
(Millions of Canadian dollars) |
2023 |
2022 |
Commitments and other contingencies |
$ 1,089 |
$ 829 |
Other fees received for services rendered |
55 |
50 |
Other fees paid for services received |
108 |
107 |
226
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Results by business segment
For management purposes, based on the products and services offered, we are organized into four business segments:
Personal & Commercial Banking, Wealth Management, Insurance, and Capital Markets. Effective the first quarter of 2023, we
simplified our reporting structure by eliminating the Investor & Treasury Services segment and moving its former businesses to
existing segments. We moved our Investor Services business to our Wealth Management segment, and our Treasury Services and
Transaction Banking businesses to our Capital Markets segment. Effective the fourth quarter of 2023, we moved the Investor
Services lending business from our Wealth Management segment to our Capital Markets segment. From a reporting perspective,
there were no changes to our Personal & Commercial Banking and Insurance segments. Comparative results have been revised
to conform to our new basis of segment presentation.
Personal & Commercial Banking provides a broad suite of financial products and services to individual and business clients for
their day-to-day banking, investing and financing needs through two businesses: Canadian Banking and Caribbean & U.S.
Banking. In Canada, we provide a broad suite of financial products and services through our large branch network, ATMs, and
mobile sales network. In the Caribbean and the U.S., we offer a broad range of financial products and services in targeted
markets. Non-interest income in Personal & Commercial Banking mainly comprises Service charges, Mutual fund revenue and
Card service revenue.
Wealth Management serves high net worth and ultra-high net worth individual and institutional clients with a comprehensive
suite of advice-based solutions and strategies as well as personalized banking relationships through our lines of businesses in
Canada, the U.S., the U.K., Europe and Asia, including Canadian Wealth Management, U.S. Wealth Management (including City
National), Global Asset Management, International Wealth Management, and Investor Services. Non-interest income in Wealth
Management mainly comprises Investment management and custodial fees, Mutual fund revenue and Securities brokerage
commissions.
Insurance has operations in Canada and globally, operating under two business lines: Canadian Insurance and International
Insurance, providing a wide range of advice and solutions for individual and business clients including life, health, wealth,
property & casualty, travel, group benefits, annuities, and reinsurance. In Canada, we offer our products and services through a
wide variety of channels, comprised of mobile advisors, advice centres, RBC Insurance
®
stores, and digital platforms as well as
through independent brokers and partners. Outside Canada, we operate in reinsurance and retrocession markets globally
offering life, critical illness, disability and longevity reinsurance products. Non-interest income in Insurance is comprised of
Insurance premiums, and investment and fee income.
Capital Markets provides expertise in advisory & origination, sales & trading, lending & financing and transaction banking to
corporations, institutional clients, asset managers, private equity firms and governments globally in our two main business lines:
Corporate & Investment Banking and Global Markets. In North America, we offer a full suite of products and services which
include equity and debt origination and distribution, advisory services, and sales & trading. Outside North America, we have a
targeted strategic presence in the U.K. & Europe, Australia, Asia & other markets aligned to our global expertise. In the U.K. &
Europe, we offer a diversified set of capabilities in key industry sectors of focus. In Australia and Asia, we compete with global
and regional investment banks in targeted areas aligned to our global expertise, including fixed income distribution and
currencies trading, secured financing, as well as corporate and investment banking. Non-interest income in Capital Markets
mainly includes Trading revenue, Underwriting and other advisory fees and Credit fees.
All other enterprise level activities that are not allocated to these four business segments, such as certain treasury and liquidity
management activities, including amounts associated with unattributed capital, and consolidation adjustments, including the
elimination of the Taxable equivalent basis (Teb) gross-up amounts, are included in Corporate Support. Teb adjustments gross
up income from certain tax-advantaged sources from Canadian taxable corporate dividends and U.S. tax credit investments
recorded in Capital Markets to their effective tax equivalent value with the corresponding offset recorded in the provision for
income taxes. Management believes that these Teb adjustments are necessary for Capital Markets to reflect how it is managed
and enhances the comparability of revenue across our taxable and tax-advantaged sources. Our use of Teb adjustments may not
be comparable to similarly adjusted amounts at other financial institutions. The Teb adjustment for the year ended October 31,
2023 was $559 million (October 31, 2022 – $572 million). Gains (losses) on economic hedges of our U.S. Wealth Management
(including City National) share-based compensation plans, which are reflected in revenue, and related variability in share-based
compensation expense driven by changes in the fair value of liabilities relating to these plans are also included in Corporate
For geographic reporting, our segments are grouped into Canada, the U.S. and Other International. Transactions are primarily
recorded in the location that best reflects the risk due to negative changes in economic conditions and prospects for growth due
to positive economic changes. This location frequently corresponds with the location of the legal entity through which the
business is conducted and the location of our clients. Transactions are recorded in the local currency and are subject to foreign
Management reporting framework
Our management reporting framework is intended to measure the performance of each business segment as if it were a stand-
alone business and reflects the way that the business segment is managed. This approach is intended to ensure that our
business segments’ results include all applicable revenue and expenses associated with the conduct of their business and
depicts how management views those results. We regularly monitor these segment results for the purpose of making decisions
about resource allocation and performance assessment. These items do not impact our consolidated results.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
227
The expenses in each business segment may include costs or services directly incurred or provided on their behalf at the
enterprise level. For other costs not directly attributable to one of our business segments, we use a management reporting
framework that uses assumptions and methodologies for allocating overhead costs and indirect expenses to our business
segments and that assists in the attribution of capital and the transfer pricing of funds to our business segments in a manner that
consistently measures and aligns the economic costs with the underlying benefits and risks of that specific business segment.
Activities and business conducted between our business segments are generally at market rates. All other enterprise level
activities that are not allocated to our four business segments are reported under Corporate Support.
Our assumptions and methodologies used in our management reporting framework are periodically reviewed by us to
ensure that they remain valid. The capital attribution methodologies involve a number of assumptions that are revised
periodically.
For the year ended October 31, 2023 |
|||||||||
Personal & |
|||||||||
Commercial |
Wealth |
Capital |
Corporate |
United |
Other |
||||
(Millions of Canadian dollars) |
Banking |
Management |
Insurance |
Markets (1) |
Support (1) |
Total |
Canada |
States |
International |
Net interest income (2) |
$ 16,074 |
$ 4,495 |
$ – |
$ 3,379 |
$ 1,181 |
$ 25,129 |
$ 18,752 |
$ 5,065 |
$ 1,312 |
Non-interest income |
6,046 |
13,049 |
5,675 |
7,672 |
(1,442) |
31,000 |
14,851 |
8,563 |
7,586 |
Total revenue |
22,120 |
17,544 |
5,675 |
11,051 |
(261) |
56,129 |
33,603 |
13,628 |
8,898 |
Provision for credit losses |
1,579 |
328 |
– |
561 |
– |
2,468 |
1,648 |
784 |
36 |
Insurance policyholder benefits, |
|||||||||
claims and acquisition expense |
– |
– |
4,022 |
– |
– |
4,022 |
2,161 |
– |
1,861 |
Non-interest expense |
9,215 |
14,128 |
653 |
6,509 |
668 |
31,173 |
15,319 |
11,177 |
4,677 |
Net income (loss) before income |
|||||||||
taxes |
11,326 |
3,088 |
1,000 |
3,981 |
(929) |
18,466 |
14,475 |
1,667 |
2,324 |
Income taxes (recoveries) |
3,060 |
661 |
197 |
(158) |
(160) |
3,600 |
4,770 |
(1,103) |
(67) |
Net income |
$ 8,266 |
$ 2,427 |
$ 803 |
$ 4,139 |
$ (769) |
$ 14,866 |
$ 9,705 |
$ 2,770 |
$ 2,391 |
Non-interest expense includes: |
|||||||||
Depreciation and amortization |
$ 961 |
$ 1,234 |
$ 58 |
$ 509 |
$ – |
$ 2,762 |
$ 1,570 |
$ 836 |
$ 356 |
Impairment of other intangibles |
13 |
81 |
1 |
2 |
11 |
108 |
28 |
65 |
15 |
Total assets |
$ 636,046 |
$ 179,227 |
$ 22,591 |
$ 1,100,172 |
$ 66,956 |
$ 2,004,992 |
$ 1,042,663 |
$ 639,296 |
$ 323,033 |
Total assets include: |
|||||||||
Additions to premises and |
|||||||||
equipment and intangibles |
$ 463 |
$ 1,008 |
$ 53 |
$ 311 |
$ 639 |
$ 2,474 |
$ 1,334 |
$ 700 |
$ 440 |
Total liabilities |
$ 635,952 |
$ 177,389 |
$ 23,355 |
$ 1,099,893 |
$ (49,357) |
$ 1,887,232 |
For the year ended October 31, 2022 |
|||||||||
Personal & |
|||||||||
Commercial |
Wealth |
Capital |
Corporate |
Other |
|||||
(Millions of Canadian dollars) |
Banking |
Management (3) |
Insurance |
Markets (1) , (3) |
Support (1) |
Total |
Canada |
United States |
International |
Net interest income (2) |
$ 14,019 |
$ 3,886 |
$ – |
$ 4,944 |
$ (132) |
$ 22,717 |
$ 15,761 |
$ 5,423 |
$ 1,533 |
Non-interest income |
6,124 |
12,357 |
3,510 |
5,005 |
(728) |
26,268 |
13,508 |
6,364 |
6,396 |
Total revenue |
20,143 |
16,243 |
3,510 |
9,949 |
(860) |
48,985 |
29,269 |
11,787 |
7,929 |
Provision for credit losses |
463 |
33 |
– |
(13) |
1 |
484 |
600 |
60 |
(176) |
Insurance policyholder benefits, |
|||||||||
claims and acquisition expense |
– |
– |
1,783 |
– |
– |
1,783 |
(466) |
– |
2,249 |
Non-interest expense |
8,437 |
12,015 |
588 |
5,816 |
(247) |
26,609 |
13,648 |
9,006 |
3,955 |
Net income (loss) before income |
|||||||||
taxes |
11,243 |
4,195 |
1,139 |
4,146 |
(614) |
20,109 |
15,487 |
2,721 |
1,901 |
Income taxes (recoveries) |
2,873 |
985 |
282 |
778 |
(616) |
4,302 |
3,615 |
452 |
235 |
Net income |
$ 8,370 |
$ 3,210 |
$ 857 |
$ 3,368 |
$ 2 |
$ 15,807 |
$ 11,872 |
$ 2,269 |
$ 1,666 |
Non-interest expense includes: |
|||||||||
Depreciation and amortization |
$ 942 |
$ 1,109 |
$ 57 |
$ 514 |
$ 12 |
$ 2,634 |
$ 1,617 |
$ 776 |
$ 241 |
Impairment of other intangibles |
11 |
2 |
2 |
3 |
– |
18 |
11 |
5 |
2 |
Total assets |
$ 602,824 |
$ 198,380 |
$ 21,918 |
$ 1,033,978 |
$ 60,119 |
$ 1,917,219 |
$ 992,485 |
$ 570,255 |
$ 354,479 |
Total assets include: |
|||||||||
Additions to premises and |
|||||||||
equipment and intangibles |
$ 394 |
$ 2,347 |
$ 49 |
$ 258 |
$ 630 |
$ 3,678 |
$ 1,263 |
$ 666 |
$ 1,749 |
Total liabilities |
$ 602,741 |
$ 198,329 |
$ 22,588 |
$ 1,033,689 |
$ (48,303) |
$ 1,809,044 |
(1)
Taxable equivalent basis.
(2)
Interest revenue is reported net of interest expense as we rely primarily on net interest income as a performance measure.
(3)
Nature and extent of risks arising from financial instruments
We are exposed to credit, market and liquidity and funding risks as a result of holding financial instruments. Our risk
measurement and objectives, policies and methodologies for managing these risks are disclosed in the shaded text along with
those tables specifically marked with an asterisk (*) in the Credit risk section of Management’s Discussion and Analysis. These
shaded text and tables are an integral part of these Consolidated Financial Statements.
Concentrations of credit risk exist if a number of our counterparties are engaged in similar activities, are located in the same
geographic region or have comparable economic characteristics such that their ability to meet contractual obligations would be
similarly affected by changes in economic, political or other conditions.
228
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Note 28
Nature and extent of risks arising from financial instruments
(continued)
Concentrations of credit risk indicate the relative sensitivity of our performance to developments affecting a particular
industry or geographic location. The amounts of credit exposure associated with certain of our on- and off-balance sheet
financial instruments are summarized in the following tables.
As at October 31, 2023 | |||||||||
(Millions of Canadian dollars, | United | Other | |||||||
except percentage amounts) | Canada | % | States | % | Europe | % | International | % | Total |
On-balance sheet assets other | |||||||||
than derivatives (1) | $ 798,259 | 66% | $ 294,670 | 24% | $ 76,637 | 6% | $ 50,147 | 4% | $ 1,219,713 |
Derivatives before master | |||||||||
netting agreements (2), (3) | 27,221 | 19% | 36,698 | 25% | 67,406 | 46% | 14,470 | 10% | 145,795 |
$ 825,480 | 60% | $ 331,368 | 24% | $ 144,043 | 11% | $ 64,617 | 5% | $ 1,365,508 | |
Off-balance sheet credit | |||||||||
instruments (4) | |||||||||
Committed and uncommitted (5) | $ 427,849 | 56% | $ 252,071 | 33% | $ 51,393 | 8% | $ 23,183 | 3% | $ 754,496 |
Other | 85,222 | 61% | 30,737 | 22% | 21,428 | 15% | 2,731 | 2% | 140,118 |
$ 513,071 | 57% | $ 282,808 | 32% | $ 72,821 | 8% | $ 25,914 | 3% | $ 894,614 |
As at October 31, 2022 | |||||||||
(Millions of Canadian dollars, | United | Other | |||||||
except percentage amounts) | Canada | % | States | % | Europe | % | International | % | Total |
On-balance sheet assets other | |||||||||
than derivatives (1) | $ 759,037 | 65% | $ 263,736 | 23% | $ 87,671 | 8% | $ 48,991 | 4% | $ 1,159,435 |
Derivatives before master | |||||||||
netting agreements (2), (3) | 32,434 | 20% | 35,921 | 23% | 72,885 | 46% | 17,439 | 11% | 158,679 |
$ 791,471 | 60% | $ 299,657 | 23% | $ 160,556 | 12% | $ 66,430 | 5% | $ 1,318,114 | |
Off-balance sheet credit | |||||||||
instruments (4) | |||||||||
Committed and uncommitted (5) | $ 398,719 | 57% | $ 223,624 | 32% | $ 52,669 | 8% | $ 20,857 | 3% | $ 695,869 |
Other | 79,110 | 66% | 13,847 | 12% | 24,476 | 20% | 2,485 | 2% | 119,918 |
$ 477,829 | 59% | $ 237,471 | 29% | $ 77,145 | 9% | $ 23,342 | 3% | $ 815,787 |
(1)
Includes Assets purchased under reverse repurchase agreements and securities borrowed, Loans and Customers’ liability under acceptances. The largest concentrations
in Canada are Ontario at 57% (October 31, 2022 – 56%), the Prairies at 15% (October 31, 2022 – 15%), British Columbia and the territories at 14% (October 31, 2022 – 15%)
and Quebec at 10% (October 31, 2022 – 10%). No industry accounts for more than 20% (October 31, 2022 – 20%) of total on-balance sheet credit instruments, with the
exception of Banking, which accounted for 25% (October 31, 2022 – 26%), and Government, which accounted for 28% (October 31, 2022 – 32%). The classification of our
sectors aligns with our view of credit risk by industry.
(2)
A further breakdown of our derivative exposures by risk rating and counterparty type is provided in Note 9.
(3)
Excludes valuation adjustments determined on a pooled basis.
(4)
Balances presented are contractual amounts representing our maximum exposure to credit risk.
(5)
Represents our maximum exposure to credit risk. Retail and wholesale commitments respectively comprise 44% and 56% of our total commitments (October 31, 2022 –
45% and 55%). The largest concentrations in the wholesale portfolio relate to Financial services at 15% (October 31, 2022 – 15%), Real estate and related at 12%
(October 31, 2022 – 12%), Utilities at 11% (October 31, 2022 – 11%), Other services at 8% (October 31, 2022 – 7%), and Investments at 6% (October 31, 2022 – 6%). The
Capital management
Regulatory capital and capital ratios
OSFI formally establishes risk-based capital and leverage minimums and Total Loss Absorbing Capacity (TLAC) ratios for deposit-
taking institutions in Canada. We are required to calculate our capital ratios using the Basel III framework. Under Basel III,
regulatory capital includes Common Equity Tier 1 (CET1), Tier 1 and Tier 2 capital. CET1 capital mainly consists of common shares,
retained earnings and other components of equity. Regulatory adjustments under Basel III include deductions of goodwill and
other intangibles, certain deferred tax assets, defined benefit pension fund assets, investments in banking, financial and
insurance entities, the shortfall of provisions to expected losses, prudential valuation adjustments, prepaid portfolio insurance
assets, non payment and non delivery of trades and equity investment in funds subject to the fall-back approach. Tier 1 capital
comprises predominantly CET1 and Additional Tier 1 items including non-cumulative preferred shares and LRCNs that meet
certain criteria. Tier 2 capital includes subordinated debentures that meet certain criteria, certain loan loss allowances and non-
controlling interests in subsidiaries’ Tier 2 instruments. Total capital is the sum of Tier 1 and Tier 2 capital. External TLAC
instruments comprise predominantly senior bail-in debt, which includes eligible senior unsecured debt with an original term to
maturity of greater than 400 days and remaining term to maturity of greater than 365 days. TLAC available is defined as the sum
of Total capital and external TLAC instruments.
Regulatory capital ratios are calculated by dividing CET1, Tier 1, Total capital and TLAC available by risk-weighted assets. The
leverage ratio is calculated by dividing Tier 1 capital by an exposure measure. The exposure measure consists of total assets
(excluding items deducted from Tier 1 capital) and certain off-balance sheet items converted into credit exposure equivalents.
Adjustments are also made to derivatives and secured financing transactions to reflect credit and other risks. The TLAC leverage
ratio is calculated by dividing TLAC available by the leverage ratio exposure.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
229
During 2023 and 2022, we complied with all applicable capital, leverage and TLAC requirements, including the domestic stability
buffer, imposed by OSFI.
As at |
||
October 31 |
October 31 |
|
(Millions of Canadian dollars, except percentage amounts and as otherwise noted) |
2023 |
2022 |
Capital (1) |
||
CET1 capital |
$ 86,611 |
$ 76,945 |
Tier 1 capital |
93,904 |
84,242 |
Total capital |
104,952 |
93,850 |
Risk-weighted assets (RWA) used in calculation of capital ratios (1) |
||
Credit risk |
$ 475,842 |
$ 496,898 |
Market risk |
40,498 |
35,342 |
Operational risk |
79,883 |
77,639 |
Total RWA |
$ 596,223 |
$ 609,879 |
Capital ratios and Leverage ratio (1) |
||
CET1 ratio |
14.5% |
12.6% |
Tier 1 capital ratio |
15.7% |
13.8% |
Total capital ratio |
17.6% |
15.4% |
Leverage ratio |
4.3% |
4.4% |
Leverage ratio exposure (billions) |
$ 2,180 |
$ 1,898 |
TLAC available and ratios (2) |
||
TLAC available |
$ 184,916 |
$ 160,961 |
TLAC ratio |
31.0% |
26.4% |
TLAC leverage ratio |
8.5% |
8.5% |
(1)
Capital, RWA, and capital ratios are calculated using OSFI’s Capital Adequacy Requirements (CAR) guideline and the Leverage ratio is calculated using OSFI’s Leverage
Requirements (LR) guideline. Both the CAR guideline and LR guideline are based on the Basel III framework. The results for the year ended October 31, 2023 reflect our
adoption of the revised CAR and LR guidelines that came into effect in Q2 2023 as part of OSFI’s implementation of the Basel III reforms.
(2)
TLAC available and TLAC ratios are calculated using OSFI’s TLAC guideline. The TLAC standard is applied at the resolution entity level which for us is deemed to be
Royal Bank of Canada and its subsidiaries. A resolution entity and its subsidiaries are collectively called a resolution group. Both the TLAC ratio and TLAC leverage ratio
Offsetting financial assets and financial liabilities
Offsetting within our Consolidated Balance Sheets may be achieved where financial assets and liabilities are subject to master
netting arrangements that provide the currently enforceable right of offset and where there is an intention to settle on a net
basis, or realize the assets and settle the liabilities simultaneously. For derivative contracts and repurchase and reverse
repurchase arrangements, this is generally achieved when there is a market mechanism for settlement (e.g., central counterparty
exchange or clearing house) which provides daily net settlement of cash flows arising from these contracts. Margin receivables
and margin payables are generally offset as they settle simultaneously through a market settlement mechanism.
Amounts that do not qualify for offsetting include master netting arrangements that only permit outstanding transactions
with the same counterparty to be offset in an event of default or occurrence of other predetermined events. Such master netting
arrangements include the International Swaps and Derivatives Association Master Agreement or certain derivative exchange or
clearing counterparty agreements for derivative contracts, global master repurchase agreement and global master securities
lending agreements for repurchase, reverse repurchase and other similar secured lending and borrowing arrangements.
The amount of financial collateral received or pledged subject to master netting arrangements or similar agreements that do
not qualify for offsetting refers to the collateral received or pledged to cover the net exposure between counterparties by
enabling the collateral to be realized in an event of default or the occurrence of other predetermined events. Certain amounts of
collateral are restricted from being sold or re-pledged unless there is an event of default or the occurrence of other
predetermined events.
230
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
The following tables provide the financial instrument amounts that have been offset on the Consolidated Balance Sheets and
the amounts that do not qualify for offsetting but are subject to enforceable master netting arrangements or similar agreements.
The amounts presented are not intended to represent our actual exposure to credit risk.
Financial instruments subject to enforceable master netting arrangements or similar agreements
As at October 31, 2023 | ||||||||
Amounts subject to enforceable netting arrangements | ||||||||
| Related amounts not | ||||||||
offset on the Consolidated | ||||||||
| Balance Sheets (1) | ||||||||
Amounts not | Net amounts | |||||||
Gross amounts | Gross amounts | Net amounts | Impact of | subject to | presented | |||
of recognized | offset on the | presented in the | master | enforceable | on the | |||
financial | Consolidated | Consolidated | netting | Financial | netting | Consolidated | ||
(Millions of Canadian dollars) | instruments | Balance Sheets | Balance Sheets | agreements | collateral (2) | Net amounts | arrangements | Balance Sheets |
Financial assets | ||||||||
Assets purchased under reverse | ||||||||
repurchase agreements and | ||||||||
securities borrowed | $ 436,617 | $ 96,676 | $ 339,941 | $ 201 | $ 336,112 | $ 3,628 | $ 250 | $ 340,191 |
Derivative assets | 138,318 | 1,544 | 136,774 | 89,889 | 22,310 | 24,575 | 5,676 | 142,450 |
Other financial assets | 3,306 | 443 | 2,863 | 19 | 421 | 2,423 | – | 2,863 |
$ 578,241 | $ 98,663 | $ 479,578 | $ 90,109 | $ 358,843 | $ 30,626 | $ 5,926 | $ 485,504 | |
Financial liabilities | ||||||||
Obligations related to assets sold | ||||||||
under repurchase agreements | ||||||||
and securities loaned | $ 427,330 | $ 96,676 | $ 330,654 | $ 201 | $ 325,674 | $ 4,779 | $ 4,584 | $ 335,238 |
Derivative liabilities | 132,770 | 1,544 | 131,226 | 89,889 | 17,340 | 23,997 | 11,403 | 142,629 |
Other financial liabilities | 1,475 | 443 | 1,032 | 19 | – | 1,013 | – | 1,032 |
$ 561,575 | $ 98,663 | $ 462,912 | $ 90,109 | $ 343,014 | $ 29,789 | $ 15,987 | $ 478,899 | |
| As at October 31, 2022 | ||||||||
| Amounts subject to enforceable netting arrangements | ||||||||
| Related amounts not | ||||||||
offset on the Consolidated | ||||||||
| Balance Sheets (1) | ||||||||
Amounts not | Net amounts | |||||||
Gross amounts | Gross amounts | Net amounts | Impact of | subject to | presented | |||
of recognized | offset on the | presented in the | master | enforceable | on the | |||
financial | Consolidated | Consolidated | netting | Financial | netting | Consolidated | ||
(Millions of Canadian dollars) | instruments | Balance Sheets | Balance Sheets | agreements | collateral (2) | Net amounts | arrangements | Balance Sheets |
Financial assets | ||||||||
Assets purchased under reverse | ||||||||
repurchase agreements and | ||||||||
securities borrowed | $ 411,937 | $ 94,203 | $ 317,734 | $ 293 | $ 314,602 | $ 2,839 | $ 111 | $ 317,845 |
Derivative assets | 146,479 | 2,185 | 144,294 | 98,610 | 21,412 | 24,272 | 10,145 | 154,439 |
Other financial assets | 1,638 | 304 | 1,334 | 11 | 83 | 1,240 | – | 1,334 |
$ 560,054 | $ 96,692 | $ 463,362 | $ 98,914 | $ 336,097 | $ 28,351 | $ 10,256 | $ 473,618 | |
Financial liabilities | ||||||||
Obligations related to assets sold | ||||||||
under repurchase agreements | ||||||||
and securities loaned | $ 360,722 | $ 94,203 | $ 266,519 | $ 293 | $ 265,822 | $ 404 | $ 7,428 | $ 273,947 |
Derivative liabilities | 141,137 | 2,185 | 138,952 | 98,610 | 19,758 | 20,584 | 14,539 | 153,491 |
Other financial liabilities | 825 | 304 | 521 | 11 | – | 510 | – | 521 |
$ 502,684 | $ 96,692 | $ 405,992 | $ 98,914 | $ 285,580 | $ 21,498 | $ 21,967 | $ 427,959 | |
(1)
Financial collateral is reflected at fair value. The financial instrument amounts and financial collateral disclosed are limited to the net balance sheet exposure, and any
over-collateralization is excluded from the table.
(2)
Includes cash collateral of $17 billion (October 31, 2022 – $20 billion) and non-cash collateral of $342 billion (October 31, 2022 – $316 billion) received for financial assets
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
231
Note 31
Recovery and settlement of on-balance sheet assets and liabilities
The table below presents an analysis of assets and liabilities recorded on our Consolidated Balance Sheets by amounts to be
recovered or settled within one year and after one year, as at the balance sheet date, based on contractual maturities and
certain other assumptions outlined in the footnotes below. As warranted, we manage the liquidity risk of various products based
on historical behavioural patterns that are often not aligned with contractual maturities. Amounts to be recovered or settled
within one year, as presented below, may not be reflective of our long-term view of the liquidity profile of certain balance sheet
categories.
As at |
||||||
October 31, 2023 |
October 31, 2022 |
|||||
Within one |
After one |
Within one |
After one |
|||
(Millions of Canadian dollars) |
year |
year |
Total |
year |
year |
Total |
Assets |
||||||
Cash and due from banks (1) |
$ 59,793 |
$ 2,196 |
$ 61,989 |
$ 71,081 |
$ 1,316 |
$ 72,397 |
Interest-bearing deposits with |
||||||
banks |
71,086 |
– |
71,086 |
108,011 |
– |
108,011 |
Securities |
||||||
Trading (2) |
180,929 |
9,222 |
190,151 |
139,810 |
8,395 |
148,205 |
Investment, net of applicable |
||||||
allowance |
33,363 |
186,216 |
219,579 |
26,540 |
143,478 |
170,018 |
Assets purchased under reverse |
||||||
repurchase agreements and |
||||||
securities borrowed |
336,437 |
3,754 |
340,191 |
316,714 |
1,131 |
317,845 |
Loans |
||||||
Retail |
120,247 |
449,704 |
569,951 |
113,965 |
435,786 |
549,751 |
Wholesale |
76,249 |
211,577 |
287,826 |
70,374 |
203,593 |
273,967 |
Allowance for loan losses |
(5,004) |
(3,753) |
||||
Segregated fund net assets |
– |
2,760 |
2,760 |
– |
2,638 |
2,638 |
Other |
||||||
Customers’ liability under |
||||||
acceptances |
21,690 |
5 |
21,695 |
17,827 |
– |
17,827 |
Derivatives (2) |
140,261 |
2,189 |
142,450 |
151,928 |
2,511 |
154,439 |
Premises and equipment |
65 |
6,684 |
6,749 |
59 |
7,155 |
7,214 |
Goodwill |
– |
12,594 |
12,594 |
– |
12,277 |
12,277 |
Other intangibles |
– |
5,907 |
5,907 |
– |
6,083 |
6,083 |
Other assets |
62,555 |
14,513 |
77,068 |
66,071 |
14,229 |
80,300 |
$ 1,102,675 |
$ 907,321 |
$ 2,004,992 |
$ 1,082,380 |
$ 838,592 |
$ 1,917,219 |
|
Liabilities |
||||||
Deposits (3) |
$ 991,484 |
$ 240,203 |
$ 1,231,687 |
$ 1,023,324 |
$ 185,490 |
$ 1,208,814 |
Segregated fund net liabilities |
– |
2,760 |
2,760 |
– |
2,638 |
2,638 |
Other |
||||||
Acceptances |
21,740 |
5 |
21,745 |
17,872 |
– |
17,872 |
Obligations related to securities |
||||||
sold short |
32,602 |
1,049 |
33,651 |
34,105 |
1,406 |
35,511 |
Obligations related to assets sold |
||||||
under repurchase agreements |
||||||
and securities loaned |
334,959 |
279 |
335,238 |
273,001 |
946 |
273,947 |
Derivatives (2) |
131,352 |
11,277 |
142,629 |
140,808 |
12,683 |
153,491 |
Insurance claims and policy |
||||||
benefit liabilities |
1,898 |
10,068 |
11,966 |
1,904 |
9,607 |
11,511 |
Other liabilities |
69,187 |
26,983 |
96,170 |
71,689 |
23,546 |
95,235 |
Subordinated debentures |
– |
11,386 |
11,386 |
110 |
9,915 |
10,025 |
$ 1,583,222 |
$ 304,010 |
$ 1,887,232 |
$ 1,562,813 |
$ 246,231 |
$ 1,809,044 |
(1)
Cash and due from banks are assumed to be recovered within one year, except for cash balances not available for use by the Bank.
(2)
Trading securities classified as FVTPL and trading derivatives are presented as within one year as this best represents in most instances the short-term nature of our
trading activities. Trading securities designated as FVTPL are generally presented based on contractual maturity. Non-trading derivatives are presented according to the
recovery or settlement of the hedging transaction.
(3)
Demand deposits of $511 billion (October 31, 2022 – $562 billion) are presented as within one year due to their being repayable on demand or at short notice on a
contractual basis. In practice, these deposits relate to a broad range of individuals and customer-types which form a stable base for our operations and liquidity needs.
232
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Parent company information
The following table presents information regarding the legal entity of Royal Bank of Canada with its subsidiaries presented on an
equity accounted basis.
Condensed Balance Sheets
As at |
||
October 31 |
October 31 |
|
(Millions of Canadian dollars) |
2023 |
2022 |
Assets |
||
Cash and due from banks |
$ 41,770 |
$ 48,062 |
Interest-bearing deposits with banks |
61,256 |
84,680 |
Securities |
217,490 |
174,615 |
Investments in bank subsidiaries and associated companies (1) |
55,082 |
49,841 |
Investments in other subsidiaries and associated companies |
105,070 |
88,260 |
Assets purchased under reverse repurchase agreements and securities borrowed |
150,207 |
132,829 |
Loans, net of allowance for loan losses |
709,635 |
679,580 |
Net balances due from bank subsidiaries (1) |
– |
7,172 |
Other assets |
214,145 |
227,767 |
$ 1,554,655 |
$ 1,492,806 |
|
Liabilities and shareholders’ equity |
||
Deposits |
$ 1,006,284 |
$ 955,978 |
Net balances due to bank subsidiaries (1) |
10,132 |
– |
Net balances due to other subsidiaries |
6,866 |
36,701 |
Other liabilities |
402,326 |
382,099 |
1,425,608 |
1,374,778 |
|
Subordinated debentures |
11,386 |
9,964 |
Shareholders’ equity |
117,661 |
108,064 |
$ 1,554,655 |
$ 1,492,806 |
(1)
Bank refers primarily to regulated deposit-taking institutions and securities firms.
Condensed Statements of Income and Comprehensive Income
For the year ended |
||
October 31 |
October 31 |
|
(Millions of Canadian dollars) |
2023 |
2022 |
Interest and dividend income (1) |
$ 56,495 |
$ 27,791 |
Interest expense |
44,174 |
12,846 |
Net interest income |
12,321 |
14,945 |
Non-interest income (2) |
5,390 |
5,425 |
Total revenue |
17,711 |
20,370 |
Provision for credit losses |
2,002 |
579 |
Non-interest expense |
11,780 |
10,175 |
Income before income taxes |
3,929 |
9,616 |
Income taxes |
1,874 |
2,276 |
Net income before equity in undistributed income of subsidiaries |
2,055 |
7,340 |
Equity in undistributed income of subsidiaries |
12,804 |
8,454 |
Net income |
$ 14,859 |
$ 15,794 |
Other comprehensive income (loss), net of taxes |
251 |
5,810 |
Total comprehensive income |
$ 15,110 |
$ 21,604 |
(1)
Includes dividend income from investments in subsidiaries and associated companies of $25 million (October 31, 2022 – $11 million).
(2)
Includes a nominal share of income (loss) from associated companies (October 31, 2022 – nominal).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2023
233
Condensed Statements of Cash Flows
For the year ended |
||
October 31 |
October 31 |
|
(Millions of Canadian dollars) |
2023 |
2022 |
Cash flows from operating activities |
||
Net income |
$ 14,859 |
$ 15,794 |
Adjustments to determine net cash from operating activities: |
||
Change in undistributed earnings of subsidiaries |
(12,804) |
(8,454) |
Change in deposits, net of securitizations |
50,306 |
101,145 |
Change in loans, net of securitizations |
(30,055) |
(78,288) |
Change in trading securities |
(12,832) |
(10,348) |
Change in obligations related to assets sold under repurchase agreements and securities |
||
loaned |
21,954 |
24,133 |
Change in assets purchased under reverse repurchase agreements and securities borrowed |
(17,378) |
(7,239) |
Change in obligations related to securities sold short |
(819) |
3,024 |
Other operating activities, net |
5,000 |
2,385 |
Net cash from (used in) operating activities |
18,231 |
42,152 |
Cash flows from investing activities |
||
Change in interest-bearing deposits with banks |
23,424 |
(27,784) |
Proceeds from sales and maturities of investment securities |
127,965 |
59,304 |
Purchases of investment securities |
(153,099) |
(71,509) |
Net acquisitions of premises and equipment and other intangibles |
(2,075) |
(1,180) |
Change in cash invested in subsidiaries |
(3,802) |
(2,514) |
Change in net funding provided to subsidiaries |
(12,531) |
(36,981) |
Net cash from (used in) investing activities |
(20,118) |
(80,664) |
Cash flows from financing activities |
||
Issuance of subordinated debentures |
1,500 |
1,000 |
Repayment of subordinated debentures |
(110) |
– |
Issue of common shares, net of issuance costs |
65 |
51 |
Common shares purchased for cancellation |
– |
(5,426) |
Issue of preferred shares and other equity instruments, net of issuance costs |
– |
749 |
Redemption of preferred shares and other equity instruments |
– |
(155) |
Dividends paid on shares and distributions paid on other equity instruments |
(5,549) |
(6,960) |
Repayment of lease liabilities |
(311) |
(302) |
Net cash from (used in) financing activities |
(4,405) |
(11,043) |
Net change in cash and due from banks |
(6,292) |
(49,555) |
Cash and due from banks at beginning of year |
48,062 |
97,617 |
Cash and due from banks at end of year |
$ 41,770 |
$ 48,062 |
Supplemental disclosure of cash flow information |
||
Amount of interest paid |
$ 35,104 |
$ 7,801 |
Amount of interest received |
49,098 |
21,332 |
Amount of dividends received |
2,628 |
2,618 |
Amount of income taxes paid |
2,604 |
4,641 |
234
Royal Bank of Canada: Annual Report 2023
Consolidated Financial Statements
Principal subsidiaries
(Millions of Canadian dollars) | As at October 31, 2023 | |
Carrying value of | ||
voting shares owned | ||
Principal subsidiaries (1) | Principal office address (2) | by the Bank (3) |
Royal Bank Holding Inc. | Toronto, Ontario, Canada | $ 85,823 |
RBC Direct Investing Inc. | Toronto, Ontario, Canada | |
RBC Insurance Holdings Inc. | Mississauga, Ontario, Canada | |
RBC Life Insurance Company | Mississauga, Ontario, Canada | |
Investment Holdings (Cayman) Limited | George Town, Grand Cayman, Cayman Islands | |
RBC (Barbados) Funding Ltd. | St. James, Barbados | |
Capital Funding Alberta Limited | Calgary, Alberta, Canada | |
RBC Global Asset Management Inc. | Toronto, Ontario, Canada | |
RBC Investor Services Trust | Toronto, Ontario, Canada | |
RBC (Barbados) Trading Bank Corporation | St. James, Barbados | |
RBC US Group Holdings LLC (2) | Toronto, Ontario, Canada | 32,278 |
RBC USA Holdco Corporation (2) | New York, New York, U.S. | |
RBC Capital Markets, LLC (2) | New York, New York, U.S. | |
City National Bank (2) | Los Angeles, California, U.S. | |
RBC Dominion Securities Limited | Toronto, Ontario, Canada | 15,290 |
RBC Dominion Securities Inc. | Toronto, Ontario, Canada | |
Royal Bank Mortgage Corporation | Toronto, Ontario, Canada | 6,277 |
RBC Europe Limited | London, England | 2,977 |
The Royal Trust Company | Montreal, Quebec, Canada | 1,367 |
Royal Trust Corporation of Canada | Toronto, Ontario, Canada | 553 |
(1)
The Bank directly or indirectly controls each subsidiary.
(2)
Each subsidiary is incorporated or organized under the laws of the state, province or country in which the principal office is situated, except for RBC US Group Holdings
LLC and RBC USA Holdco Corporation which are incorporated under the laws of the State of Delaware, U.S., RBC Capital Markets, LLC, which is organized under the laws
of the State of Minnesota, U.S., and City National Bank which is a national bank, chartered under the laws of the United States of America.
(3)
The carrying value of voting shares is stated as the Bank’s equity in such investments.
Certain of our subsidiaries, joint ventures and associates are subject to regulatory requirements of the jurisdictions in which they
operate. When these subsidiaries, joint ventures and associates are subject to such requirements, they may be restricted from
transferring to us our share of their assets in the form of cash dividends, loans or advances. As at October 31, 2023, restricted net
Ten-year statistical review
Royal Bank of Canada: Annual Report 2023
235
Ten-year statistical review
Condensed Balance Sheets
(Millions of Canadian dollars) (1)
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
Assets
Cash and due from banks
$
61,989
$
72,397
$
113,846
$
118,888
$
26,310
$
30,209
$
28,407
$
14,929
$
12,452
$
17,421
Interest-bearing deposits with banks
71,086
108,011
79,638
39,013
38,345
36,471
32,662
27,851
22,690
8,399
Securities, net of applicable allowance (2)
409,730
318,223
284,724
275,814
249,004
222,866
218,379
236,093
215,508
199,148
Assets purchased under reverse repurchase
agreements and securities borrowed
340,191
317,845
307,903
313,015
306,961
294,602
220,977
186,302
174,723
135,580
Loans, net of allowance
852,773
819,965
717,575
660,992
618,856
576,818
542,617
521,604
472,223
435,229
Other
269,223
280,778
202,637
216,826
189,459
173,768
169,811
193,479
176,612
144,773
Total assets
$2,004,992
$1,917,219
$1,706,323
$1,624,548
$1,428,935
$1,334,734
$1,212,853
$1,180,258
$1,074,208
$
940,550
Liabilities
Deposits (3)
$1,231,687
$1,208,814
$1,100,831
$1,011,885
$
886,005
$
836,197
$
789,036
$
757,589
$
697,227
$
614,100
Other (3)
644,159
590,205
497,137
516,029
449,490
409,451
340,124
341,295
305,675
264,088
Subordinated debentures
11,386
10,025
9,593
9,867
9,815
9,131
9,265
9,762
7,362
7,859
Total liabilities
$1,887,232
$1,809,044
$1,607,561
$1,537,781
$1,345,310
$1,254,779
$1,138,425
$1,108,646
$1,010,264
$
886,047
Equity attributable to shareholders
117,661
108,064
98,667
86,664
83,523
79,861
73,829
71,017
62,146
52,690
Non-controlling interest
99
111
95
103
102
94
599
595
1,798
1,813
Total equity
117,760
108,175
98,762
86,767
83,625
79,955
74,428
71,612
63,944
54,503
Total liabilities and equity
$2,004,992
$1,917,219
$1,706,323
$1,624,548
$1,428,935
$1,334,734
$1,212,853
$1,180,258
$1,074,208
$
940,550
Condensed Income Statements
(Millions of Canadian dollars) (1)
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
Net interest income (3)
$
25,129
$
22,717
$
20,002
$
20,835
$
19,749
$
17,952
$
16,926
$
16,531
$
14,771
$
14,116
Non-interest income (3), (4)
31,000
26,268
29,691
26,346
26,253
24,624
23,743
22,264
20,932
19,992
Total revenue (4)
56,129
48,985
49,693
47,181
46,002
42,576
40,669
38,795
35,703
34,108
Provision for credit losses (5)
2,468
484
(753)
4,351
1,864
1,307
1,150
1,546
1,097
1,164
Insurance policyholder benefits, claims and
acquisition expense
4,022
1,783
3,891
3,683
4,085
2,676
3,053
3,424
2,963
3,573
Non-interest expense (4)
31,173
26,609
25,924
24,758
24,139
22,833
21,794
20,526
19,020
17,661
Net income
$
14,866
$
15,807
$
16,050
$
11,437
$
12,871
$
12,431
$
11,469
$
10,458
$
10,026
$
9,004
Other Statistics – reported
(Millions of Canadian dollars, except
percentages and per share amounts) (1)
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
PROFITABILITY MEASURES
Earnings per shares – basic
$
10.51
$
11.08
$
11.08
$
7.84
$
8.78
$
8.39
$
7.59
$
6.80
$
6.75
$
6.03
– diluted
$
10.50
$
11.06
$
11.06
$
7.82
$
8.75
$
8.36
$
7.56
$
6.78
$
6.73
$
6.00
Return on common equity (6), (7)
14.2%
16.4%
18.6%
14.2%
16.8%
17.6%
17.0%
16.3%
18.6%
19.0%
Return on risk-weighted assets
2.49%
2.68%
2.90%
2.10%
2.52%
2.55%
2.49%
2.34%
2.45%
2.52%
Efficiency ratio (4)
55.5%
54.3%
52.2%
52.5%
52.5%
53.6%
53.6%
52.9%
53.3%
51.8%
KEY RATIOS
PCL on impaired loans as a % of average net
loans and acceptances (8)
0.21%
0.10%
0.10%
0.24%
0.27%
0.20%
0.21%
0.28%
0.24%
0.27%
Net interest margin (average earning assets,
net) (3), (6)
1.50%
1.48%
1.48%
1.55%
1.61%
1.64%
1.69%
1.70%
1.71%
1.86%
SHARE INFORMATION
Common shares outstanding (000s) –
end of period
1,400,511
1,382,911
1,424,525
1,422,473
1,430,096
1,438,794
1,452,535
1,484,235
1,443,955
1,443,125
Dividends declared per common share
$
5.34
$
4.96
$
4.32
$
4.29
$
4.07
$
3.77
$
3.48
$
3.24
$
3.08
$
2.84
Dividend yield (9)
4.3%
3.7%
3.8%
4.7%
4.1%
3.7%
3.8%
4.3%
4.1%
3.8%
Dividend payout ratio
51%
45%
39%
55%
46%
45%
46%
48%
46%
47%
Book value per share (10)
$
78.79
$
72.85
$
64.57
$
56.75
$
54.41
$
51.12
$
46.41
$
43.32
$
39.51
$
33.69
Common share price (RY on TSX) (11)
$
110.76
$
126.05
$
128.82
$
93.16
$
106.24
$
95.92
$
100.87
$
83.80
$
74.77
$
80.01
Market capitalization (TSX) (11)
155,121
174,316
183,507
132,518
151,933
138,009
146,554
124,476
107,925
115,393
Market price to book value
1.41
1.73
2.00
1.64
1.95
1.88
2.17
1.93
1.89
2.38
CAPITAL MEASURES – CONSOLIDATED
(12)
Common Equity Tier 1 capital ratio
14.5%
12.6%
13.7%
12.5%
12.1%
11.5%
10.9%
10.8%
10.6%
9.9%
Tier 1 capital ratio
15.7%
13.8%
14.9%
13.5%
13.2%
12.8%
12.3%
12.3%
12.2%
11.4%
Total capital ratio
17.6%
15.4%
16.7%
15.5%
15.2%
14.6%
14.2%
14.4%
14.0%
13.4%
Leverage ratio
4.3%
4.4%
4.9%
4.8%
4.3%
4.4%
4.4%
4.4%
4.3%
n.a.
TLAC ratio
31.0%
26.4%
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
TLAC leverage ratio
8.5%
8.5%
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
(1)
Effective November 1, 2019, we adopted IFRS 16
Leases
. Results from periods prior to November 1, 2019 are reported in accordance with IAS 17
Leases
in this 2023 Annual
Report. Effective November 1, 2018, we adopted IFRS 15
Revenue from Contracts with Customers
. Results from periods prior to November 1, 2018 are reported in
accordance with IAS 18
Revenue
in this 2023 Annual Report. Effective November 1, 2017, we adopted IFRS 9
Financial Instruments
(IFRS 9). Results from periods prior to
November 1, 2017 are reported in accordance with IAS 39
Financial Instruments: Recognition and Measurement
(IAS 39) in this 2023 Annual Report.
(2)
Securities are comprised of trading and investment securities. Under IFRS 9, investment securities represent debt and equity securities at FVOCI and debt securities at
amortized cost, net of the applicable allowance. Under IAS 39, investment securities represented available-for-sale securities and held-to-maturity securities.
(3)
Commencing Q4 2019, the interest component and the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in trading revenue
and deposits, respectively are presented in net interest income and other liabilities respectively. As at November 1, 2016, comparative amounts have been reclassified to
conform with this presentation.
(4)
Effective Q4 2017, service fees and other costs incurred in association with certain commissions and fees earned are presented on a gross basis in non-interest expense.
As at November 1, 2014, comparative amounts have been reclassified to conform with this presentation.
(5)
Under IFRS 9, PCL relates primarily to loans, acceptances, and commitments, and also applies to all financial assets except for those classified or designated as FVTPL
and equity securities designated as FVOCI. Prior to the adoption of IFRS 9, PCL related only to loans, acceptances, and commitments. PCL on loans, acceptances, and
commitments is comprised of PCL on impaired loans (Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39) and PCL on performing loans (Stage 1 and
Stage 2 PCL under IFRS 9 and PCL on loans not yet identified as impaired under IAS 39).
(6)
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period. This includes Average common equity used in
the calculation of ROE. For further details, refer to the Key performance and non-GAAP measures section of the MD&A.
(7)
This measure may not have a standardized meaning under generally accepted accounting principles (GAAP) and may not be comparable to similar measures disclosed
by other financial institutions. For further details, refer to the Key performance and non-GAAP measures section of the MD&A.
(8)
PCL on impaired loans represents Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39. Stage 3 PCL under IFRS 9 is comprised of lifetime credit losses of
credit-impaired loans, acceptances and commitments.
(9)
Defined as dividends per common share divided by the average of the high and low share price in the relevant period.
(10)
Calculated as common equity divided by the number of common shares outstanding at the end of the period.
(11)
Based on TSX closing market price at period-end.
(12)
Capital ratios are calculated using OSFI’s CAR guideline, the Leverage ratio is calculated using OSFI’s LR guideline, and both the TLAC and TLAC leverage ratios are
calculated using OSFI’s TLAC guideline. The results for the year ended October 31, 2023 reflect our adoption of the revised CAR and LR guidelines that came into effect in
Q2 2023 as part of OSFI’s implementation of the Basel III reforms. For further details, refer to the Capital management section.
n.a.
not applicable
Shareholder Information
Corporate headquarters
Street address:
Royal Bank of Canada
200 Bay Street
Toronto, Ontario M5J 2J5
Canada
Tel: 1-888-212-5533
Mailing address:
P.O. Box 1
Royal Bank Plaza
Toronto, Ontario M5J 2J5
Canada
website: rbc.com
Transfer Agent and Registrar
Main Agent:
Computershare Trust Company
of Canada
100 University Avenue North
Tower, 8th Floor
Toronto, Ontario M5J 2Y1 Canada
Tel: 1-866-586-7635 (Canada and
the U.S.) or 514-982-7555
(International)
Fax: 1-888-453-0330 (Canada and
the U.S.) or 416-263-9394
(International)
website: computershare.com/rbc
email: service@computershare.com
Co-Transfer Agent (U.S.):
Computershare Trust
Company, N.A.
150 Royall Street, Suite 101
Canton, Massachusetts 02021
U.S.A.
Co-Transfer Agent (U.K.):
Computershare Investor
Services PLC
Securities Services – Registrars
P.O. Box 82, The Pavilions,
Bridgwater Road,
Bristol BS99 6ZZ
U.K.
Stock exchange listings
(Symbol: RY)
Common shares are listed on:
Canada – Toronto Stock
Exchange (TSX)
U.S. – New York Stock Exchange
(NYSE)
Preferred shares AZ, BB, BD, BF,
BH, BI and BO are listed on the
TSX.
Valuation day price
For Canadian income tax purposes,
Royal Bank of Canada’s common
stock was quoted at $29.52 per share
on the Valuation Day (December 22,
1971). This is equivalent to $7.38 per
share after adjusting for the two-for-
one stock split of March 1981 and the
two-for- one stock split of February
1990. The one-for-one stock dividends
in October 2000 and April 2006 did not
affect the Valuation Day amount for
our common shares.
Shareholder contacts
For dividend information, change
in share registration or address,
lost stock certificates, tax forms,
estate transfers, direct registration or
dividend reinvestment, please
contact: Computershare Trust
Company of Canada
100 University Avenue North Tower,
8th Floor Toronto, Ontario M5J 2Y1
Canada
Tel: 1-866-586-7635 (Canada and
the U.S.) or 514-982-7555
(International)
Fax: 1-888-453-0330 (Canada and
the U.S.) or 416-263-9394
(International)
email: service@computershare.com
Financial analysts, portfolio
managers, institutional
investors
For financial information inquiries,
please contact: Investor Relations
Royal Bank of Canada
200 Bay Street
South Tower
Toronto, Ontario M5J 2J5
Canada
email: invesrel@rbc.com
or visit our website at
rbc.com/investorrelations
Direct deposit service
Shareholders in Canada and the U.S.
may have their common share
dividends deposited directly to their
bank account by electronic funds
transfer. To arrange for this service,
please contact our Transfer Agent and
Registrar, Computershare Trust
Company of Canada.
International shareholders (other than
holders in the U.S. or Canada) may be
able to receive their dividend and/or
distribution payments in the currency
of their choice. Computershare offers
an International Currency Exchange
service that enables RBC’s
international shareholders to receive
their dividend and/or distribution
payments in the currency of their
choice. Please refer to
investorcentre.com/rbc.
Eligible dividend designation
For purposes of the
Income Tax Act
(Canada) and any corresponding
provincial and territorial tax
legislation, all dividends (and deemed
dividends) paid by RBC to Canadian
residents on both its common and
preferred shares, are designated as
“eligible dividends”, unless stated
otherwise.
Common share repurchases
As at October 31, 2023, we did not
have an active normal course issuer
bid (NCIB). For further details, refer to
the Capital management section.
2024 Quarterly earnings
release dates
First quarter
February 28
Second quarter
May 30
Third quarter
August 28
Fourth quarter
December 4
2024 Annual Meeting
The Annual Meeting of
Common Shareholders will be
held on Thursday, April 11,
2024.
Dividend dates for 2024
Subject to approval by the Board of Directors
Record
dates
Payment
dates
Common and preferred shares
series AZ, BB, BD, BF, BH, BI and BO
January 25
April 25
July 25
October 24
February 23
May 24
August 23
November 22
Preferred shares series BT
February 16
August 16
February 23
August 23
Governance
Summaries of the significant ways in which corporate governance
practices followed by RBC differ from corporate governance practices
required to be followed by U.S. domestic companies under the NYSE
listing standards are available on our website at rbc.com/governance.
Information contained in or otherwise accessible through the websites mentioned in this report to shareholders does not form a part of this report. All references
to websites are inactive textual references and are for your information only.
®
Registered Trademarks of Royal Bank of Canada. ‡ All other trademarks are the property of their respective owner(s).
236
Royal Bank of Canada: Annual Report 2023
Shareholder Information
rbc.com/ar2023
81104 (12/2023)
Management Responsibility Statement
1.
We confirm to the best of our knowledge, as of the date hereof:
a)
the accompanying consolidated financial statements of Royal Bank of Canada and its
subsidiaries (the “Bank”), prepared in accordance with applicable accounting standards, give a
true and fair view of the assets, liabilities, financial position and profit or loss of the Royal Bank of
Canada as at and for the periods ended October 31, 2023 and 2022; and
b)
the accompanying management discussion & analysis for the fiscal year ended October 31, 2023
includes a fair review of the development and performance of the business and the position of the
Royal Bank of Canada, together with a description of the principal risks and uncertainties that it
faces.
Toronto, November 30, 2023
/s/ David McKay
David McKay
President and Chief Executive Officer
/s/ Nadine Ahn
Nadine Ahn
Chief Financial Officer