Royal Bank of Canada
Annual Report 2022
Table of contents
CEO Letter
4
Chair Letter
8
2022 Highlights
10
Management’s Discussion and Analysis
20
Enhanced Disclosure Task Force
Recommendations Index
128
Reports and Consolidated
Financial Statements
129
Ten-Year Statistical Review
230
Shareholder Information
232
Connect with us
facebook.com/rbc
instagram.com/rbc
twitter.com/@rbc
youtube.com/user/RBC
linkedin.com/company/rbc
tiktok.com/@rbc
For more information on how we are leading with Purpose in creating differentiated value for our
clients, communities, employees and shareholders, please visit RBC Stories.
About the cover
Participants at the starting gate of the Kids’ Mile as part of the RBC Race for the
Kids event held in Hyde Park, Chicago, U.S. on October 16, 2022. The event raised
close to US$300,000 to support pediatric research at the University of Chicago
Medicine Comer Children’s Hospital. To learn more about how we are helping
communities prosper across the regions where we live and work, please refer
to pages 14 and 15 of this report. (Photo/Jason Smith)
Royal Bank of Canada Annual Report 2022
|
1
Our Purpose
Helping clients thrive and
communities prosper
Guided by
our Vision
to be among the world’s most trusted and
successful financial institutions, and driven by
our Purpose
,
we aim to be:
In Canada:
the undisputed leader in financial services
In the United States:
the preferred partner to corporate,
institutional and high net worth clients and their businesses
In select global financial centres:
a leading financial services
partner valued for our expertise
We are guided by
our Values
:
Client First
Collaboration
Accountability
Diversity & Inclusion
Integrity
2
|
Royal Bank of Canada Annual Report 2022
Who we are
By the numbers
17 million
clients
95,000+
employees
29
countries
Royal Bank of Canada is a global financial
institution with a purpose-driven, principles-led
approach to delivering leading performance.
Our success comes from the 95,000+ employees
who leverage their imaginations and insights to
bring our vision, values and strategy to life so
we can help our clients thrive and communities
prosper. As Canada’s biggest bank and one
of the largest in the world, based on market
capitalization, we have a diversified business
model with a focus on innovation and providing
exceptional experiences to our 17 million clients
in Canada, the U.S. and 27 other countries.
This report showcases our 2022 results and the
many stories that defined our year, including
how we’re performing against our balanced
scorecard and the strong industry and client
recognition awarded to our products, services,
brand and people.
Royal Bank of Canada Annual Report 2022
|
3
Why invest?
Diversified business model with scale and market-
leading franchises that provide a full suite of
products, advice and services for clients
Market-leading presence in Canada and an
established multi-platform U.S. strategy with
a long runway for premium growth
Differentiated technology and innovation
investments that go beyond banking
Premium ROE and disciplined expense
management
Strong balance sheet and prudent risk
management
Leading Canadian core deposit franchise that
serves as a stable source of funding
Well-positioned to benefit from evolving macro
environment
Strong performance in ESG rankings and ratings
(1)
(1)
Based on our 80.25 average percentile ranking compiled from our four top-tier ESG rankings and ratings; refer to page 19 of the 2022 Annual Report
for additional information
4
|
Royal Bank of Canada Annual Report 2022
Dave
McKay
President and CEO
Fellow shareholders,
I’m writing this letter as we all continue to live through a
period of historic economic and societal change.
Many of our clients and communities are anxious about
the future, including the effects of rising inflation, higher
interest rates and volatile markets. The onset of a tragic
and senseless war in Ukraine has intensified post-pandemic
economic challenges while also contributing to supply
chain disruptions and global energy market turmoil. Against
this backdrop, our communities continue to grapple with
combating climate change – arguably the most complex
challenge of all – and shifting toward a more inclusive and
sustainable net-zero future.
In these uncertain times, one thing is clear to me: the
leadership, stability and guidance that RBC can bring to our
clients and communities is more important than ever.
The future is bright for RBC. Much of my optimism comes
from working alongside tens of thousands of passionate,
imaginative and inspirational RBC colleagues who bring
support and new ideas to our stakeholders every single day.
These ideas are more than advice and can come in many
shapes and sizes – from big ideas that can change whole
industries to in-the-moment ideas that make things easier
for a young person starting their career or a growing family.
As I’ve expressed in the past, our bank’s
prosperity rests on the strength and
stability of our 17 million clients and the
communities where they raise families,
build businesses and live their lives.
In these challenging times, our colleagues take seriously
the responsibility of helping clients navigate risks and
opportunities to make the best decisions possible for them.
They bring that same dedication to helping build and grow
sustainable, vibrant and inclusive communities.
It is a true privilege to work alongside my colleagues, and
this report shares many examples of how Team RBC is
helping make progress possible for people, places and
projects that matter to our collective future.
An all-weather bank with our sights set on growth
We aspire to be one of the most highly valued and most
respected financial institutions in the world.
On that journey, I’m pleased to share that we ended the
fiscal year as a top-10 global bank by market capitalization
and the highest valued bank on a Price-to-Book Ratio among
global banks
(1)
. We’ve also been recognized yet again as
the most valuable brand in Canada and second among all
global banks.
In 2022, we generated earnings of $15.8 billion and an ROE
of 16.4 per cent, and we delivered $6.9 billion in dividends to
our common shareholders while buying back $5.4 billion in
common shares.
A message
from
(1)
Banks with over $850 billion in loans
Royal Bank of Canada Annual Report 2022
|
5
Our financial performance demonstrates how we continue
to build long-term client franchises and deliver a premium
return on equity, even as we transform RBC for the future
and pursue targeted growth strategies in Canada, the
U.S., the U.K. and Europe. This has been one of the most
challenging operating environments in decades, but our size,
scale, strong and prudent risk and capital management, and
diversified business mix put us in a position of strategic and
financial strength.
In short, we’re an all-weather bank
that’s not only built to perform through
the economic cycle, but also pursue
big opportunities to grow where others
simply can’t.
In Canada, we are the leading bank with deep and trusted
client relationships across our franchises. We have #1 or
#2 in market share in all key product categories, supported
by the largest retail network in the country. This year, we
partnered with ICICI Bank Canada to create a seamless
banking experience for newcomers. We also prioritized
building more engaging digital experiences that clients truly
value. We’ve received industry recognition numerous times
this year, including ranking highest in mobile banking client
satisfaction by J.D. Power.
In the U.S., our second home market, we’re continuing to win
and have a long runway for premium growth through our
differentiated strategy to serve corporate, institutional and
high-net-worth clients and their businesses. As a top-10 capital
markets business in the U.S., we continue to deliver notable
wins in corporate and investment banking and global
markets. At City National, we kept our focus on organically
growing the core banking business and enhancing our
risk resilience. As the 6th largest wealth manager in the
country
(2)
, our U.S. Wealth Management business continues
to add more products and talent to support our growing
client base.
In the U.K. and Europe, steady and consistent growth has led
us to build a trusted and competitive franchise that’s just
getting started. With the acquisition of Brewin Dolphin, we’re
now one of the largest wealth managers in the U.K., Ireland
and Channel Islands, and are able to leverage our global
capabilities for clients. We have big ambitions for targeted
growth in these regions, with plans to continue leading with
advice and recruiting top talent.
Across all these key regions, we’ve
spent years building our core deposit
franchises – both on the consumer side
and the business side.
Deposits are the long-term lifeblood of any bank, giving it
the ability to fund loans and growth. Our focus and scale in
this area has given us a significant advantage against our
peers, which we’ll continue to prioritize in the years ahead.
This report showcases our 2022 results and the many stories
that defined our year, including how we’re performing
against our balanced scorecard and the strong industry and
client recognition awarded to our products, services, brand
and people. I’m proud of these highlights and encourage
you to read them for a deeper understanding of what we
accomplished this year.
Despite our recent success, we are not content to coast on
our brand and size. We’re striving to be even better. Here are
just a few things I’m most excited about heading into 2023:
100 Bishopsgate – RBC’s London, U.K. headquarters
City National Bank – New York City, U.S.
(2) U.S. wealth advisory firms quarterly earnings releases (10-Q)
6
|
Royal Bank of Canada Annual Report 2022
More digitally-backed, client-centric experiences
in banking – and beyond
We have a bold ambition to grow our market-leading
franchises, add clients and serve them more deeply. To
do that, we’re investing in building the best and most
personalized client experiences possible.
We will continue to challenge the status quo and rethink the
experiences we deliver to engage with our clients in newer,
smarter and simpler ways. We’re always on the lookout for
the next great idea. That means more innovative products,
insightful advice backed by the power of data and the creativity
of our people, and leading partnerships that add more value.
This is especially critical amidst the generational changes
in the way people live and work, including what they expect
from a bank.
Our RBCx™ division shows how we’re doing things differently.
This team is supporting 4,000+ tech and innovation clients of
all sizes and also redefining what a bank can do through in-
house ventures like Ownr
®
, Mydoh
®
and Dr. Bill
®
– services that
collectively reach hundreds of thousands of people who are
looking to pursue big ambitions or just make life a little easier.
We’re innovating across all our businesses, including in
Capital Markets with our AI-based Aiden
®
trading platform;
P&CB with our Vantage banking experience and the
continued build out of our healthcare strategy with the
recent acquisition of cloud-based MDBilling.ca; and other
examples across our Wealth Management, Investor &
Treasury Services and Insurance teams.
I truly believe there’s no other large
bank in the world that delivers the
differentiated client experience we do
at scale.
Of course, none of this is possible without investing in
our collaborative and client-focused people. Every day,
our employees are turning ambitious and bold ideas into
game-changing reality – in areas from cyber security to AI
and machine learning, digital to software development,
architecture to data science. We’re building the bank of the
future, and right now we’re tracking ahead of the game.
If it doesn’t exist, we’re probably working on it.
Climate and inclusion plans that can make
progress possible
In a complex environment, our clients and communities look
to us to make sense of the world around them, share our
views, speak up and lean in on issues that demand action.
In fact, this is a business imperative for RBC, and what we’re
doing fills me with optimism about the inclusive, sustainable
and prosperous communities we’re helping to build.
Climate change is one of the world’s
most pressing issues – one that can
impact where we live, our food supply
and the world around us. The actions
we take in the coming years will have a
lasting effect for generations to come.
The best way RBC can help is by partnering with our clients
to reduce their emissions. We committed to providing $500
billion in sustainable financing by 2025 – which means
financing activities that take into account environmental,
social and governance factors – and are on our way to
reaching that goal. This supports everything from the
development and deployment of clean energy technologies
to new opportunities in carbon capture use and storage,
low-carbon fuels, grid innovations and electric vehicles, just
to name a few examples.
We recently released our initial interim emissions reduction
targets across three key sectors – oil & gas, power
generation and automotive – to help us track and measure
how we’re doing in working with our clients to reduce their
emissions and keep us accountable along the way.
Dave McKay addresses an all-employee town hall, October 18, 2022
Royal Bank of Canada Annual Report 2022
|
7
It’s critical that businesses, governments and individuals
work together to reshape our economies and societies if
we are to be successful. We cannot act independently and
expect to make progress. RBC is committed to helping play a
coordinating role in this effort to build a cleaner future and
bring green solutions to market. This also includes helping
to promote climate literacy and offering ideas and research
that inform and inspire a successful transition.
Taking collective action on the net-zero transition requires
more than financial capital. We must also unlock the
incredible potential of people, particularly talent from
historically underrepresented groups
(3)
and young people.
Our society cannot move forward to
address the big economic and societal
issues if people and communities are
at risk of falling behind or being left
out completely.
To address the climate challenge and other skills challenges
across our changing economy, societies need to transform
the way we train and reskill people and build more inclusive
workforces. To help, we created RBC Future Launch
®
– a
10-year, $500 million commitment to prepare youth for
the jobs of tomorrow – and we’ve reached more than five
million young Canadians through tools, scholarships and
partnerships since 2017.
Alongside new entrepreneur loan programs and scholarship
assistance, I’m particularly proud of the impact RBC Future
Launch
®
continues to have in helping empower Black and
Indigenous leaders of tomorrow to reach their potential.
People and culture that will define our future
As a relationship-driven bank, our culture and people are
a major factor in determining what we strive to achieve
and how we perform against those aspirations. Many of
RBC’s best moments happen when our people are together
– problem solving with our clients, being active in our
communities and collaborating alongside each other.
Over the past few months, we’ve been finding the right balance
as we continue to build our flexible and hybrid working model
for the future – a model that will strengthen our creative,
collaborative, inclusive and always-learning culture.
It hasn’t been easy to get to where we are today, but I’m
proud of the way our teams led through tremendous
disruption and uncertainty, and responded to the needs of
our clients and communities throughout the pandemic with
resilience and determination.
Looking ahead, we aim to continue to be an organization
that leads the way on skills and career development, equity
and inclusion and the new world of work. This year, we were
recognized as one of Canada’s top employers for diversity,
young people and professional development
(4)
. We were
also named one of the best workplaces in Canada for
hybrid working
(5)
.
Lastly, what our people across the globe do in our
communities is what will continue to drive our culture. We
bring our resources, talents and connections together to
make positive change – from empowering ascending artists
who are the heart of our vibrant and inclusive cities and
towns, to supporting relief and recovery efforts when a
natural disaster strikes one of our communities.
This year, through our first-ever global Employee Giving
Campaign, our people rallied to support communities at
a time of great need, collectively contributing nearly $22
million to over 9,500 charities in more than two dozen
countries around the world.
Alongside this program, our global RBC Race for the Kids
event series has brought together communities in support
of critical youth mental health and wellness causes for over
a decade. To date, we’ve raised more than $83 million for
youth-focused charities around the world.
These are just two examples of the impact RBC colleagues
can achieve when working together to help solve important
societal or community challenges.
Looking ahead
While it might be hard to imagine in an increasingly
disruptive and complex world, I have a great deal of
optimism and hope for the year ahead.
Part of the strength of RBC is our ability to adapt to the many
needs of our clients and communities. Right now, RBC needs
to be both a beacon and an anchor to those we proudly
serve. We’ve embraced this role throughout the pandemic,
and I’m confident we’ll continue doing so.
This is just one of the reasons why we
say
ideas happen here
.
I want to thank you for your trust and belief in Team RBC and
what we’ll do to thrive and prosper together in the years ahead.
As we enter 2023, I have more conviction than ever in where
our great organization is going and how we’ll get there
together. We have an ambitious plan to build even more
amazing digital experiences for our clients and help play an
important role to solve some of society’s biggest challenges.
I look forward to sharing our progress in the year ahead.
Dave McKay
President and CEO
RBC employees – WaterPark Place, Toronto, Canada
(3)
A group that is historically underrepresented may include those who self-identify as
women; Black, Indigenous, and People of Colour (BIPOC); LGBTQ+ and/or persons
with disabilities
(4) MediaCorp Canada Inc.
(5) Great Place to Work Institute
8
|
Royal Bank of Canada Annual Report 2022
RBC believes leadership centres on serving others.
Helping clients make smart decisions today and remain
confident in their financial future is at the heart of
everything we do.
Providing our colleagues with greater flexibility and
personalized work experiences, while remaining engaged
and inspired to make meaningful contributions to our
success is a central focus of RBC’s employee experience.
Addressing economic and social ills exposed by the
pandemic and placing the planet on a more sustainable
path is not only essential to the success of the communities
where we serve, but also our own.
RBC continued to align its Purpose with performance to
drive premium growth and, in turn, create value for all its
stakeholders, including shareholders. The Board’s ongoing
confidence in RBC is underpinned by its leadership team,
financial strength and scale, growth strategy, diverse
business mix, powerful brand and engaged and motivated
workforce.
Directors serve as stewards of
the bank, exercising independent
judgement in overseeing management
and safeguarding the interests of
its shareholders. We also recognize
the bank is not a passive participant
in society. It must – and does – take
responsibility for its commitments
and actions.
Governance is key in all of this. The Board not only helps
set a strategic direction for the bank, but also oversees the
policies and practices that monitor, measure and report
on its performance in a timely and transparent manner.
Promoting a strong risk-aware culture and conduct-related
practices throughout RBC are also priorities for the Board.
Climate continues to be a key area of focus for the Board.
Directors oversee the bank’s climate strategy, the RBC
Climate Blueprint, and how environmental and social risks
are managed. They assess and evaluate progress against
the bank’s goals, commitments, plans, targets and metrics
to determine their effectiveness and impact.
An important milestone was reached this year with the
release of RBC’s 2030 initial interim emissions reduction
targets for certain high-emitting sectors: oil & gas, power
generation and automotive. In addition, a Sustainable
Finance Framework was published which outlines the bank’s
approach and methodology for classifying, tracking and
disclosing its progress towards the commitment to provide
$500 billion in sustainable financing by 2025. Sustainable
finance solutions provide clients with products and services
that contribute to key environmental, social and governance
(ESG) objectives.
More broadly, we believe the bank’s approach to ESG has
and will continue to have a significant impact on RBC’s
success and those we serve. For instance, oversight of
RBC’s diversity and inclusion (D&I) practices, policies and
initiatives are carried out at the Board.
A message
from
Katie
Taylor
Chair of the Board
Royal Bank of Canada Annual Report 2022
|
9
In 2022, the Board reviewed a refreshed D&I strategy that
serves both colleagues and communities with, for instance,
a focus on improving representation in leadership at all
levels and influencing equitable access to financial products
and services. Additionally, 31 per cent of new executive
appointments were Black, Indigenous or people of colour,
surpassing our goal for 2022. We nonetheless still need
to do more to further increase women representation at
the executive level, as women made up 43 per cent of new
executive appointments, below our 50 per cent target
(1)
.
Similarly, good governance is a never-ending journey. A
large, vibrant enterprise like RBC will regularly come across
new themes or issues that require the Board’s engagement.
That’s why the Board’s areas of focus are continuously
assessed to align with regulatory requirements,
stakeholders’ expectations, evolving best practices as well
as changes in the industry and economy. Committee work
and priorities may adapt as a result. Directors look for ways
to continuously improve their understanding in areas of
importance, engage with external advisors and participate
in education sessions to remain abreast of evolving risks
and opportunities.
In 2022, we added to the Board’s strength with the
appointment of Mirko Bibic, President and Chief Executive
Officer of BCE Inc. and Bell Canada. His deep strategic,
operational, governance and risk experience across a
wide range of commercial and consumer portfolios in the
communications sector will strengthen the capabilities and
broaden the perspectives of the Board.
Eight years ago, when I wrote my first shareholder letter
as RBC Chair, I spoke about the inextricable link between
our stakeholders’ success and the bank’s. As the largest
Canadian financial institution by market capitalization and
indeed, one of the largest in the world by the same measure,
I underscored the high standard RBC must set as a leading
corporate citizen.
When leadership centres on serving others, great things
happen. During my time as Chair, RBC’s client base has
grown by approximately one million and the total value of
deposits has almost doubled
(2)
, a testament to the bank’s
client-first focus. Benefits have expanded and evolved to
keep pace with changing employee needs and expectations.
The bank embarked upon a 10-year, $500 million
commitment to set youth up for success through RBC Future
Launch
®
. This initiative has provided $331+ million since 2017,
reaching over five million Canadian youth
(3)
. Net income has
increased at a compound annual growth rate (CAGR) of 7 per
cent. Additionally, share price and dividends have grown at a
CAGR of 6 per cent and 7 per cent respectively
(4)
.
Serving as RBC Chair has been both an honour and great
privilege for me. I am grateful for the Directors past and
present who have led us to this exciting point in the bank’s
journey. I am equally grateful to each and every RBCer
who has and continues to build this extraordinary global
franchise with passion and purpose. Going forward, as a
proud RBC shareholder, I will watch with keen interest in how
Dave, his leadership team and our incredible colleagues find
even more new ways to create value and make an impact.
We will all be better for it.
Kathleen Taylor
Chair of the Board
Royal Bank Plaza – South Tower, Toronto, Canada
(1) Refer to page 13 of the 2022 Annual Report for additional information
(2)
Between October 31, 2014 and October 31, 2022, client base has increased from
16 million to 17 million and deposits from $614.1 billion to $1,208.8 billion
(3)
Refer to page 15 of the 2022 Annual Report for additional information
(4)
Between October 31, 2014 and October 31, 2022, net income increased from $9.0
billion to $15.8 billion, share price increased from $80.01 to $126.05, and dividends
declared per common share increased from $2.84 to $4.96
10
|
Royal Bank of Canada Annual Report 2022
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 and #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)
Largest Canadian bank-owned insurance
organization
(4)
6th largest full-service wealth advisory
firm in the U.S.
as measured by assets under
administration (AUA)
(3)
2022 highlights across our balanced scorecard
At RBC, our clients are at the centre of everything we do. Enabled by
our investments in technology and talent, we believe our differentiated
advice, products and services deliver long-term value and create
exceptional client experiences.
Clients
(1) Based on global investment banking fees (fiscal 2022), Dealogic
(2) Based on market share (fiscal 2022), Dealogic
Customer Service Award
Winner
among the big 5
retail banks – Recognized
in all 11 categories of the
2022 Ipsos Financial Service
Excellence Awards, for the
2nd consecutive year
Best in Customer
Satisfaction
among
Canada’s big 5 retail banks
by J.D. Power, 6 out of the
last 7 years, and, in 2022,
ranked highest in Customer
Satisfaction with Mobile
Banking Apps
(3) Refer to the Glossary for definition on page 126
(4) On a total revenue basis
Royal Bank of Canada Annual Report 2022
|
11
RBC Global Asset Management
®
named
TopGun
Investment Team of the Year
(5)
One of the
top 3 Greenwich Quality Leaders
in
Canadian Institutional Investment Management
Service for the 8th consecutive year
(6)
Recognized as the
most valuable Canadian
brand
and 2nd among the Top 10 Global Banks
(7)
Outstanding Global Private Bank
in North
America for the 7th consecutive year
(8)
RBC Dominion Securities ranked
highest
among Canadian bank-owned investment
brokerage firms
for the 16th consecutive year
(9)
Leveraged our industry-leading Canadian
mobile app
to deliver value-added client
insights. 3.3 million clients have activated
personalized plans through MyAdvisor
®
Partnered with ICICI Bank Canada to create a
seamless banking experience
for newcomers
to Canada
RBCx™
supports 4,000 tech and innovation
clients and in-house ventures like Mydoh
®
(used by 100,000+ Canadians), Ownr
®
(trusted
by 85,000+ Canadian businesses) and Dr. Bill
®
(serving 8,000 physicians)
Best Global Retail Bank
and
Best Bank for
small and medium-sized enterprises
(10)
Expanded the Avion Rewards™ loyalty
program
with METRO Inc., Lowe’s
‡
, RONA
‡
and
Réno-Dépôt
‡
joining our retail partnerships
with Petro-Canada
‡(11)
, WestJet
‡
, Rexall
‡
,
DoorDash
‡
and more
(5)
Brendan Wood International
(6) Coalition Greenwich
(7)
Kantar BrandZ Most Valuable Global Brands
(8)
Private Banker International Global Wealth Awards
(9)
Investment Executive Brokerage Report Card
(10) RBI Global retail banking awards
(11) Petro-Canada is a Suncor business
12
|
Royal Bank of Canada Annual Report 2022
Employees
Our collective success depends on attracting, retaining and developing
the right talent to deliver on our strategy. From wellness and flexibility,
to skill building and leadership development, we are committed to
supporting, enabling and empowering our employees as they help
our clients thrive and communities prosper.
Among
Canada’s Top 100
Employers
,
Canada’s Best
Diversity Employers
and
Best
Workplaces
in 2022
(1)(2)
Recognized as one of the
Best
Workplaces for Professional
Development
for our experiential
learning, coaching, mentorship
and formal training
(2)
Named one of the
Best
Workplaces for Hybrid Work
for flexibility and resources
available to support the new
world of work
(2)
(1) MediaCorp Canada Inc.
(2) Great Place to Work Institute
2022 highlights across our balanced scorecard
$16.5 billion
in competitive compensation
and benefits
Announced a
$200 million investment in
our employees
, including a mid-year 3%
salary increase, enhanced defined pension
contributions and family benefits in Canada,
and more support for career development
Enhanced our critical
tech talent strategy
with a new Tech Career Journey and
storytelling initiatives to strengthen our
reputation as a top employer, welcoming
2,300 experienced technologists, 39% of
whom were women
Recognized as one of
Canada’s Top Employers
for Young People
(1)
Royal Bank of Canada Annual Report 2022
|
13
Accelerating our progress in Diversity
& Inclusion:
Black, Indigenous and People of Colour
(BIPOC)
represented:
43% of hires
(3)
43% of promotions
(4)
31% of new executive appointments,
surpassing our goal of 30% for the year
(5)
Women
represented:
51% of hires
(3)
53% of promotions
(4)
43% of new executive appointments
(5)
Global employee base comprised of
20% young
people
(6)
Welcomed 1,500+ summer students
across
the globe, 52% were BIPOC
(7)
Introduced a
new HR management system
with
self-serve processes and AI-enabled learning and
job recommendations to support career growth
and enhance our employees’ digital experience
(3)
Hires includes new external hires and rehires excluding City National Bank, BlueBay
Asset Management and Brewin Dolphin; based on self-identification; excludes summer
interns, students and co-ops. BIPOC hires includes Canada and U.S. only. Women hires is
global
(4)
Promotions are defined as an upward change in position level, HR Class or Global
Grade. Excludes summer interns, students, co-ops, City National Bank, Blue Bay Asset
Management and Brewin Dolphin. Values for women represent data from our global
operations. Values for BIPOC represent data from our businesses in Canada and the
U.S., based on self-identification
2022 Employee Engagement Survey
found
employees are highly engaged and feel proud
to be part of RBC
(8)
:
93%
feel they contribute to RBC’s success
89%
are proud to be part of RBC
88%
are willing to go above and beyond
(5)
Represents data for our businesses in Canada governed by the Employment Equity Act.
A new executive appointment is the appointment of an internal employee or external
hire as a first-time Vice President, Senior Vice President or Executive Vice President
(6)
Headcount under 30 globally, excluding City National, BlueBay Asset Management and
Brewin Dolphin employees
(7) Based on self-identification
(8)
Employee Engagement Survey conducted between April 27-May 11, 2022; participation
rate was 73%
14
|
Royal Bank of Canada Annual Report 2022
2022 highlights across our balanced scorecard
Communities
Supporting the communities where we live and work is central to our
Purpose. Through our global partnerships, donations and employee
initiatives, RBC is committed to building vibrant, socially inclusive
and sustainable communities.
With our key programs – RBC Future Launch
®
, Tech for Nature™ and
Emerging Artists – our approach is aligned to our priority ESG pillars
including youth, climate, diversity & inclusion and financial wellness.
$154+ million given globally through donations and community investments
, including nearly
$1.9 million to support humanitarian relief efforts in Ukraine, Pakistan, natural disaster response
efforts in Canada and the U.S., and in response to local tragedies
(1)
Employees stepped up to participate in the
second RBC Global Earth Day Challenge
, completing
51,000+ earth-friendly activities. RBC provided rewards for completing each activity, leading to
$760,000+ in support of local charities
Celebrated the return of live events
with marquee enterprise sponsorships, including the RBC
Canadian Open, RBC Heritage, RBCxMusic
®
Concert Series and the Toronto International Film Festival
(1)
Includes employee volunteer grants and gifts in kind, as well as contributions to non-profits and non-registered charities. Figure includes sponsorships
Royal Bank of Canada Annual Report 2022
|
15
Since its start in 2009, the
RBC Race for the Kids
has raised $83+ million for
youth-focused charities
around the world. In 2022,
37,000+ participants raised
$9+ million for 22 charities
across 10 countries
(2) Refer to page 101 of the 2022 Annual Report for additional information
$6 billion
in support of our communities as one of
the largest taxpayers in Canada, and as a taxpayer
in other countries where we operate
(2)
RBC Charity Day for the Kids
donated US$5 million
to 55+ youth-focused charities around the globe.
Since launching in 2015, this initiative has raised
US$25.2 million for 100+ organizations
Launched the
RBC Black Entrepreneur Business
Loan
, supporting Black entrepreneurs in Canada
as they start, manage and grow their business with
loans of up to $250,000
Expanded our
Employee Giving Campaign
globally, with 81% of RBC employees supporting
9,500+ charities across 28 countries. Together
with retirees, RBC raised $21.8 million
$331+ million
provided through
RBC Future
Launch
®
, reaching 5.3 million Canadian youth
through 840+ partner programs since 2017. Through
our $1.6 million investment in RBC Future Launch
®
scholarships this year, 500+ young Canadians will
have the opportunity to pursue their business and
academic passions
Through the
RBC Emerging Artists
program, our
investments in arts organizations have exceeded
$119 million, supporting 35,000+ artists since 2007
16
|
Royal Bank of Canada Annual Report 2022
Sustainability
Climate change presents a significant challenge that is impacting
communities globally. Achieving net-zero greenhouse gas
(GHG) emissions by 2050 requires one of the largest economic
transformations in generations. RBC is committed to working
alongside governments, businesses and individuals to facilitate
meaningful progress towards net-zero.
2022 highlights across our balanced scorecard
Royal Bank of Canada Annual Report 2022
|
17
Signed our second long-term renewable energy
Power Purchase
Agreement
, advancing our goals to reduce emissions from our
global operations by 70% and to source 100% of our electricity from
renewable and non-emitting sources, both by 2025
Acted as a financial advisor to 23 Indigenous communities
buying
an ownership stake in 7 Enbridge pipelines in Northern Alberta – the
largest Indigenous energy partnership transaction in North America,
to-date
(1)
RBC GAM is a founding signatory to the
Canadian Investor
Statement on Climate Change
, which demonstrates the collective
ambition and action of Canadian investors in recognizing the need
to accelerate the transition towards a net-zero economy
Supported the development and deployment of
cutting-edge
clean energy technologies
through our investment in funds
like EVOK, focusing on opportunities in carbon capture use &
storage (CCUS), low-carbon fuels, clean energy, grid innovations
and mobility
(2)
RBC released its
Sustainable Finance
Framework
, which outlines the approach
the bank takes to measure progress against
its commitment to provide $500 billion in
sustainable financing by 2025
RBC delivered a key milestone in its
commitment to achieving net-zero in its
lending portfolio by 2050 with the release
of its initial set of 2030 interim emissions
reduction targets for key sectors: oil
& gas, power generation and automotive
RBC Tech for Nature™
, a global initiative to support
new ideas, technologies, and partnerships that
address complex environmental challenges.
Since 2019, 550+ organizations have benefitted
from $39+ million in community investments
towards a $100 million commitment by 2025
RBC intends to help finance the transition to
net-zero, strengthen a diverse and inclusive
culture, and build stronger communities and
enable economic inclusion
Honoured as
ESG Manager of the year
through
the 2022 UK Pensions Awards
Ranked #4 globally
in Institutional Investor’s
ESG Research Team category
(1) Indigenous Communities and Enbridge Announce Landmark Equity Partnership
(2) Evok Innovations Announces First Close of $300 Million USD Cleantech Fund
18
|
Royal Bank of Canada Annual Report 2022
(1)
A medium-term (3-5 year) objective is considered to be achieved when the performance goal is met in either a 3- or 5-year period.
These objectives assume a normal business environment and our ability to achieve them in a period may be adversely affected by the
macroeconomic backdrop
(2)
Annualized TSR is calculated based on the TSX common share price appreciation plus reinvested dividend income. Source: Bloomberg, as at
October 31, 2022. Please refer to page 24
(3) Excludes Corporate Support
(4) Compound Annual Growth Rate
Financial performance metrics
Total shareholder return
(2)
Earnings
7%
10%
Revenue by segment
(3)
Medium-Term Objectives
(1)
Diluted EPS growth of 7%+
ROE of 16%+
Strong capital ratio (CET1)
Dividend payout ratio of 40%–50%
RBC
Global peer average
net income (C$ billion)
Annualized Dividend
Increase of:
Five year
(4)
Ten year
(4)
(C$ billion)
8%
16.4%
12.9%
46%
10%
6%
8%
16.7%
12.5%
46%
9%
5%
5-Year
3-Year
5-Year
3-Year
$16.1
2021
2022
$15.8
$9.1
Capital
Markets
$2.2
I&TS
$3.5
Insurance
$20.1
P&CB
$14.8
Wealth
Management
Shareholders
2022 highlights across our balanced scorecard
RBC is driven by its vision, values and commitment to delivering
long-term results.
Royal Bank of Canada Annual Report 2022
|
19
(5) Refer to the Glossary for definition on page 127
(6)
Total payout ratio is calculated as total common shareholder distributions (common dividends of $6.9 billion + common share repurchases
of $5.4 billion) as a percentage of net income available to common shareholders ($15.5 billion)
(7)
Average percentile ranking and rating compiled from our priority ESG rating agencies and indices: Sustainalytics, MSCI ESG Rating, FTSE4Good
and S&P Global’s Corporate Sustainability Assessment (informing the DJSI) – FTSE4Good and MSCI ratings reflect 2021 scores. The ESG rankings
and ratings market is evolving and is not currently regulated in Canada or the U.S. ESG rating agencies and indices may use different data, metrics,
models and/or methodologies. ESG ranking and ratings are not necessarily comparable, and those given to RBC are for information only. Investors
and other stakeholders should carefully consider the foregoing factors and other uncertainties when reviewing these rankings and ratings
(8)
On January 27, 2022, Moody’s upgraded our long-term debt ratings and assessments, as well as affirmed our short-term debt ratings. Includes
senior long-term debt issued prior to September 23, 2018 and senior long-term debt issued on or after September 23, 2018 which is excluded from
the Bail-in regime
80.25
(7)
average percentile ranking and
rating on our priority ESG indices
Strong funding profile
Long-term credit rating upgraded
to
Aa1
by Moody’s
(8)
Approximately 400,000 net new
clients
added in 2022
Leading 103% ratio of loans to
deposits
in Canadian Banking
$11.06
diluted earnings per share (EPS),
flat from 2021
16.4% return on common
equity
(5)
,
down from 18.6% in 2021
12.6%
robust common equity
tier 1 (CET1) ratio
Prudent risk management
with 10
basis points of provision for credit
losses (PCL) on impaired loans
$4.96 dividends
declared per share, up 15% from
2021; dividend payout ratio of 45%
$12.4
billion of profits returned
to our shareholders through
dividends and share repurchases;
total payout ratio of 80%
(6)
Management’s Discussion and Analysis
Management’s Discussion and Analysis (MD&A) is provided to enable a reader to assess our results of operations and financial condition for the fiscal
year ended October 31, 2022, compared to the preceding fiscal year. This MD&A should be read in conjunction with our 2022 Annual Consolidated
Financial Statements and related notes and is dated November 29, 2022. All amounts are in Canadian dollars, unless otherwise specified, and are based
on financial statements presented in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting
Standards Board (IASB), unless otherwise noted.
Additional information about us, including our 2022
Annual Information Form, is available free of charge on our website at rbc.com/investorrelations, on
the Canadian Securities Administrators’ website at sedar.com and on the EDGAR section of the United States (U.S.) Securities and Exchange
Commission’s (SEC) website at sec.gov.
Information contained in or otherwise accessible through the websites mentioned herein does not form part of this report. All references in this report to
websites are inactive textual references and are for your information only.
Table of contents
Caution regarding forward-looking
statements
20
Overview and outlook
21
Selected financial and other highlights
21
About Royal Bank of Canada
22
Vision and strategic goals
22
Economic, market and regulatory
review and outlook
22
Key corporate events of 2022
23
Defining and measuring success
through total shareholder returns
24
Financial performance
24
Overview
24
Impact of foreign currency translation
25
Total revenue
25
Provision for credit losses
26
Insurance policyholder benefits, claims
and acquisition expense
27
Non-interest expense
27
Income and other taxes
27
Client assets
28
Business segment results
29
Results by business segment
29
How we measure and report our
business segments
29
Key performance and non-GAAP
measures
30
Personal & Commercial Banking
32
Wealth Management
37
Insurance
43
Investor & Treasury Services
47
Capital Markets
49
Corporate Support
53
Quarterly financial information
53
Fourth quarter performance
53
Quarterly results and trend analysis
54
Financial condition
55
Condensed balance sheets
55
Off-balance sheet arrangements
56
Risk management
58
Top and emerging risks
58
Overview
60
Enterprise risk management
61
Transactional/positional risk drivers
66
Credit risk
66
Market risk
76
Liquidity and funding risk
81
Insurance risk
94
Operational/regulatory compliance
risk drivers
94
Operational risk
94
Regulatory compliance risk
96
Strategic risk drivers
97
Strategic risk
97
Reputation risk
97
Legal and regulatory environment risk
98
Competitive risk
99
Macroeconomic risk drivers
99
Systemic risk
99
Overview of other risks
100
Capital management
105
Accounting and control matters
114
Critical accounting policies and
estimates
114
Controls and procedures
117
Related party transactions
117
Supplementary information
118
Glossary
126
Enhanced Disclosure Task Force
recommendations index
128
Caution regarding forward-looking statements
From time to time, we make written or oral forward-looking statements within the meaning of certain securities laws, including the “safe harbour” provisions
of the
United States Private Securities Litigation Reform Act of 1995
and any applicable Canadian securities legislation. We may make forward-looking
statements in this 2022 Annual Report, in other filings with Canadian regulators or the SEC, in other reports to shareholders, and in other communications.
Forward-looking statements in this document include, but are not limited to, statements relating to our financial performance objectives, vision and strategic
goals, the economic, market, and regulatory review and outlook for Canadian, U.S., U.K., European and global economies, the regulatory environment in
which we operate, the impact from rising interest rates, the expected closing of the transaction involving HSBC Bank Canada, the Strategic priorities and
Outlook sections for each of our business segments, the risk environment including our credit risk, market risk, liquidity and funding risk, the direction of the
coronavirus (COVID-19) pandemic and its potential impact on our business operations, financial results, condition and objectives and on the global economy
and financial market conditions, our climate- and sustainability-related beliefs, targets and goals (including our net-zero and sustainable finance
commitments), and includes our President and Chief Executive Officer’s statements. The forward-looking information contained in this document is
presented for the purpose of assisting the holders of our securities and financial analysts in understanding our financial position and results of operations
as at and for the periods ended on the dates presented, as well as our financial performance objectives, vision and strategic goals, and may not be
appropriate for other purposes. Forward-looking statements are typically identified by words such as “believe”, “expect”, “foresee”, “forecast”, “anticipate”,
“intend”, “estimate”, “goal”, “commit”, “target”, “objective”, “plan” and “project” and similar expressions of future or conditional verbs such as “will”, “may”,
“might”, “should”, “could” or “would”.
By their very nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties, which give rise to
the possibility that our predictions, forecasts, projections, expectations or conclusions will not prove to be accurate, that our assumptions may not be
correct that our financial performance, environmental & social or other objectives, vision and strategic goals will not be achieved, and that our actual results
may differ materially from such predictions, forecasts, projections, expectations or conclusions.
We caution readers not to place undue reliance on these statements as a number of risk factors could cause our actual results to differ materially from
the expectations expressed in such forward-looking statements. These factors – many of which are beyond our control and the effects of which can be
difficult to predict – include: credit, market, liquidity and funding, insurance, operational, regulatory compliance (which could lead to us being subject to
various legal and regulatory proceedings, the potential outcome of which could include regulatory restrictions, penalties and fines), strategic, reputation,
competitive, model, legal and regulatory environment, systemic risks and other risks discussed in the risk sections of our 2022 Annual Report including
business and economic conditions in the geographic regions in which we operate, Canadian housing and household indebtedness, information technology
and cyber risks, geopolitical uncertainty, environmental and social risk (including climate change), digital disruption and innovation, privacy, data and third-
party related risks, regulatory changes, culture and conduct risks, the effects of changes in government fiscal, monetary and other policies, tax risk and
transparency, and the emergence of widespread health emergencies or public health crises such as pandemics and epidemics, including the COVID-19
pandemic and its impact on the global economy, financial market conditions and our business operations, and financial results, condition and objectives.
Additional factors that could cause actual results to differ materially from the expectations in such forward-looking statements can be found in the risk
section of our 2022 Annual Report.
We caution that the foregoing list of risk factors is not exhaustive and other factors could also adversely affect our results. When relying on our forward-
looking statements to make decisions with respect to us, investors and others should carefully consider the foregoing factors and other uncertainties and
potential events. Material economic assumptions underlying the forward-looking statements contained in this 2022 Annual Report are set out in the Economic,
market and regulatory review and outlook section and for each business segment under the Strategic priorities and Outlook headings. Except as required by
law, we do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by us or on our behalf.
Additional information about these and other factors can be found in the risk sections of this 2022 Annual Report.
20
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Overview and outlook
Selected financial and other highlights
Table 1
(Millions of Canadian dollars, except per share, number of and percentage amounts)
2022
2021
2022 vs. 2021
Increase (decrease)
Total revenue
$
48,985
$
49,693
$
(708)
(1.4)%
Provision for credit losses (PCL)
484
(753)
1,237
(164.3)%
Insurance policyholder benefits, claims and acquisition expense (PBCAE)
1,783
3,891
(2,108)
(54.2)%
Non-interest expense
26,609
25,924
685
2.6%
Income before income taxes
20,109
20,631
(522)
(2.5)%
Net income
$
15,807
$
16,050
$
(243)
(1.5)%
Segments – net income
Personal & Commercial Banking
$
8,370
$
7,847
$
523
6.7%
Wealth Management
3,144
2,626
518
19.7%
Insurance
857
889
(32)
(3.6)%
Investor & Treasury Services
513
440
73
16.6%
Capital Markets
2,921
4,187
(1,266)
(30.2)%
Corporate Support
2
61
(59)
n.m.
Net income
$
15,807
$
16,050
$
(243)
(1.5)%
Selected information
Earnings per share (EPS) – basic
$
11.08
$
11.08
$
0.00
0.0%
– diluted
11.06
11.06
0.00
0.0%
Return on common equity (ROE)
(1)
16.4%
18.6%
n.m.
(220) bps
Average common equity
(1)
$
94,700
$
84,850
$
9,850
11.6%
Net interest margin (NIM) – on average earning assets, net
(2)
1.48%
1.48%
n.m.
– bps
PCL on loans as a % of average net loans and acceptances
0.06%
(0.10)%
n.m.
16 bps
PCL on performing loans as a % of average net loans and acceptances
(0.04)%
(0.20)%
n.m.
16 bps
PCL on impaired loans as a % of average net loans and acceptances
0.10%
0.10%
n.m.
– bps
Gross impaired loans (GIL) as a % of loans and acceptances
0.26%
0.31%
n.m.
(5) bps
Liquidity coverage ratio (LCR)
(3)
125%
123%
n.m.
200 bps
Net stable funding ratio (NSFR)
(3)
112%
116%
n.m.
(400) bps
Capital, Leverage and Total loss absorbing capacity (TLAC) ratios
(4)
Common Equity Tier 1 (CET1) ratio
12.6%
13.7%
n.m.
(110) bps
Tier 1 capital ratio
13.8%
14.9%
n.m.
(110) bps
Total capital ratio
15.4%
16.7%
n.m.
(130) bps
Leverage ratio
4.4%
4.9%
n.m.
(50) bps
TLAC ratio
(5)
26.4%
n.a.
n.a.
n.a.
TLAC leverage ratio
(5)
8.5%
n.a.
n.a.
n.a.
Selected balance sheet and other information
(6)
Total assets
$ 1,917,219
$
1,706,323
$ 210,896
12.4%
Securities, net of applicable allowance
318,223
284,724
33,499
11.8%
Loans, net of allowance for loan losses
819,965
717,575
102,390
14.3%
Derivative related assets
154,439
95,541
58,898
61.6%
Deposits
1,208,814
1,100,831
107,983
9.8%
Common equity
100,746
91,983
8,763
9.5%
Total risk-weighted assets
609,879
552,541
57,338
10.4%
Assets under management (AUM)
(2)
999,700
1,008,700
(9,000)
(0.9)%
Assets under administration (AUA)
(2), (7)
5,649,700
6,347,300
(697,600)
(11.0)%
Common share information
Shares outstanding (000s) – average basic
1,403,654
1,424,343
(20,689)
(1.5)%
– average diluted
1,406,034
1,426,735
(20,701)
(1.5)%
– end of period
1,382,911
1,424,525
(41,614)
(2.9)%
Dividends declared per common share
$
4.96
$
4.32
$
0.64
14.8%
Dividend yield
(2)
3.7%
3.8%
n.m.
(10) bps
Dividend payout ratio
(2)
45%
39%
n.m.
600 bps
Common share price (RY on TSX)
(8)
$
126.05
$
128.82
$
(2.77)
(2.2)%
Market capitalization (TSX)
(8)
174,316
183,507
(9,191)
(5.0)%
Business information
(number of)
Employees (full-time equivalent) (FTE)
91,427
85,301
6,126
7.2%
Bank branches
1,271
1,295
(24)
(1.9)%
Automated teller machines (ATMs)
4,368
4,378
(10)
(0.2)%
Period average US$ equivalent of C$1.00
(9)
$
0.774
$
0.796
$
(0.022)
(2.8)%
Period-end US$ equivalent of C$1.00
$
0.734
$
0.808
$
(0.074)
(9.1)%
(1)
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.
(2)
See Glossary for composition of this measure.
(3)
The LCR and NSFR are calculated in accordance with the Office of the Superintendent of Financial Institutions’ (OSFI) Liquidity Adequacy Requirements (LAR) guideline.
LCR is the average for the three months ended for each respective period. For further details, refer to the Liquidity and funding risk section.
(4)
Capital ratios are calculated using OSFI’s Capital Adequacy Requirements (CAR) guideline and the Leverage ratio is calculated using OSFI’s Leverage Requirements (LR)
guideline.
(5)
Effective Q1 2022, OSFI requires Canadian Domestic Systemically Important Banks (D-SIBs) to meet minimum risk-based TLAC ratio and TLAC leverage ratio requirements
which are calculated using OSFI’s TLAC guideline. For further details, refer to the Capital management section.
(6)
Represents year-end spot balances.
(7)
AUA includes $15 billion and $6 billion (2021 – $15 billion and $3 billion) of securitized residential mortgages and credit card loans, respectively.
(8)
Based on TSX closing market price at period-end.
(9)
Average amounts are calculated using month-end spot rates for the period.
n.a.
not applicable
n.m. not meaningful
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
21
About Royal Bank of Canada
Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading
performance. Our success comes from the 95,000+ employees who leverage their imaginations and insights to bring our vision,
values and strategy to life so we can help our clients thrive and communities prosper. As Canada’s biggest bank and one of the
largest in the world, based on market capitalization, we have a diversified business model with a focus on innovation and
providing exceptional experiences to our 17 million clients in Canada, the U.S. and 27 other countries. Learn more at rbc.com.
Our business segments are described below.
Personal &
Commercial Banking
Provides a broad suite of financial products and services in Canada, the Caribbean and the U.S.
Our commitment to building and maintaining deep and meaningful relationships with our clients
is underscored by the breadth of our product suite, our depth of expertise, and the features of our
digital solutions.
Wealth
Management
Serves affluent, high net worth (HNW) and ultra-high net worth (UHNW) clients from our offices in
key financial centres mainly in Canada, the U.S., the United Kingdom (U.K.), Europe, and Asia. We
offer a comprehensive suite of investment, trust, banking, credit and other advice-based
solutions. We also provide asset management products to institutional and individual clients
through our distribution channels and third-party distributors.
Insurance
Offers a wide range of advice and solutions for individual and business clients including life,
health, wealth, home, auto, travel, annuities and reinsurance.
Investor & Treasury
Services
Provides asset, payment and treasury services to financial institutions and asset owners
worldwide. We are a leader in Canadian cash management and transaction banking services.
Trusted with nearly 4 trillion in AUA, our focus is on safeguarding client assets and supporting our
clients’ growth.
Capital Markets
Provides expertise in advisory & origination, sales & trading, and lending & financing to
corporations, institutional clients, asset managers, private equity firms and governments
globally. We serve clients from 63 offices in 18 countries across North America, the U.K. & Europe,
and Australia, Asia & other regions.
Corporate Support
Corporate Support consists of Technology & Operations, which provides the technological and
operational foundation required to effectively deliver products and services to our clients,
Functions, which includes our finance, human resources, risk management, internal audit and
other functional groups, as well as our Corporate Treasury function.
Vision and strategic goals
Our business strategies and actions are guided by our vision,
“To be among the world’s most trusted and successful financial
institutions.”
Our three strategic goals are:
•
In Canada, to be the undisputed leader in financial services;
•
In the U.S., to be the preferred partner to corporate, institutional and HNW clients and their businesses; and
•
In select global financial centres, to be a leading financial services partner valued for our expertise.
For our progress in 2022 against our business strategies and strategic goals, refer to the Business segment results section.
Economic, market and regulatory review and outlook – data as at November 29, 2022
The predictions and forecasts in this section are based on information and assumptions from sources we consider reliable. If this
information or these assumptions are not accurate, actual economic outcomes may differ materially from the outlook presented
in this section.
Economic and market review and outlook
Unemployment remains very low across many advanced economies, with labour shortages limiting further increases in
production. However, we expect unemployment rates will rise as central banks continue to raise interest rates to contain high
inflation, adding to growth headwinds. The U.S. and Canadian economies are expected to undergo moderate recessions in
calendar 2023. Recessions in the Euro Area and the United Kingdom (U.K.) have likely already started with higher interest rates
adding to surging inflation and disruptions from the war in Ukraine. While global inflation pressures have eased with the price of
key commodities and shipping costs declining from peak levels earlier in calendar 2022, inflation pressures have also broadened
across a wide array of goods and services. Consumer demand has continued to outpace available supply, and labour shortages
have driven wages higher, adding to potentially longer-lasting price pressures. Central banks are responding by increasing
interest rates more quickly than previously expected. Higher interest rates, elevated inflation and a decline in the value of
equities are reducing household confidence and purchasing power.
22
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Canada
Canadian GDP is expected to increase 3.2% in calendar 2022 following a 4.5% increase in calendar 2021. Output growth in this
calendar year has been supported by recovery from the COVID-19 pandemic in the travel and hospitality sectors and increased
activity in the oil and gas and mining sectors reflecting higher global commodity prices. Labour market conditions remain tight
with elevated job openings and unemployment rates at multi-decade lows. Growth is expected to continue to moderate in the
final calendar quarter of 2022 with a moderate recession expected in the first half of calendar 2023. While the unemployment rate
is low at 5.2% as of October 2022, it has increased from 4.9% in June and July of 2022. While inflation growth rates have begun to
moderate as global supply chain disruptions have eased, and house prices are declining in response to Bank of Canada (BoC)
interest rate increases, the inflation rate in October was still high and pressures remain broad-based. The BoC has already
increased the overnight rate by 350 basis points since March 2022 and we expect that rate to rise to 4.0% before the end of the
calendar year. Rising household debt servicing costs, high consumer price growth, and declining house prices are expected to
weaken household confidence and purchasing power over the next calendar year.
U.S.
U.S. GDP is expected to increase 1.8% in calendar 2022 following a 5.9% increase in calendar 2021. Labour markets have remained
very strong. However the unemployment rate has begun to increase from lows over the summer and the number of job openings
is decreasing. We expect further increases in the unemployment rate over the remainder of calendar 2022 and in calendar 2023.
While inflation rates have begun to decrease as global supply chain disruptions ease, and the price of gasoline has declined from
higher levels in the spring, price growth remains very high and broad-based. The Federal Reserve (Fed) is responding with
continued interest rate hikes. The Fed has already increased the federal funds rate target by 375 basis points since March 2022
and we expect that target range will rise to 4.75% to 5.0% by the end of the first calendar quarter of 2023. Higher interest rates
and inflation are reducing household purchasing power, and we expect consumer spending growth to slow with a moderate
recession expected in the first half of calendar 2023.
Europe
Euro area GDP is expected to rise by 3.0% in calendar 2022 following a 5.3% increase in calendar 2021. The Euro area economy is
expected to have entered a moderate recession in the second half of calendar 2022. The war in Ukraine is having a more direct
impact on economies in the Euro area relative to other regions due to stronger direct trade linkages. In addition, inflation in the
region is expected to continue to surge higher driven by increased energy costs. Despite a slowing growth outlook, surging
inflation is pushing the European Central Bank (ECB) to raise interest rates from exceptionally low negative rates at the
beginning of this calendar year. The ECB increased interest rates by 50 bps in July 2022 and another 75 bps in each of September
and October 2022. We expect further increases to push the deposit rate to 2.5% by the end of the first calendar quarter of 2023.
U.K. GDP is projected to rise by 4.2% in calendar 2022 after a 7.5% increase in calendar 2021. The U.K. is also expected to have
entered a recession in the second half of calendar 2022. As inflation in the U.K. has continued to surge, we expect the Bank of
England (BoE) to raise interest rates more quickly than previously anticipated to 3.75% by early calendar 2023.
Financial markets
Bond yields have increased substantially from the second calendar quarter of 2022 as central banks respond to high inflation.
The spread between longer and shorter duration bond yields, which is a commonly used recession indicator, has narrowed
sharply with the spread between 10-year and 2-year yields inverting to negative values in the U.S. and Canada. Equity markets
have declined from the beginning of calendar 2022 on a worsening global growth outlook. Global inflation pressures have shown
signs of easing and inflation rates may have peaked in some regions such as the U.S. and Canada. However, underlying inflation
pressures are not expected to ease to central bank target rates until the economy weakens substantially.
Regulatory environment
We continue to monitor and prepare for regulatory developments and changes in a manner that seeks to ensure compliance with
new requirements, while mitigating adverse business or financial impacts. Such impacts could result from new or amended laws
or regulations and the expectations of those who enforce them. A high level summary of the key regulatory changes that have the
potential to increase or decrease our costs and the complexity of our operations is included in the Legal and regulatory
environment risk section of this 2022 Annual Report.
For a discussion on risk factors resulting from these and other developments which may affect our business and financial
results, refer to the risk sections of this 2022 Annual Report. For further details on our framework and activities to manage risks,
refer to the risk and Capital management sections of this 2022 Annual Report.
Key corporate events of 2022
HSBC Bank Canada
On November 29, 2022, we entered into an agreement to acquire 100% of the common shares of HSBC Bank Canada (HSBC
Canada) for an all-cash purchase price of $13.5 billion. In addition, we will purchase all of the existing preferred shares and
subordinated debt of HSBC Canada held directly or indirectly by HSBC Holdings plc at par value. HSBC Canada is a premier
Canadian personal and commercial bank focused on globally connected clients.
The transaction is expected to close by late 2023 and is subject to the satisfaction of customary closing conditions, including
regulatory approvals. For further details, refer to Note 33 of our Consolidated Financial Statements.
Brewin Dolphin Holdings PLC
On September 27, 2022, we completed the acquisition of Brewin Dolphin Holdings PLC (Brewin Dolphin) for total consideration of
£1,591 million ($2,341 million) as of the date of close. The results of the acquired business have been consolidated from the
closing date and are included in International Wealth Management within our Wealth Management segment. For further details,
refer to Note 6 of our Consolidated Financial Statements.
RBC Investor Services
On October 17, 2022, we announced the signing of a Memorandum of Understanding with CACEIS (the asset servicing banking
group of Crédit Agricole S.A. and Banco Santander, S.A.) with a view for CACEIS to acquire the European asset servicing activities
of RBC Investor Services and its associated Malaysian centre of excellence. The execution of the final agreements between CACEIS
and RBC requires prior consultation with the relevant works councils of CACEIS. The completion of the contemplated transaction
will be subject to customary closing conditions, including regulatory and antitrust approvals, and is expected to take place by the
end of the third calendar quarter of 2023. This transaction will have a de minimus impact on RBC’s CET1 ratio and EPS.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
23
Defining and measuring success through total shareholder returns
Our focus is to maximize total shareholder returns (TSR) through the achievement of top half performance compared to our
global peer group over the medium-term (3-5 years), which we believe reflects a longer-term view of strong and consistent
financial performance.
Maximizing TSR is aligned with our three strategic goals discussed earlier and we believe represents the most appropriate
measure of shareholder value creation. TSR is a concept used to compare the performance of our common shares over a period
of time, reflecting share price appreciation and dividends paid to common shareholders. The absolute size of TSR will vary
depending on market conditions, and the bank’s position reflects the market’s perception of our overall performance relative to
our peers over a period of time.
Financial performance objectives are used to measure our performance against our medium-term TSR objectives and are
used as goals as we execute against our strategic priorities. We review and revise these financial performance objectives as
economic, market and regulatory environments change.
The following table provides a summary of our 3-year and 5-year performance against our medium-term financial
performance objectives:
Financial performance compared to our medium-term objectives
Table 2
Medium-term objectives
(1)
3-year
(2)
5-year
(2)
Diluted EPS growth of 7% +
8%
8%
ROE of 16% +
16.4%
16.7%
Strong capital ratio (CET1)
(3)
12.9%
12.5%
Dividend payout ratio 40% – 50%
46%
46%
(1)
A medium-term (3-5 year) objective is considered to be achieved when the performance goal is met in either a 3- or 5-year period. These objectives assume a normal
business environment and our ability to achieve them in a period may be adversely affected by the macroeconomic backdrop.
(2)
Diluted EPS growth is calculated using a Compound Annual Growth Rate (CAGR). ROE, CET1 and dividend payout ratio are calculated using an average.
(3)
For further details on the CET1 ratio, refer to the Capital management section.
Our 3-year and 5-year medium-term financial performance objectives will remain unchanged in fiscal 2023.
We compare our TSR to that of a global peer group approved by our Board of Directors (the Board). The global peer group
consists of the following 9 financial institutions:
•
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%
9%
Top half
Top half
Peer group average (excluding RBC)
6%
5%
(1)
The 3- and 5-year annualized TSR are calculated based on our common share price appreciation as per the TSX closing market price plus reinvested dividends for the
period October 31, 2019 to October 31, 2022 and October 31, 2017 to October 31, 2022.
Common share and dividend information
Table 4
For the year ended October 31
2022
2021
2020
2019
2018
Common share price (RY on TSX) – close, end of period
$
126.05
$
128.82
$
93.16
$
106.24
$
95.92
Dividends paid per share
4.96
4.32
4.26
4.00
3.70
Increase (decrease) in share price
(2.2)%
38.3%
(12.3)%
10.8%
(4.9)%
Total shareholder return
1.6%
43.8%
(8.4)%
15.2%
(1.0)%
Financial performance
Overview
2022 vs. 2021
Net income of $15,807 million was down $243 million or 2% from last year. Diluted EPS of $11.06 was flat and ROE of 16.4% was
down 220 bps. Our CET1 ratio was 12.6%, down 110 bps from last year.
Our earnings reflect lower results in Capital Markets and Insurance, partially offset by higher earnings in Personal &
Commercial Banking, Wealth Management, and Investor & Treasury Services. The current year also reflects lower releases of
provisions on performing loans.
For further details on our business segment results and CET1 ratio, refer to the Business segment results and Capital
management sections, respectively.
24
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Impact of foreign currency translation
The following table reflects the estimated impact of foreign currency translation on key income statement items:
Table 5
(Millions of Canadian dollars, except per share amounts)
2022 vs. 2021
Increase (decrease):
Total revenue
$
165
PCL
3
Non-interest expense
72
Income taxes
8
Net income
82
Impact on EPS
Basic
$
0.06
Diluted
0.06
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)
2022
2021
U.S. dollar
0.774
0.796
British pound
0.618
0.579
Euro
0.727
0.668
(1)
Average amounts are calculated using month-end spot rates for the period.
Total revenue
Table 7
(Millions of Canadian dollars, except percentage amounts)
2022
2021
Interest and dividend income
$
40,771
$
28,145
Interest expense
18,054
8,143
Net interest income
$
22,717
$
20,002
NIM
1.48%
1.48%
Insurance premiums, investment and fee income
$
3,510
$
5,600
Trading revenue
926
1,183
Investment management and custodial fees
7,610
7,132
Mutual fund revenue
4,289
4,251
Securities brokerage commissions
1,481
1,538
Service charges
1,976
1,858
Underwriting and other advisory fees
2,058
2,692
Foreign exchange revenue, other than trading
1,038
1,066
Card service revenue
1,203
1,078
Credit fees
1,512
1,530
Net gains on investment securities
43
145
Share of profit in joint ventures and associates
110
130
Other
512
1,488
Non-interest income
$
26,268
$
29,691
Total revenue
$
48,985
$
49,693
2022 vs. 2021
Total revenue decreased $708 million or 1% from last year, largely due to lower insurance premiums, investment and fee income
(Insurance revenue) and other revenue. Lower underwriting and other advisory fees and trading revenue also contributed to the
decrease. These factors were partially offset by higher net interest income and investment management and custodial fees.
Net interest income increased $2,715 million or 14%, primarily due to average volume growth and higher spreads in Canadian
Banking and Wealth Management.
NIM remained flat, as the benefit to our Canadian Banking and Wealth Management segments from rising interest rates was
offset by spread compression in repo products.
Insurance revenue decreased $2,090 million or 37%, mainly due to the change in fair value of investments backing
policyholder liabilities and lower group annuity sales, both of which are largely offset in PBCAE. These factors were partially
offset by business growth in Canadian Insurance across the majority of our products.
Investment management and custodial fees increased $478 million or 7%, primarily driven by higher average fee-based client
assets reflecting net sales.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
25
Trading revenue decreased $257 million or 22%, mainly due to the impact from loan underwriting markdowns, primarily in the
U.S., largely driven by challenging market conditions.
Underwriting and other advisory fees decreased $634 million or 24%, mainly attributable to lower debt and equity origination
across most regions.
Other revenue decreased $976 million or 66%, primarily attributable to changes in the fair value of the hedges related to our
U.S. share-based compensation plans, which was largely offset in Non-interest expense.
Additional trading information
Table 8
(Millions of Canadian dollars)
2022
2021
(2)
Net interest income
(1)
$
2,024
$
2,230
Non-interest income
926
1,183
Total trading revenue
$
2,950
$
3,413
Total trading revenue by product
Interest rate and credit
$
1,147
$
1,904
Equities
951
935
Foreign exchange and commodities
852
574
Total trading revenue
$
2,950
$
3,413
(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).
(2)
Amounts have been revised from those previously presented.
2022 vs. 2021
Total trading revenue of $2,950 million, which is comprised of trading-related revenue recorded in Net interest income and
Non-interest income, decreased $463 million or 14% from last year, mainly due to the impact from loan underwriting markdowns,
primarily in the U.S., largely driven by challenging market conditions.
Provision for credit losses
(1)
Table 9
For the year ended
(Millions of Canadian dollars, except percentage amounts)
October 31
2022
October 31
2021
Personal & Commercial Banking
$
(281)
$
(899)
Wealth Management
21
(32)
Capital Markets
(22)
(414)
Corporate Support and other
(2)
1
(5)
PCL on performing loans
(281)
(1,350)
Personal & Commercial Banking
$
755
$
731
Wealth Management
13
(14)
Capital Markets
13
(39)
Corporate Support and other
(2)
(3)
–
PCL on impaired loans
778
678
PCL – Loans
497
(672)
PCL – Other financial assets
(3)
(13)
(81)
Total PCL
$
484
$
(753)
PCL on loans is comprised of:
Retail
$
(31)
$
(684)
Wholesale
(250)
(666)
PCL on performing loans
(281)
(1,350)
Retail
648
604
Wholesale
130
74
PCL on impaired loans
778
678
PCL – Loans
$
497
$
(672)
PCL on loans as a % of average net loans and acceptances
0.06%
(0.10)%
PCL on impaired loans as a % of average net loans and
acceptances
0.10%
0.10%
(1)
Information on loans represents loans, acceptance and commitments.
(2)
Includes PCL recorded in Corporate Support, Insurance and Investor & Treasury Services.
(3)
PCL on other financial assets mainly represents provisions on debt securities measured at FVOCI and amortized cost,
accounts receivable and financial guarantees.
26
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
2022 vs. 2021
Total PCL was $484 million compared to $(753) million last year, primarily reflecting lower releases of provisions on performing
loans in Personal & Commercial Banking and Capital Markets. The PCL on loans ratio increased 16 bps.
PCL on performing loans was $(281) million, compared to $(1,350) million last year, primarily in Personal & Commercial
Banking and Capital Markets, reflecting the recovery from the COVID-19 pandemic in both 2022 and 2021. The releases in the
current year were partially offset by unfavourable changes in our macroeconomic outlook.
PCL on impaired loans increased $100 million or 15%, mainly reflecting recoveries last year as compared to provisions taken
in the current year in Capital Markets and Wealth Management, as well as higher provisions in Personal & Commercial Banking.
Insurance policyholder benefits, claims and acquisition expense (PBCAE)
2022 vs. 2021
PBCAE of $1,783 million decreased $2,108 million or 54% from last year, mainly reflecting the change in fair value of investments
backing policyholder liabilities and lower group annuity sales, both of which are largely offset in revenue. Higher favourable
investment-related experience and favourable annual actuarial assumption updates in the current year largely related to
economic assumptions also contributed to the decrease. These factors were partially offset by the impact of lower new longevity
reinsurance contracts, as well as business growth in Canadian Insurance.
Non-interest expense
Table 10
(Millions of Canadian dollars, except percentage amounts)
2022
2021
Salaries
$
7,251
$
6,724
Variable compensation
7,127
7,145
Benefits and retention compensation
2,015
2,053
Share-based compensation
135
617
Human resources
16,528
16,539
Equipment
2,099
1,986
Occupancy
1,554
1,584
Communications
1,082
931
Professional fees
1,511
1,351
Amortization of other intangibles
1,369
1,287
Other
2,466
2,246
Non-interest expense
$
26,609
$
25,924
Efficiency ratio
(1)
54.3%
52.2%
Efficiency ratio adjusted
(2)
52.3%
52.2%
(1)
Efficiency ratio is calculated as Non-interest expense divided by Total revenue.
(2)
This is a non-GAAP ratio. This measure has been adjusted by excluding the change in fair value of investments backing
policyholder liabilities from total revenue. For further details, refer to the Key performance and non-GAAP measures
section.
2022 vs. 2021
Non-interest expense increased $685 million or 3% from last year, mainly due to higher staff and technology related costs as well
as increased marketing costs and other discretionary spend. These factors were partially offset by the change in the fair value of
our U.S share-based compensation plans, which was largely offset in Other revenue.
Our efficiency ratio of 54.3% increased 210 bps from last year. Excluding the change in fair value of investments backing
policyholder liabilities, our efficiency ratio of 52.3% increased 10 bps from last year.
Efficiency ratio excluding the change in fair value of investments backing policyholder liabilities is a non-GAAP ratio. For further
details, including a reconciliation, refer to the Key performance and non-GAAP measures section.
Income and other taxes
Table 11
(Millions of Canadian dollars, except percentage amounts)
2022
2021
Income taxes
$
4,302
$
4,581
Other taxes
Value added and sales taxes
508
443
Payroll taxes
871
810
Capital taxes
90
73
Property taxes
129
140
Insurance premium taxes
31
31
Business taxes
72
39
1,701
1,536
Total income and other taxes
$
6,003
$
6,117
Income before income taxes
$
20,109
$
20,631
Effective income tax rate
21.4%
22.2%
Effective total tax rate
(1)
27.5%
27.6%
(1)
Total income and other taxes as a percentage of income before income taxes and other taxes.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
27
2022 vs. 2021
Income tax expense decreased $279 million or 6% from last year, primarily due to lower income before income taxes, an increase
in income from lower tax rate jurisdictions and higher tax-exempt income in the current year.
The effective income tax rate of 21.4% decreased 80 bps, primarily due to higher tax-exempt income and an increase in
income from lower tax rate jurisdictions in the current year.
Other taxes increased $165 million or 11% from last year, mainly due to higher value added and sales taxes commensurate
with increased purchase activity, higher payroll taxes driven by higher staff-related costs, as well as an increase in business
taxes.
Client assets
Assets under administration
AUA are assets administered by us which are beneficially owned by our clients. We provide services that are administrative in
nature, including safekeeping, collecting investment income, settling purchase and sale transactions, and record keeping.
Underlying investment strategies within AUA are determined by our clients and generally do not impact the administrative fees
that we receive. Administrative fees can be impacted by factors such as asset valuation level changes from market movements,
types of services administered, transaction volumes, geography and client relationship pricing based on volumes or multiple
services.
Our Investor & Treasury Services business is the primary business segment that has AUA with approximately 69% of total
AUA, as at October 31, 2022, followed by our Wealth Management and Personal & Commercial Banking businesses with
approximately 25% and 6% of total AUA, respectively.
2022 vs. 2021
AUA decreased $698 billion or 11% from last year, primarily due to unfavourable market conditions, partially offset by increased
client activity in Investor & Treasury Services, the impact of foreign exchange translation and the inclusion of our acquisition of
Brewin Dolphin in Wealth Management.
The following table summarizes AUA by geography and asset class:
AUA by geographic mix and asset class
Table 12
(Millions of Canadian dollars)
2022
2021
Canada
(1)
Money market
$
43,200
$
42,700
Fixed income
735,800
772,400
Equity
734,000
781,400
Multi-asset and other
1,006,300
1,150,400
Total Canada
2,519,300
2,746,900
U.S.
(1)
Money market
40,700
49,800
Fixed income
116,000
90,400
Equity
246,300
256,000
Multi-asset and other
304,300
324,600
Total U.S.
707,300
720,800
Other International
(1)
Money market
38,200
32,800
Fixed income
252,700
308,200
Equity
636,600
865,000
Multi-asset and other
1,495,600
1,673,600
Total International
2,423,100
2,879,600
Total AUA
$
5,649,700
$
6,347,300
(1)
Geographic information is based on the location from where our clients are serviced.
Assets under management
AUM are assets managed by us which are beneficially owned by our clients. Management fees are paid by the investment funds
and other clients for the investment capabilities of an investment manager and can also cover administrative services.
Management fees may be calculated daily, monthly or quarterly as a percentage of the AUM, depending on the distribution
channel, product and investment strategies. In general, equity strategies carry a higher fee rate than fixed income or money
market strategies. Fees are also impacted by asset mix and relationship pricing for clients using multiple services. Higher risk
assets generally produce higher fees, while clients using multiple services can take advantage of synergies which reduce the fees
they are charged. Certain funds may have performance fee arrangements where fees are recorded when certain benchmarks or
performance targets are achieved. These factors could lead to differences in fees earned by product and therefore net return by
asset class may vary despite similar average AUM. Our Wealth Management segment is the primary business segment that has
AUM with approximately 99% of total AUM as at October 31, 2022.
2022 vs. 2021
AUM decreased $9 billion or 1% from last year, primarily due to unfavourable market conditions, partially offset by the inclusion
of our acquisition of Brewin Dolphin, the impact of foreign exchange translation and net sales.
28
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
The following table presents the change in AUM for the year ended October 31, 2022:
Client assets – AUM
Table 13
2022
2021
(Millions of Canadian dollars)
Money market
Fixed income
Equity
Multi-asset
and other
Total
Total
AUM, beginning balance
$
43,500
$ 235,400
$ 137,600
$ 592,200
$ 1,008,700
$
843,600
Institutional inflows
100,000
42,900
16,100
16,600
175,600
98,000
Institutional outflows
(107,300)
(48,900)
(10,600)
(13,200)
(180,000)
(73,700)
Personal flows, net
(700)
(2,900)
2,000
23,000
21,400
51,500
Total net flows
(8,000)
(8,900)
7,500
26,400
17,000
75,800
Market impact
200
(27,400)
(18,100)
(72,100)
(117,400)
123,800
Acquisition/dispositions
–
–
–
58,500
58,500
(4,500)
Foreign exchange
2,100
(1,300)
2,900
29,200
32,900
(30,000)
Total market, acquisition/dispositions
and foreign exchange impact
2,300
(28,700)
(15,200)
15,600
(26,000)
89,300
AUM, balance at end of year
$
37,800
$ 197,800
$ 129,900
$ 634,200
$
999,700
$ 1,008,700
Business segment results
Results by business segments
Table 14
2022
2021
(Millions of Canadian dollars,
except percentage amounts)
Personal &
Commercial
Banking
Wealth
Management
Insurance
Investor &
Treasury
Services
Capital
Markets
(1)
Corporate
Support
(1)
Total
Total
Net interest income
$
14,019
$
3,634
$
–
$
498
$
4,698
$
(132)
$
22,717
$
20,002
Non-interest income
6,124
11,215
3,510
1,725
4,422
(728)
26,268
29,691
Total revenue
20,143
14,849
3,510
2,223
9,120
(860)
48,985
49,693
PCL
463
34
–
(3)
(11)
1
484
(753)
PBCAE
–
–
1,783
–
–
–
1,783
3,891
Non-interest expense
8,437
10,701
588
1,569
5,561
(247)
26,609
25,924
Income before
income taxes
11,243
4,114
1,139
657
3,570
(614)
20,109
20,631
Income taxes
2,873
970
282
144
649
(616)
4,302
4,581
Net income
$
8,370
$
3,144
$
857
$
513
$
2,921
$
2
$
15,807
$
16,050
ROE
(2)
30.9%
16.5%
36.4%
16.4%
11.3%
n.m.
16.4%
18.6%
Average assets
$ 575,900
$ 158,100
$ 22,500
$ 250,600
$ 824,800
$ 55,000
$ 1,886,900
$ 1,678,200
(1)
Net interest income, Non-interest income, Total revenue, Income before income taxes, and Income taxes are presented in Capital Markets on a taxable equivalent basis
(teb). The teb adjustment is eliminated in the Corporate Support segment. For a further discussion, refer to the How we measure and report our business segments
section.
(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.
Expense and tax allocation
To ensure that our business segments’ results include expenses associated with the conduct of their business, we allocate costs
incurred or services provided by Technology & Operations and Functions, which are directly undertaken or provided on the
business segments’ behalf. For other costs not directly attributable to our business segments, including overhead costs and
other indirect expenses, we use our management reporting framework for allocating these costs to each business segment in a
manner that is intended to reflect the underlying benefits.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
29
Capital attribution
Our management reporting framework also determines the attribution of capital to our business segments in a manner that is
intended to consistently measure and align economic costs with the underlying benefits and risks associated with the activities
of each business segment. The amount of capital assigned to each business segment is referred to as attributed capital.
Unattributed capital and associated amounts are reported in Corporate Support. For further information, refer to the Capital
management section.
Funds transfer pricing
Funds transfer pricing refers to the pricing of intra-company borrowing or lending for management reporting purposes. We
employ a funds transfer pricing process to enable risk-adjusted management reporting of segment results. This process
determines the costs and revenue for intra-company borrowing and lending of funds after taking into consideration our interest
rate risk and liquidity risk management objectives, as well as applicable regulatory requirements.
Provisions for credit losses
PCL is recorded to recognize expected credit losses on all financial assets, except for financial assets classified or designated as
FVTPL and equity securities designated as FVOCI, which are not subject to impairment assessment. For details on our accounting
policy on Allowance for credit losses (ACL), refer to Note 2 of our 2022 Annual Consolidated Financial Statements.
PCL is included in the results of each business segment to fully reflect the appropriate expenses related to the conduct of
each business segment.
In addition to the key methodologies described above, the following components of our management reporting framework also
impact how our business segments are managed and reported:
•
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 five business segments, such as certain treasury and liquidity management activities, including
amounts associated with unattributed capital, and consolidation adjustments, including the elimination of the teb gross-up
amounts. In addition, we record gains (losses) on economic hedges of our U.S. Wealth Management (including City National)
share-based compensation plans, which are reflected in revenue, and related variability in share-based compensation
expense driven by changes in the fair value of liabilities relating to these plans in Corporate Support as we believe this
presentation more closely aligns with how we view business performance and manage the underlying risks.
Key performance and non-GAAP measures
Performance measures
We measure and evaluate the performance of our consolidated operations and each business segment using a number of
financial metrics, such as net income and ROE. Certain financial metrics, including ROE, do not have a standardized meaning
under generally accepted accounting principles (GAAP) and may not be comparable to similar measures disclosed by other
financial institutions.
Return on common equity
We use ROE, at both the consolidated and business segment levels, as a measure of return on total capital invested in our
business. Management views the business segment ROE measure as a useful measure for supporting investment and resource
allocation decisions because it adjusts for certain items that may affect comparability between business segments and certain
competitors.
Our consolidated ROE calculation is based on net income available to common shareholders divided by total average
common equity for the period. Business segment ROE calculations are based on net income available to common shareholders
divided by average attributed capital for the period. For each segment, average attributed capital includes the capital required to
underpin various risks as described in the Capital management section and amounts invested in goodwill and intangibles.
The attribution of capital involves the use of assumptions, judgments and methodologies that are regularly reviewed and
revised by management as deemed necessary. Changes to such assumptions, judgments and methodologies can have a material
effect on the business segment ROE information that we report. Other companies that disclose information on similar
attributions and related return measures may use different assumptions, judgments and methodologies.
30
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Calculation of ROE
Table 15
2022
2021
(Millions of Canadian dollars,
except percentage amounts)
Personal &
Commercial
Banking
Wealth
Management
Insurance
Investor &
Treasury
Services
Capital
Markets
Corporate
Support
Total
Total
Net income available to
common shareholders
$
8,287
$
3,096
$
851
$
505
$
2,855
$
(47)
$ 15,547
$ 15,781
Total average common
equity
(1), (2)
26,800
18,800
2,350
3,100
25,350
18,300
94,700
84,850
ROE
(3)
30.9%
16.5%
36.4%
16.4%
11.3%
n.m.
16.4%
18.6%
(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 described below are more reflective of our ongoing operating results and provide
readers with a better understanding of management’s perspective on our performance. These measures also enhance the
comparability of our financial performance for the year ended October 31, 2022 with the results from last year. Non-GAAP
measures (including non-GAAP ratios) do not have a standardized meaning under GAAP and may not be comparable to similar
measures disclosed by other financial institutions.
The following discussion describes the non-GAAP measures we use in evaluating our operating results.
Adjusted efficiency ratio
Our efficiency ratio is impacted by the change in fair value of investments backing policyholder liabilities, which is reported in
revenue and largely offset in PBCAE. The adjusted efficiency ratio is a non-GAAP ratio and is calculated using adjusted total
revenue, which is a non-GAAP measure as it excludes the impact from the change in fair value of investments backing
policyholder liabilities. We believe the adjusted efficiency ratio is a useful measure as changes in the fair value of investments
backing policyholder liabilities can lead to volatility in total revenue that could obscure trends in underlying business
performance and reduce comparability with prior periods.
Consolidated non-GAAP efficiency ratio
Table 16
2022
2021
Item excluded
Item excluded
(Millions of Canadian dollars,
except percentage amounts)
As reported
Change in fair value
of investments backing
policyholder liabilities
Adjusted
As reported
Change in fair value
of investments backing
policyholder liabilities
Adjusted
Total revenue
$ 48,985
$
1,888
$ 50,873
$ 49,693
$
13
$
49,706
Non-interest expense
26,609
–
26,609
25,924
–
25,924
Efficiency ratio
54.3%
52.3%
52.2%
52.2%
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
31
Personal & Commercial Banking
Personal & Commercial Banking provides a broad suite of financial products and services to individuals and businesses for their
day-to-day banking, investing and financing needs. We are focused on building deep and meaningful relationships with our
clients, underscored by the delivery of exceptional client experiences, the breadth of our product suite, our depth of expertise,
and the features of our digital solutions.
> 14 million
#1 or #2
38,450
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, one of the largest mobile sales forces
across Canada along with market-leading digital capabilities. In Caribbean &
U.S. Banking, we offer a broad range of financial products and services in
targeted markets.
In Canada, we compete with other Schedule 1 banks, independent trust
companies, foreign banks, credit unions, caisses populaires, auto financing
companies, as well as emerging entrants to the financial services industry.
In the Caribbean, our competition includes banks, trust companies and
investment management companies serving retail and corporate clients, as well
as public institutions. In the U.S., we compete primarily with other Canadian
banking institutions that have U.S. operations.
Total revenue
$20.1 billion
70% Personal Banking
26% Business Banking
4% Caribbean and U.S. Banking
2022 Operating environment
›
In the early part of the fiscal year, the operating environment continued to be impacted by COVID-19 related restrictions;
however, it was buffered in part by low unemployment levels, sustained GDP growth and government support. As restrictions
eased during the year, client activity improved, driving solid revenue growth in fiscal 2022.
›
In response to rising inflation, the BoC raised the benchmark interest rate by 350 basis points from March 2022 to October 2022.
As a result of the rising interest rate environment, we saw NIM expansion in fiscal 2022, reversing the decline in the prior year.
The combination of strong volumes and higher NIM translated to significant growth in net interest income.
›
While the credit environment in fiscal 2022 reflected a recovery from the COVID-19 pandemic, it also reflected unfavourable
changes in our economic outlook towards the latter half of the year, including the impact of slowing economic growth as well
as rising inflation and interest rates. PCL on impaired loans remained well below pre-pandemic levels.
›
As a result of the rising rate environment, housing activity has slowed and household debt servicing costs increased. In the
latter half of the year, we saw mortgage originations below prior year levels.
›
Personal and business deposits continued to see significant growth in the first half of the year as COVID-19 related disruptions
persisted; however, as a result of the economy re-opening and robust client activity, as well as the impact from Bank of
Canada’s monetary policy, deposit growth decelerated in the latter half of the fiscal year but remained well above pre-
pandemic levels.
›
In fiscal 2022, we saw unfavourable market conditions driving mutual fund balances lower from both market depreciation and
net redemptions. We also saw a decline in client activity in our Direct Investing business from elevated levels in the previous
year.
›
Client preferences for digital offerings are evolving and we continue to invest in digital solutions to improve the client
experience and deliver personalized advice.
›
Our Caribbean Banking business was favourably impacted by the recovery from the COVID-19 pandemic, reflecting higher client
activity. We also saw releases of provisions on performing and impaired loans.
›
In the U.S., earnings were favourably impacted by the rising interest rate environment and the increase in cross-border travel,
as most restrictions related to COVID-19 were lifted.
32
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Strategic priorities
OUR STRATEGY
PROGRESS IN 2022
PRIORITIES IN 2023
Transform sales, advice and
services
Evolved our branch network by opening new format
branches and investing in upgrading existing
locations with the objective of enhancing the client
experience, allowing clients to engage in deeper
conversations with our advisors and enabling them to
complete more transactions digitally
Continued to create capacity and capability to focus on
advice, complex servicing and sales, all underpinned by
innovation across our distribution network
Leveraged our industry-leading Canadian mobile app to
revolutionize the mobile client experience through
personalization and value-added client insights
Continued to tailor advice and insights to the individual
to help clients manage their finances through the NOMI
suite of capabilities, including NOMI Insights
®
, NOMI
Find & Save
®
that uses predictive technology to help
clients save, and NOMI
®
Forecast that provides a
seven-day forecast of clients’ future cash flow
In May 2022, Retail Banker International awarded RBC
with the Best Global Retail Bank and Best Bank for
Small & Medium-Sized enterprises (SMEs) awards,
recognizing the Bank’s success in respect of its retail
banking profits, world-class cost-income ratio,
continued market share gains and exceptional client
base
In October 2022, J.D. Power Canada ranked RBC the
highest in Customer Satisfaction among Big 5 Banks for
the third consecutive year from the J.D. Power 2022
Canada Retail Banking Satisfaction Study
In November 2021, RBC was awarded the Best Payments
Innovation Award from The Digital Banker as part of the
Global Retail Banking Innovation Awards 2021
Leveraged our existing product portfolio to support our
clients’ transition to net zero, including lending such as
electric and hybrid vehicles and energy retrofit loans,
and ESG investment products including market-linked
ESG GIC, InvestEase
®
responsible investing portfolio
and RBC Vision funds
Continued to grow our national cleantech practice
through RBCx and worked with a number of cleantech
ecosystem partners to identify and overcome the
hurdles to commercialization of cleantech solutions
Provide flexibility by continuing to deliver anytime,
anywhere solutions to our clients across all channels,
seamlessly integrating mobile and digital services into
our clients’ lives
Continue to reimagine our branch network to meet the
evolving needs of our clients
Expand our expert advisor network to support clients
with complex advice needs
Continue to focus on opportunities to support
businesses and retail clients in their transition to net
zero, including building upon our existing portfolio of
products, services and advice
Continue to utilize and transform our joint venture
Moneris to deliver a leading merchant platform
Accelerate our growth
Ownr
®
has launched more than 32,800 new Canadian
businesses, driving close to 21,600 small business RBC
bank accounts this year
Since the launch of the full product offering in August
2021, Mydoh has reached 100,000 Canadian parents and
children and is experiencing very high engagement
Continued to provide superior working capital solutions
to our business clients through RBC PayEdge
TM
platform
Lead with RBC Vantage
TM
, a program that allows clients
to unlock rewards, savings, insights and more with any
eligible bank account. Approximately 2 million clients
signed up for RBC Vantage since launch and we’ve
delivered millions in fee rebates and over 1 billion RBC
Avion
®
points
Launched Vantage Snapshot
TM
that provides clients
with a personalized picture of the cumulative savings
and benefits they’ve received with their RBC bank
accounts and highlights opportunities for clients to
earn and save more – all in one spot
Launched our next-generation loyalty program, Avion
Rewards
TM
, that provides Canadians with more ways to
shop, earn, save and redeem with innovative shopping
features, best-in-class cash back deals and offers, and
more ways to pay with points
Maintained our focus on key high-growth and high-
value segments such as retirees, youth, newcomers,
business owners, high net worth clients, and healthcare
professionals
Entered into a collaboration agreement with ICICI Bank
Canada to focus on building banking solutions that
simplify the financial transition for newcomers from the
time they choose Canada to their arrival and beyond
Continue to build a suite of best-in-class value
propositions, digital experiences and Beyond Banking
ventures to accelerate client acquisition
Engage Canadians earlier, more often and in more
compelling ways
Focus on engaging key high-growth client segments and
enabling our advisors to build new and deeper
relationships with the objective of achieving industry-
leading volume growth
Establish additional key partnerships to continue to
add value for our clients
Enable unparalleled value for both consumers and
merchants through best-in-class loyalty program
Focus on increasing employee engagement and
continue to build a future-ready workforce
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
33
OUR STRATEGY
PROGRESS IN 2022
PRIORITIES IN 2023
Digitize to unlock productivity
Achieved 11% year over year growth in number of
mobile users
Recognized with the J.D. Power Canada award for “Best
in Customer Satisfaction” for our mobile banking app.
The recognition comes from the J.D. Power 2022
Canadian Banking Mobile App Satisfaction Study
Continued to invest in solutions that simplify, digitize
and automate experiences for clients and employees,
and enable employees to deliver relevant and expert
advice, such as our market-leading MyAdvisor
®
personalized planning capability
Enhanced digital experience for our small business and
commercial clients and made it easier for them to
transact with us
Entered into agreements with Plaid and Envestnet |
Yodlee that allow RBC clients to better manage their
finances and build wealth by securely connecting to
and sharing their RBC financial information with
thousands of third-party applications
Deliver more personalized insights to improve the
client experience while continuing to simplify and
digitize everyday banking
Lead in mobile capabilities and enable fulfillment of
servicing through digital channels with access to
advisors to help clients on their chosen path
Invest in new tools and capabilities and proactively
seek ways to streamline internal processes and the
client experience
Accelerate adoption of business agility and deliver
faster, smarter and higher quality products and
solutions
In the Caribbean
Accelerated actions focused on enhancing the client
experience underpinned by programs across growth
and transformation priorities, including product
development and digitization
Continue focus on modernizing data and technology;
enhancing the client experience by digitizing and
simplifying day to day banking; and developing and
accelerating key programs to enable employees for
success and accelerate growth
In the U.S.
Despite lingering impacts of the COVID-19 pandemic,
continued to drive accelerated client and real estate
financing growth leveraging a competitively
differentiated value proposition and home-buying
solution
Made focused investments to digitize client and
internal processes within real estate financing,
improving process robustness and control automation,
and expanding targeted discounts and offers of value to
the cross-border lifestyle
Continue driving accelerated growth momentum
through deeper integration to increase market share of
Canadian purchasers of U.S. real estate and new-to-
RBC relationship acquisition
Expand digitally enabled client experiences to extend
competitive differentiation and drive industry leading
client satisfaction, while accelerating automation of
operational processes and controls to enhance
scalability
Outlook
Interest rate hikes by central banks to contain surging inflation are adding to global growth risk in the year ahead. Housing markets in Canada
have already pulled back significantly since spring in response to increases in interest rates. Labour market conditions are extremely tight with
demand for workers well outpacing available supply, leading to shortages across regions and sectors. However, as the economic backdrop
deteriorates we expect job openings will fall and unemployment rates will rise. We expect moderate recessions in the U.S. and Canada in the
first half of calendar 2023 with consumer spending contracting as higher borrowing costs and prices reduce household purchasing power. We
expect the economy will begin to grow again in the second half of calendar 2023 with slowing inflation allowing central banks to pause interest
rate hikes in the coming months. We will continue to pursue industry-leading outcomes and operational efficiency initiatives during uncertain
times, and channel transformation to achieve our vision of being a digitally-enabled relationship bank.
The Caribbean’s economic recovery has continued to strengthen in calendar 2022, supported by strong tourism-related travel. However,
a slowing of the growth momentum is expected in 2023 as major source markets (U.S., U.K., Canada, Europe) are projected to fall into
recessions. We will continue to focus on growth strategies in our target markets, improving operational efficiency, and adding value for
our clients.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.
34
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Personal & Commercial Banking
Table 17
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
2022
2021
Net interest income
$
14,019
$
12,621
Non-interest income
6,124
5,725
Total revenue
20,143
18,346
PCL on performing assets
(283)
(909)
PCL on impaired assets
746
722
PCL
463
(187)
Non-interest expense
8,437
7,978
Income before income taxes
11,243
10,555
Net income
$
8,370
$
7,847
Revenue by business
Canadian Banking
$
19,282
$
17,570
Personal Banking
13,957
13,337
Business Banking
5,325
4,233
Caribbean & U.S. Banking
861
776
Key ratios
ROE
30.9%
32.0%
NIM
2.55%
2.51%
Efficiency ratio
41.9%
43.5%
Operating leverage
(1)
4.0%
3.1%
Selected balance sheet information
Average total assets
$
575,900
$
527,100
Average total earning assets, net
548,900
502,000
Average loans and acceptances, net
553,300
505,600
Average deposits
552,100
504,300
Other information
AUA
(2), (3)
$
336,400
$
367,700
Average AUA
355,600
340,800
AUM
(3)
5,600
5,400
Number of employees (FTE)
38,450
36,675
Credit information
PCL on impaired loans as a % of average net loans and acceptances
0.14%
0.14%
Other selected information – Canadian Banking
Net income
$
8,024
$
7,620
NIM
2.54%
2.50%
Efficiency ratio
40.5%
42.0%
Operating leverage
3.8%
2.9%
(1)
See Glossary for composition of this measure.
(2)
AUA includes securitized residential mortgages and credit card loans as at October 31, 2022 of $15 billion and $6 billion, respectively (October 31, 2021 – $15 billion and $3 billion).
(3)
Represents year-end spot balances.
Financial performance
2022 vs. 2021
Net income increased $523 million or 7% from last year, primarily attributable to higher net interest income, driven by average
volume growth of 9% in Canadian Banking and higher spreads. Higher non-interest income also contributed to the increase.
These factors were partially offset by higher PCL, higher staff and technology related costs, including digital initiatives.
Total revenue increased $1,797 million or 10%, primarily due to higher net interest income reflecting average volume growth
in Canadian Banking of 9% in loans and 9% in deposits. Increased client activity contributed to higher foreign exchange revenue,
card service revenue and service charges.
NIM increased 4 bps, primarily due to the impact of the rising interest rate environment, partially offset by changes in
product mix and lower prepayment revenue in our mortgage portfolios.
PCL was $463 million compared to $(187) million last year. The increase in PCL was primarily attributable to lower releases of
provisions on performing loans due to unfavourable changes in our macroeconomic outlook in the current year.
Non-interest expense increased $459 million or 6%, mainly attributable to higher staff and technology related costs,
including digital initiatives, as well as higher marketing costs.
Average loans and acceptances increased $48 billion or 9%, mainly driven by growth in residential mortgages and business loans.
Average deposits increased $48 billion or 9%, reflecting growth in business deposits and personal deposits including
Guaranteed Investment Certificates (GICs).
Business line review
In Canada, we operate through two business lines: Personal Banking and Business Banking.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
35
Personal Banking
Personal Banking offers a full range of products focused on meeting the needs of our individual Canadian clients at every stage
of their lives through a wide range of financing and investment products and services. This includes home equity financing,
personal lending, chequing and savings accounts, private banking, indirect lending (including auto financing), mutual funds and
self-directed brokerage accounts, GICs, credit cards, and payment products and solutions.
We rank #1 or #2 in market share for all key Personal Banking products in Canada supported by the largest retail banking
network in Canada, with 1,162 branches and 4,028 ATMs.
Financial performance
Total revenue increased $620 million or 5% compared to last year, primarily due to higher net interest income reflecting average
volume growth of 9% and higher interest rates, partially offset by the impact of competitive pricing in our mortgage portfolios.
Increased client activity also contributed to higher card service revenue, foreign exchange revenue and service charges. These
factors were partially offset by lower securities brokerage commissions.
Average residential mortgages increased 11% compared to last year, mainly due to solid, but moderating, housing activity
and mortgage originations.
Average deposits increased 9% from last year, largely reflecting acquisition of new clients and an increase in activity from
existing clients.
Selected highlights
Table 18
(Millions of Canadian dollars, except number of)
2022
2021
Total revenue
$
13,957
$ 13,337
Other information
Average residential mortgages
338,400
305,400
Average other loans and acceptances, net
75,700
74,800
Average deposits
293,500
270,500
Average credit card balances
18,200
16,600
Credit card purchase volumes
162,200
132,400
Branch mutual fund balances
(1)
178,600
205,500
Average branch mutual fund balances
194,400
191,300
AUA – Self-directed brokerage
(1)
127,600
135,900
Number as at October 31:
Branches
1,162
1,182
ATMs
4,028
4,032
(1)
Represents year-end spot balances.
0
50,000
100,000
350,000
300,000
200,000
250,000
150,000
2022
Other loans and
acceptances, net
Residential mortgages
Deposits
Average residential mortgages, loans and deposits
(Millions of Canadian dollars)
2021
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 $1,092 million or 26% compared to last year, primarily due to higher net interest income reflecting higher
interest rates and average volume growth of 11%. Higher credit fees, service charges and foreign exchange revenue reflecting
increased client activity also contributed to the increase.
Average loans and acceptances increased 11% and average deposits increased 11%, mainly due to new account acquisitions
as well as deepening of our existing client relationships.
Selected highlights
Table 19
(Millions of Canadian dollars)
2022
2021
Total revenue
$
5,325
$
4,233
Other information (average)
Loans and acceptances, net
110,800
99,800
Deposits
237,900
215,200
2021
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
2022
Caribbean & U.S. Banking
Our Caribbean Banking business offers a comprehensive suite of banking products and services, as well as international
financing and trade promotion services through extensive branch, ATM, online, and mobile banking networks.
Our U.S. Banking business serves the needs of Canadian retail and small business clients providing personalized,
digitally-enabled cross-border banking solutions enabling a cross-border lifestyle in all 50 states across the U.S.
36
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Financial performance
Total revenue increased $85 million or 11% from last year, primarily due to higher net interest income reflecting average volume
growth of 12% and higher spreads. Higher card service revenue reflecting increased client activity also contributed to the
increase.
Average loans and acceptances increased 12% and average deposits increased 11% primarily due to increased client activity
and the impact of foreign exchange translation.
Selected highlights
Table 20
(Millions of Canadian dollars,
except number of and percentage amounts)
2022
2021
Total revenue
$
861
$
776
Other information
NIM
2.90%
2.85%
Average loans and acceptances, net
10,200
9,100
Average deposits
20,800
18,700
AUA
(1)
6,500
5,700
Average AUA
6,300
5,700
AUM
(1)
5,300
5,100
Number as at October 31:
Branches
38
38
ATMs
269
271
(1)
Represents year-end spot balances.
2021
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
2022
Wealth Management
Wealth Management is a global business serving clients in key financial centres. We serve HNW and UHNW individual and
institutional clients with a comprehensive suite of advice-based solutions and strategies to help them achieve their financial goals.
$14.8 billion
> 6,100
> $55 billion
Total revenue
Client-facing advisors
AUA net flows
Asset under Administration
(AUA)
Total AUA
$1,388 billion
5% Institutional
94% Personal
1% Mutual Funds
Assets under Management
(AUM)
Total AUM
$992 billion
49% Personal
26% Mutual Funds
25% Institutional
Our lines of business include Canadian Wealth
Management, U.S. Wealth Management (including
City National), Global Asset Management (GAM),
and International Wealth Management.
•
Canadian Wealth Management is the largest
full-service wealth advisory business in
Canada, as measured by AUA, serving HNW and
UHNW clients
•
U.S. Wealth Management (including City
National) also encompasses our private client
group (PCG) and clearing and custody (C&C)
businesses. PCG is the 6th largest full-service
wealth advisory firm in the U.S., as measured by
AUA, and City National is a premier U.S. private
and commercial bank serving HNW, UHNW and
commercial clients
•
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
2022 Operating environment
›
Earnings in the current fiscal year were favourably impacted by the rising interest rate environment reflecting rate hikes by the
Fed, BoC and other central banks, while challenging market conditions unfavourably impacted our fee-based client assets.
›
Our core businesses performed well with continued volume growth in City National and net positive flows of fee-based client
assets in our wealth advisory businesses reflecting the strength of our business driven by the quality of our advice, the breadth
of our investment and holistic wealth planning solutions and clients’ trust in our brand. The mutual fund sector has seen a
slowdown in sales due to the rising interest rate environment and market volatility.
›
We continued to invest in our people and technology to maintain our competitive advantage and increase efficiencies in an
environment characterized by market volatility, rapidly changing client preferences and increasing regulatory requirements.
›
While the credit environment in fiscal 2022 reflected a recovery from the COVID-19 pandemic, it also reflected unfavourable
changes in our economic outlook towards the latter half of the year, including the impact of slowing economic growth as well
as rising inflation and interest rates.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
37
Strategic priorities
OUR STRATEGY
PROGRESS IN 2022
PRIORITIES IN 2023
In Canada, be the premier service
provider for HNW and UHNW clients
Further extended our position as industry leader in our
full-service private wealth business
Continued to focus on holistic wealth planning, including
advisor training on intergenerational and business wealth
transfer
Continued to expand RBC
®
Premier Banking to deepen
banking relationships with Wealth Management clients
Continued to enhance our digital and data capabilities to
drive increased client satisfaction and advisor productivity
Implemented unique capabilities that are becoming
increasingly important to our client base such as private
alternative investment products
Continue to retain and attract top-performing advisors to
strengthen our talent advantage
Deliver a differentiated client experience through enriched
advisor-client interactions and seamless digital experiences
Deepen client relationships by leveraging the combined
strengths across other business segments with a focus on the
business owner client segment
Continue to invest in digital solutions to streamline and
simplify the business and improve efficiency and advisor
productivity
Renew legacy infrastructure to ensure ongoing resiliency in
our technology platforms
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, solid
execution on our technology transformation and
provided proactive liquidity to our clients via a
revamped securities-based lending platform
In City National, we continued to focus on organically
growing our core-banking business and enhancing our
risk management and controls foundation
As part of the Preferred Banking mortgage-led strategy,
City National launched a pilot mortgage pod program
designed to attract new clients with a mortgage-led
strategy
The National Corporate Banking division, which was
launched in 2021 to pursue the mid-Corp segment
(companies with annual revenue from $500 million to
$2 billion), gained market share in 2022
Continue to deliver an exceptional client experience for
targeted HNW, UHNW, middle market, and business
banking segments
Leverage the combined strengths within U.S. Wealth
Management (including City National) and Capital
Markets to deepen client relationships
In City National, we will continue to focus on enhancing
our risk management and compliance capabilities
across the three lines of defense
Serve our clients more effectively through a
technology-driven platform, for example, transforming
our end-to-end commercial credit journey leveraging a
new commercial lending platform, strengthening the
mortgage platform by modernizing technology and
enhancing our client-facing digital capabilities
Drive programs to enhance profitability and scalability
across the organization
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
Completed acquisition of Brewin Dolphin, increasing
our distribution, AUM and client base to position
ourselves as the third largest wealth manager in the
U.K.
In Asia, continued growth momentum achieved through
the addition of experienced client-facing advisors and
net new assets
Focus on growing market share in target markets
Continue to leverage our global strengths to better
serve clients
Continue to deliver an exceptional client experience
and increase business effectiveness and talent
capabilities
Successful integration of RBC Brewin Dolphin to
enhance client value proposition and consolidate
position in the U.K. local market
Focus on growing the business in Asia by attracting
experienced advisors; enhancing digital and product
capabilities; and deepening cross-business, global
collaboration
In asset management, be a leading,
diversified asset manager focused on
global institutional and North
American retail clients
Maintained #1 market share in Canadian mutual fund
AUM
RBC
®
iShares strategic alliance maintained #1 market
share in Canadian ETFs
RBC GAM investment teams continued to integrate
material ESG factors into their investment processes
for applicable investment strategies
Continue to expand our investment capabilities to meet
evolving client needs in our target distribution regions
Continue shift to a more unified asset management
operating model to take better advantage of enterprise
and GAM global scale, resources and infrastructure
Outlook
The ongoing uncertainty in the macroeconomic environment, including the expectation of further interest rate increases and a
slowdown in economic growth, will continue to impact markets.
Despite this uncertainty, we believe our diversified businesses remain well-positioned to continue growing our leading
position in Canada and increasing our market share in the HNW and UHNW client segments globally, leveraging the strength of
our brand, reputation and solid financial position. Our strategy remains unchanged as we continue to focus on delivering an
unmatched client experience through holistic goals-based advice, attracting and retaining top-performing advisors, and
collaborating across the enterprise to bring the full breadth of our capabilities to our clients. We will continue to invest in our
people and technology to improve client and advisor experiences, drive operational efficiencies, and further strengthen our risk,
compliance and controls infrastructure to meet heightened regulatory requirements.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook
section.
38
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Wealth Management
Table 21
(Millions of Canadian dollars, except number of, percentage amounts and as otherwise noted)
2022
2021
Net interest income
$
3,634
$
2,689
Non-interest income
11,215
10,607
Total revenue
14,849
13,296
PCL on performing assets
21
(33)
PCL on impaired assets
13
(14)
PCL
34
(47)
Non-interest expense
10,701
9,929
Income before income taxes
4,114
3,414
Net income
$
3,144
$
2,626
Revenue by business
Canadian Wealth Management
$
4,308
$
3,908
U.S. Wealth Management (including City National)
7,448
6,320
U.S. Wealth Management (including City National) (US$ millions)
5,757
5,035
Global Asset Management
2,667
2,726
International Wealth Management
426
342
Key ratios
ROE
16.5%
15.9%
NIM
2.57%
2.25%
Pre-tax margin
(1)
27.7%
25.7%
Selected balance sheet information
Average total assets
$
158,100
$
136,000
Average total earning assets, net
141,200
119,500
Average loans and acceptances, net
99,800
84,000
Average deposits
158,800
143,000
Other information
AUA
(2), (3)
$
1,387,900
$
1,322,300
AUM
(2)
991,500
1,000,600
Average AUA
1,318,100
1,242,400
Average AUM
966,300
937,200
PCL on impaired loans as a % of average net loans and acceptances
0.01%
(0.02)%
Number of employees (FTE)
22,782
19,486
Number of advisors
(4)
6,158
5,548
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items
(Millions of Canadian dollars, except percentage amounts)
2022 vs. 2021
Increase (decrease):
Total revenue
$
158
PCL
5
Non-interest expense
129
Net income
17
Percentage change in average U.S. dollar equivalent of C$1.00
(3)%
Percentage change in average British pound equivalent of C$1.00
7%
Percentage change in average Euro equivalent of C$1.00
9%
(1)
Pre-tax margin is defined as Income before income taxes divided by Total revenue.
(2)
Represents year-end spot balances.
(3)
In addition to Canadian Wealth Management, U.S. Wealth Management (including City National), and International Wealth Management, AUA includes $6,400 million
(2021 – $7,100 million) related to GAM.
(4)
Represents client-facing advisors across all our Wealth Management businesses.
Client assets – AUA
Table 22
(Millions of Canadian dollars)
2022
2021
AUA, beginning balance
$
1,322,300
$
1,100,000
Asset inflows
380,600
352,800
Asset outflows
(325,100)
(299,200)
Total net flows
55,500
53,600
Market impact
(153,000)
235,900
Acquisitions/dispositions
79,800
(12,100)
Foreign exchange
83,300
(55,100)
Total market, acquisition/dispositions and foreign exchange impact
10,100
168,700
AUA, balance at end of year
$
1,387,900
$
1,322,300
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
39
Client assets – AUM
Table 23
2022
2021
(Millions of Canadian dollars)
Money
market
Fixed
income
Equity
Multi-asset
and other
Total
Total
AUM, beginning balance
$
43,400
$ 233,300
$ 137,200
$ 586,700
$ 1,000,600
$
836,400
Institutional inflows
100,000
42,900
16,100
16,600
175,600
97,900
Institutional outflows
(107,300)
(48,900)
(10,600)
(13,200)
(180,000)
(73,600)
Personal flows, net
(700)
(2,900)
1,900
22,700
21,000
51,000
Total net flows
(8,000)
(8,900)
7,400
26,100
16,600
75,300
Market impact
200
(27,200)
(18,100)
(71,600)
(116,700)
123,200
Acquisition/dispositions
–
–
–
58,500
58,500
(4,500)
Foreign exchange
2,200
(1,600)
2,900
29,000
32,500
(29,800)
Total market, acquisition/dispositions
and foreign exchange impact
2,400
(28,800)
(15,200)
15,900
(25,700)
88,900
AUM, balance at end of year
$
37,800
$ 195,600
$ 129,400
$ 628,700
$
991,500
$ 1,000,600
AUA by geographic mix and asset class
Table 24
(Millions of Canadian dollars)
2022
2021
Canada
(1)
Money market
$
26,200
$
24,700
Fixed income
30,500
29,200
Equity
81,800
91,300
Multi-asset and other
369,500
377,400
Total Canada
508,000
522,600
U.S.
(1)
Money market
40,700
49,500
Fixed income
116,000
90,300
Equity
246,300
256,000
Multi-asset and other
297,100
308,400
Total U.S.
700,100
704,200
Other International
(1)
Money market
16,600
15,300
Fixed income
8,900
8,100
Equity
47,000
37,700
Multi-asset and other
107,300
34,400
Total International
179,800
95,500
Total AUA
$ 1,387,900
$ 1,322,300
(1)
Geographic information is based on the location from where our clients are served.
Financial performance
2022 vs. 2021
Net income increased $518 million or 20% from last year, mainly due to higher net interest income reflecting higher average
volume growth and interest rates as well as higher average fee-based client assets. The impact of a legal provision taken in U.S.
Wealth Management (including City National) in the prior year that was partially released in the first quarter of 2022 also
contributed to the increase. These factors were partially offset by higher staff-related costs and variable compensation.
Total revenue increased $1,553 million or 12%, largely due to higher net interest income driven by average volume growth of
19% in loans and 11% in deposits and higher interest rates. Higher average fee-based client assets, primarily reflecting net sales,
and the impact of foreign exchange translation also contributed to the increase.
PCL was $34 million compared to $(47) million last year, primarily in U.S. Wealth Management (including City National),
mainly attributable to releases of provisions on performing loans in the prior year reflecting the recovery from the COVID-19
pandemic, as compared to provisions taken in the current year, largely driven by unfavourable changes in our macroeconomic
outlook. Provisions taken on impaired loans in the current year, as compared to recoveries in the prior year, also contributed to
the increase, resulting in a 3 bps increase in the PCL on impaired loans ratio.
Non-interest expense increased $772 million or 8%, mainly due to higher staff and technology related costs. Higher variable
compensation commensurate with increased results, the impact of foreign exchange translation as well as the Brewin Dolphin
acquisition and related costs also contributed to the increase. Partly offsetting these factors was the impact of a legal provision
taken in U.S. Wealth Management (including City National) in the prior year that was partially released in the first quarter of
2022.
AUA increased $66 billion or 5%, mainly due to the impact of foreign exchange translation, the inclusion of our acquisition of
Brewin Dolphin, and net sales. These factors were partially offset by unfavourable market conditions.
AUM decreased $9 billion or 1%, primarily due to unfavourable market conditions, partially offset by the inclusion of our
acquisition of Brewin Dolphin, the impact of foreign exchange translation and net sales.
40
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Business line review
Canadian Wealth Management
Canadian Wealth Management includes our full-service Canadian wealth advisory business, which is the largest in Canada as
measured by AUA, with over 1,950 investment advisors providing comprehensive financial solutions with a focus on HNW and
UHNW clients. Additionally, we provide discretionary investment management and estate and trust services to our clients
through over 100 investment counsellors and over 100 trust professionals across Canada.
We compete with domestic banks and trust companies, investment counselling firms, bank-owned full-service brokerages
and boutique brokerages, mutual fund companies, and global private banks. In Canada, bank-owned wealth managers continue
to be the major players.
Financial performance
Revenue increased $400 million or 10% from last year, primarily due to higher average fee-based client assets, largely driven by
net sales, as well as higher net interest income from higher interest rates.
Selected highlights
Table 25
(Millions of Canadian dollars)
2022
2021
Total revenue
$
4,308
$
3,908
Other information
Average loans and acceptances, net
5,600
4,600
Average deposits
28,600
26,200
AUA
(1)
511,300
524,200
AUM
(1)
171,700
168,900
Average AUA
519,600
486,100
Average AUM
171,800
151,900
(1)
Represents year-end spot balances.
0
200,000
100,000
300,000
400,000
600,000
500,000
2022
2021
AUA
AUM
Average AUA and AUM
(Millions of Canadian dollars)
U.S. Wealth Management (including City National)
U.S. Wealth Management (including City National) also encompasses PCG and our C&C businesses. PCG is the 7
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 provides a premier banking and financial experience through a high-touch
service model, proactive advice and financial solutions. City National offers a broad range of lending, deposit, cash management,
equipment financing, wealth management, and other products and services. In the U.S., we operate in a fragmented and highly
competitive industry. Our competitors include other broker-dealers, commercial banks and other financial institutions that
service HNW and UHNW individuals, entrepreneurs and their businesses.
Financial performance
Revenue increased $1,128 million or 18% from last year. In U.S. dollars, revenue increased $722 million or 14%, primarily due to
higher net interest income driven by average volume growth of 14% in loans and 9% in deposits as well as higher interest rates,
which also drove higher revenue from sweep deposits. Higher average fee-based client assets, largely driven by net sales, also
contributed to the increase.
NIM was up 21 bps, reflecting the impact of the rising interest rate environment as well as changes in average earning assets
mix.
Selected highlights
Table 26
(Millions of Canadian dollars,
except as otherwise noted)
2022
2021
Total revenue
$
7,448
$
6,320
Other information
(Millions of U.S. dollars)
Total revenue
5,757
5,035
NIM
2.38%
2.17%
Average earning assets, net
98,100
86,300
Average loans, guarantees and
letters of credit, net
68,800
60,200
Average deposits
90,600
83,000
AUA
(1)
513,700
568,800
AUM
(1)
159,200
182,100
Average AUA
538,100
525,300
Average AUM
168,100
165,600
(1)
Represents year-end spot balances.
0
200,000
100,000
300,000
400,000
600,000
500,000
2022
2021
AUA
AUM
Average AUA and AUM
(Millions of U.S. dollars)
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
41
Global Asset Management
GAM provides global investment management services and solutions for individual and institutional investors in Canada, the
U.K., the U.S., Europe, and Asia. We provide a broad range of investment management services through mutual, pooled and
private funds, fee-based accounts, and separately managed portfolios. We distribute our investment solutions through a broad
network of bank branches, our self-directed and full-service wealth advisory businesses, independent third-party advisors and
private banks, and directly to individual clients. We also provide investment solutions directly to institutional clients, including
pension plans, insurance companies, corporations, and endowments and foundations.
We are the largest retail fund company in Canada measured by AUM, as well as a leading institutional asset manager. We
face competition in Canada from banks, insurance companies and asset management organizations. The Canadian fund
management industry is large and mature, but remains a relatively fragmented industry.
In the U.S., our asset management business offers investment management solutions and services, primarily to institutional
investors, and competes with independent asset management firms, as well as those that are part of national and international
banks and insurance companies.
Internationally, through our global capabilities distributed under the brand RBC BlueBay Asset Management, we offer
investment management solutions for institutions and, through private banks including RBC Wealth Management
®
, to HNW and
UHNW investors. We face competition from asset managers that are owned by international banks, as well as national and
regional asset managers in the geographies where we serve clients.
Financial performance
Revenue decreased $59 million or 2% from last year, largely due to changes in the fair value of seed capital investments, the
impact of foreign exchange translation as well as lower performance fees. These factors were partially offset by higher fee-based
revenue driven by the impact of net sales.
Selected highlights
Table 27
(Millions of Canadian dollars)
2022
2021
Total revenue
$
2,667
$
2,726
Other information
Canadian net long-term mutual
fund sales (redemptions)
(1)
(5,246)
21,830
Canadian net money market mutual
fund sales (redemptions)
(1)
(127)
(2,757)
AUM
(2)
522,700
597,300
Average AUM
562,200
568,200
(1)
As reported to the Investment Funds Institute of Canada. Includes all
prospectus-based mutual funds across our Canadian GAM businesses.
(2)
Represents year-end spot balances.
0
600,000
2022
2021
Average AUM
(Millions of Canadian dollars)
100,000
200,000
300,000
500,000
400,000
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 $84 million or 25% from last year, primarily due to higher net interest income reflecting higher interest rates.
Selected highlights
Table 28
(Millions of Canadian dollars)
2022
2021
Total revenue
$
426
$
342
Other information
Average loans, guarantees and
letters of credit, net
5,000
4,600
Average deposits
12,300
12,500
AUA
(1), (2)
170,100
86,800
AUM
(1), (2)
80,100
8,900
Average AUA
97,200
90,500
Average AUM
15,400
9,300
(1)
Represents year-end spot balances.
(2)
AUA and AUM reflect the inclusion of $79,800 million and $72,400 million,
respectively, related to our acquisition of Brewin Dolphin, which closed on
September 27, 2022.
0
50,000
100,000
150,000
2022
2021
AUA
AUM
Average AUA and AUM
(Millions of Canadian dollars)
42
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Insurance
RBC Insurance
®
offers a wide range of advice and solutions for individual and business clients, including life, health, wealth,
home, auto, travel, annuities, and reinsurance.
$3.5 billion
> 4.9 million
2,731
Total revenue
Number of clients
Employees
Premiums and Deposits
Total premiums
and deposits
$5.5 billion
45% Life and Health
42% Annuity
12%
Segregated Fund Deposits
1%
Property and Casualty
RBC Insurance
®
is the largest Canadian bank-owned insurance organization on
a total revenue basis and operates under two business lines: Canadian
Insurance and International Insurance.
In Canada, we offer life, health, travel, wealth accumulation solutions, and
annuities to individuals and businesses. We also offer home and auto insurance
for individuals through a distribution agreement with Aviva Canada. Our
products and services are distributed through a wide variety of channels,
including advice centres, RBC Insurance
®
stores, mobile advisors, digital
platforms, independent brokers and partners.
Outside Canada, we operate globally in the reinsurance and retrocession
markets offering life, disability and longevity reinsurance.
2022 Operating environment
›
In Canada, the COVID-19 pandemic continued to stimulate an increased interest in protection, positioning us well to deliver our
market-leading products through our best-in-class network of advisors and partners. The industry continued to face a number
of challenges and opportunities, including a rising interest rate environment, evolving regulatory requirements, a competitive
landscape underscored by consolidation, continued digital disruption and changing client expectations. As a result, we evolved
our robust risk frameworks, controls and risk culture to protect clients and meet the expectations of both federal and
provincial regulators. We also accelerated investment in product innovation, digitization, and data to better meet client
protection needs, enhance access and convenience, and deliver improved experiences. We prioritized investment in our
people, positioning ourselves as an employer of choice.
›
In the U.K., there was a sustained appetite for longevity risk transfer as companies continued to actively manage longevity risk.
As a result, the longevity reinsurance market remained competitive in fiscal 2022.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
43
Strategic priorities
OUR STRATEGY
PROGRESS IN 2022
PRIORITIES IN 2023
Grow our Insurance business in Canada, and
internationally
Launched RBC Growth Insurance Plus™ product
for affluent Canadians looking to supplement life
insurance needs, or for corporations, to help meet
their corporate life insurance needs
Introduced a new critical illness insurance
product as an option for Group Benefits Solutions
clients, strengthening our offering in the
marketplace
Launched a Workplace Wellness Toolkit designed
to support businesses in assessing the wellbeing
needs of their employees and creating wellness
strategies tailored to the unique goals of their
organization
Continued to grow our longevity reinsurance and
group annuity businesses, driven by our
relationships within the U.K. and Canadian
markets, and our strong underwriting expertise
Be an innovative, client-focused provider of a full
suite of insurance solutions
Develop and sustain excellence in distribution
Launched RBC Insurance
®
Sales Technology
Support Centre (STSC) to support advisors and
their clients, resulting in faster and more efficient
support for key tools and technologies
Launched Aviva Underwriting Chat, giving our
home and auto advisors the ability to chat directly
with Aviva’s Underwriters, improving the client
experience by bringing efficiency, and reducing
the time spent on hold while applications are
considered
Built the first interface between RBC Insurance
®
and our external distribution partners, allowing
for more efficient new distribution channels and
partnerships for term life products
Sustain distribution excellence through channel
growth and by supporting our agents and partners
with best-in-class tools, and unique value
propositions
Accelerate investments in product innovation,
digitization, and data
Launched electronic delivery of select life and
health contracts, improving cycle times, and
increasing contract delivery for clients
Introduced a new disability electronic application
enabling online submissions of certain disability
products, simplifying the process, facilitating
quicker decisions on applications, and reducing
time to purchase
Added digital signature capabilities to electronic
applications for our simplified term life insurance
product, improving the advisor and client
experience
Invest in product innovation, risk selection,
underwriting, digital capabilities and other
solutions which streamline our processes in order
to attract and retain clients
Evolve our risk culture
Added two socially responsible investing options
to our segregated fund offerings. The fund
investments exclude companies whose primary
business is alcohol, tobacco products, firearms,
cannabis, adult entertainment or gambling
As part of our continuous commitment to diversity
& inclusion, we enhanced the language of our
Group Life and Health booklets and contracts,
recognizing all gender identities
Evolve our robust risk frameworks, controls and
risk culture to protect clients and meet the
expectations of both federal and provincial
regulators
Attract and retain top talent
Remained an employer of choice enabling us to
attract, retain and engage employees to serve our
clients and deliver value to our shareholders
Foster diversity, equity and inclusion, and focus
on inspiring future readiness to attract, retain and
engage top talent
Outlook
The insurance industry is expected to continue experiencing change in fiscal 2023 driven by evolving client expectations,
accelerated digital disruption, and distribution innovation. Government and regulatory pressures are expected to continue into
the coming fiscal year. As consumers focus more attention on overall protection, we will continue to provide advice and
education, deliver our products and services, and create industry partnerships to assist our clients. We will maintain our strength
by investing in technology, product and service innovation, efficient distribution channels, and a strong risk culture. This will
enable our goal of being an innovative, client-focused provider of a full suite of insurance solutions, and will allow us to thrive in
a rapidly changing environment.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook
section.
44
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Insurance
Table 29
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
2022
2021
Non-interest income
Net earned premiums
$
4,653
$
4,840
Investment Income, gains/(losses) on assets supporting insurance policyholder liabilities
(1)
(1,363)
577
Fee income
220
183
Total revenue
3,510
5,600
PCL
–
(1)
Insurance policyholder benefits and claims
(1)
1,468
3,547
Insurance policyholder acquisition expense
315
344
Non-interest expense
588
596
Income before income taxes
1,139
1,114
Net income
$
857
$
889
Revenue by business
Canadian Insurance
$
653
$
2,917
International Insurance
2,857
2,683
Key ratios
ROE
36.4%
37.4%
Selected balance sheet information
Average total assets
$
22,500
$
21,600
Other information
Premiums and deposits
(2)
$
5,498
$
5,721
Canadian Insurance
2,999
3,162
International Insurance
2,499
2,559
Insurance claims and policy benefit liabilities
11,511
12,816
Fair value changes on investments backing policyholder liabilities
(1)
(1,888)
(13)
Number of employees (FTE)
2,731
2,573
(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
2022 vs. 2021
Net income decreased $32 million or 4% from last year, largely due to the impact of lower new longevity reinsurance contracts,
partially offset by higher favourable investment-related experience.
Total revenue decreased $2,090 million or 37%, mainly due to the change in fair value of investments backing policyholder
liabilities and lower group annuity sales, both of which are largely offset in PBCAE as indicated below. These factors were
partially offset by business growth in Canadian Insurance across the majority of our products.
PBCAE decreased $2,108 million or 54%, mainly reflecting the change in fair value of investments backing policyholder
liabilities and lower group annuity sales, both of which are largely offset in revenue. Higher favourable investment-related
experience and favourable annual actuarial assumption updates in the current year largely related to economic assumptions
also contributed to the decrease. These factors were partially offset by the impact of lower new longevity reinsurance contracts,
as well as business growth in Canadian Insurance.
Non-interest expense decreased $8 million or 1% mainly due to lower costs associated with ongoing efficiency initiatives and
lower legal costs. These factors were partially offset by increased costs in support of sales and client service activities.
Business line review
Canadian Insurance
We offer life, health, travel, wealth accumulation solutions, and annuities to individuals and businesses across Canada. We also
offer home and auto insurance for individuals, through a distribution agreement with Aviva Canada. Our life and health portfolio
includes participating whole life, universal life, term life, critical illness, disability, and group benefits, including long-term
disability, and health and dental insurance. Wealth solutions include a family of segregated funds as well as individual annuities.
Our travel products include out-of-province/country medical coverage, and trip cancellation and interruption insurance.
Our group annuities business helps defined benefit pension plan sponsors better manage and control risk. RBC Insurance
®
has a set of strategies and initiatives aimed at building our momentum and positioning us for growth in this product line, where
companies are increasingly looking to transfer the risks associated with their pension obligations to insurance companies –
either through group annuity contracts or longevity swap products.
In Canada, many of our competitors specialize in either life or health or in property and casualty products. As a multi-line
carrier, we offer a broad suite of solutions, increasing convenience for our clients. Many of our solutions hold market leadership
positions, including our disability insurance and wealth products.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
45
Financial performance
Total revenue decreased $2,264 million or 78% from last year, primarily due to the change in fair value of investments backing
policyholder liabilities and lower group annuity sales. These factors were partially offset by business growth across the majority
of our products.
Premiums and deposits decreased $163 million or 5%, mainly due to group annuity and individual life products.
Selected highlights
Table 30
(Millions of Canadian dollars)
2022
2021
Total revenue
$
653
$ 2,917
Other information
Premiums and deposits
Life and health
1,416
1,434
Property and casualty
81
77
Annuity
834
989
Segregated fund deposits
668
662
Fair value changes on investments
backing policyholder liabilities
(2,259)
(119)
0
1,000
4,000
3,000
2,000
Property and casualty
Se
g
re
g
ated fund
Annuity
Life and health
2022
Premiums and deposits
(Millions of Canadian dollars)
2021
International Insurance
International Insurance is primarily comprised of our reinsurance businesses which insure risks of other insurance and
reinsurance companies. We offer life, disability and longevity reinsurance solutions.
The global reinsurance market is competitive with significant market opportunities in the U.S., U.K, and Europe. Market share
is largely held by a small number of reinsurers, with RBC Insurance
®
continuing to have steady growth.
Financial performance
Total revenue increased $174 million or 6% from last year, mainly due to the change in fair value of investments backing
policyholder liabilities.
Premiums and deposits decreased $60 million or 2%.
Selected highlights
Table 31
(Millions of Canadian dollars)
2022
2021
Total revenue
$ 2,857
$ 2,683
Other information
Premiums and deposits
Life and health
1,044
1,050
Annuity
1,455
1,509
Fair value changes on investments
backing policyholder liabilities
371
106
0
1,000
4,000
3,000
2,000
Life and health
2022
2021
Premiums and deposits
(Millions of Canadian dollars)
Annuity
46
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Investor & Treasury Services
Investor & Treasury Services provides asset, payment and treasury services to financial institutions and asset owners worldwide.
We are a leader in Canadian cash management and transaction banking services. Trusted with nearly 4 trillion in AUA, our focus
is on safeguarding client assets and supporting our clients’ growth.
$3.9 trillion
16.4%
$61.8 billion
AUA
Return on equity
Average client deposits
Revenue by Geography
Total revenue
$2.2 billion
39% North America
33%
Europe (Ex. U.K.)
17% U.K.
11% Asia-Pacific
Our product and service offering includes custody, fund administration,
shareholder services, private capital services, middle office, transaction banking
(including trade finance, insourced solutions and services to broker dealers), and
treasury and market services (including cash/liquidity management, foreign
exchange and securities finance).
Our asset services business competes against the world’s largest custodians in
selected countries in North America, Europe, and the U.K.
Our transaction banking business competes against the largest banks in Canada.
2022 Operating environment
›
Results for our asset services business were impacted by industry headwinds such as continued pricing pressure, partially
offset by rising interest rates.
›
Our funding and liquidity business managed through a rising rate environment and results were driven by increased market
opportunities.
›
We continued to execute on initiatives to improve our cost structure, focus on markets and segments where we have
competitive advantages and upgrade our technology capabilities.
Strategic priorities
OUR STRATEGY
PROGRESS IN 2022
PRIORITIES IN 2023
Grow the Canadian franchise
Delivered significant revenue growth in our
transaction banking business through acquisition
of new clients, expansion of existing relationships,
and delivery of new product offerings
Grow relationships with Canadian asset
managers, investment counsellors, pension
funds, insurance companies, and transaction
banking clients
Deliver new products to meet growing client
demand and enhance our core capabilities in
Canada to improve the client experience
Compete in select asset servicing
segments and markets
Signed a Memorandum of Understanding to divest
our European asset servicing activities and
associated Malaysian centre of excellence
Continued cross-segment collaboration to grow
fund finance sales
Complete the intended divestiture (subject to
customary closing conditions, including
regulatory and antitrust approvals)
Deliver seamless client experiences and
employ technology to enable our clients’
success
Continued to evolve our digital offering, improve
interactive applications to increase clients’ digital
self-service capacity and reduce operational risk
Continue to invest to seamlessly onboard,
integrate and support our clients through
digital channels
Outlook
In fiscal 2023, we expect the global asset services industry will remain challenging. While we expect some benefit from rising
interest rates in fiscal 2023, ongoing fee reductions, competition from global custody providers in key markets and the impact of
reduced client activity as a result of lower asset values and net client movements, are expected to constrain revenue growth.
Ongoing inflationary pressures coupled with recession concerns also have the potential to impact our results in fiscal 2023.
Completing the divestiture of our European asset servicing activities and associated Malaysian centre of excellence will be a
priority. We will focus on growing in markets and segments where we have competitive advantages, improving operational
efficiency and leveraging our investment in technology to enable our clients’ success.
We will continue to prioritize prudent risk and funding management amidst an evolving liquidity environment and uncertain
market backdrop.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook
section.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
47
Investor & Treasury Services
Table 32
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
2022
2021
Net interest income
$
498
$
460
Non-interest income
1,725
1,704
Total revenue
2,223
2,164
PCL on performing assets
1
(8)
PCL on impaired assets
(4)
–
PCL
(3)
(8)
Non-interest expense
1,569
1,589
Income before income taxes
657
583
Net income
$
513
$
440
Key ratios
ROE
16.4%
14.0%
Selected balance sheet information
Average total assets
$
250,600
$
235,400
Average deposits
245,000
219,800
Average client deposits
61,800
64,400
Average wholesale funding deposits
183,200
155,400
Other information
AUA
(1)
$
3,906,900
$ 4,640,900
Average AUA
4,392,600
4,634,900
Number of employees (FTE)
3,497
3,718
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items
(Millions of Canadian dollars, except percentage amounts)
2022 vs. 2021
Increase (decrease):
Total revenue
$
(70)
PCL
–
Non-interest expense
(68)
Net income
(3)
Percentage change in average U.S. dollar equivalent of C$1.00
(3)%
Percentage change in average British pound equivalent of C$1.00
7%
Percentage change in average Euro equivalent of C$1.00
9%
(1)
Represents year-end spot balances.
Financial performance
2022 vs. 2021
Net income increased $73 million or 17% from last year, mainly driven by higher revenue from client deposits, partially offset by
higher technology-related costs.
Total revenue increased $59 million or 3%, mainly due to higher revenue from client deposits reflecting improved margins,
partially offset by the impact of foreign exchange translation.
Non-interest expense decreased $20 million or 1%, mainly due to the impact of foreign exchange translation and lower
staff-related costs. These factors were partially offset by higher technology-related costs, a favourable sales tax adjustment in
the prior year and higher legal costs.
48
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Capital Markets
RBC Capital Markets
®
is a premier global investment bank providing expertise in advisory & origination, sales & trading, and
lending & financing to corporations, institutional clients, asset managers, private equity firms and governments globally. Our
professionals ensure that clients receive the advice, products, and services their businesses need from 63 offices in 18 countries.
Our presence extends across North America, the U.K. & Europe, and Australia, Asia & other regions.
>19,500
#9
6,887
Number of clients
Global league table rankings
1
Employees
Revenue by Geography
Total revenue
$9.1 billion
49%
U.S.
29%
Canada
16%
U.K. & Europe
6%
Australia, Asia &
other regions
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, and sales &
trading. In Canada, we are a market leader with a strategic presence in all lines
of capital markets businesses. In the U.S., where our competitors include large
global investment banks, we have a full industry sector coverage and investment
banking product range, as well as capabilities in credit, secured lending,
municipal finance, fixed income, currencies & commodities, and equities.
Outside North America, we have a targeted strategic presence in the U.K. &
Europe, Australia, Asia & other markets aligned to our global expertise. In the
U.K. & Europe, we offer a diversified set of capabilities in key industry sectors of
focus. In Australia and Asia, we compete with global and regional investment
banks in targeted areas aligned to our global expertise, including fixed income
distribution and currencies trading, secured financing, as well as corporate and
investment banking.
2022 Operating environment
›
The fiscal 2022 operating environment was characterized by significant geopolitical and economic uncertainty alongside
elevated inflation and rising interest rates, resulting in increased financial market volatility and asset revaluation. This created
a challenging operating environment that led to a decline in activity across some of our global capital markets businesses,
particularly in the second half of the fiscal year. Global investment banking fee pools were impacted by weakness in credit and
equity markets beginning in the second fiscal quarter of 2022, resulting in an approximately 30% decline in global investment
banking fee pools
1
this fiscal year compared to record levels in fiscal 2021.
›
Trading activity remained elevated in some businesses, particularly in macro-focused businesses such as rates and foreign
exchange. However, this was offset by a more challenging environment for credit trading as a result of widening spreads and
slower new issuance activities. Despite the market disruption, our balance sheet strength enabled us to continue supporting
our clients during the 2022 fiscal year.
›
While the credit environment in fiscal 2022 reflected the recovery from the COVID-19 pandemic, it also reflected unfavourable
changes in our economic outlook towards the latter half of the year, including the impact of slowing economic growth as well
as rising inflation and interest rates. PCL on impaired loans remained below pre-pandemic levels.
1
Source: Dealogic, based on global investment bank fees, Fiscal 2022
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
49
Strategic priorities
OUR STRATEGY
PROGRESS IN 2022
PRIORITIES IN 2023
Grow and deepen client relationships
Strengthened relationships with key clients,
resulting in high quality mandates and notable
wins in Corporate & Investment Banking and
Global Markets, for example:
•
Financial Advisor to DigitalBridge and IFM
Investors on US$11 billion landmark
communications infrastructure take-private
transaction
•
Financial Advisor and Lead Arranger to The
Vertex Company and American Industrial
Partners on its merger with Vectrus, creating a
US$2.1 billion entity
Deliver holistic coverage to clients and drive
multi-product client relationships to gain market
share
Expand client coverage in underpenetrated
sectors and products
Lead with advice and extend capabilities
Expanded advisory and thought leadership
capabilities inclusive of Sustainable Finance
1
and
Private Capital
Refreshed our Global Markets strategy to deliver
holistic client service providing trusted solutions
and execution, leveraging origination and
financing, enabled by digital offerings
Examples include:
•
Joint Bookrunner and Global Coordinator on
Definity Financial’s Initial Public Offering
(IPO) and Private Placement Agent on its
Cornerstone Private Placement raising
proceeds of C$2.1 billion, making it the largest
IPO in Canadian financial services since 1999
•
Advised SS&C Technologies on the £1.2 billion
acquisition of BluePrism, demonstrating our
strength in delivering support in complex
cross-border, sector and product transactions
involving publicly traded targets
Grow all areas of origination, inclusive of
structured solutions, through partnership across
Corporate & Investment Banking and Global
Markets
Continue to drive cross-platform and geographic
collaboration across businesses and asset classes
Lead on Sustainable Finance
1
, Energy Transition,
and Private Capital solutions
Leverage digital and data to deliver
innovative solutions
Launched Aiden
®
Arrival, the second algorithm on
the AI-based electronic trading platform, aimed at
enhancing flexibility and control over trade
execution
Scaled our digital research platform, Elements,
into next generation applications utilizing
alternative data
Scale digital capabilities including electronic
execution, analytics and platform capabilities
across Capital Markets
Generate differentiated insights and thought
leadership leveraging data and analytics
Prioritize and align for impact
Embedded productivity and efficiency measures
within the businesses, and formalized a benefits
tracking process
Enhanced collaboration with Treasury & Market
Services to increase funding capacity
Strategically deploy talent, technology and
financial resources to areas of greatest
opportunity
Align business and functional strategies to build
scale and maximize impact
Drive agility and ease of doing business
Leveraged the newly created cross-business and
functional Investment Review Board to address
the technology capital allocation process
Improve processes, leveraging an end-to-end
approach to enhance client outcomes
Accelerate execution and simplify procedures to
improve employee experience
Engage, enable and empower our talent
Invested in senior talent through external hiring
and promotions and repositioned our talent
strategy to be better aligned with business
outcomes
Advanced our Diversity & Inclusion (D&I) strategy
and improved representation of diverse talent
Invest in talent through scaled development
programs, increased mobility, senior hiring and
promotions
Deliver on D&I strategy and build on our inclusive
culture
Outlook
In fiscal 2023, the outlook remains uncertain and financial market volatility is expected to persist. Despite these market
dynamics, a modest recovery of capital markets industry revenues is expected. We will continue to pursue market share growth
in both our Corporate & Investment Banking and Global Markets businesses. In Investment Banking, we continue to focus on
targeted sectors and investment in talent, with an emphasis on advisory products. In Global Markets, our focus remains on
delivering robust results through continued resource optimization, acceleration of cross-selling activities, further deployment of
electronic and digital capabilities, and building on our strong risk management practices. In Corporate Banking, following higher
levels of balance sheet deployment in support of increased client financing demands in fiscal 2022, we will continue to pursue a
moderate growth approach consistent with our focus on our balance sheet-enabled strategy to deepen relationships with lending
clients in order to drive growth in our non-lending businesses. This strategy will continue to be underpinned by strong credit risk
management practices, optimization of our financial resources and supporting our clients in the execution of their strategies.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook
section.
1
Sustainable finance refers to financial activities that take into account environmental, social and governance factors
50
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Capital Markets
Table 33
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
2022
2021
Net interest income
(1)
$
4,698
$
4,553
Non-interest income
(1)
4,422
5,634
Total revenue
(1)
9,120
10,187
PCL on performing assets
(34)
(476)
PCL on impaired assets
23
(33)
PCL
(11)
(509)
Non-interest expense
5,561
5,427
Income before income taxes
3,570
5,269
Net income
$
2,921
$
4,187
Revenue by business
Corporate & Investment Banking
$
4,309
$
4,823
Global Markets
5,245
5,542
Other
(434)
(178)
Key ratios
ROE
11.3%
18.3%
Selected balance sheet information
Average total assets
$
824,800
$
710,200
Average trading securities
133,000
122,900
Average loans and acceptances, net
121,700
100,000
Average deposits
79,000
73,500
Other information
Number of employees (FTE)
6,887
6,414
Credit information
PCL on impaired loans as a % of average net loans and acceptances
0.01%
(0.04)%
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items
(Millions of Canadian dollars, except percentage amounts)
2022 vs. 2021
Increase (decrease):
Total revenue
$
42
PCL
–
Non-interest expense
8
Net income
34
Percentage change in average U.S. dollar equivalent of C$1.00
(3)%
Percentage change in average British pound equivalent of C$1.00
7%
Percentage change in average Euro equivalent of C$1.00
9%
(1)
The teb adjustment for 2022 was $572 million (2021 – $518 million). For further discussion, refer to the How we measure and report our business segments section.
10,500
7,500
9,000
4,500
6,000
3,000
1,500
0
2022
2021
Revenue by region
(Millions of Canadian dollars)
Australia, Asia & other regions
U.K. & Europe
U.S.
Canada
Financial performance
2022 vs. 2021
Net income decreased $1,266 million or 30% from last year, primarily driven by lower revenue in Corporate & Investment Banking,
larger releases of provisions on performing assets in the prior year, and lower revenue in Global Markets.
Total revenue decreased $1,067 million or 10%, mainly due to the impact from loan underwriting markdowns, primarily in the
U.S., largely driven by challenging market conditions. Lower debt and equity origination across most regions also contributed to
the decrease. This was partially offset by higher lending revenue across most regions.
PCL was $(11) million compared to $(509) million last year, primarily attributable to releases of provisions on performing
assets reflecting the recovery from the COVID-19 pandemic in both 2022 and 2021. The releases in the current year were partially
offset by unfavourable changes in our macroeconomic outlook. Provisions taken on impaired loans in the current year as
compared to recoveries in the prior year also contributed to the increase, resulting in an increase of 5 bps in the PCL on impaired
loans ratio.
Non-interest expense increased $134 million or 2%, mainly due to higher technology-related costs, higher marketing and
business development costs, and higher trade execution costs. These factors were partially offset by changes in the fair value of
our share-based compensation plans, which was largely offset in other revenue.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
51
Business line review
Corporate & Investment Banking
Corporate & Investment Banking comprises our corporate lending, municipal finance, loan syndication, debt and equity
origination, and M&A advisory services. For debt and equity origination, revenue is allocated between Corporate & Investment
Banking and Global Markets based on the contribution of each group in accordance with an established agreement.
Financial performance
Corporate & Investment Banking revenue of $4,309 million decreased $514 million or 11% from last year.
Investment Banking revenue decreased $773 million or 30%, mainly due to the impact from loan underwriting markdowns,
primarily in the U.S., largely driven by challenging market conditions. Lower debt origination primarily in the U.S. also contributed
to the decrease.
Lending and other revenue increased $259 million or 11%, primarily due to average volume growth in the U.S. and Europe.
Selected highlights
Table 34
(Millions of Canadian dollars)
2022
2021
Total revenue
(1)
$
4,309
$
4,823
Breakdown of revenue
(1)
Investment banking
1,786
2,559
Lending and other
(2)
2,523
2,264
Other information
Average assets
100,100
81,400
Average loans and acceptances, net
92,400
73,300
(1)
The teb adjustment for the year ended October 31, 2022 was $39 million
(October 31, 2021 – $37 million). For further discussion, refer to the How we
measure and report our business segments section.
(2)
Comprises our corporate lending, client securitization, and global credit
businesses.
0
1,000
5,000
2,000
3,000
4,000
2022
2021
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 $5,245 million decreased $297 million or 5% from last year.
Revenue in our Fixed income, currencies and commodities business decreased $308 million or 11%, largely driven by lower
fixed income trading revenue and lower debt origination both primarily in the U.S. These factors were partially offset by higher
foreign exchange trading revenue across all regions.
Revenue in our Equities business decreased $73 million or 5%, primarily due to lower equity origination across most regions.
Revenue in our Repo and secured financing business increased $84 million or 7%, mainly due to increased client activity.
Selected highlights
Table 35
(Millions of Canadian dollars)
2022
2021
Total revenue
(1)
$
5,245
$
5,542
Breakdown of revenue
(1)
Fixed income, currencies
and commodities
2,570
2,878
Equities
1,458
1,531
Repo and secured financing
(2)
1,217
1,133
Other information
Average assets
707,500
626,500
(1)
The teb adjustment for the year ended October 31, 2022 was $533 million
(October 31, 2021 – $481 million). For further discussion, refer to the How we
measure and report our business segments section.
(2)
Comprises our secured funding businesses for internal businesses and
external clients.
0
1,000
2,000
6,000
3,000
4,000
5,000
2022
2021
Repo and secured
financing
Global equities
Fixed income, currencies
and commodities
Breakdown of total revenue
(Millions of Canadian dollars)
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
Revenue decreased $256 million from last year, reflecting higher residual funding costs and changes in the fair value of hedges
related to our share-based compensation plans, which was largely offset in non-interest expense.
52
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Corporate Support
Corporate Support consists of Technology & Operations, which provides the technological and operational foundation required
to effectively deliver products and services to our clients, Functions, which includes our finance, human resources, risk
management, internal audit and other functional groups, as well as our Corporate Treasury function. Reported results for
Corporate Support mainly reflect certain activities related to monitoring and oversight of enterprise activities which are not
allocated to business segments. For further details, refer to the How we measure and report our business segments section.
Corporate Support
Table 36
(Millions of Canadian dollars)
2022
2021
Net interest income (loss)
(1)
$
(132)
$
(321)
Non-interest income (loss)
(1)
,
(2)
(728)
421
Total revenue
(1)
,
(2)
(860)
100
PCL
1
(1)
Non-interest expense
(2)
(247)
405
Income (loss) before income taxes
(1)
(614)
(304)
Income taxes (recoveries)
(1)
(616)
(365)
Net income (loss)
$
2
$
61
(1)
Teb adjusted.
(2)
Revenue for the year ended October 31, 2022, included losses of $363 million (October 31, 2021 – gains of $394 million) on economic hedges of our U.S. Wealth
Management (including City National) share-based compensation plans, and non-interest expense included $(289) million (October 31, 2021 – $382 million) of share-based
compensation expense driven by changes in the fair value of liabilities relating to our U.S. Wealth Management (including City National) share-based compensation
plans.
Due to the nature of activities and consolidation adjustments reported in this segment, we believe that a comparative period
analysis is not relevant.
Total revenue and Income taxes (recoveries) in each period in Corporate Support include the deduction of the teb adjustments
related to the gross-up of income from Canadian taxable corporate dividends and the U.S. tax credit investment business
recorded in Capital Markets. The amount deducted from revenue was offset by an equivalent increase in Income taxes
(recoveries).
The teb amount for the year ended October 31, 2022 was $572 million and was $518 million last year.
The following identifies the material items, other than the teb impacts noted previously, affecting the reported results in each
year.
2022
Net income was $2 million. Net favourable tax adjustments and asset/liability management activities were offset by residual
unallocated items.
2021
Net income was $61 million, primarily due to asset/liability management activities and residual unallocated items, partially offset
by net unfavourable tax adjustments.
Quarterly financial information
Fourth quarter performance
Q4 2022 vs. Q4 2021
Fourth quarter net income of $3,882 million was down $10 million. Diluted EPS of $2.74 was up $0.06 and ROE of 15.6% was down
130 bps. Our CET1 ratio of 12.6% was down 110 bps from a year ago. Lower results in Capital Markets and Corporate Support were
partially offset by strong earnings in Wealth Management and Personal & Commercial Banking.
Total revenue increased $191 million or 2%, largely due to higher net interest income and trading revenue. These factors were
partially offset by lower insurance revenue, other revenue, underwriting and other advisory fees and mutual fund revenue.
Net interest income increased $1,221 million or 24%, mainly due to higher spreads and average volume growth in loans and
deposits in Canadian Banking and Wealth Management. These factors were partially offset by lower net interest income in Investor
& Treasury Services reflecting higher funding costs that were offset by related gains on non-trading derivatives in Other revenue.
Insurance revenue decreased $857 million or 57%, primarily due to lower group annuity sales and the change in fair value of
investments backing policyholder liabilities, both of which are largely offset in PBCAE.
Trading revenue increased $348 million, largely due to higher fixed income trading revenue across most regions.
Mutual fund revenue decreased $132 million or 12%, largely due to lower average mutual fund balances in Wealth
Management and Canadian Banking.
Underwriting and other advisory fees decreased $174 million or 27%, mainly due to lower debt origination across all regions.
Other revenue decreased $219 million or 90%, largely due to the impact of economic hedges, including changes in the fair
value of hedges related to our U.S. share-based compensation plans that were largely offset in Non-interest expense. These
factors were partially offset by net gains on non-trading derivatives, which were offset within net interest income.
Total PCL was $381 million compared to $(227) million last year, reflecting provisions taken on performing loans and higher
provisions on impaired loans in the current quarter as compared to releases of provisions on performing loans in the prior year,
primarily in Personal & Commercial Banking. The PCL on loans ratio of 18 bps compared to (12) bps last year increased 30 bps.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
53
PBCAE decreased $916 million, primarily due to lower group annuity sales and the change in fair value of investments
backing policyholder liabilities, both of which are largely offset in revenue. Higher favourable annual actuarial assumption
updates largely related to economic assumption updates in the current year also contributed to the decrease.
Non-interest expense increased $626 million or 10%, mainly attributable to higher variable compensation, primarily due to
the timing of true-ups related to our variable compensation plans in Capital Markets and higher staff-related costs. The impact of
foreign exchange translation as well as the Brewin Dolphin acquisition and related costs also contributed to the increase. These
factors were partially offset by the change in the fair value of our U.S. share-based compensation plans as well as the impact of a
legal provision taken in U.S Wealth Management (including City National) in the prior year that was partially released in the first
quarter of 2022.
Income tax expense decreased $117 million or 11%, primarily due to an increase in income from lower tax rate jurisdictions in
the current year and lower income before income taxes. The effective income tax rate of 20.1% decreased 190 bps from last year,
mainly due to an increase in income from lower tax rate jurisdictions in the current year.
Q4 2022 vs. Q3 2022
Net income of $3,882 million was up $305 million or 9% compared to last quarter, primarily due to higher fixed income trading
revenue in Capital Markets as the prior quarter included the impact from loan underwriting markdowns, primarily in the U.S, and
higher spreads in Canadian Banking and Wealth Management. These factors were partially offset by higher compensation,
primarily due to the timing of true-ups related to our variable compensation plans.
Quarterly results and trend analysis
Our quarterly results are impacted by a number of trends and recurring factors, which include seasonality of certain businesses,
general economic and market conditions, and fluctuations in the Canadian dollar relative to other currencies. The following table
summarizes our results for the last eight quarters (the period):
Quarterly results
(1)
Table 37
2022
2021
(Millions of Canadian dollars, except per
share and percentage amounts)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Personal & Commercial Banking
$ 5,419
$
5,182
$
4,739
$
4,803
$
4,605
$
4,651
$
4,527
$
4,563
Wealth Management
3,976
3,655
3,605
3,613
3,444
3,373
3,260
3,219
Insurance
644
1,233
234
1,399
1,501
1,754
536
1,809
Investor & Treasury Services
503
582
551
587
548
517
534
565
Capital Markets
(2)
2,313
1,649
2,348
2,810
2,298
2,463
2,718
2,708
Corporate Support
(2)
(288)
(169)
(257)
(146)
(20)
(2)
43
79
Total revenue
12,567
12,132
11,220
13,066
12,376
12,756
11,618
12,943
PCL
381
340
(342)
105
(227)
(540)
(96)
110
PBCAE
116
850
(180)
997
1,032
1,304
149
1,406
Non-interest expense
7,209
6,386
6,434
6,580
6,583
6,420
6,379
6,542
Income before income taxes
4,861
4,556
5,308
5,384
4,988
5,572
5,186
4,885
Income taxes
979
979
1,055
1,289
1,096
1,276
1,171
1,038
Net income
$ 3,882
$
3,577
$
4,253
$
4,095
$
3,892
$
4,296
$
4,015
$
3,847
EPS – basic
$
2.75
$
2.52
$
2.97
$
2.84
$
2.68
$
2.97
$
2.76
$
2.66
– diluted
2.74
2.51
2.96
2.84
2.68
2.97
2.76
2.66
Effective income tax rate
20.1%
21.5%
19.9%
23.9%
22.0%
22.9%
22.6%
21.2%
Period average US$ equivalent
of C$1.00
$ 0.739
$
0.783
$
0.789
$
0.787
$
0.796
$
0.812
$
0.798
$
0.779
(1)
Fluctuations in the Canadian dollar relative to other foreign currencies have affected our consolidated results over the period.
(2)
Teb adjusted. For further discussion, refer to the How we measure and report our business segments section of this 2022 Annual Report.
Seasonality
Seasonal factors may impact our results in certain quarters. The first quarter has historically been stronger for our Capital
Markets businesses. The second quarter has fewer days than the other quarters, which generally results in a decrease in net
interest income and certain expense items. The third and fourth quarters include the summer months which generally results in
lower client activity and may negatively impact the results of our Capital Markets trading business.
Trend analysis
Earnings over the period have been impacted by the factors noted below.
Personal & Commercial Banking revenue has benefitted from solid volume growth in loans and deposits over the period. NIM
has been favourably impacted by the rising interest rate environment over the last three quarters, whereas a low interest rate
environment persisted in the earlier part of the period.
Wealth Management revenue has benefitted from growth in average fee-based client assets, which is impacted by market
conditions, and volume growth in loans and deposits over the period. The rising interest rate environment also favourably
impacted revenue over the last three quarters, whereas a low interest rate environment persisted in the earlier part of the period.
Insurance revenue has fluctuated over the period, primarily due to the impact of changes in the fair value of investments
backing policyholder liabilities as well as the timing of group annuity sales, both of which are largely offset in PBCAE. Group
annuity sales are generally higher in the first half of the fiscal year.
Investor & Treasury Services revenue has been impacted by interest rate movements, market volatility and client activity
over the period.
54
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Capital Markets revenue is influenced, to a large extent, by market conditions that impact client activity. Trading revenue
across the first half of the period benefitted from increased client activity. Beginning in the second quarter of 2022, there was a
decline in global fee pools. Trading results were further impacted notably in the third quarter of 2022 amidst challenging market
conditions, driving lower fixed income trading revenue, including the impact from loan underwriting markdowns.
PCL is comprised of provisions taken on performing assets and provisions taken on impaired assets. PCL on performing
assets has fluctuated over the period as it is impacted by changes in macroeconomic conditions, exposures and credit quality.
Throughout 2021 and the first half of 2022, we saw improvements in our macroeconomic and credit quality outlook, as the
economic impact from the COVID-19 pandemic eased in most regions, resulting in releases of provisions on performing assets. In
the last half of 2022, unfavourable changes in our macroeconomic outlook resulted in an increase in provisions. PCL on impaired
assets remained lower than pre-pandemic levels over the period.
PBCAE has fluctuated over the period reflecting changes in the fair value of investments backing policyholder liabilities,
which is impacted by changes in market conditions, as well as group annuity sales, both of which are largely offset in revenue.
PBCAE has also fluctuated due to the impact of investment-related experience and claims costs over the period. Actuarial
adjustments, which generally occur in the fourth quarter of each year, also impact PBCAE.
Non-interest expense has been impacted by fluctuations in variable compensation over the period, commensurate with
fluctuations in revenue and earnings. Changes in the fair value of our U.S. share-based compensation plans, which are largely
offset in revenue, have also contributed to fluctuations over the period and are impacted by market conditions. While we
continue to focus on efficiency management activities, expenses over the period also reflect investments in staff and technology
and increases in discretionary spend, including marketing. The fourth quarter of 2021 included a legal provision in U.S. Wealth
Management (including City National) that was partially released in the first quarter of 2022.
Our effective income tax rate has fluctuated over the period, mostly due to varying levels of tax adjustments and changes in
earnings mix. The second and fourth quarters of 2022 reflected the impact of net favourable tax adjustments and an increase in
income from lower tax rate jurisdictions, respectively.
Financial condition
Condensed balance sheets
Table 38
As at October 31 (Millions of Canadian dollars)
2022
2021
Assets
Cash and due from banks
$
72,397
$
113,846
Interest-bearing deposits with banks
108,011
79,638
Securities, net of applicable allowance
(1)
318,223
284,724
Assets purchased under reverse repurchase agreements and securities borrowed
317,845
307,903
Loans
Retail
549,751
503,598
Wholesale
273,967
218,066
Allowance for loan losses
(3,753)
(4,089)
Other – Derivatives
154,439
95,541
– Other
(2)
126,339
107,096
Total assets
$
1,917,219
$
1,706,323
Liabilities
Deposits
$
1,208,814
$
1,100,831
Other – Derivatives
153,491
91,439
– Other
(2)
436,714
405,698
Subordinated debentures
10,025
9,593
Total liabilities
1,809,044
1,607,561
Equity attributable to shareholders
108,064
98,667
Non-controlling interests
111
95
Total equity
108,175
98,762
Total liabilities and equity
$
1,917,219
$
1,706,323
(1)
Securities are comprised of trading and investment securities.
(2)
Other – Other assets and liabilities include Segregated fund net assets and liabilities, respectively.
2022 vs. 2021
Total assets increased $211 billion or 12% from last year. Foreign exchange translation increased total assets by $114 billion.
Cash and due from banks was down $41 billion or 36%, primarily due to lower deposits with central banks, reflecting our
liquidity and short-term cash management activities.
Interest-bearing deposits with banks increased $28 billion or 36%, mainly due to higher deposits with central banks,
reflecting our short-term cash and liquidity management activities.
Securities, net of applicable allowance, were up $33 billion or 12%, mainly due to higher government securities, reflecting
short-term market opportunities and liquidity management activities, and the impact of foreign exchange translation. These
factors were partially offset by lower equity trading securities.
Assets purchased under reverse repurchase agreements (reverse repos) and securities borrowed increased $10 billion or 3%,
primarily due to the impact of foreign exchange translation and liquidity management activities, partially offset by decreased
client demand.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
55
Loans (net of Allowance for loan losses) were up $102 billion or 14%, primarily due to volume growth in wholesale loans and
residential mortgages. The impact of foreign exchange translation also contributed to the increase.
Derivative assets were up $59 billion or 62%, primarily attributable to the impact of foreign exchange translation.
Other assets were up $19 billion or 18%, primarily reflecting higher cash collateral and margin deposits. The impact of foreign
exchange translation also contributed to the increase.
Total liabilities increased $201 billion or 13% from last year. Foreign exchange translation increased total liabilities by $114 billion.
Deposits increased $108 billion or 10%, mainly due to issuances of long-term and short-term notes due to funding
requirements and the impact of foreign exchange translation. Higher retail deposits also contributed to the increase.
Derivative liabilities were up $62 billion or 68%, primarily attributable to the impact of foreign exchange translation and
higher fair values on interest rate contracts, partially offset by lower fair values on foreign exchange contracts.
Other liabilities increased $31 billion or 8%, primarily due to higher short-term borrowings of subsidiaries due to funding
requirements, higher cash collateral and the impact of foreign exchange translation.
Total equity increased $9 billion or 10%, mainly reflecting earnings, net of dividends, and other comprehensive income (OCI).
These factors were partially offset by share repurchases.
Off-balance sheet arrangements
In the normal course of business, we engage in a variety of financial transactions that, for accounting purposes, are not recorded
on our Consolidated Balance Sheets. Off-balance sheet transactions are generally undertaken for risk, capital and funding
management purposes which benefit us and our clients. These include transactions with structured entities and may also include
the issuance of guarantees. These transactions give rise to, among other risks, varying degrees of market, credit, liquidity and
funding risk, which are discussed in the Risk management section.
We use structured entities to securitize our financial assets as well as assist our clients in securitizing their financial assets.
These entities are not operating entities, typically have no employees, and may or may not be recorded on our Consolidated
Balance Sheets.
In the normal course of business, we engage in a variety of financial transactions that may qualify for derecognition. We
apply the derecognition rules to determine whether we have transferred substantially all the risks and rewards or control
associated with the financial assets to a third party. If the transaction meets specific criteria, it may qualify for full or partial
derecognition from our Consolidated Balance Sheets.
Securitizations of our financial assets
We periodically securitize our credit card receivables and residential and commercial mortgage loans primarily to diversify our
funding sources, enhance our liquidity position and for capital purposes. We also securitize residential and commercial
mortgage loans as part of our sales and trading activities.
We securitize our credit card receivables, on a revolving basis, through a consolidated structured entity. We securitize single
and multiple-family residential mortgages through the National Housing Act Mortgage-Backed Securities (NHA MBS) program.
The majority of our securitization activities are recorded on our Consolidated Balance Sheets as we do not meet the
derecognition criteria. During 2022 and 2021, we did not derecognize any mortgages securitized through the NHA MBS program.
For further details, refer to Note 7 and Note 8 of our 2022 Annual Consolidated Financial Statements.
We also periodically securitize commercial mortgage loans by selling them in collateral pools, which meet certain
diversification, leverage and debt coverage criteria, to structured entities, one of which is sponsored by us. Securitized
commercial mortgage loans are derecognized from our Consolidated Balance Sheets as we have transferred substantially all of
the risks and rewards of ownership of the securitized assets. During the year ended October 31, 2022, we securitized $450 million
of commercial mortgages (October 31, 2021 – $nil). Our continuing involvement with the transferred assets is limited to servicing
certain of the underlying commercial mortgages sold. As at October 31, 2022, there was $2 billion of commercial mortgages
outstanding that we continue to service related to these securitization activities (October 31, 2021 – $2 billion).
Involvement with unconsolidated structured entities
In the normal course of business, we engage in a variety of financial transactions with structured entities to support our
customers’ financing and investing needs, including securitization of our clients’ financial assets, creation of investment
products, and other types of structured financing.
We have the ability to use credit mitigation tools such as third-party guarantees, credit default swaps, and collateral to
mitigate risks assumed through securitization and re-securitization exposures. The process in place to monitor the credit quality
of our securitization and re-securitization exposures involves, among other things, reviewing the performance data of the
underlying assets. We affirm our ratings each quarter and formally confirm or assign a new rating at least annually. For further
details on our activities to manage risks, refer to the Risk management section.
Below is a description of our activities with respect to certain significant unconsolidated structured entities. For a complete
discussion of our interests in consolidated and unconsolidated structured entities, refer to Note 8 of our 2022 Annual
Consolidated Financial Statements.
RBC-administered multi-seller conduits
We administer multi-seller conduits which are used primarily for the securitization of our clients’ financial assets. Our clients
primarily use our multi-seller conduits to diversify their financing sources and to reduce funding costs by leveraging the value of
high-quality collateral. The conduits offer us a favourable revenue stream and risk-adjusted return.
We provide services such as transaction structuring, administration, backstop liquidity facilities and partial credit
enhancements to the multi-seller conduits. Revenue for all such services amounted to $296 million during the year (October 31,
2021 – $304 million).
Our total commitment to the conduits in the form of backstop liquidity and credit enhancement facilities is shown below. The
total committed amount of these facilities exceeds the total amount of the maximum assets that may have to be purchased by
the conduits under the purchase agreements. As a result, the maximum exposure to loss attributable to our backstop liquidity
and credit enhancement facilities is less than the total committed amounts of these facilities.
56
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Liquidity and credit enhancement facilities
Table 39
2022
2021
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
$ 48,235
$ 45,261
$ 45,261
$ 40,876
$ 38,330
$ 38,330
Credit enhancement facilities
(3)
2,974
2,974
2,974
2,546
2,546
2,546
Total
$ 51,209
$ 48,235
$ 48,235
$ 43,422
$ 40,876
$ 40,876
(1)
Based on total committed financing limit.
(2)
Not presented in the table above are derivative assets with a fair value of $25 million (October 31, 2021 – $17 million) which are a component of our total maximum
exposure to loss from our interests in the multi-seller conduits. Refer to Note 8 of our 2022 Annual Consolidated Financial Statements for more details.
(3)
Includes $14 million (October 31, 2021 – $9 million) of Financial standby letters of credit.
As at October 31, 2022, the notional amount of backstop liquidity facilities we provide increased $7 billion or 18% from last year,
primarily due to an increase in outstanding securitized assets of the multi-seller conduits as well as the impact of foreign
exchange translation. The notional amount of partial credit enhancement facilities we provide increased $428 million or 17% from
last year, primarily due to an increase in outstanding securitized assets of the multi-seller conduits.
Maximum exposure to loss by client type
Table 40
2022
2021
As at October 31 (Millions of dollars)
US$
C$
Total C$
US$
C$
Total C$
Outstanding securitized assets
Auto and truck loans and leases
$ 10,553
$
3,967
$ 18,351
$
11,546
$
3,752
$
18,048
Consumer loans
3,198
–
4,359
2,466
–
3,054
Credit cards
4,932
719
7,441
3,876
510
5,309
Dealer floor plan receivables
1,012
580
1,960
906
770
1,892
Equipment receivables
2,291
243
3,365
2,227
–
2,757
Fleet finance receivables
785
213
1,283
366
213
667
Insurance premiums
143
428
624
170
428
638
Residential mortgages
–
1,785
1,785
–
873
873
Student loans
2,013
139
2,882
1,587
–
1,965
Trade receivables
2,306
–
3,144
2,337
–
2,893
Transportation finance
2,119
153
3,041
2,163
102
2,780
Total
$ 29,352
$
8,227
$ 48,235
$
27,644
$
6,648
$
40,876
Canadian equivalent
$ 40,007
$
8,227
$ 48,235
$
34,228
$
6,648
$
40,876
Our overall exposure increased 18% compared to last year, primarily due to an increase in the outstanding securitized assets of
the multi-seller conduits as well as the impact of foreign exchange translation. Correspondingly, total assets of the multi-seller
conduits increased $7 billion or 18% from last year, also primarily due to an increase in outstanding securitized assets in the
multi-seller conduits as well as the impact of foreign exchange. All of the multi-seller conduits transactions were internally rated
A or above. All transactions funded by the unconsolidated multi-seller conduits are internally rated using a rating system as
outlined in the internal ratings map in the credit risk section.
Multiple independent debt rating agencies review all of the transactions in the multi-seller conduits. Transactions financed in
the U.S. multi-seller conduits are reviewed by Moody’s Investors Service (Moody’s), Standard & Poor’s (S&P) and Fitch Ratings
(Fitch). Transactions in two of the Canadian multi-seller conduits are reviewed by DBRS Morningstar (DBRS) and Moody’s while
one of the Canadian multi-seller conduits is also reviewed by S&P. Each applicable rating agency also reviews ongoing transaction
performance on a monthly basis and may publish reports detailing portfolio and program information related to the conduits.
As at October 31, 2022, the total asset-backed commercial paper (ABCP) issued by the conduits amounted to $33 billion, an
increase of $8 billion or 32% from last year, primarily due to higher client usage. The rating agencies that rate the ABCP rated
100% (October 31, 2021 – 100%) of the total amount issued within the top ratings category.
Structured finance
We provide liquidity facilities to certain municipal bond tender option bond trusts in which we have an interest but do not
consolidate because the residual certificates issued by the tender option bond trusts are held by third parties. As at October 31,
2022, our maximum exposure to loss from these unconsolidated municipal bond tender option bond trusts was $3 billion
(October 31, 2021 – $3 billion).
We provide senior warehouse financing to unaffiliated structured entities that are established by third parties to acquire
loans and issue term collateralized loan obligations (CLO). Subordinated financing is provided during the warehouse phase by
either the collateral manager or third-party investors. Subordinated financing serves as the first loss tranche which absorbs
losses prior to ourselves as the senior lender. A portion of the proceeds from the sale of the term CLO is used to fully repay the
senior warehouse financing that we provide. As at October 31, 2022, our maximum exposure to loss associated with the
outstanding senior warehouse financing facilities was $640 million (October 31, 2021 – $951 million). The decrease in our
maximum exposure to loss from last year was driven by repayments of existing financing facilities partially offset by the impact
of foreign exchange translation.
We provide senior financing to unaffiliated structured entities that are established by third parties to acquire loans.
Subordinated financing is provided by either the collateral manager or third-party investors. Subordinated financing serves as
the first loss tranche which absorb losses prior to ourselves as the senior lender. These facilities tend to be longer in term than
the CLO warehouse facilities and benefit from credit enhancement designed to cover a multiple of historical losses. As at
October 31, 2022, our maximum exposure to loss associated with the outstanding senior financing facilities was $5 billion
(October 31, 2021 – $4 billion). The increase in our maximum exposure to loss from last year was driven by the addition of new
financing facilities as well as the impact of foreign exchange translation.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
57
Investment funds
We invest in hedge funds primarily to provide clients with desired exposures to reference funds. As we make investments in the
reference funds, exposures to the funds are simultaneously transferred to clients through derivative transactions. Our maximum
exposure to loss in the reference funds is limited to our investments in the funds. As at October 31, 2022, our maximum exposure
to loss was $3 billion (October 31, 2021 – $3 billion).
We also provide liquidity facilities to certain third-party investment funds. The funds issue unsecured variable-rate preferred
shares and invest in portfolios of tax exempt bonds. As at October 31, 2022, our maximum exposure to loss on these funds was
$667 million (October 31, 2021 – $606 million). The increase in our maximum exposure to loss from last year was driven by the
addition of new financing facilities as well as the impact of foreign exchange translation.
Third-party securitization vehicles
We hold interests in certain unconsolidated third-party securitization vehicles, which are structured entities. We, as well as other
financial institutions, are obligated to provide funding to these entities up to our maximum commitment level and are exposed to
credit losses on the underlying assets after various credit enhancements. As at October 31, 2022, our maximum exposure to loss
in these entities was $14 billion (October 31, 2021 – $12 billion). The increase in our maximum exposure to loss compared to last
year reflects an increase in client activity with third-party securitization vehicles. Interest and non-interest income earned in
respect of these investments was $186 million (October 31, 2021 – $89 million).
Guarantees, retail and commercial commitments
We provide our clients with guarantees and commitments that expose us to liquidity and funding risks. Our maximum potential
amount of future payments in relation to our commitments and guarantee products as at October 31, 2022 amounted to
$453 billion compared to $414 billion last year, primarily driven by the impact of foreign exchange translation and volume growth
in other commitments to extend credit. Refer to Liquidity and funding risk and Note 24 of our 2022 Annual Consolidated Financial
Statements for details regarding our guarantees and commitments.
Risk management
We are in the business of managing the risks inherent to the financial services industry as we aim to create maximum value for
our shareholders, clients, employees and communities. The ability to manage risk is a core competency of the bank, and is
supported by our risk-aware culture and risk management approach. Our view of risks is dynamic, and reflects the pace of
change in the financial services industry.
Top and emerging risks
An important component of our risk management approach is to ensure that top and emerging risks, as they evolve, are
identified, managed, and incorporated into our existing risk management assessment, measurement, monitoring and escalation
processes and addressed in our risk frameworks and policies. These practices are intended to ensure a forward-looking risk
assessment is maintained by management in the course of business development and as part of the execution of ongoing risk
oversight responsibilities. Top and emerging risks are discussed by senior management and the Board on a regular basis.
We have developed supplementary internal guidance to support enterprise-wide identification and assessment of all
material risks, including those that are not readily apparent. Top and emerging risks encompass those that could materially
impact our financial results, financial and operational resilience, reputation, business model, or strategy, as well as those that
may materially impact us as the risks evolve. The following represents our top and emerging risks:
Top & emerging risks
Description
Business and economic
conditions
Our financial results are affected to varying degrees by the general business and economic conditions in
the geographic regions in which we operate. These conditions may include factors such as: consumer
saving and spending habits; consumer borrowing and repayment patterns; unemployment rates; the
differing economic trajectories among nations across the globe, global tensions and geopolitical
uncertainty; the level of business investment and overall business sentiment; trade; the direction of the
COVID-19 pandemic and the emergence of new pathogens; the level of government spending as well as
fiscal and monetary policy; the level of activity and volatility of the financial markets; disruptions to
energy and other commodity markets; competitiveness; supply chain challenges and labour shortages
affecting certain sectors; the evolution of elevated inflationary pressures; and possible stagflation or
deflation. Moreover, interest rate changes and actions taken by central banks to manage inflation or the
broader economy have implications for us. Our financial results are sensitive to changes in interest
rates, as described in the Systemic risk section.
For example, a slowdown in economic growth or an economic downturn could adversely impact
employment rates and household incomes, consumer spending, housing prices, corporate earnings and
business investment and could adversely affect our business, including but not limited to the demand for
our loan and other products, and result in lower earnings, including higher credit losses. In addition to
risks arising from monetary policy tightening, risks are also emerging around how governments will seek
to recoup pandemic-related support, or any new support provided to deal with emerging economic
challenges. This may include, for example, changes to tax policy to address fiscal capacity concerns and
to balance budgets in the future.
There are also emerging risks related to wealth and income inequality, as well as changing
demographics and immigration, which could impact the labour market, inflation, demand and consumer
trends, and potentially have broader societal and government policy implications.
58
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Top & emerging risks
Description
Canadian housing and
household indebtedness
Notwithstanding currently low unemployment rates, Canadian housing and household indebtedness
risks remain heightened in the current rising interest rate environment. Concerns related to elevated
levels of mortgage-related Canadian household debt, which accelerated during the COVID-19 pandemic,
could escalate if the BoC continues to increase interest rates, if the current period of elevated inflation is
prolonged or if unemployment increases, potentially resulting in, among other things, higher credit
losses. Moreover, continued interest rate increases or slowing economic growth could adversely impact
housing market activity and housing prices, which could push loan-to-value (LTV) ratios higher and
further increase credit losses.
While real estate rental activity has rebounded in certain markets, changing consumer preferences and
work arrangements, and the impact from elevated borrowing costs, may continue to have an adverse
impact on future real estate investment and demand.
Information technology and
cyber risks
Information technology (IT) and cyber risks remain top risks, not only for the financial services sector,
but for other industries worldwide. Geopolitical tensions have increased the risk of nation state actors
attacking critical infrastructure, including banks and critical third-party suppliers (e.g., utilities, telecom
providers, etc.). We continue to be subject to the heightened inherent risk of cyber-attacks, data
breaches, cyber extortion and similar compromises, due to: (i) the size, scale, and global nature of our
operations; (ii) our heavy reliance on the internet to conduct day-to-day business activities; (iii) our
intricate technological infrastructure; and (iv) our reliance on third-party service providers. Ransomware
threats are growing in sophistication and being used to launch major supply chain attacks. Additionally,
clients’ use of personal devices can create further avenues for potential cyber-related incidents, as the
bank has little or no control over the safety of these devices. Resulting implications could include
business interruptions, client service disruptions, financial loss, theft of intellectual property and
confidential information, litigation, enhanced regulatory attention and penalties, as well as reputational
damage. Furthermore, the adoption of emerging technologies, such as cloud computing, Artificial
Intelligence (AI) and robotics, call for continued focus and investment to manage risks effectively. For
more details on how we are managing these risks, refer to the Operational risk section.
Geopolitical uncertainty
In 2022, the Russia-Ukraine conflict upended the geopolitical landscape, with wide-ranging impacts to
the global economy and markets. The duration and path of the conflict remains uncertain, and could
continue to fuel, or exacerbate global tensions, energy and other commodity shortages, supply chain
disruptions, inflationary pressures, weakening sentiment and growth prospects, market volatility,
cyberattacks, and the proliferation of sanctions and trade measures. Europe, in particular, faces
significant uncertainty given its dependence on Russia for energy imports and its weakening economic
prospects. Furthermore, the Canadian economy is vulnerable to continued trade tensions given the
country’s trading relationships with the U.S. and China. Tensions remain elevated between China and the
U.S. and its allies over a number of issues, including trade, technology, human rights, Taiwan, Hong Kong,
and Macau. Tensions between China and its neighbours over territorial claims, and the prospect of even
closer relations between China and Russia, add further global and economic uncertainty. Other
geopolitical tensions could also add to economic and market uncertainties. In addition, an uncertain
geopolitical or economic environment could lead to increases in polarization, social unrest, or terrorism,
each of which could have direct or indirect impacts to the bank.
More broadly, the future of global trade remains uncertain, as countries look to decrease reliance on the
global supply chain and nations with differing values. Increased protectionism and economic
nationalism could reshape global alliances as the supply of critical goods of economic and national
importance (e.g., energy, semiconductors) remains one of the top priorities of governments. We will
continue to monitor these developments and others, and will assess the implications they have on us.
Environmental and
social risk
(including climate change)
We, like other organizations, are increasingly under scrutiny to address social and racial inequality and
other human rights issues, and failure to do so may result in strategic, regulatory and reputation risks.
Risks associated with climate change are evolving as it relates to the global transition to a net-zero
economy and physical climate risks (e.g., extreme weather events).
Environmental and social risks, including climate change, are each unique and transverse risks
impacting our principal risk types in different ways and to varying degrees. While E&S risk manifests
itself through credit, reputation, and regulatory compliance risks, the impact of E&S risk also extends to
our other principal risks, including systemic, competitive, strategic, legal and regulatory environment,
operational, market, liquidity and insurance risks.
For details on these risks and how we are managing these risks, refer to the Overview of other risks
section.
Digital disruption
and innovation
The COVID-19 pandemic changed the way consumers interact with financial services providers, including
increasing demand for digital banking services. While this represents an opportunity for us to leverage our
use of technology, the need to meet the rapidly evolving needs of clients and compete with non-traditional
competitors has increased our strategic and reputation risks. Additional risks continue to emerge, as
demographic trends, evolving client expectations, the increased power to analyze data and the
emergence of disruptors are creating competitive pressures across a number of sectors. Moreover,
established technology companies, newer competitors, and regulatory changes continue to foster new
business models that are challenging or could challenge traditional banks and financial products. Finally,
while the adoption of new technologies, such as AI and machine learning, presents opportunities for us, it
is resulting or could result in new and complex strategic, operational, regulatory, compliance and
reputation risks that would need to be managed effectively.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
59
Top & emerging risks
Description
Privacy, data and third-party
related risks
The protection and responsible use of personal information are critical to maintaining our clients’ trust. In
addition, the management and governance of our data also remains a top risk given the high value
attributed to our data for the insights it can generate for clients and communities. Resulting implications
from failing to manage data and privacy risks could include financial loss, theft of intellectual property
and/or confidential information, litigation, enhanced regulatory attention and penalties, as well as
reputational damage. Effective privacy and information management practices continue to grow in
importance, as demonstrated by the continued development of complex regulations in the jurisdictions in
which we operate. Our potential exposure to these risks increases as we continue to partner with third-
party service providers and adopt new business models and technologies (e.g., cloud computing, AI and
machine learning). Threat actors gravitate towards vulnerabilities in an ecosystem, and the weakest link
in the supply chain can be a supplier or third-party service provider that may not have sufficiently robust
controls. Privacy, data and third-party related risks have been heightened as the use of work from home
arrangements remains common practice. Third-party providers critical to our operations are monitored
for any impact on their ability to deliver services, including vendors of our third-party providers. For
details on how we are managing these risks, refer to the Operational risk section.
Regulatory changes
The ongoing introduction of new or revised regulations requires enhanced focus across the organization
on meeting additional regulatory requirements across the multiple jurisdictions in which we operate.
Financial and other reforms that have been implemented or are being implemented, across multiple
jurisdictions, such as digital, data and technology reforms, cyber security and anti-money laundering
regulations, interest rate benchmark reform, as well as privacy, climate and consumer protection,
continue to impact our operations and strategies. For more details, refer to the Legal and regulatory
environment risk section.
Culture and conduct risks
Our Purpose, values and risk principles are key dimensions of our culture. We demonstrate our culture
through our conduct – the behaviours, decisions, and actions of the organization and our employees.
Culture and conduct risks are considered top risks for the financial services industry due to the impact
that our choices, behaviours, and overall risk governance can have on outcomes for our stakeholders.
We embed client considerations into our decision-making processes and aim to focus on the fair
treatment of clients, and continue to implement regulatory changes that align with this objective. We are
responsive to evolving employee needs while expecting employees to always act with integrity.
Regulators continue to focus on conduct matters and risks, and heightened expectations generally from
regulators could lead to investigations, remediation requirements, higher compliance costs and
enforcement actions and fines, and potential criminal prosecutions or imposition of sanctions, including
restrictions on our activities. While we take steps to continue to strengthen our conduct practices, and
prevent and detect outcomes which could potentially harm clients, employees or the integrity of the
markets, such outcomes may not always be prevented or detected. For more details, refer to the Culture
and conduct risks section.
Overview
As a global financial institution with a diversified business model, we actively manage a variety of risks to help protect and
enable our businesses by following these risk management principles:
Risk management principles
•
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, and corresponding capital and liquidity requirements. We seek to ensure that our business activities and
transactions provide an appropriate balance of return for the risks assumed and the costs incurred. Our organizational design
and governance processes are intended to ensure that our Group Risk Management (GRM) function is independent from the
businesses it supports.
Risk drivers
We define risk as the potential vulnerabilities in the short-, medium- or long-term that may impact our financial results, financial
and operational resilience, reputation, business model, or strategy. Risk can be realized through losses, or an undesirable
outcome with respect to volatility of earnings in relation to expected earnings, capital adequacy, or liquidity. Our principal risks
include credit, market, liquidity, insurance, operational, regulatory compliance, strategic, reputation, legal and regulatory
environment, competitive, and systemic risks, that have been classified into four categories based on the level of control and
60
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
influence that we can exert against these risks. These categories are maintained by GRM and reviewed regularly to ensure all
principal risks are reflected. This classification methodology provides a common language and discipline for the identification
and assessment of risk in existing businesses, new businesses, products or initiatives, as well as acquisitions and alliances.
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 rising inflationary pressures and interest rates, economic slowdowns or recessions,
deterioration in the Canadian housing market, abrupt changes in the geopolitical environment,
unfavourable global trade agreements, political uncertainties, or the outbreak of a pandemic or other
health crises.
Macroeconomic risk is the least controllable type of risk arising from the business environment in which we
operate.
However, we have in place a number of controls to mitigate the impacts of systemic risk, including our
diversified business model and funding sources, financial crisis management strategies and protocols,
stress testing programs, and product and geographic diversification.
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.
Choosing the wrong strategy, or poorly executing on the correct strategy, could result in reputational risk
consequences, impact our revenue mix, and/or affect our exposure to earnings volatility and loss absorption
capacity.
There is a fair degree of control and influence that we can exert in managing strategic and reputation risk.
While the legal and regulatory environment and competitive risks are less controllable, we seek to influence
them through our role as a corporate entity and as an active participant in the Canadian and global financial
services industry.
Operational /
Regulatory
Compliance
The complexity and scope of our operations across the globe exposes us to operational and regulatory
compliance risks.
We have a certain level of control over these risks through the effective management of operational risk and
regulatory compliance risk, including how we manage our dependence on people, systems, and processes,
as well as how we respond to external events.
Transactional /
Positional
A more traditional risk perspective involves credit, market, liquidity and insurance risks arising from, among
other things, lending transactions and balance sheet positions. These risks are an integral part of our
day-to-day business activities.
We understand these risks well and have the greatest level of control and influence over them.
We earn revenue by taking these transactional / positional risks.
Enterprise risk management
Under the oversight of the Board and senior management, the Enterprise Risk Management Framework (ERMF) provides an
overview of our enterprise-wide programs for managing risk, including identifying, assessing, measuring, controlling, monitoring
and reporting on the significant risks that face the organization.
Risk governance
We have an effective and well-established governance framework in place so that risks impacting our businesses are identified,
appropriately categorized, assessed, managed and communicated to the Board in a timely manner. The risk governance
framework has been established, and is maintained in alignment with, the expectations of OSFI, the Basel Committee on Banking
Supervision’s (BCBS) corporate governance principles, and the requirements and expectations of other regulators in the
jurisdictions in which we conduct business, and in accordance with industry best practices. The Board oversees the
implementation of our risk management framework, while employees at all levels of the organization are responsible for
managing the day-to-day risks that arise in the context of their mandates. As illustrated below, we use the three lines of defence
governance model so that risks are appropriately and adequately managed throughout the enterprise to achieve our strategic
objectives.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
61
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
The CRO has direct access to the
Risk Committee
The Chief Compliance Officer (CCO) and the
Chief Anti-Money Laundering Officer (CAMLO)
have direct access to the Audit Committee
Establishes risk management practices and
provides risk guidance
Provides oversight of the effectiveness of
First Line risk management practices
Monitors and independently reports on the
level of risk against established risk appetite
SECOND LINE OF DEFENCE
RISK OVERSIGHT
RISK OVERSIGHT
RISK
MANAGEMENT
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
annually approves our Code of Conduct and closely collaborates with management to set the tone from above and promotes a strong governance
culture that influences RBC at every level and across all global businesses. The Board also approves our risk appetite, provides oversight and carries out its
risk management mandate primarily through its committees:
AUDIT COMMITTEE
RISK COMMITTEE
BOARD OF DIRECTORS
GOVERNANCE COMMITTEE
HUMAN RESOURCES COMMITTEE
The
Risk Committee
assists the Board in overseeing our risk management program ensuring that management has policies, processes and procedures to
manage our significant risks and monitor our risk posture and risk profile. The Risk Committee oversees the risk management function, having regard to its
independence from the businesses whose activities it reviews. Its oversight activities include the review of the GRM function which evaluates GRM’s success
against its key priorities, the mandate of the Chief Risk Officer (CRO), and GRM’s organizational structure, budget and resources.
The
Audit Committee
assists the Board in its oversight of (i) the integrity of our financial statements; (ii) the qualifications, performance and independence of
our external auditors; (iii) the performance of our internal audit function, (iv) internal controls; and (v) compliance with legal and regulatory requirements.
The
Governance Committee
recommends individuals for Board member election or re-election, oversees the process for evaluating Board Committee and
director effectiveness, and oversees management of conduct and culture, including breaches of our Code of Conduct. Additional responsibilities include
(i) developing and recommending governance frameworks, principles and policies to the Board; (ii) overseeing and coordinating ESG matters at the Board
and its committees; (iii) monitoring developments in corporate governance and adapting best practices; and (iv) reviewing shareholder proposals and
recommending responses to the Board.
The
Human Resources Committee
assists the Board in its oversight of compensation policies and programs, compensation risk management and the
compensation for the CEO and Group Executives (GE). It also oversees our pension plans, key talent management and human resources strategies and
practices, including employee engagement, diversity & inclusion and health & wellness, as well as succession plans for key senior leadership roles.
Actively shapes enterprise risk appetite and recommends it for Board approval.
THE GROUP EXECUTIVE AND GROUP RISK COMMITTEE
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.
Visibly supports and communicates enterprise risk appetite, seeking to ensure that sufficient resources and expertise are in place to help
provide effective oversight of adherence to the enterprise risk appetite.
Seeks to ensure principles, policies, authorities, resources, responsibilities and reporting are in place to support the control infrastructure
necessary for an effective enterprise-wide risk management program.
Oversees culture and conduct program and key activities.
Provides appropriate and timely information to the Board or its Committees with regard to the identification, measurement, and management
of the significant risks to which we are exposed across all of our legal entities, businesses and operations globally.
62
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Risk appetite
Effective risk management protects us from unacceptable
losses or undesirable outcomes with respect to earnings
volatility, capital adequacy or liquidity, reputation risk or other
risks while supporting and enabling our overall business
strategy. It requires the clear articulation of our risk appetite,
which is the amount and type of risk that we are able and willing
to accept in the pursuit of our business objectives. It reflects our
self-imposed upper bound to risk-taking, set at levels inside of
regulatory limits and constraints, and influences our risk
management philosophy, Code of Conduct, business practices
and resource allocation. It provides clear boundaries and sets
an overall tone for balancing risk-reward trade-offs to ensure
the long-term viability of the organization.
Our risk appetite is integrated into our strategic, financial,
and capital planning processes, as well as ongoing business
decision-making processes and is reviewed and approved
annually by the Board.
Our Enterprise Risk Appetite Framework (ERAF) outlines the
foundational aspects of our approach to risk appetite,
articulates our quantitative and qualitative risk appetite
statements and their supporting measures and associated
constraints, which can be applied at the enterprise, business
segment, business unit and legal entity level, and describes our
requirements and expectations to embed effective risk appetite
practices throughout the organization.
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 risk we understand. Make thoughtful
and future-focused risk decisions, taking
environmental and social considerations into
account.
•
Effectively balance risk and reward to enable
sustainable growth.
•
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. The degree of integration
across our Finance and Risk functions continues to increase in measuring both financial and risk performance.
Certain risks, such as credit, market, liquidity and insurance risks, can be more easily quantified than others, such as
operational, reputation, strategic, legal, and regulatory compliance risks. For the risks that are more difficult to quantify, greater
emphasis is placed on qualitative risk factors and assessment of activities to gauge the overall level of risk. In addition,
judgmental risk measures and techniques such as stress testing, and scenario and sensitivity analyses can be used to assess and
measure risks, and we are continuously evolving our risk measures and techniques to manage our risks. Our primary methods for
measuring risk include:
•
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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
63
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, and Economics. Generally, our stress testing scenarios evaluate global recessions, equity market
corrections, elevated debt levels, trade policies, changes in interest rates, real estate price corrections, and shocks to credit
spreads and commodity markets, among other factors. During our fiscal 2022 stress testing exercises, we addressed several
emerging risks inclusive of inflation risk, supply chain pressures as well as physical and transitional climate risk, with a focus on
the impacts of these risks on revenue, net income and capital projections.
Ongoing stress testing and scenario analyses within specific risk types, such as market risk (including Interest Rate Risk in
the Banking Book (IRRBB)), liquidity risk, retail and wholesale credit risk, operational risk, and insurance risk, supplement and
support our enterprise-wide analyses. Results from these risk-specific programs are used in a variety of decision-making
processes including risk limit setting, portfolio composition evaluation, risk appetite articulation and business strategy
implementation.
In addition to ongoing enterprise-wide and risk-specific stress testing programs, we use ad hoc and reverse stress testing to
deepen our knowledge of the risks we face. Ad hoc stress tests are one-off analyses used to investigate developing conditions or
to stress a particular portfolio in more depth. Reverse stress tests, starting with a severe outcome and aiming to reverse-
engineer scenarios that might lead to it, are used in risk identification and understanding of risk/return boundaries.
In addition to internal stress tests, we participate in a number of regulator-required stress test exercises, on a periodic basis,
across several jurisdictions.
Model governance and validation
Quantitative models are used for many purposes including, but not limited to, the valuation of financial products, the
identification, measurement and management of different types of risk, stress testing, assessing capital adequacy, informing
business and risk decisions, measuring compliance with internal limits, meeting financial reporting and regulatory requirements,
and issuing public disclosures.
Model risk is the risk of adverse financial and/or reputational consequences to the enterprise arising from the use or misuse
of a model at any stage throughout its life cycle and is managed through our model risk governance and oversight structure. The
governance and oversight structure, which is implemented through our three lines of defence governance model, is founded on
the basis that model risk management is a shared responsibility across the three lines spanning all stages of the model’s life
cycle. We continue to evolve our governance model to seek to take into account any new risk considerations that may emerge
from the growing use of AI methods and applications in our models across our organization.
Prior to being used, models are subject to independent validation and approval by our enterprise model risk management
function, a team of modelling professionals with reporting lines independent of those of the model owners, developers and users.
The validation seeks to ensure that models are sound and capable of fulfilling their intended use. In addition to independently
validating models prior to use, our enterprise model risk management function provides controls that span the life-cycle of a
model, including model change management procedures, requirements for ongoing monitoring, and annual assessments to
ensure each model continues to serve its intended purpose.
Risk control
Our enterprise-wide risk management approach is supported by a comprehensive set of risk controls that are defined in our
ERMF. The ERMF serves as the foundation for our approach to risk management and sets the expectations for the development
and communication of policies, the establishment of formal independent risk review and approval processes, and the
establishment of delegated risk approval authorities and risk limits. The ERMF is further reinforced and supported by a number of
additional Board-approved risk frameworks, various policies thereunder and a comprehensive set of risk controls. Together, our
risk frameworks and supporting policies provide direction and insight on how respective risks are identified, assessed, measured,
managed, mitigated, monitored and reported. The enterprise-wide policies are considered our minimum requirements,
articulating the parameters within which business groups and employees must operate.
64
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Enterprise Risk Management
Framework
Enterprise Risk Appetite
Framework
Enterprise Culture and
Conduct Risks
Framework
Enterprise-Wide Policies for Multiple Risk Types
(e.g. Product and Suitability Risk Policy; Policy on Risk Limits and Risk Approval Authorities; Stress-Testing Policy)
Segment or Region Specific Risk Policy and Procedures
The approval hierarchy for risk frameworks and policy documents:
Board of Directors or Board Committees
Senior Management Committees
(e.g. Policy Review Committee, Operational Risk Committee, Asset Liability Committee) for most policies.
Board or Board Committee approval is required in some instances (e.g. RBC Code of Conduct, Dividend Policy)
Generally by business or Functional Unit management/committees.
Group Risk Management approval is required if there are significant
risk implications
Enterprise Risk Policy Architecture
Data Policy
Credit Risk
Mitigation
Policy
Dividends
& Capital
Note Coupons
Policy
Internal
Controls
Management
Policy
Market Risk
Policy
Privacy Risk
Management
Policy
Liquidity
Risk Policy
Insurance
Risk
Mitigation
Policy
Information
Security
Policy
Fiduciary
Risk Policy
Supporting Risk-Specific Enterprise-Wide Policies (examples)
Data
Management
Framework
Credit Risk
Management
Framework
Capital
Management
Framework
Operational
Risk
Management
Framework
Market Risk
Management
Framework
Regulatory
Compliance
Management
Framework
Liquidity
Risk
Management
Framework
Insurance
Risk
Management
Framework
Information
Technology
Risk
Management
Framework
Reputation
Risk
Management
Framework
Delegated risk approval authorities and risk limits
Risk Appetite is designed to account for strategic and forward-looking considerations whereas delegated authorities and risk
limits are used to govern and monitor our day-to-day business activities. Risk Appetite is supported by Risk Approval Authorities
delegated by the Board to senior management which provide thresholds for escalation of exposures and transactions to the Risk
Committee of the Board for review and approval. The allocation of Risk Appetite and Board Delegated Authorities may be
supported by the establishment of management delegated authorities and/or risk limits. These authorities and limits are used to
implement risk management strategies to diversify risks, reduce unexpected losses and/or promote stability of earnings, govern
on-going operations and monitor utilization of risk limits. Excesses to Management Delegated Authorities and risk limits can act
as early warning indicators for Risk Appetite constraints and Board Delegated Authorities thus allowing for timely management
attention. Senior management can delegate some or all of their authorities onwards to others in the organization. The delegated
authorities enable the approval of single name, geographic and industry sectors, and product and portfolio exposures within
defined parameters and limits. They are also used to manage concentration risk, establish underwriting and inventory limits for
trading and investment banking activities and set market risk tolerances.
Risk review and approval processes
Risk review and approval processes provide an important control mechanism and are established by GRM based on the nature,
size and complexity of the risk involved. In general, the risk review and approval process involves a formal review and approval
by an individual, group or committee that is independent from the originator. The approval responsibilities are governed by the
Enterprise Risk Appetite Framework and delegated authorities and risk limits are based on the following categories: transactions,
projects and initiatives, and new products and services.
Risk monitoring and reporting
Enterprise and business segment level risk monitoring and internal reporting are critical components of our enterprise risk
management program and support the ability of senior management and the Board to effectively perform their risk management
and oversight responsibilities. In addition, we publish a number of external reports on risk matters to comply with regulatory
requirements. The Risk Committee of the Board receives a CRO report at each meeting that has been reviewed by senior
management, and which includes, among others, top and emerging risks, industry trends or other notable items. On a quarterly
basis, we provide our Enterprise Risk Report to senior management and the Risk Committee of the Board which includes, among
others, top and emerging risks, risk profile relative to our risk appetite, portfolio quality metrics and a range of risks we face
along with an analysis of the related issues, key trends and, when required, management actions. On an annual basis, we provide
a benchmarking review to the Board which compares our performance to peers across a variety of risk metrics and includes a
composite risk scorecard which provides an objective measure of our ranking relative to the peer group. In addition to our
regular risk monitoring, other risk-specific presentations are provided to, and discussed with, senior management and the Board
on top and emerging risks or changes in our risk profile.
The shaded text along with the tables specifically marked with an asterisk (*) in the following sections of the MD&A represent
our disclosures on credit, market and liquidity and funding risks in accordance with IFRS 7,
Financial Instruments: Disclosures
,
and include discussion on how we measure our risks and the objectives, policies and methodologies for managing these risks.
Therefore, these shaded text and marked tables represent an integral part of our 2022 Annual Consolidated Financial
Statements.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
65
Transactional/positional risk drivers
Credit risk
Credit risk is the risk of loss associated with an obligor’s potential inability or unwillingness to fulfill its contractual obligations
on a timely basis and may arise directly from the risk of default of a primary obligor (e.g., issuer, debtor, counterparty,
borrower or policyholder), indirectly from a secondary obligor (e.g., guarantor or reinsurer), through off-balance sheet
exposures, contingent credit risk, associated credit risk and/or transactional risk. Credit risk includes counterparty credit risk
arising from both trading and non-trading activities.
The responsibility for managing credit risk is shared broadly following the three lines of defence governance model. The
allocation of the Board approved credit risk appetite is supported by the establishment of risk approval authorities and risk
limits, delegated by the Board to the President & CEO and CRO. Credit transactions in excess of these authorities must be
approved by the Risk Committee of the Board. To facilitate day-to-day business activities, the CRO has been empowered to
further delegate credit risk approval authorities to individuals within GRM, the business segments, and functional units as
necessary.
We balance our risk and return by setting the following objectives for the management of credit risk:
•
Ensuring credit quality is not compromised for growth;
•
Mitigating credit risk 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) describes the principles, methodologies, systems, roles and
responsibilities, reports and controls that exist for managing credit risk within the enterprise. Additional supporting policies
exist that are designed to provide further clarification of roles and responsibilities, acceptable practices, limits and key
controls within the enterprise.
Credit risk measurement
We quantify credit risk at both the individual obligor and portfolio levels to manage expected credit losses and minimize
unexpected losses to limit earnings volatility and ensure we are adequately capitalized.
We employ a variety of risk measurement methodologies to measure and quantify credit risk for our wholesale and retail
credit portfolios. The wholesale portfolio is comprised of businesses, sovereigns, public sector entities, banks and other
financial institutions, as well as certain HNW individuals. The retail portfolio is comprised of residential mortgages, personal
loans, credit cards, and small business loans. Our credit risk rating systems are designed to assess and quantify the risk
inherent in credit activities in an accurate and consistent manner. The resulting ratings and scores are then used for both
client- and transaction-level risk decision-making and as key inputs for our risk measurement and capital calculations.
Measurement of economic and regulatory capital
Economic capital, which is our internal quantification of risks, is used for limit setting. It is also used for internal capital
adequacy and allocation of capital to the Insurance segment. Our methodology for allocating capital to our business
segments, other than Insurance, is based on regulatory requirements. For further details, refer to the Capital management
section.
In measuring credit risk to determine regulatory capital, two principal approaches are available: Internal Ratings Based
(IRB) Approach and Standardized Approach.
The Standardized Approach applies primarily to our Caribbean banking operations and City National and is based on risk
weights prescribed by OSFI that are used to calculate RWA for credit risk exposure.
The IRB Approach, which applies to most of our credit risk exposures, utilizes three key parameters which form the basis of
our credit risk measures for both regulatory and economic capital.
•
Probability of default (PD): An estimated percentage that represents the likelihood of default within a given time period of
an obligor for a specific rating grade or for a particular pool of exposure.
•
Exposure at default (EAD): An amount expected to be owed by an obligor at the time of default.
•
Loss given default (LGD): An estimated percentage of EAD that is not expected to be recovered during the collections and
recovery process.
These parameters are determined based primarily on historical experience from internal credit risk rating systems in
accordance with supervisory standards.
Each credit facility is assigned an LGD rate that is largely driven by factors that impact the extent of losses anticipated in
the event the obligor defaults. These factors mainly include seniority of debt, collateral and the industry sector in which the
obligor operates. Estimated LGD rates draw primarily on internal loss experiences. Where we have limited internal loss data,
we also refer to appropriate external data to supplement the estimation process. LGD rates are estimated to reflect
conditions that might be expected to prevail in a period of an economic downturn, with additional conservatism added to
reflect data limitations and statistical uncertainties identified in the estimation process.
66
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
EAD is estimated based on the current exposure to the obligor and the possible future changes in that exposure driven by
factors such as the nature of the credit commitment. As with LGD, rates are estimated to reflect an economic downturn, with
added conservatism to reflect data and statistical uncertainties identified in the modelling process.
Estimates of PD, LGD and EAD are reviewed, and then validated and back-tested by an independent validation team
within the bank, on an annual basis. In addition, quarterly monitoring and back-testing is performed by the estimation team.
These ratings and risk measurements are used to determine our expected losses as well as economic and regulatory capital,
setting of risk limits, portfolio management and product pricing.
Financial and regulatory measurement distinctions
Expected loss models are used for both regulatory capital and accounting purposes. Under both models, expected losses are
calculated as the product of PD, LGD and EAD. However, there are certain key differences under current Basel and IFRS
reporting frameworks which could lead to significantly different expected loss estimates, including:
•
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 2022 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
67
Internal ratings map*
Table 41
PD Bands
Ratings
Business and Bank
Sovereign
BRR
S&P
Moody’s
Description
1
0.0000% – 0.0300%
0.0000% – 0.0150%
1+
AAA
Aaa
Investment Grade
2
0.0000% – 0.0300%
0.0151% – 0.0250%
1H
AA+
Aa1
3
0.0000% – 0.0350%
0.0251% – 0.0350%
1M
AA
Aa2
4
0.0351% – 0.0450%
1L
AA-
Aa3
5
0.0451% – 0.0550%
2+H
A+
A1
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% – 0.1000%
2M
BBB
Baa2
10
0.1001% – 0.1770%
2L
BBB-
Baa3
11
0.1771% – 0.3705%
2-H
BB+
Ba1
Non-investment
Grade
12
0.3706% – 0.7065%
2-M
BB
Ba2
13
0.7066% – 1.1600%
2-L
BB-
Ba3
14
1.1601% – 1.6810%
3+H
B+
B1
15
1.6811% – 2.3490%
3+M
B
B2
16
2.3491% – 4.4040%
3+L
B-
B3
17
4.4041% – 7.0010%
3H
CCC+
Caa1
18
7.0011% – 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
Impaired
22
100%
6
D
C
*
This table represents an integral part of our 2022 Annual Consolidated Financial Statements.
Counterparty credit risk
Counterparty credit risk is the risk that a party with whom the bank has entered into a financial or non-financial contract will fail
to fulfill its contractual agreement and default on its obligation. It incorporates not only the contract’s current value, but also
considers how that value can move as market conditions change. Counterparty credit risk usually arises from trading-related
derivative and repo-style transactions. Derivative transactions include forwards, futures, swaps and options, and can have
underlying references that are either financial (e.g., interest rate, foreign exchange, credit, or equity) or non-financial (e.g.,
precious metal and commodities). For further details on our derivative instruments and credit risk mitigation, refer to Note 9 of
our 2022 Annual Consolidated Financial Statements.
Trading counterparty credit activities are undertaken in a manner consistent with the relevant requirements under the
ECRMF and the Enterprise Market Risk Management Framework (EMRMF), in line with our credit risk management policy
documents and with approval in accordance with the appropriate delegated authorities.
The primary risk mitigation techniques for trading counterparty credit risk are close-out netting and collateralization.
Close-out netting considers the net value of contractual obligations between counterparties in a default situation, thereby
reducing overall credit exposure. Collateralization is when a borrower pledges assets as security, which provides recourse to the
lender in the event of default. The policies that we maintain in relation to the recognition of risk mitigation from these techniques
incorporate such considerations as:
•
The use of standardized agreements such as the International Swaps and Derivatives Association Master Agreement and
Credit Support Annex;
•
Restricting eligible collateral to high quality liquid assets, primarily cash and highly-rated government securities, subject to
appropriate haircuts; and
•
The use of initial margin and variation margin arrangements in accordance with regulatory requirements and internal risk
standards.
Similarly, for securities finance and repurchase trading activity we mitigate counterparty credit risk via the use of
standardized securities finance agreements, and by taking collateral generally in the form of eligible liquid securities.
We also mitigate counterparty credit risk through the use of central counterparties (CCPs). These highly-regulated entities
intermediate trades between participating bilateral counterparties and mitigate credit risk through the use of initial and
variation margin and the ability to net offsetting trades amongst participants. The specific structure and capitalization, including
contingent capital arrangements, of individual CCPs are analyzed as part of assigning an internal counterparty credit risk rating
and determining appropriate counterparty credit risk limits.
68
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Wrong-way risk
Wrong-way risk is the risk that exposure to a counterparty is adversely correlated with the credit quality of that counterparty.
There are two types of wrong-way risk:
•
Specific wrong-way risk, which exists when our exposure to a particular counterparty is positively correlated with the PD of
the counterparty due to the nature of our transactions with them (e.g., loans collateralized by shares or debt issued by the
counterparty or a related party). Specific wrong-way risk over-the-counter (OTC) derivative trades are done on an exception
basis only, and are permitted only when explicitly pre-approved by GRM. Factors considered in reviewing such trades include
the credit quality of the counterparty, the nature of the asset(s) underlying the derivative and the existence of credit
mitigation.
•
General wrong-way risk, which exists when there is a positive correlation between the PD of the counterparties and general
macroeconomic or market factors. This typically occurs with derivatives (e.g., the size of the exposure increases) or with
collateralized transactions (e.g., the value of the collateral declines). We monitor general wrong-way counterparty credit risk
using a variety of metrics including stress scenarios, investment strategy concentration, the ability of counterparties to
generate cash and liquidity, liquidity of the collateral and terms of financing.
Retail credit risk
Credit scoring is the primary risk rating system for assessing obligor and transaction risk for retail exposures. Scoring models
use internal and external data to assess and score borrowers, predict future performance and manage limits for existing loans
and collection activities. Credit scores are one of the factors employed in the acquisition of new clients and management of
existing clients. The credit score of the borrower is used to assess the predicted credit risk for each independent acquisition
or account management action, leading to an automated decision or guidance for an adjudicator. Credit scoring improves
credit decision quality, adjudication timeframes and consistency in the credit decision process and facilitates risk-based
pricing. Since the onset of the COVID-19 pandemic, we adapted our retail credit risk methodology by enhancing our product
level credit strategies with advanced analytics and portfolio monitoring.
To arrive at a retail risk rating, borrower scores are categorized and associated with PDs for further grouping into risk
rating categories. The following table maps PD bands to various summarized risk levels for retail exposures:
Internal ratings map*
Table 42
PD bands
Description
0.030% – 3.844%
Low risk
3.845% – 6.786%
Medium risk
6.787% – 99.99%
High risk
100%
Impaired/Default
*
This table represents an integral part of our 2022 Annual Consolidated Financial Statements.
Credit risk mitigation
We seek to reduce our exposure to credit risk through a variety of means, including the structuring of transactions and the
use of collateral.
Structuring of transactions
Specific credit policies and procedures set out the requirements for structuring transactions. Risk mitigants include the use
of guarantees, collateral, seniority, LTV requirements and covenants. Product-specific guidelines set out appropriate
product structuring as well as client and guarantor criteria.
Collateral
When we advance credit, we often require obligors to pledge collateral as security. The extent of risk mitigation provided by
collateral depends on the amount, type and quality of the collateral taken. Specific requirements relating to collateral
valuation and management are set out in our credit risk management policies.
The types of collateral used to secure credit or trading facilities within the bank are varied. For example, our securities
financing and collateralized OTC derivatives activities are primarily secured by cash and highly-rated liquid government and
agency securities. Wholesale lending to business clients is often secured by pledges of the assets of the business, such as
accounts receivable, inventory, operating assets and commercial real estate. In Canadian Banking and Wealth Management,
collateral typically consists of a pledge over a real estate property, or a portfolio of debt securities and equities trading on a
recognized exchange.
•
We employ a risk-based approach to property valuation. Property valuation methods include automated valuation
models (AVM) and appraisals. An AVM is a tool that estimates the value of a property by reference to market data
including sales of comparable properties and price trends specific to the Metropolitan Statistical Area in which the
property being valued is located. Using a risk-based approach, we also employ appraisals which can include drive-by or
full on-site appraisals.
•
We continue to actively manage our entire mortgage portfolio and perform stress testing, based on a combination of
increasing unemployment, rising interest rates and a downturn in real estate markets.
•
We are compliant with regulatory requirements that govern residential mortgage underwriting practices, including LTV
parameters and property valuation requirements.
There were no significant changes regarding our risk management policies on collateral or to the quality of the collateral
held during the period.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
69
Credit risk approval
The Board, GE, GRC and other senior management committees work together to ensure the ECRMF and supporting policies,
processes and procedures exist to manage credit risk and approve related credit risk limits. Reports are provided to the
Board, the GRC, and senior executives to keep them informed of our risk profile, including significant credit risk issues, shifts
in exposures and trending information, to ensure appropriate and timely actions can be taken where necessary. Our
enterprise-wide credit risk policies set out the minimum requirements for the management of credit risk in a variety of
borrower, transactional and portfolio management contexts.
Transaction approval
Credit transactions are governed by our RBC Enterprise Policy on Risk Limits and Risk Approval Authorities that captures the
limits delegated to management and the credit rules policy, which outlines the minimum standards for managing credit risk
at the individual client relationship and/or transaction level. The credit rules policy is further supported by business and/or
product-specific policies and guidelines as appropriate. Transaction approvals are subject to delegated risk approval
authorities. If a transaction exceeds senior management’s authorities, the approval of the Risk Committee of the Board is
required.
Product approval
Proposals for credit products and services are comprehensively reviewed and approved under a risk assessment framework
and are subject to risk approval authorities which increase as the level of risk increases. New and amended products must
be reviewed relative to all risk drivers, including credit risk. All existing products must be reviewed following a risk-based
assessment approach on a regular basis.
Credit risk limits
•
The allocation of risk appetite and Board delegated authorities are supported by the establishment of risk limits which
take into account both regulatory constraints and internal risk management judgment. Risk limits are established at the
following levels: single name limits, regional, country and industrial sector limits (notional and economic capital),
regulatory large exposure limits, product and portfolio limits, and underwriting and distribution risk limits. These limits
apply across all businesses, portfolios, transactions and products.
•
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 taking into account business, economic, financial
and regulatory environments.
Credit risk administration
Loan forbearance
In our overall management of borrower relationships, economic or legal reasons may necessitate forbearance to certain clients
with respect to the original terms and conditions of their loans. We have specialized groups and formalized policies that direct
the management of high risk, delinquent or defaulted borrowers. We strive to identify borrowers in financial difficulty early and
modify their loan terms to minimize losses and assist clients in need. A forbearance agreement may be entered into with the
borrower where we will forbear from enforcing on security in exchange for concessions made by the borrower. In these
circumstances, a borrower may be granted concessions that would not otherwise be considered. Examples of such concessions
to retail borrowers may include rate reduction, payment deferral and term extensions. Concessions to wholesale borrowers may
include payment deferral, restructuring the agreements, modifying the original terms of the agreement and/or relaxation of
covenants. For both retail and wholesale loans, the appropriate remediation techniques are based on the individual borrower’s
situation, our policy and the client’s willingness and capacity to meet the new arrangement.
70
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Credit risk exposure by portfolio, sector and geography
The following table presents our credit risk exposures under the Basel regulatory defined classes and reflects EAD. The
classification of our sectors aligns with our view of credit risk by industry.
Credit risk exposure by portfolio, sector and geography
Table 43
As at
October 31
2022
October 31
2021
Credit risk
(1), (2)
Counterparty credit risk
(5)
Credit risk (1), (2)
Counterparty credit risk (5)
On-balance
sheet amount
Off-balance sheet
amount
(3)
Repo-style
transactions
Derivatives
Total
exposure
On-balance
sheet amount
Off-balance sheet
amount (3)
Repo-style
transactions
Derivatives
Total
exposure
(Millions of Canadian dollars)
Undrawn
Other
(4)
Undrawn
Other (4)
Retail
Residential secured (6)
$
393,346
$
107,604
$
–
$
–
$
–
$
500,950
$
362,793
$
96,609
$
–
$
–
$
–
$
459,402
Qualifying revolving (7)
32,474
94,949
–
–
–
127,423
30,080
90,932
–
–
–
121,012
Other retail
98,070
19,993
136
–
–
118,199
85,362
19,422
146
–
–
104,930
Total retail
$
523,890
$ 222,546
$
136
$
–
$
–
$
746,572
$
478,235
$ 206,963
$
146
$
–
$
–
$
685,344
Wholesale
Agriculture
$
10,417
$
2,089
$
36
$
–
$
161
$
12,703
$
9,400
$
1,756
$
30
$
–
$
84
$
11,270
Automotive
8,919
9,184
317
–
1,606
20,026
6,288
9,184
173
–
1,124
16,769
Banking (8)
73,335
5,487
1,036
111,559
38,830
230,247
45,906
4,545
765
117,996
30,888
200,100
Consumer discretionary
19,666
9,297
569
–
949
30,481
14,792
9,380
573
–
698
25,443
Consumer staples
7,103
6,750
346
–
1,923
16,122
6,254
6,949
180
–
1,058
14,441
Oil and gas
6,086
11,272
1,923
–
5,959
25,240
5,678
10,328
1,474
–
7,493
24,973
Financial services
45,394
25,017
3,530
69,790
24,546
168,277
32,977
19,252
2,623
64,593
16,262
135,707
Financing products (8)
5,762
2,352
163
237
780
9,294
7,868
2,405
485
388
848
11,994
Forest products
1,143
1,033
230
–
78
2,484
969
991
201
–
17
2,178
Governments (8)
279,401
5,678
1,563
18,745
6,290
311,677
287,806
4,794
1,533
23,536
5,692
323,361
Industrial products
10,755
9,319
601
–
1,216
21,891
7,308
8,933
594
–
811
17,646
Information technology
5,291
7,144
298
55
1,908
14,696
3,591
5,715
237
49
5,447
15,039
Investments
23,764
3,946
669
157
458
28,994
22,238
3,201
412
12
174
26,037
Mining and metals
2,377
4,259
945
–
467
8,048
993
3,730
952
–
237
5,912
Public works and
infrastructure
2,614
2,417
497
–
144
5,672
1,427
1,963
391
–
239
4,020
Real estate and related
89,926
18,295
1,872
–
818
110,911
76,141
14,223
1,568
–
1,176
93,108
Other services
27,839
13,425
2,848
33
852
44,997
23,872
13,362
1,860
47
1,316
40,457
Telecommunication
and media
7,301
8,298
79
–
2,751
18,429
5,294
9,748
598
–
1,976
17,616
Transportation
6,394
6,386
930
–
2,069
15,779
6,151
6,832
1,319
–
1,426
15,728
Utilities
12,318
20,651
5,275
–
5,081
43,325
9,059
17,152
4,131
–
4,464
34,806
Other sectors
4,113
1,700
71
73
20,126
26,083
3,084
1,139
7
7
6,960
11,197
Total wholesale
$
649,918
$ 173,999
$ 23,798
$ 200,649
$ 117,012
$ 1,165,376
$
577,096
$ 155,582
$ 20,106
$ 206,628
$ 88,390
$ 1,047,802
Total exposure
(1)
$ 1,173,808
$ 396,545
$ 23,934
$ 200,649
$ 117,012
$ 1,911,948
$ 1,055,331
$ 362,545
$ 20,252
$ 206,628
$ 88,390
$ 1,733,146
By geography
(9)
Canada
$
697,015
$
284,705
$
9,444
$
79,795
$
41,923
$
1,112,882
$
693,700
$ 264,708
$
9,141
$
88,523
$ 27,978
$ 1,084,050
U.S.
334,821
79,829
10,145
59,866
24,161
508,822
245,929
69,295
7,866
54,617
27,270
404,977
Europe
79,343
25,485
2,603
39,244
36,107
182,782
62,509
22,667
1,991
42,483
25,757
155,407
Other International
62,629
6,526
1,742
21,744
14,821
107,462
53,193
5,875
1,254
21,005
7,385
88,712
Total exposure
(1)
$ 1,173,808
$ 396,545
$ 23,934
$ 200,649
$ 117,012
$ 1,911,948
$ 1,055,331
$ 362,545
$ 20,252
$ 206,628
$ 88,390
$ 1,733,146
(1)
Excludes securitization, banking book equities and other assets not subject to the standardized or IRB approach as well as exposures acquired through the U.S.
government Paycheck Protection Program.
(2)
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.
(3)
EAD for undrawn credit commitments and other off-balance sheet amounts are reported after the application of credit conversion factors.
(4)
Includes other off-balance sheet exposures such as letters of credit and guarantees.
(5)
Counterparty credit risk EAD reflects exposure amounts after netting. Collateral is included in EAD for repo-style transactions to the extent allowed by regulatory
guidelines. Exchange traded derivatives are included in Other sectors.
(6)
Includes residential mortgages and home equity lines of credit.
(7)
Includes credit cards, unsecured lines of credit and overdraft protection products.
(8)
Comparative amounts have been reclassified from those previously presented.
(9)
Geographic profile is based on country of residence of the borrower.
2022 vs. 2021
Total credit risk exposure increased $179 billion or 10% from last year, primarily due to the impact of foreign exchange
translation, volume growth in loans and undrawn commitments in our retail and wholesale portfolios, higher derivative
exposures and an increase in securities.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
71
Net International exposure by region and client type
(1), (2)
Table 44
As at
October 31
2022
October 31
2021
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.)
$ 14,832
$
38,187
$
1,408
$ 3,326
$ 18,746
$ 25,896
$ 13,111
$
57,753
$
49,893
U.K.
8,332
26,926
597
4,094
17,374
14,198
8,377
39,949
34,075
Caribbean
(4)
8,524
10,594
455
115
7,605
3,913
8,170
19,688
20,945
Asia-Pacific
6,817
26,031
941
1,549
11,017
19,392
4,929
35,338
27,871
Other
(4), (5)
596
1,990
390
67
574
1,833
636
3,043
2,547
Net International
exposure
(6), (7)
$ 39,101
$ 103,728
$
3,791
$ 9,151
$ 55,316
$ 65,232
$ 35,223
$ 155,771
$ 135,331
(1)
Geographic profile is based on country of risk, which reflects our assessment of the geographic risk associated with a given exposure. Typically, this is the residence of
the borrower.
(2)
Exposures are calculated on a fair value basis and net of collateral, which includes $357 billion against repo-style transactions (October 31, 2021 – $349 billion) and
$14 billion against derivatives (October 31, 2021 – $11 billion).
(3)
Securities include $13 billion of trading securities (October 31, 2021 – $22 billion), $56 billion of deposits (October 31, 2021 – $34 billion), and $35 billion of investment
securities (October 31, 2021 – $33 billion).
(4)
Exposures to Latin America, previously reported with Caribbean exposures, are now presented in Other. Comparative period amounts have been reclassified to conform
to this presentation.
(5)
Includes exposures in the Middle East, Africa, and Latin America.
(6)
Excludes $5,213 million (October 31, 2021 – $3,076 million) of exposures to supranational agencies.
(7)
Reflects $2,233 million of mitigation through credit default swaps, which are largely used to hedge single name exposures and market risk (October 31, 2021 – $1,499 million).
72
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Residential mortgages and home equity lines of credit (insured vs. uninsured)
(1)
Residential mortgages and home equity lines of credit are secured by residential properties. The following table presents a
breakdown by geographic region.
Residential mortgages and home equity lines of credit
Table 45
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
As at October 31, 2021
(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
$
8,407
48%
$
8,944
52%
$
17,351
$
1,602
Quebec
12,742
32
27,567
68
40,309
3,135
Ontario
34,211
20
135,767
80
169,978
15,891
Alberta
20,680
50
20,821
50
41,501
5,343
Saskatchewan and
Manitoba
9,179
46
10,714
54
19,893
1,970
B.C. and territories
13,314
20
51,823
80
65,137
7,383
Total Canada
(5)
98,533
28
255,636
72
354,169
35,324
U.S.
1
–
23,422
100
23,423
1,413
Other International
–
–
2,740
100
2,740
1,518
Total International
1
–
26,162
100
26,163
2,931
Total
$
98,534
26%
$
281,798
74%
$
380,332
$
38,255
(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 $39,591 million and $23 million of uninsured and insured home equity lines of credit, respectively (October 31, 2021 –
$38,228 million and $27 million, respectively), reported within the personal loan category. The amounts in the U.S. and Other
International include term loans collateralized by residential mortgages.
(4)
Region is based upon the address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador,
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 $384 billion (October 31, 2021 – $354 billion) includes $12 billion (October 31,
2021 – $11 billion) of mortgages with commercial clients in Canadian Banking, of which $9 billion (October 31, 2021 – $8 billion) are
insured mortgages, and $17 billion (October 31, 2021 – $19 billion) of residential mortgages in Capital Markets, of which $17 billion
(October 31, 2021 – $18 billion) are held for securitization purposes. All of the residential mortgages held for securitization purposes are
insured (October 31, 2021 – all insured).
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
73
Residential mortgages portfolio by amortization period
(1)
The following table provides a summary of the percentage of residential mortgages that fall within the remaining amortization
periods based upon current customer payment amounts, which incorporate payments larger than the minimum contractual
amount and/or higher frequency of payments.
Residential mortgages portfolio by amortization period
Table 46
As at
October 31
2022
October 31
2021
Canada
U.S. and other
International
Total
Canada
U.S. and other
International
Total
Amortization period
≤
25 years
57%
25%
54%
75%
27%
71%
> 25 years
≤
30 years
16
75
21
25
71
28
> 30 years
≤
35 years
2
–
2
–
2
1
> 35 years
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).
Average LTV ratios
(1)
The following table provides a summary of our average LTV ratios for newly originated and acquired uninsured residential
mortgages and RBC Homeline Plan
®
products by geographic region, as well as the respective LTV ratios for our total Canadian
Banking residential mortgage portfolio outstanding.
Average LTV ratios
Table 47
For the year ended
October 31
2022
October 31
2021
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
72%
73%
74%
75%
Quebec
72
72
72
74
Ontario
70
66
71
68
Alberta
73
73
73
72
Saskatchewan and Manitoba
73
75
74
75
B.C. and territories
68
66
69
67
U.S.
75
n.m.
74
n.m.
Other International
72
n.m.
73
n.m.
Average of newly originated
and acquired for the
period
(5), (6)
71%
68%
72%
69%
Total Canadian Banking
residential mortgages
portfolio
(7)
52%
46%
52%
46%
(1)
Disclosure is provided in accordance with the requirements of OSFI’s Guideline B-20 (Residential Mortgage Underwriting Practices and
Procedures).
(2)
Residential mortgages exclude residential mortgages within the RBC Homeline Plan
®
products.
(3)
RBC Homeline Plan
®
products are comprised of both residential mortgages and home equity lines of credit.
(4)
Region is based upon address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, Prince
Edward Island, Nova Scotia and New Brunswick, and B.C. and territories are comprised of British Columbia, Nunavut, Northwest
Territories and Yukon.
(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
74
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Credit quality performance
The following credit quality performance tables and analysis provide information on loans, which represents loans, acceptances
and commitments, and other financial assets.
Gross impaired loans (GIL)
Table 48
As at and for the year ended
(Millions of Canadian dollars, except percentage amounts)
October 31
2022
October 31
2021
Personal & Commercial Banking
$ 1,362
$
1,590
Wealth Management
278
233
Capital Markets
559
485
Total GIL
$ 2,199
$
2,308
Impaired loans, beginning balance
$ 2,308
$
3,195
Classified as impaired during the period (new impaired)
(1)
1,711
1,726
Net repayments
(1)
(450)
(721)
Amounts written off
(1,149)
(1,169)
Other
(2)
(221)
(723)
Impaired loans, balance at end of period
$ 2,199
$
2,308
GIL as a % of related loans and acceptances
Total GIL as a % of related loans and acceptances
0.26%
0.31%
Personal & Commercial Banking
0.23%
0.30%
Canadian Banking
0.18%
0.24%
Caribbean Banking
3.93%
4.65%
Wealth Management
0.25%
0.26%
Capital Markets
0.42%
0.45%
(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.
2022 vs. 2021
Total GIL of $2,199 million decreased $109 million or 5% from last year and the total GIL ratio of 26 bps decreased 5 bps, due to
lower impaired loans in Personal & Commercial Banking, partially offset by higher impaired loans in Capital Markets and Wealth
Management.
GIL in Personal & Commercial Banking decreased $228 million or 14%, mainly due to lower impaired loans in our Canadian
Banking commercial portfolios, largely in the real estate and related and other services sectors. Lower impaired loans in our
Canadian Banking residential mortgages portfolios also contributed to the decrease.
GIL in Wealth Management increased $45 million or 19%, largely due to higher impaired loans in U.S. Wealth Management
(including City National), mainly in the consumer discretionary sector, partially offset by repayments in International Wealth
Management in the investment sector.
GIL in Capital Markets increased $74 million or 15%, largely due to higher impaired loans in the real estate and related and
consumer staples sectors, partially offset by lower impaired loans in a few sectors, including the transportation sector.
Allowance for credit losses
Table 49
As at
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Personal & Commercial Banking
$ 3,200
$ 3,478
Wealth Management
382
320
Capital Markets
597
620
Corporate Support and other
(1)
2
1
ACL on loans
4,181
4,419
ACL on other financial assets
(2)
33
52
Total ACL
$ 4,214
$ 4,471
ACL on loans is comprised of:
Retail
$ 2,285
$ 2,287
Wholesale
1,227
1,435
ACL on performing loans
$ 3,512
$ 3,722
ACL on impaired loans
669
697
(1)
Includes PCL recorded in Corporate Support, Insurance and Investor & Treasury Services.
(2)
ACL on other financial assets mainly represents allowances on debt securities measured at FVOCI and amortized cost,
accounts receivable and financial guarantees.
2022 vs. 2021
Total ACL of $4,214 million decreased $257 million or 6% from last year, primarily reflecting a decrease of $238 million in ACL on loans.
ACL on performing loans of $3,512 million decreased $210 million or 6%, primarily due to lower ACL in Personal & Commercial
Banking, reflecting the recovery from the COVID-19 pandemic, partially offset by unfavourable changes in our macroeconomic
outlook in the current year.
ACL on impaired loans of $669 million decreased $28 million or 4%, due to lower ACL in Capital Markets and Personal &
Commercial Banking, partially offset by higher ACL in Wealth Management.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
75
Market risk
Market risk is defined to be the impact of market prices upon our financial condition. This includes potential gains or losses
due to changes in market determined variables such as interest rates, credit spreads, equity prices, commodity prices, foreign
exchange rates and implied volatilities.
The measures of financial condition impacted by market risk are as follows:
1.
Positions whose revaluation gains and losses are reported in revenue, which includes:
a)
Changes in the fair value of instruments classified or designated as FVTPL, and
b)
Hedge ineffectiveness.
2.
CET1 capital, which includes:
a)
All of the above, plus
b)
Changes in the fair value of FVOCI securities where revaluation gains and losses are reported as OCI,
c)
Changes in the Canadian dollar value of investments in foreign subsidiaries, net of hedges, due to foreign exchange
translation, and
d)
Changes in the fair value of employee benefit plan deficits.
3.
CET1 ratio, which includes:
a)
All of the above, plus
b)
Changes in RWA resulting from changes in traded market risk factors, and
c)
Changes in the Canadian dollar value of RWA due to foreign exchange translation.
4.
The economic value of the Bank, which includes:
a)
Points 1 and 2 above, plus
b)
Changes in the economic value of other non-trading positions, net interest income, and fee based income, as a
result of changes in market risk factors.
Market risk controls – FVTPL positions
As an element of the ERAF, the Board approves our overall market risk constraints. GRM creates and manages the control
structure for FVTPL positions which ensures that business is conducted on a basis consistent with Board requirements. The
Market and Counterparty Credit Risk function within GRM is responsible for creating and managing the controls and
governance procedures that ensure that risk taken is consistent with risk appetite constraints set by the Board. These controls
include limits on probabilistic measures of potential loss such as Value-at-Risk, Stressed Value-at-Risk, Incremental Risk Charge
and stress tests as defined below:
Value-at-Risk (VaR)
is a statistical measure of potential loss for a financial portfolio computed at a given level of
confidence and over a defined holding period. We measure VaR at the 99th percentile confidence level for price movements
over a one-day holding period using historic simulation of the last two years of equally weighted historic market data.
These calculations are updated daily with current risk positions, with the exception of certain less material positions that
are not actively traded and are updated on at least a monthly basis.
Stressed Value-at-Risk (SVaR)
is calculated in an identical manner as VaR with the exception that it is computed using a
fixed historical one-year period of extreme volatility and its inverse rather than the most recent two-year history. The
stress period used is a one-year period covering the market volatility observed during Q2 2020. SVaR is calculated daily for
all portfolios, with the exception of certain less material positions that are not actively traded and are updated on at least
a monthly basis.
VaR and SVaR are statistical estimates based on historical market data and should be interpreted with knowledge of their
limitations, which include the following:
•
VaR and SVaR will not be predictive of future losses if the realized market movements differ significantly from the
historical periods used to compute them.
•
VaR and SVaR project potential losses over a one-day holding period and do not project potential losses for risk
positions held over longer time periods.
•
VaR and SVaR are measured using positions at close of business and do not include the impact of trading and hedging
activity over the course of a day.
We validate our VaR and SVaR measures through a variety of means – including subjecting the models to vetting and
validation by a group independent of the model developers and by back-testing the VaR against daily marked-to-market
revenue to identify and examine events in which actual outcomes in trading revenue exceed the VaR projections.
Incremental Risk Charge (IRC)
captures the risk of losses under default or rating changes for issuers of certain traded fixed
income instruments. IRC is measured over a one year horizon at a 99.9% confidence level, and captures different liquidity
horizons for instruments and concentrations in issuers under a constant level of risk assumption. Changes in measured risk
levels are primarily associated with changes in inventory from the applicable fixed income trading portfolios.
Stress tests
– Our market risk stress testing program is used to identify and control risk due to large changes in market
prices and rates. We conduct stress testing daily on positions that are marked-to-market. The stress tests simulate both
historical and hypothetical events which are severe and long-term in duration. Historical scenarios are taken from actual
market events and range in duration up to 90 days. Examples include the COVID-19 Pandemic of 2020, Global Financial Crisis
of 2008 and the Taper Tantrum of 2013. Hypothetical scenarios are designed to be forward-looking at potential future market
stresses, and are designed to be severe but plausible. We are constantly evaluating and refining these scenarios as market
conditions change. Stress results are calculated assuming an instantaneous revaluation of our positions with no
management action.
76
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
These measures are computed on all positions that are FVTPL for financial reporting purposes, with the exception of those in a
designated hedging relationship and those in our insurance businesses.
Market risk measures – FVTPL positions
Market risk measures*
Table 50
October 31, 2022
October 31, 2021
For the year ended
For the year ended
(Millions of Canadian dollars)
As at
Average
High
Low
As at
Average
High
Low
Equity
$
45
$
34
$
51
$
21
$
24
$
20
$
38
$
12
Foreign exchange
3
4
7
1
4
4
6
2
Commodities
6
5
6
3
3
3
4
2
Interest rate
(1)
47
34
62
17
61
44
64
21
Credit specific
(2)
5
7
10
4
9
8
11
6
Diversification
(3)
(47)
(31)
n.m.
n.m.
(51)
(35)
n.m.
n.m.
Market risk VaR
(4)
$
59
$
53
$
87
$
34
$
50
$
44
$
72
$
23
Market risk Stressed VaR
(4)
$
192
$
103
$
226
$
47
$
59
$
53
$
101
$
29
*
This table represents an integral part of our 2022 Annual Consolidated Financial Statements.
(1)
General credit spread risk and funding spread risk associated with uncollateralized derivatives are included under interest rate VaR.
(2)
Credit specific risk captures issuer-specific credit spread volatility.
(3)
Market risk VaR is less than the sum of the individual risk factor VaR results due to risk factor diversification.
(4)
The average market risk VaR and average SVaR for the year ended October 31, 2022 includes $11 million and $36 million, respectively (October 31, 2021 – $13 million and
$15 million), related to loan underwriting commitments.
n.m.
not meaningful
2022 vs. 2021
Average market risk VaR of $53 million increased $9 million from last year. This was driven by the impact of heightened market
volatility this year on our equity derivatives portfolio, partially offset by the impact of the Q2 2020 period of significant market
volatility no longer being reflected in our two-year historical VaR period.
Average SVaR of $103 million increased $50 million, largely driven by unfavourable market conditions this year which
impacted loan underwriting commitments, and increased exposures in our fixed income portfolios.
The following chart displays a bar graph of our daily trading profit and loss and a line graph of our daily market risk VaR. We
incurred 4 days of net trading losses in 2022.
Trading revenue
(teb),
(1) (2)
and VaR
(Millions of Canadian dollars)
Nov 1, 2021
Jan 31, 2022
Apr 30, 2022
Jul 31, 2022
Oct 31, 2022
80
60
40
20
-60
-20
-40
0
-100
-80
Trading Revenue (teb)
(1) (2)
VaR
(1)
Trading revenue (teb) amounts in the chart above have been revised from those previously presented.
(2)
Trading revenue (teb) amounts in the chart above exclude the impact of loan underwriting commitments.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
77
The following chart displays the distribution of daily trading profit and loss in 2022 and 2021 with 4 days of net trading losses in
2022 as mentioned above and no net trading losses in 2021. The largest reported profit was $54 million with an average daily
profit of $16 million.
Frequency in Number of Days
Daily net trading revenue (C$ millions), excluding structured entities
2022
2021
-60
-50
-55
-40
-45
-30
-35
-20
-25
-10
-15
0
5
-5
10
15
20
25
30
35
40
45
50
55
60
0
10
20
30
40
50
60
70
80
90
Trading revenue
(teb), (1) (2)
(1)
Amounts have been revised from those previously presented.
(2)
Trading revenue (teb) amounts in the chart above exclude the impact of loan underwriting commitments.
Market risk measures for assets and liabilities of RBC Insurance
®
We offer a range of insurance products to clients and hold investments to meet the future obligations to policyholders. The
investments which support actuarial liabilities are predominantly fixed income assets designated as FVTPL. Consequently,
changes in the fair values of these assets are recorded in the Consolidated Statements of Income and are largely offset by
changes in the fair value of the actuarial liabilities, the impact of which is reflected in PBCAE. As at October 31, 2022, we held
assets in support of approximately $12 billion of liabilities with respect to insurance obligations (October 31, 2021 – $13 billion).
Market risk controls – Interest Rate Risk in the Banking Book (IRRBB) positions
1
IRRBB arises primarily from traditional customer-originated banking products such as deposits and loans, and includes
related hedges and interest rate risk from securities held for liquidity management purposes. Factors contributing to IRRBB
include mismatches between asset and liability repricing dates, relative changes in asset and liability rates in response to
market rate scenarios, and other product features affecting the expected timing of cash flows, such as options to pre-pay
loans or redeem term deposits prior to contractual maturity. IRRBB sensitivities are regularly measured and reported, and
subject to limits and controls with independent oversight from GRM.
The Board approves the risk appetite for IRRBB, and the Asset-Liability Committee (ALCO) and GRM provide ongoing
governance through IRRBB risk policies, limits, operating standards and other controls. IRRBB reports are reviewed regularly
by GRM, ALCO, the GRC, the Risk Committee of the Board and the Board.
IRRBB measurement
To monitor and control IRRBB, we assess two primary metrics, Net Interest Income (NII) risk and Economic Value of Equity
(EVE) risk, under a range of market shocks, scenarios, and time horizons. Market scenarios include currency-specific parallel
and non-parallel yield curve changes, interest rate volatility shocks, and interest rate scenarios prescribed by regulators.
In measuring NII risk, detailed banking book balance sheets and income statements are dynamically simulated to
estimate the impact of market stress scenarios on projected NII. Assets, liabilities and off-balance sheet positions are
simulated over various time horizons. The simulations incorporate maturities, renewals, and new originations along with
prepayment and redemption behaviour. Product pricing and volumes are forecasted based on past experience to determine
response expectations for a given market shock scenario. EVE risk captures the market value sensitivity to changes in rates. In
measuring EVE risk, deterministic (single-scenario) and stochastic (multiple-scenario) valuation techniques are applied to
spot position data. NII and EVE risks are measured for a range of market risk stress scenarios which include extreme but
plausible changes in market rates and volatilities. IRRBB measures assume continuation of existing hedge strategies.
Management of NII and EVE risk is complementary and supports our efforts to generate a sustainable high-quality NII
stream. NII and EVE risks for specific units are measured daily, weekly or monthly depending on materiality, complexity and
hedge strategy.
A number of assumptions affecting cash flows, product re-pricing and the administration of rates underlie the models
used to measure NII and EVE risk. The key assumptions pertain to the projected funding date of mortgage rate commitments,
fixed-rate loan prepayment behaviour, term deposit redemption behaviour, and the term and rate profile of non-maturity
deposits. All assumptions are derived empirically based on historical client behaviour and product pricing with consideration
of possible forward-looking changes. All models and assumptions used to measure IRRBB are subject to independent
oversight by GRM.
Market risk measures – IRRBB Sensitivities
The following table shows the potential before-tax impact of an immediate and sustained 100 bps increase or decrease in
interest rates on projected 12-month NII and EVE, assuming no subsequent hedging. Rate floors are applied within the
declining rate scenarios to prevent EVE valuation and NII simulation market rate levels from falling below a minimum average
level of negative 25 bps across major currencies. Interest rate risk measures are based on current on and off-balance sheet
positions which can change over time in response to business activity and management actions.
1
IRRBB positions include the impact of derivatives in hedge accounting relationships and FVOCI securities used for interest rate risk management.
78
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Market risk – IRRBB measures*
Table 51
October 31
2022
October 31
2021
EVE risk
NII risk
(1)
(Millions of Canadian dollars)
Canadian
dollar impact
U.S. dollar
impact
Total
Canadian
dollar impact
U.S. dollar
impact
Total
EVE risk
NII risk (1)
Before-tax impact of:
100 bps increase in rates
$
(1,332)
$
(568)
$
(1,900)
$
547
$
234
$
781
$
(2,009)
$
929
100 bps decrease in rates
1,269
440
1,709
(598)
(241)
(839)
1,537
(921)
*
This table represents an integral part of our 2022 Annual Consolidated Financial Statements.
(1)
Represents the 12-month NII exposure to an instantaneous and sustained shift in interest rates.
As at October 31, 2022, an immediate and sustained -100 bps shock would have had a negative impact to our NII of $839 million,
down from $921 million last year, and an immediate and sustained +100 bps shock would have had a negative impact to our EVE
of $1,900 million, down from $2,009 million last year. Both the year-over-year change in NII and EVE sensitivity reflect additional
hedging activity. The impact of hedging activity on the EVE sensitivity was more than offset by the impact of a higher rate
environment. During 2022, NII and EVE risks remained within approved limits.
Market risk measures for other material non-trading portfolios
Investment securities carried at FVOCI
We held $93 billion of investment securities carried at FVOCI as at October 31, 2022, compared to $78 billion at the end of the prior
year. We hold debt securities carried at FVOCI primarily as investments, as well as to manage liquidity risk and hedge interest
rate risk in our non-trading banking balance sheet. As at October 31, 2022, our portfolio of investment securities carried at FVOCI
is interest rate sensitive and would impact OCI by a pre-tax change in value of $6 million as measured by the change in the value
of the securities for a one basis point parallel increase in yields. The portfolio also exposes us to credit spread risk of a pre-tax
change in value of $16 million, as measured by the change in value for a one basis point widening of credit spreads. The value of
the investment securities carried at FVOCI included in our IRRBB measures as at October 31, 2022 was $90 billion. Our investment
securities carried at FVOCI also include equity exposures of $1 billion as at October 31, 2022, compared to $1 billion at the end of
the prior year.
Non-trading foreign exchange rate risk
Foreign exchange rate risk is the potential adverse impact on earnings and economic value due to changes in foreign currency
rates. Our revenue, expenses and income denominated in currencies other than the Canadian dollar are subject to
fluctuations as a result of changes in the value of the average Canadian dollar relative to the average value of those
currencies. Our most significant exposure is to the U.S. dollar, due to our operations in the U.S. and other activities conducted
in U.S. dollars. Other significant exposures are to the British pound and the Euro, due to our activities conducted
internationally in these currencies. A strengthening or weakening of the Canadian dollar compared to the U.S. dollar, British
pound and the Euro could reduce or increase, as applicable, the translated value of our foreign currency denominated
revenue, expenses and earnings and could have a significant effect on the results of our operations. We are also exposed to
foreign exchange rate risk arising from our investments in foreign operations. For unhedged equity investments, when the
Canadian dollar appreciates against other currencies, the unrealized translation losses on net foreign investments decreases
our shareholders’ equity through the other components of equity and decreases the translated value of the RWA of the foreign
currency-denominated asset. The reverse is true when the Canadian dollar depreciates against other currencies.
Consequently, we consider these impacts in selecting an appropriate level of our investments in foreign operations to be
hedged.
Derivatives related to non-trading activity
Derivatives are also used to hedge market risk exposure unrelated to our trading activity. Hedge accounting is elected where
applicable. These derivatives are included in our IRRBB measures and other internal non-trading market risk measures. We use
interest rate swaps to manage our IRRBB, funding and investment activities. Interest rate swaps are also used to hedge changes
in the fair value of certain fixed-rate instruments. We also use foreign exchange derivatives to manage our exposure to equity
investments in subsidiaries that are denominated in foreign currencies, particularly the U.S. dollar, British Pound, and Euro.
For further details on the application of hedge accounting and the use of derivatives for hedging activities, refer to Notes 2 and 9
of our 2022 Annual Consolidated Financial Statements.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
79
Linkage of market risk to selected balance sheet items
The following tables provide the linkages between selected balance sheet items with positions included in our trading market risk
and non-trading market risk disclosures, which illustrates how we manage market risk for our assets and liabilities through
different risk measures:
Linkage of market risk to selected balance sheet items
Table 52
As at October 31, 2022
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
$
72,397
$
–
$
72,397
Interest rate
Interest-bearing deposits with banks
108,011
84,468
23,543
Interest rate
Securities
Trading
148,205
137,293
10,912
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
264,665
53,180
Interest rate
Loans
Retail
549,751
6,128
543,623
Interest rate
Wholesale
273,967
8,558
265,409
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
(3)
14,072
Total assets
$
1,917,219
$
661,182
$
1,241,965
Liabilities subject to market risk
Deposits
$
1,208,814
$
141,319
$
1,067,495
Interest rate
Segregated fund liabilities
2,638
–
2,638
Interest rate
Other
Obligations related to securities sold short
35,511
35,511
–
Obligations related to assets sold
under repurchase agreements and
securities loaned
273,947
248,712
25,235
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
(4)
21,737
Total liabilities
$
1,809,044
$
575,542
$
1,211,765
Total equity
108,175
Total liabilities and equity
$
1,917,219
(1)
Traded risk includes positions that are classified or designated as FVTPL and positions whose revaluation gains and losses are reported in revenue. Market risk
measures of VaR, SVaR, IRC and stress tests are used as risk controls for traded risk.
(2)
Non-traded risk includes positions used in the management of IRRBB and other non-trading portfolios. Other material non-trading portfolios include positions from RBC
Insurance
®
and investment securities, net of applicable allowance, not included in IRRBB.
(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.
80
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
As at October 31, 2021
Market risk measure
(Millions of Canadian dollars)
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
$
113,846
$
–
$
113,846
Interest rate
Interest-bearing deposits with banks
79,638
56,896
22,742
Interest rate
Securities
Trading
139,240
127,259
11,981
Interest rate, credit spread
Investment, net of applicable allowance
145,484
–
145,484
Interest rate, credit spread, equity
Assets purchased under reverse repurchase
agreements and securities borrowed
307,903
265,011
42,892
Interest rate
Loans
Retail
503,598
9,231
494,367
Interest rate
Wholesale
218,066
9,685
208,381
Interest rate
Allowance for loan losses
(4,089)
–
(4,089)
Interest rate
Segregated fund net assets
2,666
–
2,666
Interest rate
Other
Derivatives
95,541
92,829
2,712
Interest rate, foreign exchange
Other assets
92,157
8,615
83,542
Interest rate
Assets not subject to market risk
(3)
12,273
Total assets
$
1,706,323
$
569,526
$
1,124,524
Liabilities subject to market risk
Deposits
$
1,100,831
$
136,927
$
963,904
Interest rate
Segregated fund liabilities
2,666
–
2,666
Interest rate
Other
Obligations related to securities sold short
37,841
37,841
–
Obligations related to assets sold
under repurchase agreements and
securities loaned
262,201
236,146
26,055
Interest rate
Derivatives
91,439
89,290
2,149
Interest rate, foreign exchange
Other liabilities
87,084
8,528
78,556
Interest rate
Subordinated debentures
9,593
–
9,593
Interest rate
Liabilities not subject to market risk
(4)
15,906
Total liabilities
$
1,607,561
$
508,732
$
1,082,923
Total equity
98,762
Total liabilities and equity
$
1,706,323
(1)
Traded risk includes positions that are classified or designated as FVTPL and positions whose revaluation gains and losses are reported in revenue. Market risk
measures of VaR, SVaR, IRC and stress tests are used as risk controls for traded risk.
(2)
Non-traded risk includes positions used in the management of IRRBB and other non-trading portfolios. Other material non-trading portfolios include positions from RBC
Insurance
®
and investment securities, net of applicable allowance, not included in IRRBB.
(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.
Liquidity and funding risk
Liquidity and funding risk (liquidity risk) is the risk that we may be unable to generate sufficient cash or its equivalents in a
timely and cost-effective manner to meet our commitments. Liquidity risk arises from mismatches in the timing and value of
on-balance sheet and off-balance sheet cash flows.
Our liquidity profile is structured to ensure that we have sufficient liquidity to satisfy current and prospective
commitments in both normal and stressed conditions. To achieve this goal, we operate under a comprehensive Liquidity Risk
Management Framework (LRMF) and Pledging Policy. We also employ several liquidity risk mitigation strategies that include:
•
Achieving an appropriate balance between the level of exposure allowed under our risk appetite and the cost of risk
mitigation;
•
Maintaining broad funding access, including preserving and promoting a reliable base of core client deposits and ongoing
access to diversified wholesale funding sources;
•
A comprehensive liquidity stress testing program, contingency, recovery and resolution planning and status monitoring to
ensure sufficiency of unencumbered marketable securities and demonstrated capacity to monetize specific asset classes;
•
Governance of pledging activity through limits and liquid asset buffers for potential pledging activity;
•
Timely and granular risk measurement information;
•
Transparent liquidity transfer pricing and cost allocation; and
•
Our three lines of defense governance model.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
81
Risk control
Our liquidity risk objectives, policies, models and methodologies are reviewed regularly, and are updated to reflect changing
market conditions and business mix. This includes aligning with local regulatory developments. We continue to maintain
liquidity and funding that is appropriate for the execution of our strategy. Liquidity risk remains well within our risk appetite.
The Board annually approves the enterprise liquidity risk appetite recommended by the Risk Committee of the Board. The
Risk Committee of the Board reviews and recommends the liquidity risk appetite and approves the LRMF. The Board, the Risk
Committee of the Board, the GRC and the ALCO regularly review reporting on our consolidated liquidity position. The GRC, the
Policy Review Committee (PRC) and/or the ALCO also review liquidity documents prepared for the Board or its committees.
•
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.
These policies are supported by operational, desk and product-level policies that implement risk control elements, such as
parameters, methodologies, management limits and authorities that govern the measurement and management of liquidity.
Stress testing is also employed to assess the robustness of the control framework and inform liquidity contingency plans.
Risk measurement
Liquidity risk is measured by applying scenario-specific assumptions against our assets and liabilities and off-balance sheet
commitments to derive expected cash flow profiles over varying time horizons. For example, government bonds generally can
be quickly and easily converted to cash without significant loss of value regardless of their contractual maturity. Similarly,
while relationship-based deposits contractually can be withdrawn immediately, in practice, these balances can be relatively
stable sources of funding depending on several factors, such as the nature of the client and their intended use. Risk
methodologies and underlying assumptions are periodically reviewed and validated to ensure their alignment with our
operating environment, expected economic and market conditions, rating agency preferences, regulatory requirements and
generally accepted industry practices.
To manage liquidity risk within our liquidity risk appetite, we set limits on various metrics reflecting a range of time horizons
and severity of stress conditions and develop contingency, recovery and resolution plans. Our liquidity risk measurement and
control activities are divided into three categories as follows:
Structural (longer-term) liquidity risk
To guide our secured and unsecured wholesale term funding activities, we employ both internal and regulatory metrics to
manage and control the structural alignment between long-term illiquid assets and longer-term funding sourced from
wholesale investors and core relationship deposits.
Tactical (shorter-term) liquidity risk
To address potential immediate cash flow risks in times of stress, we use short-term net cash flow limits to control risk of
material units, subsidiaries and currencies, and perform stress testing assessments. Net cash flow positions are determined
by applying internally-derived risk assumptions and parameters to known and anticipated cash flows for all material
unencumbered assets, liabilities and off-balance sheet activities. Encumbered assets are not considered a source of available
liquidity. We also control tactical liquidity by adhering to relevant regulatory standards, such as LCR.
Contingency liquidity risk
Contingency liquidity risk planning assesses the impact of sudden stress events and our planned responses. Our ELCP,
maintained and administered by Corporate Treasury, has been developed to guide our potential responses to liquidity crises.
Under leadership of Corporate Treasury, both enterprise and regional Liquidity Crisis Teams (LCT) meet regularly to assess
our liquidity status, approve the ELCP, and in times of stress provide valuable linkages to front line and risk functions to
support the crisis management process. LCT’s include members from key business segments, GRM, Finance, Operations, and
Communications with relevant subject matter expertise.
Our stress tests, which include elements of scenario and sensitivity analyses, measure our prospective exposure to systemic
and RBC-specific events over a period of several weeks. Different levels of severity are considered for each type of crisis with
some scenarios reflecting multiple-downgrades to our credit ratings.
The contingency liquidity risk planning process identifies contingent funding needs (e.g., draws on committed credit and
liquidity lines, demands for more collateral and deposit run-off) and sources (e.g., contingent liquid asset sales and incremental
wholesale funding capacity) under various stress scenarios, and as a result, informs requirements for our earmarked
unencumbered liquid asset portfolios.
Our unencumbered liquid asset portfolios consist of diversified, highly rated and liquid marketable securities, overnight
government reverse repos and deposits with central banks. These portfolios are subject to minimum asset quality levels and, as
appropriate, other eligibility guidelines (e.g., maturity, diversification and eligibility for central bank advances) to maximize ready
access to additional cash should it be required. These securities, when added to other unencumbered liquid assets that we hold
as a result of capital markets or other activities, contribute to our liquidity reserve, and are reflected in the asset encumbrance
disclosures shown below.
82
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Liquidity reserve and asset encumbrance
The following tables provide summaries of our liquidity reserve and asset encumbrance. In both tables, unencumbered assets
represent, to varying degrees, a ready source of funding. Unencumbered assets are the difference between total and encumbered
assets from both on- and off-balance sheet sources. The encumbered assets include: (i) bank-owned liquid assets that are either
pledged as collateral (e.g., repo financing and derivative pledging) or not freely available due to regulatory or internal policy
requirements (e.g., earmarked to satisfy mandatory reserve or regional capital adequacy requirements and to maintain
continuous access to payment and settlement systems); (ii) securities received as collateral from securities financing and
derivative transactions which have either been re-hypothecated where permissible (e.g., to obtain financing through repos or to
cover securities sold short) or have no liquidity value since re-hypothecation is prohibited; and (iii) illiquid assets that have been
securitized and sold into the market or that have been pledged as collateral in support of structured term funding vehicles. As
per our liquidity management framework and practice, encumbered assets are not considered a source of liquidity.
Liquidity reserve
Our liquidity reserve consists of available unencumbered liquid assets. Although unused wholesale funding capacity, which is
regularly assessed, could be another potential source of liquidity to mitigate stressed conditions, it is excluded in the
determination of the liquidity reserve. Similarly, uncommitted and undrawn central bank borrowing facilities that could be
accessed subject to satisfying certain preconditions as set by various central banks (e.g., BoC, the Fed, Bank of England, and
Bank of France), as well as amounts that qualify as eligible collateral at the Federal Reserve Bank of New York (FRBNY) and
Federal Home Loan Bank (FHLB) are also excluded from the determination of the liquidity reserve.
Liquidity reserve
Table 53
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
(1)
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
(2)
42,090
–
42,090
40,318
1,772
Total liquid assets
$
579,471
$ 445,218
$ 1,024,689
$ 553,161
$
471,528
As at October 31, 2021
(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
$
193,484
$
–
$
193,484
$
3,405
$
190,079
Securities issued or guaranteed by sovereigns, central
banks or multilateral development banks
(1)
214,326
313,732
528,058
357,927
170,131
Other securities
114,692
115,396
230,088
132,360
97,728
Other liquid assets
(2)
27,600
–
27,600
25,981
1,619
Total liquid assets
$
550,102
$
429,128
$
979,230
$
519,673
$
459,557
As at
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Royal Bank of Canada
$
186,855
$
233,342
Foreign branches
90,910
68,567
Subsidiaries
193,763
157,648
Total unencumbered liquid assets
$
471,528
$
459,557
(1)
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).
(2)
Encumbered liquid assets amount represents cash collateral and margin deposit amounts pledged related to OTC and exchange-traded derivative transactions.
The liquidity reserve is typically most affected by routine flows of client banking activity where liquid asset portfolios reflect
changes in deposit and loan balances, as well as by activities in Capital Markets and Investor & Treasury Services, where
business strategies and client flows may also affect liquidity reserve balances. Corporate Treasury also affects liquidity reserves
through the management of funding issuances where reserves absorb timing mismatches between debt issuances and
deployment into business activities.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
83
2022 vs. 2021
Total unencumbered liquid assets increased $12 billion or 3% from last year, mainly due to an increase in on-balance sheet
securities reflecting higher wholesale funding and client deposit levels.
Asset encumbrance
The table below provides a summary of our on- and off-balance sheet amounts for cash, securities and other assets,
distinguishing between those that are encumbered or available for sale or use as collateral in secured funding transactions.
Other assets, such as mortgages and credit card receivables, can also be monetized, albeit over longer timeframes than those
required for marketable securities. As at October 31, 2022, our unencumbered assets available as collateral comprised 24% of
total assets (October 31, 2021 – 26%).
Asset encumbrance
Table 54
As at
October 31
2022
October 31
2021
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
$
–
$
3,601
$
176,807
$
–
$
180,408
$
–
$
3,405
$
190,079
$
–
$
193,484
Securities
Trading
62,941
–
91,738
3,303
157,982
56,602
–
87,311
3,633
147,546
Investment, net of
applicable allowance
7,996
–
162,022
–
170,018
12,055
–
133,429
–
145,484
Assets purchased under
reverse repurchase
agreements and
securities borrowed
(4)
456,292
21,709
9,192
3,409
490,602
437,408
18,310
17,436
5,343
478,497
Loans
Retail
Mortgage securities
28,208
–
27,263
–
55,471
29,370
–
30,778
–
60,148
Mortgage loans
62,905
–
26,696
273,724
363,325
46,699
–
29,858
243,627
320,184
Non-mortgage loans
6,066
–
–
124,889
130,955
3,213
–
8,110
111,943
123,266
Wholesale
–
–
9,119
264,848
273,967
–
–
–
218,066
218,066
Allowance for loan losses
–
–
–
(3,753)
(3,753)
–
–
–
(4,089)
(4,089)
Segregated fund net assets
–
–
–
2,638
2,638
–
–
–
2,666
2,666
Other
Derivatives
–
–
–
154,439
154,439
–
–
–
95,541
95,541
Others
(5)
40,318
–
1,772
81,611
123,701
25,981
–
1,619
76,830
104,430
Total assets
$ 664,726
$ 25,310
$
504,609
$ 905,108
$ 2,099,753
$ 611,328
$ 21,715
$
498,620
$ 753,560
$1,885,223
(1)
Includes assets restricted from use to generate secured funding due to legal or other constraints.
(2)
Represents assets that are readily available for use as collateral, including NHA MBS, our unencumbered mortgage loans that qualify as eligible collateral at FHLB, as
well as loans that qualify as eligible collateral for discount window facility available to us and lodged at the FRBNY.
(3)
Other unencumbered assets are not subject to any restrictions on their use to secure funding or as collateral but would not be considered readily available.
(4)
Includes bank-owned liquid assets and securities received as collateral from off-balance sheet securities financing, derivative transactions, and margin lending. Includes
$22 billion (October 31, 2021 – $18 billion) of collateral received through reverse repurchase transactions that cannot be rehypothecated in its current legal form.
(5)
The Pledged as collateral amount represents cash collateral and margin deposit amounts pledged related to OTC and exchange-traded derivative transactions.
Funding
Funding strategy
Core funding, comprising capital, longer-term wholesale liabilities and a diversified pool of personal and, to a lesser extent,
commercial and institutional deposits, is the foundation of our structural liquidity position.
Deposit and funding profile
As at October 31, 2022, relationship-based deposits, which are the primary source of funding for retail and commercial lending,
were $819 billion or 54% of our total funding (October 31, 2021 – $771 billion or 55%). The remaining portion is comprised of
short-and long-term wholesale funding.
Funding for highly liquid assets consists primarily of short-term wholesale funding that reflects the monetization period of
those assets. Long-term wholesale funding is used mostly to fund less liquid wholesale assets and to support liquid asset buffers.
Senior long-term debt issued by the bank on or after September 23, 2018, that has an original term greater than 400 days and
is marketable, subject to certain exceptions, is subject to the Canadian Bank Recapitalization (Bail-in) regime. Under the Bail-in
regime, in circumstances when the Superintendent of Financial Institutions has determined that a bank may no longer be viable,
the Governor in Council may, upon a recommendation of the Minister of Finance that he or she is of the opinion that it is in the
public interest to do so, grant an order directing the Canada Deposit Insurance Corporation (CDIC) to convert all or a portion of
certain shares and liabilities of that bank into common shares. As at October 31, 2022, the notional value of issued and
outstanding long-term debt subject to conversion under the Bail-in regime was $85 billion (October 31, 2021 – $53 billion).
For further details on our wholesale funding, refer to the Composition of wholesale funding tables below.
84
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Long-term debt issuance
During 2022, we continued to experience favourable unsecured wholesale funding access and pricing. We issued, either directly
or through our subsidiaries, unsecured long-term funding of $43 billion in various currencies and markets.
We primarily use residential mortgage and credit card securitization programs as alternative sources of funding and for
liquidity and asset/liability management purposes. Our total secured long-term funding includes outstanding MBS sold,
covered bonds that are collateralized with residential mortgages and securities backed by credit card receivables.
Compared to 2021, our outstanding MBS sold decreased $190 million. Our covered bonds and securitized credit card
receivables increased $10 billion and $3 billion, respectively.
For further details, refer to the Off-balance sheet arrangements section.
Long-term funding sources*
(1)
Table 55
As at
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Unsecured long-term funding
$ 119,241
$
89,447
Secured long-term funding
68,953
56,688
Subordinated debentures
10,639
9,620
$ 198,833
$ 155,755
*
This table represents an integral part of our 2022 Annual Consolidated Financial Statements.
(1)
Based on original term to maturity greater than 1 year.
Our wholesale funding activities are well-diversified by geography, investor segment, instrument, currency, structure and
maturity. We maintain an ongoing presence in different funding markets which allows us to continuously monitor market
developments and trends, identify opportunities and risks, and take appropriate and timely actions. We operate long-term debt
issuance registered programs. The following table summarizes these programs with their authorized limits by geography.
Programs by geography
Table 56
Canada
U.S.
Europe/Asia
•
Canadian Shelf Program – $25 billion
•
U.S. Shelf Program – US$50 billion
•
European Debt Issuance Program – US$40 billion
•
Global Covered Bond Program –
€
75 billion
•
Japanese Issuance Programs – ¥1 trillion
We also raise long-term funding using Canadian Senior Notes, Canadian National Housing Act MBS, Canada Mortgage Bonds,
credit card receivable-backed securities, Kangaroo Bonds (issued in the Australian domestic market by foreign firms) and Yankee
Certificates of Deposit (issued in the U.S. domestic market by foreign firms).
We continuously evaluate opportunities to expand
into new markets and untapped investor segments since diversification expands our wholesale funding flexibility, minimizes
funding concentration and dependency, and generally reduces financing costs. As presented in the following charts, our current
long-term debt profile is well-diversified by both currency and product. Maintaining competitive credit ratings is also critical to
cost-effective funding.
Euro
18%
Other
10%
U.S. dollar
46%
Canadian dollar
26%
Long-term debt
(1)
– funding mix by currency of issuance
Covered Bonds
23%
Unsecured
funding
61%
MBS/CMB (2)
8%
Cards
securitization
3%
Subordinated
debentures
5%
Long-term debt
(1)
– funding mix by product
(1)
Includes unsecured and secured long-term funding and subordinated
debentures with an original term to maturity greater than 1 year
(1)
Includes unsecured and secured long-term funding and subordinated
debentures with an original term to maturity greater than 1 year
(2)
Mortgage-backed securities and Canada Mortgage Bonds
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
85
The following table provides our composition of wholesale funding based on remaining term to maturity:
Composition of wholesale funding
(1)
Table 57
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
As at October 31, 2021
(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)
$
5,202
$
–
$
–
$
–
$
5,202
$
–
$
–
$
5,202
Certificates of deposit and commercial paper
7,118
17,013
19,046
27,053
70,230
918
–
71,148
Asset-backed commercial paper
(3)
2,378
2,563
4,076
3,697
12,714
–
–
12,714
Senior unsecured medium-term notes
(4)
27
939
8,944
2,622
12,532
16,296
37,617
66,445
Senior unsecured structured notes
(5)
118
825
817
714
2,474
2,914
5,879
11,267
Mortgage securitization
–
354
1,302
917
2,573
4,260
9,729
16,562
Covered bonds/asset-backed securities
(6)
–
847
495
5,189
6,531
6,087
27,521
40,139
Subordinated liabilities
–
–
–
188
188
165
9,267
9,620
Other
(7)
6,637
2,194
1,448
827
11,106
7,531
466
19,103
Total
$
21,480
$
24,735
$
36,128
$
41,207
$
123,550
$
38,171
$
90,479
$
252,200
Of which:
– Secured
$
8,467
$
4,017
$
6,108
$
9,803
$
28,395
$
10,347
$
37,695
$
76,437
– Unsecured
13,013
20,718
30,020
31,404
95,155
27,824
52,784
175,763
(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 $6,038 million (October 31, 2021 – $7,020 million), bearer deposit notes (unsecured) of $5,805 million (October 31, 2021 –
$3,798 million), other long-term structured deposits (unsecured) of $12,411 million (October 31, 2021 – $8,285 million), and FHLB advances (secured) of $9,609 million
(October 31, 2021 – $nil).
86
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Credit ratings
Our ability to access unsecured funding markets and to engage in certain collateralized business activities on a cost-effective
basis are primarily dependent upon maintaining competitive credit ratings. Credit ratings and outlooks provided by rating
agencies reflect their views and methodologies. Ratings are subject to change, based on a number of factors including, but not
limited to, our financial strength, competitive position, liquidity and other factors not completely within our control.
The following table presents our major credit ratings:
Credit ratings
(1)
Table 58
As at November 29, 2022
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 inasmuch as they do not comment on market price or suitability
for a particular investor. Ratings are determined by the rating agencies based on criteria established from time to time by them, and are subject to
revision or withdrawal at any time by the rating organization.
(2)
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 January 27, 2022, Moody’s upgraded our long-term debt ratings and assessments, as well as affirmed our short-term debt ratings. Following this rating
action, our outlook is stable. This rating action concludes the review for upgrade initiated by Moody’s on October 7, 2021.
(5)
On May 13, 2022, Standard & Poor’s affirmed our ratings with a stable outlook.
(6)
On July 11, 2022, Fitch Ratings affirmed our ratings with a stable outlook.
(7)
On May 13, 2022, DBRS affirmed our ratings with a stable outlook.
Additional contractual obligations for rating downgrades
We are required to deliver collateral to certain counterparties in the event of a downgrade to our current credit rating. The
following table provides the additional collateral obligations required at the reporting date in the event of a one-, two- or three-
notch downgrade to our credit ratings. These additional collateral obligations are incremental requirements for each successive
downgrade and do not represent the cumulative impact of multiple downgrades. The amounts reported change periodically as a
result of several factors, including the transfer of trading activity to centrally cleared financial market infrastructures and
exchanges, the expiration of transactions with downgrade triggers, the imposition of internal limitations on new agreements to
exclude downgrade triggers, as well as normal course mark-to-market. There is no outstanding senior debt issued in the market
that contains rating triggers that would lead to early prepayment of principal.
Additional contractual obligations for rating downgrades
Table 59
As at
October 31
2022
October 31
2021
(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
$
236
$
146
$
304
$
312
$
112
$
140
Other contractual funding or margin requirements
(1)
38
21
25
157
13
–
(1)
Includes GICs issued by our municipal markets business out of New York.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
87
Liquidity Coverage Ratio (LCR)
The LCR is a Basel III metric that measures the sufficiency of high-quality liquid assets (HQLA) available to meet liquidity needs
over a 30-day period in an acute stress scenario. The BCBS and OSFI regulatory minimum coverage level for LCR is 100%.
OSFI requires Canadian banks to disclose the LCR using the standard Basel disclosure template and calculated using the
average of daily LCR positions during the quarter.
Liquidity coverage ratio common disclosure template
(1)
Table 60
For the three months ended
October 31
2022
(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)
$
364,478
Cash outflows
Retail deposits and deposits from small business customers, of which:
$
375,324
$
34,797
Stable deposits
(3)
127,692
3,831
Less stable deposits
247,632
30,966
Unsecured wholesale funding, of which:
431,484
201,688
Operational deposits (all counterparties) and deposits in networks of cooperative banks
(4)
180,787
43,066
Non-operational deposits
220,941
128,866
Unsecured debt
29,756
29,756
Secured wholesale funding
31,881
Additional requirements, of which:
334,060
78,395
Outflows related to derivative exposures and other collateral requirements
75,312
21,750
Outflows related to loss of funding on debt products
10,214
10,214
Credit and liquidity facilities
248,534
46,431
Other contractual funding obligations
(5)
22,080
22,080
Other contingent funding obligations
(6)
710,472
11,498
Total cash outflows
$
380,339
Cash inflows
Secured lending (e.g., reverse repos)
$
286,914
$
50,441
Inflows from fully performing exposures
15,716
9,934
Other cash inflows
28,346
28,346
Total cash inflows
$
88,721
Total adjusted
value
Total HQLA
$
364,478
Total net cash outflows
291,618
Liquidity coverage ratio
125%
July 31
2022
(Millions of Canadian dollars, except percentage amounts)
Total adjusted
value
Total HQLA
$
353,406
Total net cash outflows
287,871
Liquidity coverage ratio
123%
(1)
The LCR is calculated in accordance with OSFI’s LAR guideline, which, in turn, reflects liquidity-related requirements issued by the BCBS. The LCR for the quarter ended
October 31, 2022 is calculated as an average of 62 daily positions.
(2)
With the exception of other contingent funding obligations, unweighted inflow and outflow amounts are items maturing or callable in 30 days or less. Other contingent
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%).
88
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
We manage our LCR position within a target range that reflects our liquidity risk tolerance and takes into account business mix,
asset composition and funding capabilities. The range is subject to periodic review in light of changes to internal requirements
and external developments.
We maintain HQLAs in major currencies with dependable market depth and breadth. Our treasury management practices
ensure that the levels of HQLA are actively managed to meet target LCR objectives. Our Level 1 assets, as calculated according to
OSFI LAR and the BCBS LCR requirements, represent 89% of total HQLA. These assets consist of cash, placements with central
banks and highly rated securities issued or guaranteed by governments, central banks and supranational entities.
LCR captures cash flows from on- and off-balance sheet activities that are either expected or could potentially occur within
30 days in an acute stress scenario. Cash outflows result from the application of withdrawal and non-renewal factors to demand
and term deposits, differentiated by client type (wholesale, retail and small- and medium-sized enterprises). Cash outflows also
arise from business activities that create contingent funding and collateral requirements, such as repo funding, derivatives, short
sales of securities and the extension of credit and liquidity commitments to clients. Cash inflows arise primarily from maturing
secured loans, interbank loans and non-HQLA securities.
LCR does not reflect any market funding capacity that we believe would be available in a stress situation. All maturing
wholesale debt is assigned 100% outflow in the LCR calculation.
Q4 2022 vs. Q3 2022
The average LCR for the quarter ended October 31, 2022 was 125%, which translates into a surplus of approximately $73 billion,
compared to 123% and a surplus of approximately $66 billion in the prior quarter. LCR has increased compared to last quarter as
loan growth was more than offset by an increase in volume and change in mix of client deposits, as well as by issuances of term
funding.
Net Stable Funding Ratio (NSFR)
NSFR is a Basel III metric that measures the sufficiency of available stable funding relative to the amount of required stable
funding. The BCBS and OSFI regulatory minimum coverage level for NSFR is 100%.
Available stable funding is defined as the portion of capital and liabilities expected to be reliable over the time horizon
considered by the NSFR, which extends to one year. Required stable funding is a function of the liquidity characteristics and
residual maturities of the various assets held by the bank as well as those of its off-balance sheet exposures.
OSFI requires Canadian D-SIBs to disclose the NSFR using the standard Basel disclosure template. Amounts presented in this
disclosure template are determined in accordance with the requirements of OSFI’s LAR guideline and are not necessarily aligned
with the classification requirements prescribed under IFRS.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
89
Net Stable Funding Ratio common disclosure template
(1)
Table 61
As at October 31, 2022
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:
$ 108,053
$
–
$
–
$
9,608
$ 117,661
Regulatory Capital
108,053
–
–
9,608
117,661
Other Capital Instruments
–
–
–
–
–
Retail deposits and deposits from small business customers:
326,492
71,417
37,631
32,190
431,963
Stable deposits
(3)
106,488
32,742
20,284
14,246
165,785
Less stable deposits
220,004
38,675
17,347
17,944
266,178
Wholesale funding:
312,346
438,928
79,690
121,004
340,812
Operational deposits
(4)
186,282
–
–
–
93,141
Other wholesale funding
126,064
438,928
79,690
121,004
247,671
Liabilities with matching interdependent assets
(5)
–
3,298
4,950
21,456
–
Other liabilities:
41,545
214,175
14,020
NSFR derivative liabilities
34,934
All other liabilities and equity not included in the
above categories
41,545
164,329
1,785
13,127
14,020
Total ASF
$ 904,456
Required Stable Funding (RSF) Item
Total NSFR high-quality liquid assets (HQLA)
$
38,537
Deposits held at other financial institutions for
operational purposes
–
1,403
–
–
701
Performing loans and securities:
198,407
295,131
107,266
507,939
661,461
Performing loans to financial institutions secured by
Level 1 HQLA
–
111,525
15,189
15
14,312
Performing loans to financial institutions secured by
non-Level 1 HQLA and unsecured performing loans to
financial institutions
4,000
99,000
26,949
26,099
54,587
Performing loans to non-financial corporate clients, loans to
retail and small business customers, and loans to sovereigns,
central banks and PSEs, of which:
121,583
63,827
30,277
156,711
279,382
With a risk weight of less than or equal to 35% under the
Basel II standardized approach for credit risk
–
843
691
3,181
2,834
Performing residential mortgages, of which:
38,539
17,969
33,986
298,856
259,881
With a risk weight of less than or equal to 35% under the
Basel II standardized approach for credit risk
38,539
17,952
33,951
297,918
259,057
Securities that are not in default and do not qualify as HQLA,
including exchange-traded equities
34,285
2,810
865
26,258
53,299
Assets with matching interdependent liabilities
(5)
–
3,298
4,950
21,456
–
Other assets:
1,772
300,342
81,558
Physical traded commodities, including gold
1,772
1,506
Assets posted as initial margin for derivative contracts and
contributions to default funds of CCPs
26,604
22,613
NSFR derivative assets
26,795
–
NSFR derivative liabilities before deduction of variation
margin posted
70,722
3,536
All other assets not included in the above categories
–
123,852
8
52,361
53,903
Off-balance sheet items
711,922
26,997
Total RSF
$ 809,254
Net Stable Funding Ratio (%)
112%
As at July 31, 2022
(Millions of Canadian dollars, except percentage amounts)
Weighted
value
Total ASF
$
884,887
Total RSF
784,537
Net Stable Funding Ratio (%)
113%
(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.
90
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Available stable funding is comprised primarily of a diversified pool of personal and commercial deposits, capital, as well as
long-term wholesale liabilities. Required stable funding is driven mainly by the bank’s mortgage and loan portfolio, secured loans
to financial institutions and to a lesser extent by other less liquid assets. NSFR does not reflect any unused market funding
capacity that we believe is available to the bank.
Volume and composition of available stable funding is actively managed to optimize our structural funding position and
meet NSFR objectives. Our NSFR is managed in accordance with our comprehensive LRMF.
Q4 2022 vs. Q3 2022
The NSFR as at October 31, 2022 was 112%, which translates into a surplus of approximately $95 billion, compared to 113% and a
surplus of approximately $100 billion in the prior quarter. NSFR remained relatively flat compared to last quarter as growth in
loans and securities was offset by issuance of term funding and increases in client deposits.
Contractual maturities of financial assets, financial liabilities and off-balance sheet items
The following tables provide remaining contractual maturity profiles of all our assets, liabilities, and off-balance sheet items at
their carrying value (e.g., amortized cost or fair value) at the balance sheet date. Off-balance sheet items are allocated based on
the expiry date of the contract.
Details of contractual maturities and commitments to extend funds are a source of information for the management of
liquidity risk. Among other purposes, these details form a basis for modelling a behavioural balance sheet with effective
maturities to calculate liquidity risk measures. For further details, refer to the Risk measurement section.
Contractual maturities of financial assets, financial liabilities and off-balance sheet items
Table 62
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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
91
As at October 31, 2021
(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
$ 190,995
$
2
$
1
$
–
$
–
$
–
$
–
$
–
$
2,486
$
193,484
Securities
Trading
(1)
67,655
46
87
41
6
20
169
9,845
61,371
139,240
Investment, net of applicable
allowance
7,220
4,811
5,546
5,832
5,514
22,368
31,393
62,289
511
145,484
Assets purchased under reverse
repurchase agreements and
securities borrowed
(2)
104,301
89,612
51,664
22,982
16,987
98
–
–
22,259
307,903
Loans, net of applicable allowance
28,517
21,630
26,094
31,910
26,921
139,050
298,659
62,215
82,579
717,575
Other
Customers’ liability
under acceptances
12,654
7,209
5
–
–
5
–
–
(75)
19,798
Derivatives
5,325
10,788
4,318
4,334
3,005
10,139
17,890
39,733
9
95,541
Other financial assets
33,149
1,523
1,942
145
135
270
277
2,044
3,351
42,836
Total financial assets
449,816
135,621
89,657
65,244
52,568
171,950
348,388
176,126
172,491
1,661,861
Other non-financial assets
6,079
1,681
164
217
185
1,957
2,377
5,898
25,904
44,462
Total assets
$ 455,895
$ 137,302
$ 89,821
$ 65,461
$ 52,753
$ 173,907
$ 350,765
$
182,024
$ 198,395
$ 1,706,323
Liabilities and equity
Deposits
(3)
Unsecured borrowing
$
82,183
$
44,058
$ 56,519
$ 36,342
$ 35,792
$
30,625
$
45,745
$
18,320
$ 661,924
$ 1,011,508
Secured borrowing
2,442
4,244
7,543
4,362
2,804
9,557
15,040
6,118
–
52,110
Covered bonds
1
848
–
2,693
1,878
5,350
18,321
8,122
–
37,213
Other
Acceptances
12,653
7,207
5
2
–
5
–
–
1
19,873
Obligations related to securities
sold short
37,841
–
–
–
–
–
–
–
–
37,841
Obligations related to assets sold
under repurchase agreements
and securities loaned
(2)
168,763
62,338
5,610
4,742
848
668
–
–
19,232
262,201
Derivatives
5,456
9,903
4,938
3,747
2,723
9,211
18,727
36,733
1
91,439
Other financial liabilities
33,489
1,299
1,048
439
373
1,000
2,115
10,226
795
50,784
Subordinated debentures
–
–
–
–
188
110
1,912
7,383
–
9,593
Total financial liabilities
342,828
129,897
75,663
52,327
44,606
56,526
101,860
86,902
681,953
1,572,562
Other non-financial liabilities
1,663
6,907
434
290
155
1,108
1,172
13,360
9,910
34,999
Equity
–
–
–
–
–
–
–
–
98,762
98,762
Total liabilities and equity
$ 344,491
$ 136,804
$ 76,097
$ 52,617
$ 44,761
$
57,634
$ 103,032
$
100,262
$ 790,625
$ 1,706,323
Off-balance sheet items
Financial guarantees
$
387
$
1,950
$
2,999
$
2,928
$
2,206
$
1,829
$
3,326
$
1,181
$
61
$
16,867
Commitments to extend credit
5,964
5,538
11,400
16,231
12,024
56,688
160,789
16,733
4,544
289,911
Other credit-related commitments
966
1,064
1,569
1,536
1,376
370
726
38
99,815
107,460
Other commitments
101
11
20
21
21
64
144
278
618
1,278
Total off-balance sheet items
$
7,418
$
8,563
$ 15,988
$ 20,716
$ 15,627
$
58,951
$ 164,985
$
18,230
$ 105,038
$
415,516
(1)
Trading debt securities classified as FVTPL have been included in the less than 1 month category as there is no expectation to hold these assets to their contractual
maturity.
(2)
Open reverse repo and repo contracts, which have no set maturity date and are typically short term, have been included in the with no specific maturity category.
(3)
A major portion of relationship-based deposits are repayable on demand or at short notice on a contractual basis while, in practice, these customer balances form a core
base for our operations and liquidity needs, as explained in the preceding Deposit and funding profile section.
92
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Contractual maturities of financial liabilities and off-balance sheet items – undiscounted basis
The following tables provide remaining contractual maturity analysis of our financial liabilities and off-balance sheet items. The
amounts disclosed in the following table are the contractual undiscounted cash flows of all financial liabilities (e.g., par value or
amount payable upon maturity). The amounts do not reconcile directly with those in our consolidated balance sheets as the table
incorporates only cash flows relating to payments on maturity and do not recognize premiums, discounts or mark-to-market
adjustments recognized in the instruments’ carrying values as at the balance sheet date. Financial liabilities are based upon the
earliest period in which they are required to be paid. For off-balance sheet items, the undiscounted cash flows potentially payable
under financial guarantees and commitments to extend credit are classified on the basis of the earliest date they can be called.
Contractual maturities of financial liabilities and off-balance sheet items – undiscounted basis*
Table 63
As at October 31, 2022
(Millions of Canadian dollars)
On
demand
Within
1 year
1 year
to 2 years
2 years
to 5 years
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
As at October 31, 2021
(Millions of Canadian dollars)
On
demand
Within
1 year
1 year
to 2 years
2 years
to 5 years
5 years
and greater
Total
Financial liabilities
Deposits
(1)
$
576,161
$
367,389
$
44,951
$
78,071
$
33,063
$
1,099,635
Other
Acceptances
1
19,867
5
–
–
19,873
Obligations related to securities sold short
–
37,462
–
–
–
37,462
Obligations related to assets sold under repurchase
agreements and securities loaned
19,234
242,314
669
–
–
262,217
Other liabilities
620
35,984
384
544
7,873
45,405
Lease liabilities
–
631
582
1,522
2,342
5,077
Subordinated debentures
–
188
110
1,916
7,392
9,606
596,016
703,835
46,701
82,053
50,670
1,479,275
Off-balance sheet items
Financial guarantees
(2)
$
16,867
$
–
$
–
$
–
$
–
$
16,867
Other commitments
(3)
–
81
82
209
344
716
Commitments to extend credit
(2)
248,594
41,238
77
2
–
289,911
265,461
41,319
159
211
344
307,494
Total financial liabilities and off-balance sheet items
$
861,477
$
745,154
$
46,860
$
82,264
$
51,014
$
1,786,769
*
This table represents an integral part of our 2022 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 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 2022
93
Insurance risk
Insurance risk refers to the potential financial loss that may arise where the amount, timing and/or frequency of benefit and/or
premium payments under insurance and reinsurance contracts are different than expected. Insurance risk is distinct from those
risks covered by other parts of our risk management framework (e.g., credit, market and operational risk) where those risks are
ancillary to, or accompany, the risk transfer. The five insurance sub-risks are: morbidity, mortality, longevity, policyholder
behaviour (lapse), and travel risk.
Our Insurance Risk Management Framework provides an overview of our processes and tools for identifying, assessing,
managing, mitigating and reporting on the insurance risks that face the organization. These are also supported by our robust
three lines of defence governance structure, which is consistent with our Enterprise Risk Management Framework.
Operational/regulatory compliance risk drivers
Operational risk
Operational risk is the risk of loss or harm resulting from people, inadequate or failed internal processes, controls and systems
or from external events. Operational risk is inherent in all of our activities and third-party activities and failure to manage
operational risk can result in direct or indirect financial loss, reputational impact or regulatory scrutiny and proceedings in the
various jurisdictions where we operate.
Our management of operational risk follows the three lines of defence governance model, encompassing the organizational roles
and responsibilities for a coordinated enterprise-wide approach. For further details, refer to the Risk management – Enterprise
risk management section.
Operational risk framework
We have an Enterprise Operational Risk Framework which sets out the processes to identify, assess, monitor, measure, report
and communicate on operational risk. The processes are established through the following:
•
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
GRC and the Risk Committee of the Board.
94
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Our operations expose us to many different operational risks, which may adversely affect our businesses and financial
results. The following list is not exhaustive, as other factors could also adversely affect our results.
Operational risk
Management strategy
Information technology
and cybersecurity risk
Information technology risk is the risk associated with the use, ownership, operation, and adoption
of information systems that can result in business interruptions, client service disruptions and loss
of confidential information causing financial loss, reputational damage and regulatory fines and
penalties. We maintain a risk driven program to address the risks following our operational risk
framework supported by a global team of technology risk management experts.
Cybersecurity risk is the risk to the business associated with cyber-attacks initiated to disrupt or
disable our operations or to expose or damage data. We have a dedicated team of technology and
cybersecurity professionals that manage a comprehensive program to help protect the
organization against breaches and other incidents by ensuring appropriate security and
operational controls are in place. We continue to strengthen our cyber-control framework and to
improve our resilience and cybersecurity capabilities including 24 hour monitoring, cyber
intelligence analysis of internal and external threats and alerting of potentially suspicious security
events and incidents. Throughout the year, we continued to invest in our cybersecurity program,
and multiple scenarios, assessments and simulations were conducted to test our resiliency
strategy.
Information management
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 the risk of improper creation or collection, use,
disclosure, retention or destruction of information. The collection, use and sharing of data, as well
as the management and governance of data, are increasingly important as we continue to invest in
digital solutions and innovation, as well as expanding our business activities. This is also reflected
through regulatory developments relating to data privacy. The CDO and the Chief Privacy Office
partner with cross-functional teams to develop and implement enterprise-wide standards and
practices that describe how data is used, protected, managed and governed.
Money laundering and
Terrorist financing risk
Money laundering and Terrorist financing risk is the risk that our products and services are used to
facilitate the laundering of proceeds of crime or the financing of terrorist activity. We maintain an
enterprise-wide program designed to deter, detect and report suspected money laundering and
terrorist financing activities across our organization, while seeking to ensure compliance with the
laws and regulations of the various jurisdictions in which we operate. Our Enterprise Financial
Crimes program is dedicated to the continuous development and maintenance of robust policies,
guidelines, training, risk-assessment tools and models to enable our employees to manage
evolving money laundering and terrorist financing risks and regulatory expectations. The
Enterprise Financial Crimes program is regularly evaluated in an effort to ensure it remains aligned
with industry standards, best practices and all applicable laws, regulations and guidance. Risks of
non-compliance include enforcement actions, criminal prosecutions and reputational damage.
Third-party risk
Third-party risk is the risk of failure to effectively manage third parties which may expose us to
service disruptions, regulatory action, financial loss, litigation or reputational damage. We have a
risk-based enterprise-wide program designed to provide oversight for third-party relationships
that enables us to respond effectively to events that can cause service disruptions, financial loss
or various other risks that could impact us. Our approach to third-party risk mitigation is outlined
in policies and standards that establish the minimum requirements for identifying and managing
risks throughout the engagement with a third-party, while ensuring compliance with global
regulatory expectations. We monitor third-party providers that we consider critical to our
operations for any impact on their ability to deliver services to us, including vendors of our third-
party providers.
Business continuity risk
Business continuity risk is the risk of being unable to maintain, continue or restore essential
business operations during and/or after an event that prevents us from conducting business in the
normal course. Exposure to disruptive operational events interrupts the continuity of our business
operations and could negatively impact our financial results, reputation, client outcomes and/or
result in harm to our employees. These operational events could result from the impact of severe
weather, pandemics, failed processes, technology failures or cyber threats. Our risk-based
enterprise-wide business continuity management program considers multiple scenarios to
address the consequences of a disruption and its effects on the availability of our people,
processes, facilities, technology, and third-party arrangements. Our approach to business
continuity management is outlined in policies and standards embedded across the organization
and the related risks are regularly measured, monitored, reported and integrated in our
operational risk management and control framework.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
95
Operational risk capital
Requirements for operational risk capital are determined in accordance with OSFI issued guidelines. Currently, our operational
risk capital is assessed using the Standardized Approach (TSA) which is a formula-based calculation predicated on gross income.
Upon implementation of final Basel III reforms, OSFI will require deposit-taking institutions to adopt a new Standardized
Approach (SA) in Q2 2023 for measurement of operational risk capital. The SA methodology is based on the Business Indicator
Component (BIC), which is a financial statement-based proxy for operational risk, and the Internal Loss Multiplier, a scaling
factor that is based on the historical internal loss average relative to the BIC. Once implemented, SA will replace TSA. For further
details on operational risk capital, refer to the Capital management section.
Operational risk loss events
As at October 31, 2022, our operational risk losses remain within our risk appetite. For further details on our contingencies,
including litigation, refer to Notes 24 and 25 of our 2022 Annual Consolidated Financial Statements.
Culture and conduct risk
Our values set the tone of our organizational culture and translate into desired behaviours as articulated in our Code of Conduct
and leadership model. We define conduct as the manifestation of culture through the behaviours, judgment, decisions, and
actions of the organization and its employees. Our organizational direction establishes the expectation of good conduct
outcomes as the operating norm for the organization, all employees, and third-party service providers operating on our behalf to
drive positive outcomes for our clients, employees, stakeholders, financial markets and our reputation. We hold ourselves to the
highest standards of conduct to build the trust of our clients, investors, colleagues and community. The desired outcomes from
effective culture and conduct practices align with our purpose and values and support our risk appetite statements.
Risk culture is a subset of our overall culture that influences how, individually and collectively, we take and manage risks.
Our risk culture helps us identify and understand risks, openly discuss risks, and act on the organization’s current and perceived
future risks. Our risk culture practices are grounded in our existing risk management and human resource disciplines and
protocols. When combined with the elements of effective leadership and values, these practices provide a base from which the
resulting risk culture and conduct can be assessed, monitored, sustained and subjected to ongoing enhancement.
Our Board-approved Enterprise Culture and Conduct Risks Framework provides organizational direction and describes our
approach to a set of related topics applicable to all risk categories such as fair outcomes for clients and other stakeholders,
culture, including accountability and risk culture, conduct risk, sales conduct and client practices, and misconduct.
On a regular basis, management communicates behavioural expectations to our employees with an emphasis on conduct
and values. Our leadership model also supports and encourages effective challenge between the businesses and control
functions. These behavioural expectations are supported by tools and resources which are designed to help employees live our
values, report misconduct and raise concerns, including those that might have ethical implications. We are committed to
fostering an environment where employees feel safe to speak up without retaliation. Employees have the ability to report
matters through a global anonymous Conduct Hotline. In addition, our Code of Conduct outlines an employee’s responsibility to
be truthful, respect others, and comply with laws, regulations and our policies. Anyone who breaches or fails to report an actual
or possible breach of the Code of Conduct is subject to corrective or disciplinary action. This can range from reprimands and
impacts on performance ratings and compensation, to termination of employment relationships with the organization. Internal
audits, including behavioural science reviews with recommendations are also conducted to better understand and enhance
employee attitudes and behaviours as they relate to risk management.
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.
96
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Laws and regulations are in place to protect the financial and other interests of our clients, investors and the public. As a
large-scale global financial institution, we are subject to numerous laws and extensive and evolving regulation by governmental
agencies, supervisory authorities and self-regulatory organizations in Canada, the U.S., the U.K., Europe and other jurisdictions in
which we operate. Such regulation continues to become increasingly extensive and complex. In addition, regulatory scrutiny and
expectations in Canada, the U.S., the U.K., Europe and other jurisdictions for large financial institutions with respect to, among
other things, governance, risk management practices and controls, and conduct, as well as the enforcement of regulatory
compliance matters, has intensified. Failure to comply with these regulatory requirements and expectations or to resolve any
identified deficiencies could result in increased regulatory oversight and restrictions. Resolution of such matters can also result
in the payment of substantial penalties, agreements with respect to future operation of our business, actions with respect to
relevant personnel, admission of wrongdoing, and guilty pleas with respect to criminal charges, which may in turn prohibit us
from conducting certain types of business absent regulatory relief.
Operating in this increasingly complex regulatory environment and intense regulatory enforcement environment, we are and
have been subject to a variety of legal proceedings, including civil claims and lawsuits, criminal charges, regulatory scrutiny,
examinations and proceedings, investigations, audits and requests for information by various governmental regulatory agencies
and law enforcement authorities in various jurisdictions, and we anticipate that our ongoing business activities will give rise to
such matters in the future. The global scope of our operations also means that a single issue may give rise to overlapping
regulatory investigations, regulatory proceedings and or civil litigation claims in different jurisdictions. RBC can be subject to
such proceedings due to alleged violations of law or, if determined by regulators, allegedly inadequate policies, procedures,
controls or remediation of deficiencies. Changes to laws, including tax laws, regulations or regulatory policies, as well as the
changes in how they are interpreted, implemented or enforced, could adversely affect us, for example, by lowering barriers to
entry in the businesses in which we operate, increasing our costs of compliance, or limiting our activities and ability to execute
our strategic plans. In addition, the severity of the remedies sought in legal and regulatory proceedings to which RBC is subject
have increased. Further, there is no assurance that we always will be, or be deemed to be, in compliance with laws, regulations or
regulatory policies or expectations. Accordingly, it is possible that we could receive a judicial or regulatory enforcement
judgment or decision that results in significant fines, damages, penalties, and other costs or injunctions, criminal convictions, or
loss of licenses or registrations that would damage our reputation, and negatively impact our earnings and ability to conduct
some of our businesses. We are also subject to litigation arising in the ordinary course of our business and the adverse
resolution of any litigation could have a significant adverse effect on our results or could give rise to significant reputational
damage, which in turn could impact our future business prospects.
Our Regulatory Compliance Management Framework outlines how we manage and mitigate the regulatory compliance risks
associated with failing to comply with, or adapt to, current and changing laws and regulations in the jurisdictions in which we
operate.
Regulatory compliance risk includes the regulatory risks associated with financial crimes (which include, but are not limited
to, money laundering, bribery, and sanctions), privacy, market conduct, consumer protection, business conduct, as well as
prudential and other generally applicable non-financial requirements. Specific compliance policies, procedures and supporting
frameworks have been developed to seek to manage regulatory compliance risk.
Strategic risk drivers
Strategic risk
Strategic risk is the risk that the enterprise or particular business areas will make inappropriate strategic choices, or will be
unable to successfully implement selected strategies or achieve the expected benefits. Business strategy is a major driver of our
risk appetite and consequently the strategic choices we make in terms of business mix determine how our risk profile changes.
Responsibility for selecting and successfully implementing business strategies is mandated to the individual heads of each
business segment. Oversight of strategic risk is the responsibility of the heads of the business segments and their operating
committees, the Enterprise Strategy & Transformation group, the GE, and the Board. The Enterprise Strategy & Transformation
group supports the management of strategic risk through the strategic planning process, articulated within our Enterprise
Strategic Planning Policy, ensuring alignment across our business, financial, capital and risk planning.
Our annual business portfolio review and project approval request processes help to identify and mitigate strategic risk by
seeking to ensure that strategies for new initiatives, lines of business, and the enterprise as a whole align with our risk appetite
and risk posture. GRM provides oversight of strategic risk by providing independent reviews of these processes, establishing
enterprise risk frameworks, and independently monitoring and reporting on the level of risk established against our risk appetite
metrics in accordance with the three lines of defence governance model.
For details on the key strategic priorities for our business segments, refer to the Business segment results section.
Reputation risk
Reputation risk is the risk of an adverse impact on stakeholders’ perception of the bank due to i) the actions or inactions of the
bank, its employees, third-party service providers, or clients, ii) the perceived misalignment of these actions or inactions with
stakeholder expectations of the bank, or iii) negative public sentiment towards a global or industry issue. Our reputation is
rooted in the perception of our stakeholders, and the trust and loyalty they place in us is core to our Purpose of helping clients
thrive and communities prosper. A strong and trustworthy reputation will generally strengthen our market position, reduce the
cost of capital, increase shareholder value, strengthen our resiliency, and help attract and retain top talent. Conversely, damage
to our reputation can result in reduced share price and market capitalization, increased cost of capital, loss of strategic
flexibility, inability to enter or expand into markets, loss of client loyalty and business, regulatory fines and penalties, restrictive
agreements with regulators or prosecutors, or criminal prosecutions. The sources of reputation risk are widespread. Reputation
risk is a transverse risk which can manifest as an outcome of other risk types including but not limited to credit, regulatory, legal,
operational, and environmental and social risks. We can also experience reputation risk from a failure to maintain an effective
control environment, exhibit good conduct and maintain appropriate culture practices.
Managing our reputation risk is an integral part of our organizational culture and our overall enterprise risk management
approach, as well as a priority for employees and our Board. Our Board-approved Reputation Risk Management Framework
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
97
provides an overview of our approach to identify, assess, manage, monitor and report on reputation risk. This framework outlines
governance authorities, roles and responsibilities, and controls and mechanisms to manage our reputation risk, including our
culture of integrity, compliance with our Code of Conduct and operating within our risk appetite.
Our governance of reputation risk aims to be holistic and provides an integrated view of potential reputation issues across
the organization. This governance structure is designed to ensure that ownership and accountability for reputation risk are
understood across the enterprise, both proactive and reactive reputation risk decisions are escalated to senior management for
review and evaluation, and reporting on reputation risk is comprehensive and integrated.
Legal and regulatory environment risk
Legal and regulatory environment risk is the risk that new or modified laws and regulations, and the interpretation or application
of laws and regulations, will negatively impact the way in which we operate, both in Canada and in the other jurisdictions in
which we conduct business. The full impact of some of these changes on our business will not be known until final rules are
implemented and market practices have developed in response. We continue to respond to these and other developments and
are working to minimize any potential adverse business or economic impact. The following provides a high-level summary of
some of the key regulatory changes that have potential to increase or decrease our costs, impact our profitability and increase
the complexity of our operations.
Global uncertainty
Significant uncertainty about inflationary and trade pressures, geopolitical tensions and supply chain disruptions all pose risks
to the global economic outlook. In October 2022, the International Monetary Fund (IMF) projected global growth of 3.2% in
calendar 2022 which remains unchanged from its July forecast. The October 2022 forecast is down from 4.9% in October 2021 and
reflects the ongoing economic effects of inflationary pressures and tightening monetary policy, a worse-than-anticipated
slowdown in China resulting from COVID-19 containment measures, and the ongoing conflict between Russia and Ukraine. While
the outcome of the conflict between Russia and Ukraine remains uncertain, our exposure to Russia and Ukraine is extremely
limited, as we do not have operations in these countries, consistent with our strategy and risk appetite. Our diversified business
model, as well as our product and geographic diversification, continue to help mitigate the risks posed by global uncertainty.
Government of Canada Budget 2022
On April 7, 2022, the Government of Canada presented its 2022 budget, which included measures focused on ensuring banking
and life insurers’ groups help pay a portion of the costs of the Canadian federal government’s COVID-19 pandemic response. On
November 22, 2022, Bill C-32, Fall Economic Statement Implementation Act, 2022 (the Bill) received second reading in the House
of Commons. The Bill includes a Canada Recovery Dividend (CRD) and a permanent increase in the corporate income tax rate.
The CRD is a one-time 15% tax for 2022 determined based on the average taxable income above $1 billion for taxation years 2020
and 2021 and payable in equal installments over five years. The permanent increase in the corporate income tax rate is 1.5% on
taxable income above $100 million and would apply to taxation years that end after April 7, 2022.
The Bill is not yet substantively enacted and timing of enactment remains uncertain. Based on the draft legislation, which
remains subject to amendments prior to enactment, the CRD is expected to reduce net income by approximately $1 billion and
other comprehensive income by approximately $0.1 billion when substantively enacted. The CRD is also expected to reduce our
CET1 ratio by approximately 20 bps.
Climate-related regulatory activity
Climate change regulations, frameworks, and guidance that apply to banks, insurers and asset managers are rapidly evolving.
We continue to monitor the development of applicable laws in this area and the evolution of disclosure requirements for public
issuers. In Canada this includes OSFI’s Draft Guideline B-15 Climate Risk Management, which encompasses both climate risk
management guidance and disclosure requirements that, if approved, would apply to RBC for fiscal 2023 at the earliest, and the
Canadian Securities Administrators’ proposed National Instrument 51-107 on disclosure of climate-related matters which would
introduce climate-related disclosure requirements for Canadian reporting issuers. In the U.S., the SEC has proposed rule changes
which would require many registrants to include certain climate-related disclosures in their regulatory filings, including the
financial statements. Internationally, the European Parliament recently approved the Corporate Sustainability Reporting
Directive which will require disclosure under the European Sustainability Reporting Standards, and the International
Sustainability Standards Board has also proposed standards for climate-related disclosures and general sustainability related
disclosures.
Canadian Housing Market and Consumer Debt
In June 2022, OSFI released a new Advisory - Clarification on the Treatment of Innovative Real Estate Secured Lending Products
under Guideline B-20 (the Advisory). The Advisory complements existing expectations under Guideline B-20 – Residential
Mortgage Underwriting Practices and Procedures, which articulates OSFI’s expectations regarding underwriting practices and
procedures for reverse residential mortgages, residential mortgages with shared equity features and combined loan plans
(CLPs). We do not originate reverse residential mortgages or residential mortgages with shared equity features, but we do
originate CLPs through our RBC Homeline Plan
®
products. The Advisory is not expected to have an effect on how most borrowers
with CLPs use their products.
The Advisory will come into effect for us on October 31, 2023. New CLPs originated after this date will need to meet the new
requirements. CLPs originated before October 31, 2023 are not subject to the new requirements unless certain contractual
changes are made that would trigger application of the requirements. We have assessed the requirements and initiated a project
to meet the requirements by the effective date.
Interest rate benchmark reform
On May 16, 2022, Refinitiv Benchmark Services (UK) Limited (RBSL), the administrator of the Canadian Dollar Offered Rate
(CDOR), announced that the calculation and publication of all remaining tenors of CDOR will permanently cease after June 28,
2024. Concurrently, OSFI published their expectation that federally regulated financial institutions (FRFIs) transition all new
derivatives and securities to an alternative benchmark rate by June 30, 2023, with no new CDOR exposure after that date, with
98
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
limited exceptions for risk management requirements. Furthermore, OSFI also expects all loan agreements referencing CDOR to
be transitioned by June 28, 2024. The cessation of CDOR will be managed within our enterprise-wide interest rate benchmark
reform program.
For further details, refer to Note 2 of our 2022 Annual Consolidated Financial Statements.
U.S. regulatory initiatives
On September 29, 2022, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule
implementing the beneficial ownership information reporting requirements of the Corporate Transparency Act, which was part of
the Anti- Money Laundering Act of 2020 (AMLA). The AMLA made significant revisions to the U.S.’s anti-money laundering/
anti-terrorist financing compliance framework, including by requiring FinCEN to issue the final rule. The final rule implements
sweeping beneficial ownership disclosure requirements applicable to U.S. companies (excluding trusts) and foreign companies
doing business in the U.S., in each case subject to certain exceptions. The final rule goes into effect January 1, 2024. As part of
these broad changes to the U.S. AML regulatory regime, FinCEN has stated that it plans to update its Customer Due Diligence
rule, which requires covered financial institutions to identify and verify the beneficial owners of legal entity customers. We are
currently assessing the impact of the final rule and do not anticipate any issues in complying with the requirements.
Technology and cyber risk management
In July 2022, OSFI released final Guideline B-13 – Technology and Cyber Risk Management, which sets out expectations for the
sound management of technology and cyber risk for FRFIs.
This guideline will be effective on January 1, 2024. We have assessed the requirements and do not anticipate any issues in
complying with the requirements by the effective date.
Privacy
In June 2022, the Canadian government released Bill C-27, the Digital Charter Implementation Act, 2022, with principles focused
on strengthening consumer privacy protection in Canada. The Bill introduced three new federal Acts: the Consumer Privacy
Protection Act, the Personal Information and Data Protection Tribunal Act, and the Artificial Intelligence and Data Act. These new
Acts aim to strengthen Canada’s data privacy framework and create new regulations for responsible development and use of AI.
The Consumer Privacy Protection Act is a private sector law that will repeal and replace the current Personal Information
Protection and Electronic Documents Act. The Personal Information and Data Protection Tribunal Act will establish an
administrative tribunal to review decisions and impose penalties, and the Artificial Intelligence and Data Act will create a
risk-based approach to regulating AI systems.
While it remains uncertain when and if Bill C-27 will be enacted, this new legislation could result in significant reforms that
may impact our processes and privacy risk management practices. Our Global Privacy Program is responsible for overseeing the
implementation of these evolving privacy principles in our organization.
For further details on regulatory capital and related requirements, refer to the risk and Capital management sections of this
2022 Annual Report.
Competitive risk
Competitive risk is the risk of an inability to build or maintain a sustainable competitive advantage in a given market or markets,
and includes the potential for loss of market share due to competitors offering superior products and services. Competitive risk
can arise within or outside the financial sector, from traditional or non-traditional competitors, domestically or globally. There is
intense competition for clients among financial services companies in the markets in which we operate. Client loyalty and
retention can be influenced by a number of factors, including new technology used or services offered by our competitors,
relative service levels and prices, product and service attributes, our reputation, actions taken by our competitors, and
adherence with competition and anti-trust laws. Other companies, such as insurance companies and non-financial companies, as
well as new technological applications, are increasingly offering services traditionally provided by banks. This competition could
also reduce our revenue which could adversely affect our results.
We identify and assess competitive risks as part of our overall risk management process. Our products and services are
regularly benchmarked against existing and potential competitors. In addition, we regularly conduct risk reviews of our products,
services, mergers and acquisitions strategy, as well as we seek to ensure adherence to competition and anti-trust laws. Our
annual strategy-setting process also plays an integral role in managing competitive risk.
Macroeconomic risk drivers
Systemic risk
Systemic risk is the risk that the financial system as a whole, or a major part of it – either in an individual country, a region, or
globally – is put in real and immediate danger of collapse or serious damage due to an unforeseen event causing a substantive
shock to the financial system with the likelihood of material damage to the economy, and which would result in financial,
reputation, legal or other risks for us.
Systemic risk is considered to be the least controllable risk facing us, leading to increased vulnerabilities as experienced
during the 2008 global financial crisis and the COVID-19 pandemic. Our ability to mitigate systemic risk when undertaking
business activities is limited, other than through collaborative mechanisms between key industry participants, and, as
appropriate, the public sector and regulators to reduce the frequency and impact of these risks. The two most significant
measures in mitigating the impact of systemic risk are diversification and stress testing.
Our diversified business model, portfolios, products, activities and funding sources help mitigate the potential impacts from
systemic risk as well as having established risk limits to ensure our portfolio is diversified, and concentration risk is reduced and
remains within our risk appetite.
Stress testing involves consideration of the simultaneous movements in a number of risk factors. It is used to ensure our
business strategies and capital planning are robust by measuring the potential impacts of credit, market, liquidity, and
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
99
operational risks on us, under adverse economic conditions. Our enterprise-wide stress testing program evaluates the potential
effects of a set of specified changes in risk factors, corresponding to exceptional but plausible adverse economic and financial
market events. These stress scenarios are evaluated across the organization, and results are integrated to develop an
enterprise-wide view of the impacts on our financial results and capital requirements. For further details on our stress testing,
refer to the Enterprise risk management section.
Our financial results are affected by the business and economic conditions in the geographic regions in which we operate.
These conditions include consumer saving and spending habits as well as consumer borrowing and repayment patterns,
business investment, government spending, exchange rates, sovereign debt risks, the level of activity and volatility of the capital
markets, strength of the economy and inflation. Given the importance of our Canadian and U.S. operations, an economic
downturn may largely affect our personal and business lending activities and may result in higher provisions for credit losses.
Deterioration and uncertainty in global capital markets could result in continued high volatility that would impact results in
Capital Markets, while in Wealth Management weaker market conditions could lead to lower average fee-based client assets and
transaction volumes. In addition, worsening financial and credit market conditions may adversely affect our ability to access
capital markets on favourable terms and could negatively affect our liquidity, resulting in increased funding costs and lower
transaction volumes in Capital Markets and Investor & Treasury Services.
Our financial results are also sensitive to changes in interest rates. To address growing inflation pressures, major central
banks started to increase benchmark interest rates in early fiscal 2022 and further increases are expected. While our NIM can
potentially benefit from rate increases, rising interest rates, coupled with elevated inflation, could increase market volatility and
reduce asset values, and could adversely impact household and corporate balance sheets. This could lead to credit deterioration
and impact our financial results, particularly in our Personal & Commercial Banking, Wealth Management, and Capital Markets
businesses.
Overview of other risks
In addition to the risks described in the risk sections, there are other risk factors, described below, which may affect our
businesses and financial results. The following discussion is not exhaustive as other factors could also adversely affect our
results.
Government fiscal, monetary and other policies
Our businesses and earnings are affected by monetary policies that are adopted by the BoC, the Fed in the U.S., the ECB in the
European Union (EU), the BoE in the U.K. and monetary authorities in other jurisdictions in which we operate, as well as the fiscal
policies of the governments of Canada, the U.S., the U.K., Europe and such other jurisdictions. Such policies can also adversely
affect our clients and counterparties in Canada, the U.S. and internationally, which may increase the risk of default by such
clients and counterparties.
Tax risk and transparency
Tax risk refers to the risk of loss related to unexpected tax liabilities. The tax laws and systems that are applicable to us are
complex and wide-ranging. As a result, we seek to ensure that any decisions or actions related to tax always reflect our
assessment of the long-term costs and risks involved, including their impact on our reputation and our relationship with clients,
shareholders, and regulators.
Our approach to taxation is grounded in principles which are reflected in our Code of Conduct, is governed by our Enterprise
Tax Risk Management Policy, and incorporates the fundamentals of our risk drivers. Oversight of our tax policy and the
management of tax risk is the responsibility of the GE, the CFO and the Senior Vice President, Taxation. We discuss our tax
strategy with the Audit Committee annually and provide updates on our tax position on a regular basis.
Our tax strategy is designed to provide transparency and support our business strategy, and is aligned with our corporate
vision and values. We seek to maximize shareholder value by structuring our businesses in a tax-efficient manner while
considering reputation risk by being in compliance with all laws and regulations. Our policy requires that we:
•
Act with integrity and in a straightforward, open and honest manner in all tax matters;
•
Ensure tax strategy is aligned with our business strategy supporting only bona fide transactions with a business purpose
and economic substance;
•
Ensure all intercompany transactions are conducted in accordance with applicable transfer pricing requirements;
•
Ensure our full compliance and full disclosure to tax authorities of our statutory obligations; and
•
Endeavour to work with the tax authorities to build positive long-term relationships and where disputes occur, address
them constructively.
With respect to assessing the needs of our clients, we consider a number of factors including the purpose of the transactions. We
seek to ensure that we only support bona fide client transactions with a business purpose and economic substance. Should we
become aware of client transactions that are aimed at evading their tax obligations, we will not proceed with the transactions.
We operate in 29 countries worldwide. Our activities in these countries are subject to both Canadian and international tax
legislation and other regulations, and are fully disclosed to the relevant tax authorities. The Taxation group and GRM both
regularly review the activities of all entities in an effort to ensure compliance with tax requirements and other regulations.
Given that we operate globally, complex tax legislation and accounting principles have resulted in differing legal
interpretations between the respective tax authorities we deal with and ourselves, and we are at risk of tax authorities
disagreeing with prior positions we have taken for tax purposes. When this occurs, we are committed to an open and transparent
dialogue with the tax authorities to facilitate a quick assessment and prompt resolution of the issues where possible. Failure to
adequately manage tax risk and resolve issues with tax authorities in a satisfactory manner could adversely impact our results,
potentially to a material extent in a particular period, and/or significantly impact our reputation.
100
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Tax contribution
In 2022, total income and other tax expense, including income taxes in the Consolidated Statements of Comprehensive
Income and Changes in Equity, to various levels of governments globally totalled $6 billion (2021 – $8 billion). In Canada,
total income and other tax expense for the year ended October 31, 2022 to various levels of government totalled $5 billion
(2021 – $7 billion).
Payroll taxes
Income taxes
Value added and
sales taxes
Capital taxes
Property taxes
Insurance premium taxes
Business taxes
0
2,000
1,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2022
2021
Income and other tax expense – by category
(Millions of Canadian dollars)
0
2,000
1,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
Other International
U.S.
Canada
2022
2021
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 (including climate change)
Environmental and Social (E&S) risk is the potential for an E&S issue associated with us, a client, transaction, product, supplier
or activity, to have a negative impact on our financial position, operations, legal and regulatory compliance, or reputation. It
refers to the risk that we face as a result of the manner in which we, a supplier or a client manages E&S issues or relationships
with stakeholders and communities.
E&S issues include, but are not limited to, site contamination, waste management, land and resource use, biodiversity, water
quality and availability, climate change, environmental regulation, human rights (including, but not limited to social and racial
inequality and Indigenous Peoples’ rights), and community engagement.
E&S risks, including climate change, are each unique and transverse risks impacting our principal risk types in different ways
and to varying degrees. While E&S risk manifests itself through credit, reputation, and regulatory compliance risks, the impact of
E&S risk also extends to our other principal risks, including systemic, competitive, strategic, legal and regulatory environment,
operational, market, liquidity and insurance risks.
The following sets out our governance and risk management in respect of environmental and social risks more broadly; see
the Climate risk section below for additional information specific to climate risk.
E&S risk – governance
The Board oversees how we manage our E&S risks, our enterprise approach to E&S risks, and how we conduct our business to
meet high standards of E&S responsibility. The Committees of the Board have oversight of E&S risks that are specific to their
respective responsibilities, with the Governance Committee playing a specific oversight and coordination role over ESG matters,
including certain of our ESG disclosures. For further details on risk governance, refer to the Enterprise risk management – Risk
governance section and the Climate risk – Governance section.
Senior management is responsible for managing E&S risks and opportunities, which include climate change, and
implementing our enterprise strategies for E&S matters.
E&S risk – risk management
Roles and responsibilities related to E&S risk management are governed by the three lines of defence governance model and the
Enterprise Risk Management Framework.
The E&S Risk team within GRM is responsible for identifying, assessing, measuring, managing, mitigating, monitoring and
reporting E&S issues that may pose a risk to the bank, and for developing and maintaining policies on a regular basis to manage
E&S risk. Business segments and functional areas are responsible for incorporating E&S risk management requirements within
their operations. A bottom-up approach is taken to identifying E&S risk at the client, transaction, and supplier level, as well as
when evaluating business strategies, acquisitions, projects/initiatives, products, or services. A top-down approach is also taken
to identifying and monitoring evolving E&S risks by monitoring E&S risk in various businesses, portfolios and geographies.
Our Enterprise Policy on Environmental (including Climate) and Social Risk (E&S Risk Policy) serves as the foundation for our
approach to managing E&S risks arising from our activities. It outlines our principles for E&S risk management, as well as the
minimum requirements on how E&S risks arising from our activities are identified, assessed, measured, managed, mitigated,
monitored and reported. The E&S Risk Policy also requires that clients operating in industries of elevated environmental risk be
subjected to an environmental and social review. The E&S Risk Policy is supported by additional policies and procedures on
E&S risk management for business segments. We also have policy guidelines in place for sensitive sectors and activities, which
address our financing activities to clients and projects operating in the coal-fired power and coal mining sectors, the Arctic
ecosystem, the Arctic National Wildlife Refuge, and United Nations Educational, Scientific and Cultural Organization (UNESCO)
World Heritage Sites.
Our E&S Risk Policy also sets the minimum requirement for how we identify, assess, manage, and mitigate human rights
issues, and is supported by additional polices and position statements that reflect our approach to managing our businesses in a
responsible manner.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
101
Our Code of Conduct establishes standards of desired behaviours that apply to all directors, employees, and contract
workers of the bank and its subsidiaries. In addition, our principles-based Supplier Code of Conduct articulates our expectations
with respect to a supplier’s business integrity, responsible business practices and responsible treatment of individuals and the
environment.
Our published Human Rights Position Statement sets out our commitment to respect internationally-recognized human
rights in line with the United Nations Guiding Principles on Business and Human Rights. In addition, our Modern Slavery Act
Statement, which is published annually, sets out the policies and processes that are designed to prevent slavery and human
trafficking from taking place in our operations and supply chains.
We are a participant or signatory to various industry principles and initiatives that are designed to help mitigate E&S risk
within our business activities or advance responsible business practices, including, but not limited to the following:
•
The bank is a signatory to the Equator Principles (EP), which is a benchmark for determining, assessing and managing
E&S risks for project finance. We report annually on projects assessed according to the EP framework.
•
RBC GAM
1
, BlueBay Asset Management LLP and Brewin Dolphin Holdings Limited are signatories to the United Nations
Principles for Responsible Investment (UN PRI) and report annually on their responsible investment activities to the UN PRI.
Climate risk
Climate risk is the risk related to the global transition to a net-zero economy (transition risk) and the physical impacts of climate
change (physical risk), which includes both chronic (longer-term) and acute (event driven) risks. We may be exposed to
transition risk including through emerging regulatory and legal requirements changing business and consumer sentiments
towards and the products and services we provide to our clients. Both we and our clients may also be exposed to transition risk
through technological and societal change and market forces. Additionally, we and our clients may also be vulnerable to physical
risk including through disruptions to operations and services.
The following section is informed by the pillars of the Financial Stability Board’s Task Force on Climate-related Financial
Disclosures (TCFD).
Climate risk – governance
The Board provides oversight of the bank’s strategic approach to climate change, which includes how we manage climate-related
risks and opportunities. The Board approved our updated climate strategy, the RBC Climate Blueprint, which was published in
February 2022, and engaged with management on a range of climate-related topics including the measurement of financed
emissions, scenario analysis, and our initial interim emissions reduction targets. The Committees of the Board also engaged with
management on climate-related issues, which included emerging perspectives in Board oversight of ESG including climate, the
increased regulatory and stakeholder focus, and further incorporation of climate risks in risk appetite, risk management
frameworks and enterprise-wide stress testing.
GE is responsible for implementing the RBC Climate Blueprint. Responsibility for climate is incorporated into our
management structure and business models throughout the enterprise, and key businesses have an executive with responsibility
for climate change and are configured to address the sustainable financing, investment and client needs associated with the net-
zero transition as applicable to their business. Since 2021, we have had a Climate Strategy Steering Committee which includes
executive representation from Capital Markets, Wealth Management, GAM
®
, Personal & Commercial Banking, GRM and
Corporate Communications, and a Climate Strategy and Governance team which provides enterprise-wide strategic direction on
advancing our understanding and developing strategies to address climate-related risks and opportunities for us and our clients.
1
RBC GAM includes the following affiliates: BlueBay Asset Management LLP (BlueBay), RBC Global Asset Management Inc. (including Phillips, Hager & North Investment
Management), RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, and RBC Global Asset Management (Asia) Limited, which are
separate, but affiliated subsidiaries of RBC.
102
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Climate risk – strategy
We recognize we have a role to play in accelerating the transition to a net-zero economy and mitigating the risks associated with
climate change. Our climate strategy is underpinned by our belief that the transition to net-zero should be just, orderly and
inclusive. The RBC Climate Blueprint outlines our strategic climate priorities, including helping our clients as they transition to a
net-zero future and holding ourselves accountable to achieve net-zero in our lending by 2050. RBC GAM has an approach to
climate change that supports the RBC Climate Blueprint and lays out its commitments and actions related to climate change.
In 2021, we made a commitment to provide $500 billion in sustainable financing by 2025
2
. In October 2022, we published our
approach and methodology for classifying, tracking, and disclosing progress towards our sustainable finance commitment and to
support the identification of new growth opportunities for our clients and our business. Financing activities that help to address
environmental issues are included as one aspect of sustainable finance. Our commitment to sustainable finance therefore allows
us to build on our support for the growth of the green bond market through our issuance of green bonds under our Sustainable
Bond Framework. In addition, RBC Europe Limited (RBCEL), a wholly owned subsidiary of the bank, is a member of the Green
Bond Principles, and RBC reports annually on its green bond underwriting activities, globally. We also provide products, services
and client solutions across our business segments to help businesses and individuals accelerate their climate goals and
overcome barriers for adoption.
RBC is a member of the Net-Zero Banking Alliance (NZBA), which is a global industry-led initiative to accelerate and support
efforts to address climate change by aligning member banks’ lending and investment portfolios with net-zero emissions by 2050
3
.
We are also a member of the Partnership for Carbon Accounting Financials (PCAF), which is an industry-led partnership to
facilitate transparency and enable financial institutions to assess and disclose greenhouse gas emissions of loans and
investments. As a member of the NZBA, we made a commitment to setting and disclosing interim emissions reduction targets for
certain of our key high-emitting sectors. In March 2022, we published our initial measurement of financed emissions using the
PCAF methodology, and in October 2022, in accordance with our NZBA commitment, we published our initial interim emissions
reduction targets for the oil and gas, power generation and automotive sectors
3
.
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
4
.
Climate risk – risk management
We regard climate risk as a transverse risk, which impacts all of our principal risk types in different ways and to varying degrees,
and requires us to consider how financial and non-financial factors may impact us and our clients.
Global practices in the identification, assessment, measurement and management of climate risks and opportunities are
rapidly evolving. We are continuing to advance our climate risk measurement, management, monitoring and reporting
capabilities and to advance our understanding of the impact climate-related risks may have on our business and our clients’
businesses. In particular:
•
We conduct portfolio, client and scenario analyses to assess our exposure to, and the impact of, climate-related risks.
•
We continue to refine our climate risk appetite and, as noted above, we have published initial interim emissions
reduction targets for certain key high-emitting sectors in connection with our goal to achieve net-zero emissions in our
lending by 2050.
•
As part of our annual stress testing and analysis, we continue to integrate components of climate risk through transition
and physical risk stresses and assess its impact on our key portfolios.
•
We seek to improve data quality to further identify those sectors within our wholesale portfolio that are most affected
by physical and transition risk, which allows us to better focus ongoing monitoring of climate risk.
•
We are expanding our climate data inventory and enhancing our data governance processes to improve our climate risk
analytical capabilities.
2
Sustainable finance refers to financial activities that take into account environmental, social and governance factors.
3
Our NZBA commitment, our initial measurement of financed emissions and our initial interim emissions reduction targets exclude the practices of: (a) RBC GAM and
RBC Wealth Management. RBC Wealth Management includes the following affiliates: RBC Dominion Securities Inc. (Member – Canadian Investor Protection Fund), RBC
Direct Investing Inc. (Member–Canadian Investor Protection Fund), Royal Mutual Funds Inc., RBC Wealth Management Financial Services Inc., Royal Trust Corporation of
Canada and The Royal Trust Company, which are separate but affiliated subsidiaries of RBC; and (b) Brewin Dolphin Holdings PLC and its subsidiaries.
4
External factors that could cause our actual results to differ materially from our expectations expressed in such commitments, goals and targets include the need for
more and better climate data and standardization of climate-related measurement methodologies, our ability to gather and verify data, our ability to successfully
implement various initiatives throughout our enterprise under expected time frames, difficulty in identifying transactions, products and services that meet the
sustainable finance classification criteria, the risk that eligible transactions or related initiatives will not be completed within any specified period or at all or with the
results or outcome as originally expected or anticipated by us, our ability to track transactions and report on them as performance against our climate or sustainable
finance commitment, the compliance of various third parties with our policies and procedures and their commitment to us, the need for active and continuing
participation and action of various stakeholders, technological advancements, the evolution of consumer behaviour, varying decarbonization efforts across economies,
the need for thoughtful climate policies around the world, the challenges of balancing emission reduction targets with an orderly, just and inclusive transition and
geopolitical factors that impact global energy needs, the legal and regulatory environment, and regulatory compliance considerations. Our climate- or sustainable
finance-related commitments, goals and targets are aspirational and may need to be changed or recalibrated as data improve and as climate science, transition
pathways and market practices regarding standards, methodologies, metrics and measurements evolve.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
103
As with risk appetite, our continued development of our climate risk measurement capabilities will inform the steps we take
to further the implementation of climate-related risk limits and advance the integration of climate risks into our policies and
procedures.
In addition, we regularly review the risks that we face and reflect on those that affect our clients. We also continue to explore
opportunities to expand the products and services we provide to respond to the evolving ESG landscape, help our clients
navigate their transition to a net-zero economy, and advance their sustainability strategies:
Emerging
regulatory and
legal
requirements
•
Climate change regulations, frameworks, and guidance that apply to banks, insurers and asset managers
are rapidly evolving. Several central banks and regulators have taken steps to introduce or have already
introduced rules to address the financial and economic risks of climate change. As regulations and
formal requirements evolve, we will continue to monitor such developments and update our risk
management practices and disclosures as necessary. See the Legal and regulatory environment risk
section for further details.
Disruptions to
operations
and client
services
•
We identify properties that we lease or own, which contain business processes and supporting
applications that require enhanced facility infrastructure to mitigate site disruptions, such as those
caused by extreme weather events. We classify critical environment sites based on our business risk
tolerance for site-specific downtime and, among other things, site location, power supply, exposure to
flooding, geological stability and other hazards.
•
We take steps to mitigate and adapt to climate change through our building design and our purchasing
decisions.
•
As required, we assess the impact of climate-related events (e.g., floods, hurricanes) on our businesses
and client operations.
Products and
services we
provide
•
We maintain a diversified lending portfolio, which improves our resilience to geographic or sectoral
downturns and limits concentrations of credit exposure to climate risk.
•
Each business segment is responsible for identifying material climate-related risks and opportunities,
which are integrated into risk management processes as necessary.
•
We continue to deliver advice and solutions to our clients to support their transition to a net-zero
economy and the advancement of their sustainability strategies. For example, we provide sustainable
finance products such as green, social and sustainability bond underwriting, sustainability-linked bonds
and loans, as well as advisory services to integrate ESG factors for companies that are in the pre-initial
public offering or pre-acquisition stage. Our offerings also include ESG-integrated investment solutions,
structured products, carbon trading services, and ESG research and thought leadership. While we
finance sectors across the economy, we are working to accelerate sustainable finance and to provide
ESG advisory services to clients, inclusive of energy transition opportunities.
•
RBC GAM integrates material ESG factors in its investment processes for applicable investment
strategies to help mitigate risk and/or enhance long-term, risk-adjusted returns.
•
RBC Insurance
®
(through its insurance agency) sells property and casualty insurance products that are
underwritten and insured by Aviva Canada Inc. As such, RBC Insurance is not directly exposed to climate-
related risks associated with these products. The property and casualty insurance industry as a whole
has exposure to longer-term shifts in climate patterns and extreme weather events, which may indirectly
impact our Insurance business results. We are continuing to advance our understanding of the impact of
acute and longer term weather events on travel insurance, and for life and health insurance products
sold to group/business clients.
•
Our Personal & Commercial Banking businesses continue to provide products to support clients in the
net-zero transition, including financing for hybrid and electric vehicles, home energy retrofit financing,
ESG market-linked GICs and advisory and lending solutions for clean technology.
Climate risk – metrics & targets
We report annually on environmental performance metrics, including metrics for the value of sustainable financing,
environmental philanthropy through RBC Tech for Nature, financed emissions, and emissions reduction in our own operations.
We also published our initial interim emissions reduction targets for certain key high-emitting sectors in October 2022.
104
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Capital management
We actively manage our capital to maintain strong capital ratios and high ratings while providing strong returns to our
shareholders. In addition to the regulatory requirements, we consider the expectations of credit rating agencies, depositors and
shareholders, as well as our business plans, stress tests, peer comparisons and our internal capital ratio targets. Our goal is to
optimize our capital usage and structure, and to provide support for our business segments and clients. We also aim to generate
optimal returns for our shareholders, while protecting depositors and creditors.
Capital management framework
Our capital management framework establishes policies and processes for defining, measuring, raising and investing all forms of
capital in a coordinated and consistent manner. It sets our overall approach to capital management, including guiding principles
and roles and responsibilities relating to capital adequacy and transactions, dividends, solo capital, management of RWA,
leverage ratio exposures, TLAC capital and TLAC leverage ratios. We manage and monitor capital from several perspectives,
including regulatory capital, solo capital and TLAC.
Our capital planning process is dynamic and involves various teams including Finance, Corporate Treasury, GRM, Economics
and our businesses, and covers internal capital ratio targets, potential capital transactions as well as projected dividend payouts
and share repurchases. This process considers our business operating plans, enterprise-wide stress testing and ICAAP,
regulatory capital changes and supervisory requirements, accounting changes, internal capital requirements, rating agency
metrics and solo capital.
Our capital plan is established on an annual basis and is aligned with the management actions included in the annual
business operating plan, which includes forecast growth in assets and earnings taking into account our business strategies, the
projected market and economic environment, and peer positioning. This includes incorporating potential capital transactions
based on our projected internal capital generation, business forecasts, market conditions and other developments, such as
accounting and regulatory changes that may impact capital requirements. All of the components in the capital plan are
monitored throughout the year and are revised as deemed appropriate.
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,
D-SIB/Globally Systemically Important Banks (G-SIB) surcharge, and Domestic Stability Buffer (DSB), with a view to ensure that
the bank has adequate capital to underpin risks and absorb losses under all plausible stress scenarios, including situations like
the recent COVID-19 pandemic, given our risk profile and appetite. In addition, we include a discretionary cushion on top of OSFI’s
regulatory targets to reflect our risk appetite, our forecasts of potential negative downturns and to maintain our capital strength
for forthcoming regulatory and accounting changes, peer comparatives, rating agencies sensitivities and solo capital level.
The Board is responsible for the ultimate oversight of capital management, including the annual review and approval of the
capital plan. ALCO and GE share responsibility for capital management and receive regular reports detailing our compliance with
approved limits and guidelines. The Audit and Risk Committees jointly approve the ICAAP process.
Basel III
Our consolidated regulatory capital requirements are determined by guidelines issued by OSFI, which are based on the minimum
Basel III capital ratio requirements adopted by the BCBS.
Under Basel III, banks select from two main approaches, the Standardized Approach (SA) or the IRB Approach, to calculate
their minimum regulatory capital required to support credit, market and operational risks. We adopted the Basel III IRB approach
to calculate credit risk capital for consolidated regulatory reporting purposes. While the majority of our credit risk exposures are
reported under the Basel III IRB Approach for regulatory capital purposes, certain portfolios continue to use the Basel III SA for
credit risk (for example, our Caribbean Banking operations and City National). For consolidated regulatory reporting of market
risk capital, we use both the Internal Models-based and Standardized Approaches, and for consolidated regulatory reporting of
operational risk capital we use the SA. We determine our regulatory leverage ratio based on OSFI’s LR Guideline, which reflects
the BCBS Basel III leverage ratio requirements.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
105
All federally regulated banks with a Basel III leverage ratio total exposure exceeding
€
200 billion at their financial year-end
are required, at a minimum, to publicly disclose in the first quarter following their year-end, the twelve indicators used in the
G-SIB assessment methodology, with the goal of enhancing the transparency of the relative scale of banks’ potential global
systemic importance and data quality. The FSB publishes an updated list of G-SIBs annually. On November 21, 2022, we were
re-designated as a G-SIB by the FSB. This designation requires us to maintain a higher loss absorbency requirement (common
equity as a percentage of RWA) of 1% consistent with the D-SIB requirement.
Effective November 1, 2021, OSFI’s TLAC guideline established two minimum standards: the risk-based TLAC ratio, which
builds on the risk-based capital ratios described in the CAR guideline, and the TLAC leverage ratio, which builds on the leverage
ratio described in OSFI’s LR guideline. The TLAC requirement is intended to address the sufficiency of a D-SIB’s loss absorbing
capacity in supporting its recapitalization in the event of its failure. TLAC is defined as the aggregate of Tier 1 capital, Tier 2
capital, and external TLAC instruments, which allow conversion in whole or in part into common shares under the CDIC Act and
meet all of the eligibility criteria under the TLAC guideline.
OSFI requires all D-SIBs to publicly disclose their Pillar 2 DSB as part of their quarterly disclosures, similar to other current
capital-related disclosure requirements. The level of the Pillar 2 buffer ranges between 0% and 2.5% of the entity’s total RWA for
each of the six systemically important banks in Canada. The DSB requirements must be met at the CET1 capital level. OSFI
undertakes a review of the DSB on a semi-annual basis, in June and December, and will publicly announce any changes at that
time. On June 17, 2021, OSFI announced an increase in the DSB from 1.0% to 2.5% of total RWA effective October 31, 2021 and
reaffirmed this DSB level on June 22, 2022. The 2.5% continues to reflect the highest DSB requirement under OSFI capital
requirements.
In Q2 2020, OSFI announced a series of regulatory adjustments and guidance to support the financial and operational resilience
of the banking sector in response to the COVID-19 pandemic, and continues, as needed, to release regulations implementing,
clarifying, updating or unwinding certain aspects or requirements. Such measures and guidance include:
•
Modifications for increases in expected credit loss provisions on CET1 capital by applying a 25% after-tax exclusion rate for
growth in Stage 1 and Stage 2 allowances between Q1 2020 and the respective quarters of fiscal 2022. The exclusion rate was
reduced to the current 25% in fiscal 2022 from 50% in fiscal 2021, and will cease to apply at the beginning of fiscal 2023. These
modifications are not available for a financial institution’s IRB portfolio in any quarter in which the financial institution has a
shortfall in allowances.
•
Exclusion of central bank reserves and sovereign-issued securities that qualify as HQLA from leverage ratio exposure
amounts until December 31, 2021. On August 12, 2021, OSFI announced that the exclusion of sovereign-issued securities that
qualify as HQLA from the leverage ratio exposure measure will not extend beyond December 31, 2021 and that central bank
reserves will continue to be excluded from the leverage ratio exposure measure. On September 13, 2022, OSFI announced
that exclusion of these central bank reserves from the leverage ratio will cease effective April 1, 2023.
•
Reduction in the current regulatory capital floor for financial institutions using the IRB approach from 75% to 70% of RWA
under the SA. The reduced floor factor will remain in place until the adoption of the Basel III reforms in Q2 2023.
•
Clarification of the applicable capital and leverage ratio treatment of certain government relief programs.
OSFI has assessed and will continue to assess the need for these relief measures. We have incorporated the above
adjustments and guidance, as applicable, into our results and in our ongoing capital planning activities.
The following table provides a summary of OSFI’s current regulatory target ratios under Basel III and Pillar 2 requirements. We
are in compliance with all current capital, leverage and TLAC requirements imposed by OSFI:
Basel III – OSFI regulatory targets
Table 64
Basel III
capital and
leverage ratios
OSFI regulatory target requirements
for large banks under Basel III
RBC capital
and
leverage
ratios as at
October 31,
2022
Domestic
Stability
Buffer
(3)
Minimum
including
Capital
Buffers,
D-SIB/G-SIB
surcharge and
Domestic
Stability
Buffer as at
October 31,
2022
Minimum
Capital
Buffers
(1)
Minimum
including
Capital
Buffers
D-SIB/G-SIB
surcharge
(2)
Minimum
including
Capital
Buffers and
D-SIB/G-SIB
surcharge
(2)
Common Equity Tier 1
4.5%
2.5%
7.0%
1.0%
8.0%
12.6%
2.5%
10.5%
Tier 1 capital
6.0%
2.5%
8.5%
1.0%
9.5%
13.8%
2.5%
12.0%
Total capital
8.0%
2.5%
10.5%
1.0%
11.5%
15.4%
2.5%
14.0%
Leverage ratio
3.0%
n.a.
3.0%
n.a.
3.0%
4.4%
n.a.
3.0%
TLAC ratio
(4)
21.5%
n.a.
21.5%
n.a.
21.5%
26.4%
2.5%
24.0%
TLAC leverage ratio
(4)
6.75%
n.a.
6.75%
n.a.
6.75%
8.5%
n.a.
6.75%
(1)
The capital buffers include the capital conservation buffer and the countercyclical capital buffer as prescribed by OSFI.
(2)
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.
(3)
The Domestic Stability Buffer can range from 0% to 2.5% of total RWA and is currently set at 2.5%, reaffirmed by OSFI on June 22, 2022.
(4)
Effective November 1, 2021, OSFI requires D-SIBs to meet minimum risk-based TLAC ratio and TLAC leverage ratio requirements which are calculated using OSFI’s TLAC guideline.
n.a.
not applicable
106
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Regulatory capital, TLAC available, RWA, capital and TLAC ratios
Under Basel III, capital consists of CET1, Additional Tier 1, Tier 2 capital, and external TLAC instruments.
CET1 capital comprises the highest quality of capital. Regulatory adjustments under Basel III include full deductions of
certain items and additional capital components that are subject to threshold deductions.
Tier 1 capital comprises predominantly CET1 and Additional Tier 1 items including non-cumulative preferred shares and
limited recourse capital notes (LRCNs) that meet certain criteria. Tier 2 capital primarily includes subordinated debentures that
meet certain criteria and certain loan loss allowances. Total capital is defined as the sum of Tier 1 and Tier 2 capital. Preferred
shares, LRCNs, and subordinated debentures issued after January 1, 2013 require Non-viability contingent capital (NVCC) features
to be included into regulatory capital. NVCC requirements ensure that non-common regulatory capital instruments bear losses
before banks seek government funding.
TLAC available is defined as the sum of Total capital and external TLAC instruments. External TLAC instruments comprise
predominantly senior bail-in debt, which includes eligible senior unsecured debt with an original term to maturity of greater than
400 days and remaining term to maturity of greater than 365 days.
Capital ratios are calculated by dividing CET1, Tier 1, Total capital and TLAC available by total RWA.
The following chart provides a summary of the major components of CET1, Additional Tier 1, Tier 2 capital and external TLAC instruments.
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
S
enior 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
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, and as discussed above, this includes capital modifications associated with Stage 1
and 2 allowances which were subject to a 25% after-tax exclusion rate in fiscal 2022, and 50% in fiscal 2021. This guidance will cease to apply at the beginning of
fiscal 2023.
(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 2022
107
The following tables provide details on our regulatory capital, TLAC available, RWA, and on ratios for capital, leverage and TLAC.
Our capital position remains strong and our capital, leverage and TLAC ratios remain well above OSFI regulatory targets:
Regulatory capital, TLAC available, RWA and capital, leverage and TLAC ratios
Table 65
As at
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
October 31
2022
October 31
2021
Capital
(1)
CET1 capital
$
76,945
$
75,583
Tier 1 capital
84,242
82,246
Total capital
93,850
92,026
Risk-weighted assets (RWA) used in calculation of capital ratios
(1)
Credit risk
$ 496,898
$ 444,142
Market risk
35,342
34,806
Operational risk
77,639
73,593
Total RWA
$ 609,879
$ 552,541
Capital ratios and Leverage ratio
(1)
CET1 ratio
12.6%
13.7%
Tier 1 capital ratio
13.8%
14.9%
Total capital ratio
15.4%
16.7%
Leverage ratio
4.4%
4.9%
Leverage ratio exposure (billions)
$
1,898
$
1,662
TLAC available and ratios
(2), (3)
TLAC available
$ 160,961
n.a.
TLAC ratio
26.4%
n.a.
TLAC leverage ratio
8.5%
n.a.
(1)
Capital, RWA, and capital ratios are calculated using OSFI’s CAR guideline and the Leverage ratio is calculated using OSFI’s Leverage
Requirements (LR) guideline as updated in accordance with the regulatory guidance issued by OSFI in response to the COVID-19
pandemic. Both the CAR guideline and LR guideline are based on the Basel III framework.
(2)
Effective November 1, 2021, OSFI requires D-SIBs to meet minimum risk-based TLAC ratio and TLAC leverage ratio requirements which are
calculated using OSFI’s TLAC guideline.
(3)
The TLAC standard is applied at the resolution entity level which for us is deemed to be Royal Bank of Canada and its subsidiaries. A
resolution entity and its subsidiaries are collectively called a resolution group. Both the TLAC ratio and TLAC leverage ratio are
calculated using the TLAC available as percentage of total RWA and leverage exposure, respectively.
n.a.
not applicable
Regulatory capital and TLAC available
Table 66
As at
(Millions of Canadian dollars)
October 31
2022
October 31
2021
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
$
17,162
$
17,887
Retained earnings
77,859
71,563
Accumulated other comprehensive income (and other reserves)
5,725
2,533
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
(23,812)
(16,411)
Common Equity Tier 1 capital (CET1)
$
76,945
$
75,583
Additional Tier 1 capital: instruments and regulatory adjustments
Directly issued qualifying Additional Tier 1 instruments plus related
stock surplus
$
7,294
$
6,661
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)
3
2
Regulatory adjustments applied to Additional Tier 1 under Basel III
–
–
Additional Tier 1 capital (AT1)
$
7,297
$
6,663
Tier 1 capital (T1 = CET1 + AT1)
$
84,242
$
82,246
Tier 2 capital: instruments and provisions and regulatory adjustments
Directly issued qualifying Tier 2 instruments plus related stock surplus
$
8,587
$
8,443
Directly issued capital instruments subject to phase out from Tier 2
–
448
Tier 2 instruments issued by subsidiaries and held by third parties (amount
allowed in group Tier 2)
3
26
Collective allowance
1,018
863
Regulatory adjustments applied to Tier 2 under Basel III
–
–
Tier 2 capital (T2)
$
9,608
$
9,780
Total capital (T1 + T2)
$
93,850
$
92,026
External TLAC: instruments and regulatory adjustments
External TLAC instruments
$
66,528
n.a.
Amortised portion of T2 instruments where remaining maturity > 1 year
818
n.a.
Regulatory adjustments applied to TLAC under Basel III
(235)
n.a.
TLAC available (Total capital + External TLAC)
$ 160,961
n.a.
n.a.
not applicable
108
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
2022 vs. 2021
Continuity of CET1 ratio (Basel III)
October 31,
2021
(1)
13.7%
286 bps
(130) bps
(109) bps
(98) bps
(41) bps
12.6%
27 bps
Net income
(2)
Dividends
(2)
Brewin
Dolphin
acquisition
RWA growth
(excluding FX)
Share
repurchases
Other
(3)
Fair value
OCI
adjustments
October 31,
2022
(1)
(40) bps
(1)
Represents rounded figures.
(2)
Represents net internal capital generation of $9 billion or 156 bps consisting of Net income available to shareholders, less common and preferred share
dividends and distributions on other equity instruments.
(3)
Includes net credit migration of 14 bps, model updates of 13 bps and other movements.
Our CET1 ratio was 12.6%, down 110 bps from last year, mainly reflecting RWA growth (excluding FX), share repurchases, the
impact of our Brewin Dolphin acquisition, and the unfavourable impact of fair value OCI adjustments. These factors were
partially offset by net internal capital generation, favourable net credit migration and model updates.
Our Tier 1 capital ratio of 13.8% was down 110 bps, reflecting the factors noted above under the CET1 ratio and a favourable
impact from the net issuance of preferred shares.
Our Total capital ratio of 15.4% was down 130 bps, reflecting the factors noted above under the Tier 1 capital ratio and a
favourable impact from the net issuance of subordinated debentures.
Our Leverage ratio of 4.4% was down 50 bps, mainly reflecting share repurchases, business-driven growth in leverage exposures,
lower regulatory modifications, the unfavourable impact of fair value OCI adjustments, and the impact of our Brewin Dolphin
acquisition. These factors were partially offset by net internal capital generation.
Leverage exposures increased by $236 billion mainly driven by business growth in retail and wholesale loans, and undrawn
commitments. The impact of foreign exchange translation and lower regulatory modifications, mainly due to the reversal of the
sovereign-issued securities qualifying as HQLA, also contributed to the increase.
Our TLAC ratio of 26.4% was up 70 bps from 25.7% as at October 31, 2021, reflecting a favourable impact from the net issuance of
external TLAC instruments, partially offset by the factors noted above under the Total capital ratio.
Our TLAC leverage ratio of 8.5% was down 10 bps from 8.6%, as at October 31, 2021, reflecting the factors noted above under
the Leverage ratio, partially offset by a favourable impact from the net issuance of external TLAC instruments.
External TLAC instruments include long-term senior debt subject to conversion into common shares under the Bail-in regime.
For further details, refer to Deposit and funding profile in the Liquidity and funding risk section.
Basel III RWA
OSFI requires banks to meet minimum risk-based capital requirements for exposures to credit risk, operational risk, and where
they have significant trading activity, market risk. RWA is calculated for each of these risk types and added together to determine
total RWA. In addition, a minimum capital floor requirement must be maintained as prescribed under OSFI’s CAR guidelines which
is currently set to 70% of RWA as calculated under current Basel III standardized credit risk and market risk approaches as
defined in the CAR guidelines. If the capital requirement is less than the required threshold, a floor adjustment to RWA must be
applied to the reported RWA as prescribed by OSFI’s CAR guidelines.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
109
Total risk-weighted assets
Table 67
2022
2021
Exposure
(1)
Average
of risk-
weights
(2)
Risk-weighted assets
As at October 31 (Millions of Canadian dollars,
except percentage amounts)
Standardized
approach
Advanced
approach
Other
Total
Total
Credit risk
Lending-related and other
Residential mortgages
(3)
$
500,986
8%
$
13,518
$
28,144
$
–
$
41,662
$
34,958
Other retail
(3)
245,633
27%
8,307
57,199
–
65,506
63,422
Business
476,896
50%
72,399
166,424
–
238,823
200,553
Sovereign
340,529
5%
3,034
12,876
–
15,910
14,412
Bank
30,348
18%
1,484
3,999
–
5,483
4,756
Total lending-related and other
$ 1,594,392
23%
$
98,742
$ 268,642
$
–
$ 367,384
$ 318,101
Trading-related
Repo-style transactions
$
987,066
1%
$
18
$
8,557
$
93
$
8,668
$
9,537
Derivatives
137,865
29%
2,284
21,566
16,288
40,138
42,377
Total trading-related
$ 1,124,931
4%
$
2,302
$
30,123
$ 16,381
$
48,806
$
51,914
Total lending-related and other and
trading-related
$ 2,719,323
15%
$ 101,044
$ 298,765
$ 16,381
$ 416,190
$ 370,015
Bank book equities
4,346
131%
–
5,682
–
5,682
5,474
Securitization exposures
74,839
17%
5,912
6,631
–
12,543
10,328
Regulatory scaling factor
n.a.
n.a.
n.a.
18,267
n.a.
18,267
16,485
Other assets
31,620
140%
n.a.
n.a.
44,216
44,216
41,840
Total credit risk
$ 2,830,128
18%
$ 106,956
$ 329,345
$ 60,597
$ 496,898
$ 444,142
Market risk
Interest rate
$
2,321
10,935
–
13,256
$
14,380
Equity
2,538
1,463
–
4,001
4,178
Foreign exchange
3,394
341
–
3,735
3,083
Commodities
1,630
120
–
1,750
762
Specific risk
7,370
1,041
–
8,411
7,601
Incremental risk charge
–
4,189
–
4,189
4,802
Total market risk
$
17,253
$
18,089
$
–
$
35,342
$
34,806
Operational risk
$
77,639
–
n.a.
$
77,639
$
73,593
Total risk-weighted assets
$ 2,830,128
$ 201,848
$ 347,434
$ 60,597
$ 609,879
$ 552,541
(1)
Total exposure represents EAD which is the expected gross exposure upon the default of an obligor. This amount is before any allowance against impaired loans or
partial write-offs and does not reflect the impact of credit risk mitigation and collateral held.
(2)
Represents the average of counterparty risk weights within a particular category.
(3)
Home equity line of credit (HELOC) exposures under the IRB Approach reported as “Other Retail” in this table have now been grouped with Residential Mortgages to
ensure consistent classification between the Standardized Approach and the IRB Approach. Prior period amounts have been reclassified to conform with this
presentation.
n.a.
not applicable
2022 vs. 2021
During the year, RWA was up $57 billion, mainly reflecting business growth in commercial and corporate lending, and residential
mortgages, as well as the impact of foreign exchange translation. These factors were partially offset by favourable net credit
migration, primarily in our wholesale portfolios, and model updates. The model updates mainly reflect the impact of the Q2 2020
period of significant market volatility no longer being reflected in our two-year historical VaR period. In our CET1 ratio the impact
of foreign exchange translation on RWA is largely mitigated with economic hedges.
110
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Selected capital management activity
Selected capital management activity
Table 68
For the year ended October 31, 2022
(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)
1,270
$
99
Purchased for cancellation
(2)
(40,866)
(509)
Issuance of preferred shares, Series BT
(2), (3)
November 5, 2021
750
750
Redemption of preferred shares, Series BJ
(2), (3)
February 24, 2022
(6,000)
(150)
Tier 2 capital
Issuance of May 3, 2032 subordinated
debentures
(3), (4)
January 25, 2022
1,000
(1)
Amounts include cash received for stock options exercised during the period and fair value adjustments to stock options.
(2)
For further details, refer to Note 20 of our 2022 Annual Consolidated Financial Statements.
(3)
NVCC instruments.
(4)
For further details, refer to Note 19 of our 2022 Annual Consolidated Financial Statements.
On December 6, 2021, we announced a normal course issuer bid (NCIB) to purchase up to 45 million of our common shares,
commencing on December 8, 2021 and continuing until December 7, 2022, or such earlier date as we complete the repurchase of
all shares permitted under the bid. Since the inception of this NCIB, the total number of common shares repurchased and
cancelled was approximately 41 million, at a cost of approximately $5,426 million.
We determine the amount and timing of purchases under the NCIB, subject to prior consultation with OSFI. Purchases may
be made through the TSX, the NYSE and other designated exchanges and alternative Canadian trading systems. The price paid
for repurchased shares is the prevailing market price at the time of acquisition.
On November 5, 2021, we issued 750 thousand of Non-Cumulative 5-Year Fixed Rate Reset First Preferred Shares Series BT to
certain institutional investors at a price of $1,000 per share.
On January 25, 2022, we issued $1,000 million of NVCC subordinated debentures. The notes bear interest at a fixed rate of
2.94% per annum until May 3, 2027, and at the three-month CDOR plus 0.76% thereafter until their maturity on May 3, 2032.
On February 24, 2022, we redeemed all 6 million of our issued and outstanding Non-Cumulative First Preferred Shares
Series BJ at a price of $25.75 per share.
Dividends
Our common share dividend policy reflects our earnings outlook, payout ratio objective and the need to maintain adequate
levels of capital to support business plans. In 2022, our dividend payout ratio was 45%. Common share dividends paid during the
year were $7 billion.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
111
Selected share data
(1)
Table 69
2022
2021
(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
1,385,591
$17,318
$
4.96
1,425,187
$ 17,728
$
4.32
Treasury shares – common shares
(2)
(2,680)
(334)
(662)
(73)
Common shares outstanding
1,382,911
$16,984
1,424,525
$ 17,655
Stock options and awards
Outstanding
7,535
7,653
Exercisable
3,502
3,273
Available for grant
4,696
5,847
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 BJ
(4)
–
–
0.33
6,000
150
1.31
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%
–
–
–
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
112,015
$
6,723
Treasury instruments – preferred shares
and other equity instruments
(2)
(12)
(5)
(164)
(39)
Preferred shares and other equity
instruments outstanding
106,753
$ 7,318
111,851
$
6,684
Dividends on common shares
$ 6,946
$
6,158
Dividends on preferred shares and
distributions on other equity
instruments
(9)
247
257
(1)
For further details about our capital management activity, refer to Note 20 of our 2022 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.
(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 2022 Annual
Consolidated Financial Statements.
(9)
Excludes distributions to non-controlling interests.
112
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
As at November 25, 2022, the number of outstanding common shares was 1,382,866,527, net of treasury shares held of 2,788,345,
and the number of stock options and awards was 7,471,143.
NVCC provisions require the conversion of the capital instrument into a variable number of common shares in the event that
OSFI deems a bank to be non-viable or a federal or provincial government in Canada publicly announces that a bank has
accepted or agreed to accept a capital injection. If a NVCC trigger event were to occur, our NVCC capital instruments as at
October 31, 2022, which were the preferred shares Series AZ, BB, BD, BF, BH, BI, BO, BT, LRCN Series 1, LRCN Series 2, LRCN
Series 3 and subordinated debentures due on January 27, 2026, July 25, 2029, December 23, 2029, June 30, 2030, January 28, 2033,
November 3, 2031, and May 3, 2032 would be converted into common shares pursuant to an automatic conversion formula with a
conversion price based on the greater of: (i) a contractual floor price of $5.00, and (ii) the current market price of our common
shares at the time of the trigger event (10-day weighted average). Based on a floor price of $5.00 and including an estimate for
accrued dividends and interest, these NVCC capital instruments would convert into a maximum of 4,541 million common shares,
in aggregate, which would represent a dilution impact of 76.66% based on the number of common shares outstanding as at
October 31, 2022.
Attributed capital
Our methodology for allocating capital to our business segments is based on the Basel III regulatory capital requirements, with
the exception of Insurance. For Insurance, the allocation of capital is based on fully diversified economic capital. Risk-based
capital attribution provides a uniform base for performance measurement among business segments, which compares to our
overall corporate return objective and facilitates management decisions in resource allocation in conjunction with other factors.
The calculation and attribution of capital involves a number of assumptions and judgments by management which are
monitored to ensure that the regulatory capital framework remains comprehensive and consistent. The models are benchmarked
to leading industry practices via participation in surveys, reviews of methodologies and ongoing interaction with external risk
management industry professionals.
For additional information on the risks highlighted below, refer to the Risk management section.
Royal Bank of
Canada
Personal &
Commercial
Banking
Wealth
Management
Insurance
Investor &
Treasury Services
Capital Markets
RWA
(C$ millions)
(1)
Credit
$496,898
Market
35,342
Operational
77,639
Attributed capital
(1)
Credit
67%
Market
–
Operational
12
Goodwill
and other
intangibles
16
Other
(2)
5
Attributed capital
(1)
Credit
63%
Market
6
Operational
11
Goodwill
and other
intangibles
16
Other
(2)
4
RWA
(C$ millions)
(1)
Credit
$179,465
Market
272
Operational
30,347
RWA
(C$ millions)
(1)
Credit
$100,949
Market
693
Operational
22,637
RWA
(C$ millions)
(1)
Credit
$16,478
Market
3,727
Operational
4,587
RWA
(C$ millions)
(1)
Credit
$174,661
Market
28,820
Operational
19,774
Attributed capital
(1)
Credit
50%
Market
–
Operational
12
Goodwill
and other
intangibles
36
Other
(2)
2
Attributed capital
(1)
Based on Economic
Capital:
Credit
12%
Market
14
Operational
8
Goodwill
and other
intangibles
10
Other
(2)
56
Attributed capital
(1)
Credit
57%
Market
10
Operational
16
Goodwill
and other
intangibles
15
Other
(2)
2
Attributed capital
(1)
Credit
69%
Market
13
Operational
8
Goodwill
and other
intangibles
7
Other
(2)
3
RWA
(C$ millions)
(1), (3)
Credit
$15,507
Market
–
Operational
–
$609,879
$210,084
$124,279
$15,507
$24,792
$223,255
(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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
113
Other considerations affecting capital
Capital treatment for equity investments in other entities is determined by a combination of accounting and regulatory
guidelines based on the size or nature of the investment. Three broad approaches apply as follows:
•
Consolidation: entities which we control are consolidated on our Consolidated Balance Sheets.
•
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.
•
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 7 of OSFI’s CAR guidelines. For our securitization exposures, we
use an internal assessment approach (IAA) for exposures related to our ABCP business, and as per regulatory guidelines for
other securitization exposures we use a combination of approaches including an external ratings based approach, an IRB
approach and a standardized approach.
While our IAA rating methodologies are based in large part on criteria that are published by External Credit Assessment
Institutions (ECAIs) such as S&P and therefore are similar to the methodologies used by these institutions, they are not identical.
Our ratings process includes a comparison of the available credit enhancement in a securitization structure to a stressed level of
projected losses. The stress level used is determined by the desired risk profile of the transaction. As a result, we stress the cash
flows of a given transaction at a higher level in order to achieve a higher rating. Conversely, transactions that only pass lower
stress levels achieve lower ratings.
Most of the other securitization exposures (non-ABCP) carry external ratings and we use the external rating for determining
the proper capital allocation for these positions. We periodically compare our own ratings to ECAIs ratings to ensure that the
ratings provided by ECAIs are reasonable.
GRM is responsible for providing risk assessments for capital purposes in respect of all our banking book exposures. GRM is
independent of the business originating the securitization exposures and performs its own analysis, sometimes in conjunction
with but always independent of the applicable business. GRM has developed asset class specific criteria guidelines which
provide the rating methodologies for each asset class. The guidelines are reviewed periodically and are subject to the ratings
replication process mandated by Pillar I of the Basel rules.
Regulatory developments
Basel III reforms
On November 11, 2021, BCBS finalized the disclosure requirements for the
Minimum capital requirements for market risk
standards published in January 2019.
On January 31, 2022, OSFI announced revised capital, leverage, liquidity and disclosure rules that incorporate the final BCBS
Basel III reforms. The revised rules include new CAR, LR, LAR guidelines and related Pillar 3 disclosure requirements. The revised
CAR (other than credit valuation adjustment and market risk), LR and Pillar 3 guidelines come into effect for us in Q2 2023. The
revised LAR guidelines are effective for us on April 1, 2023. The revised CVA and market risk chapters of the CAR guidelines are
effective for us in Q1 2024. We continue to assess the impact of the revised frameworks and are taking appropriate steps to ensure
we are ready for adoption in Q2 2023 and Q1 2024. We do not anticipate any issues in complying with the new framework
requirements. We expect to continue to engage with OSFI on the domestic implementation of the Basel III reforms and are taking
appropriate steps to ensure required adoption readiness based on guidance provided to date.
Assurance on Capital, Leverage and Liquidity Returns
On November 7, 2022, OSFI released a new guideline –
Assurance on Capital, Leverage and Liquidity Returns
, which establishes
expectations on OSFI’s assurance requirements over regulatory returns. This guideline provides principles-based and risk-based
guidance to external auditors and institutions in an effort to enhance and align these expectations across all federally regulated
financial institutions (FRFIs). This guidance will be effective for us beginning in fiscal 2023. We are assessing the finalised
requirements and we do not anticipate any issues in meeting OSFI’s minimum assurance requirements for our regulatory filings
related to our capital (including TLAC), leverage and liquidity returns.
Accounting and control matters
Critical accounting policies and estimates
Application of critical accounting policies, judgments, estimates and assumptions
Our significant accounting policies are described in Note 2 of our 2022 Annual Consolidated Financial Statements. Certain of
these policies and related estimates are recognized as critical because they require us to make particularly subjective or
complex judgments about matters that are inherently uncertain and significantly different amounts could be reported under
different conditions or using different assumptions. Our critical accounting judgments, estimates and assumptions relate to the
fair value of financial instruments, ACL, goodwill and other intangible assets, employee benefits, consolidation, derecognition of
financial assets, application of the effective interest method, provisions, insurance claims and policy benefit liabilities, and
income taxes. Our critical accounting policies and estimates have been reviewed and approved by our Audit Committee, in
consultation with management, as part of their review and approval of our significant accounting policies, judgments, estimates
and assumptions.
Fair value of financial instruments
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. We determine fair value by incorporating factors that
market participants would consider in setting a price, including commonly accepted valuation approaches.
114
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
We give priority to third-party pricing services and valuation techniques with the highest and most consistent accuracy. The level
of accuracy is determined over time by comparing third-party price values to traders’ or system values, other pricing service values
and, when available, actual trade data. Other valuation techniques are used when a price or quote is not available. Some valuation
processes use models to determine fair value. We have a systematic and consistent approach to control the use of models.
In determining fair value, a hierarchy is used which prioritizes the inputs to valuation techniques. The fair value hierarchy
gives the highest priority to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs. Fair
values established based on this hierarchy require the use of observable market data whenever available. Level 1 inputs are
unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the
measurement date. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active, and model inputs that are either observable, or can be
corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 inputs include one or
more inputs that are unobservable and significant to the fair value of the asset or liability. Unobservable inputs are used to
measure fair value to the extent that observable inputs are not available at the measurement date. The availability of inputs for
valuation may affect the selection of valuation techniques. The classification of a financial instrument in the fair value hierarchy
for disclosure purposes is based upon the lowest level of input that is significant to the measurement of fair value.
Where observable prices or inputs are not available, management judgment is required to determine fair values by
assessing other relevant sources of information such as historical data, proxy information from similar transactions, and through
extrapolation and interpolation techniques. For more complex or illiquid instruments, significant judgment is required to
determine the model used, select the model inputs, and in some cases, apply valuation adjustments to the model value or quoted
price for inactively traded financial instruments. The selection of model inputs may be subjective and the inputs may be
unobservable. Unobservable inputs are inherently uncertain as there is little or no market data available from which to
determine the level at which the transaction would occur under normal business circumstances. Appropriate parameter
uncertainty and market risk valuation adjustments for such inputs and other model risk valuation adjustments are assessed in all
such instances.
Valuation adjustments may be subjective as they require significant judgment in the input selection, such as the PD and
recovery rate, and are intended to arrive at a fair value that is determined based on assumptions that market participants would
use in pricing the financial instrument. The realized price for a transaction may be different from its recorded value that was
previously estimated using management judgment, and may therefore impact unrealized gains and losses recognized in
Non-interest income – Trading revenue or Other.
For further information on the fair value of financial instruments, refer to Notes 2 and 3 of our 2022 Annual Consolidated
Financial Statements.
Allowance for credit losses
An ACL is established for all financial assets, except for financial assets classified or designated as FVTPL and equity securities
designated as FVOCI, which are not subject to impairment assessment. Assets subject to impairment assessment include certain
loans, debt securities, interest-bearing deposits with banks, customers’ liability under acceptances, accounts and accrued
interest receivable, and finance and operating lease receivables. Off-balance sheet items subject to impairment assessment
include financial guarantees and undrawn loan commitments.
We measure the ACL on each balance sheet date according to a three-stage expected credit loss impairment model:
•
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 2022 Annual Consolidated Financial Statements.
Goodwill and other intangible assets
We allocate goodwill to groups of cash-generating units (CGU). Goodwill is not amortized and is tested for impairment on an
annual basis, or more frequently if there are objective indications of impairment. We test for impairment by comparing the
recoverable amount of a CGU with its carrying amount.
We estimate the value in use and fair value less costs of disposal of our CGUs primarily using a discounted cash flow method
which incorporates each CGU’s internal forecasts of revenues and expenses. Significant management judgment is applied in the
determination of expected future cash flows (uncertainty in timing and amount), discount rates (based on CGU-specific risks)
and terminal growth rates. CGU-specific risks include country risk, business/operational risk, geographic risk (including political
risk, devaluation risk and government regulation), currency risk and price risk (including product pricing risk and inflation). If the
future cash flows and other assumptions in future periods deviate significantly from the current amounts used in our impairment
testing, the value of our goodwill could become impaired.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
115
We assess for indicators of impairment of our other intangible assets at each reporting period. If there is an indication that
an asset may be impaired, an impairment test is performed by comparing the carrying amount of the intangible asset to its
recoverable amount. Where it is not possible to estimate the recoverable amount of an individual asset, we estimate the
recoverable amount of the CGU to which the asset belongs. Significant judgment is applied in estimating the useful lives and
recoverable amounts of our intangible assets and assessing whether certain events or circumstances constitute objective
evidence of impairment. We do not have any intangible assets with indefinite lives.
For further details, refer to Notes 2 and 11 of our 2022 Annual Consolidated Financial Statements.
Employee benefits
We sponsor a number of benefit programs for eligible employees, including registered pension plans, supplemental pension
plans, health, dental, disability and life insurance plans.
The calculation of defined benefit expenses and obligations depends on various assumptions such as discount rates,
healthcare cost trend rates, projected salary increases, retirement age, and mortality and termination rates. Discount rates are
determined using a yield curve based on spot rates from high quality corporate bonds. All other assumptions are determined by
us and are reviewed by the actuaries. Actual experience that differs from the actuarial assumptions will affect the amounts of
benefit obligations and remeasurements that we recognize. The weighted average assumptions used and the sensitivity of key
assumptions are presented in Note 17 of our 2022 Annual Consolidated Financial Statements.
Consolidation of structured entities
Subsidiaries are those entities, including structured entities, over which we have control. We control an entity when we are
exposed, or have rights, to variable returns from our involvement with the entity and have the ability to affect those returns
through our power over the investee. We have power over an entity when we have existing rights that give us the current ability
to direct the activities that most significantly affect the entity’s returns (relevant activities). Power may be determined on the
basis of voting rights or, in the case of structured entities, other contractual arrangements.
We are not deemed to control an entity when we exercise power over an entity as the agent of a third party or parties. In
determining whether we are acting as an agent, we consider the overall relationship between us, the investee and other parties
to the arrangement with respect to the following factors: (i) the scope of our decision-making power; (ii) the rights held by other
parties; (iii) the remuneration to which we are entitled; and (iv) our exposure to variability of returns.
The determination of control is based on the current facts and circumstances and is continuously assessed. In some
circumstances, different factors and conditions may indicate that various parties control an entity depending on whether those
factors and conditions are assessed in isolation or in totality. Significant judgment is applied in determining whether we control
an entity, specifically, assessing whether we have substantive decision-making rights over the relevant activities and whether we
are exercising our power as a principal or an agent.
We consolidate all subsidiaries from the date control is transferred to us, and cease consolidation when an entity is no
longer controlled by us. Our consolidation conclusions affect the classification and amount of assets, liabilities, revenues and
expenses reported in our Consolidated Financial Statements.
For further details, refer to Note 8 of our 2022 Annual Consolidated Financial Statements.
Derecognition of financial assets
We periodically enter into transactions in which we transfer financial assets such as loans or MBS to structured entities or trusts
that issue securities to investors. We derecognize the assets when our contractual rights to the cash flows from the assets have
expired; when we retain the rights to receive the cash flows but assume an obligation to pay those cash flows to a third party
subject to certain pass-through requirements; or when we transfer our contractual rights to receive the cash flows and
substantially all of the risks and rewards of the assets have been transferred. When we retain substantially all of the risks and
rewards of the transferred assets, the transferred assets are not derecognized from our Consolidated Balance Sheets and are
accounted for as secured financing transactions. When we neither retain nor transfer substantially all risks and rewards of
ownership of the assets, we derecognize the assets if control over the assets is relinquished. If we retain control over the
transferred assets, we continue to recognize the transferred assets to the extent of our continuing involvement. Management
judgment is applied in determining whether we have transferred or retained substantially all risk and rewards of ownership of the
transferred financial asset.
The majority of assets transferred under repurchase agreements, securities lending agreements, and in our Canadian
residential mortgage securitization transactions do not qualify for derecognition. As a result, we continue to record the
associated transferred assets on our Consolidated Balance Sheets and no gains or losses are recognized for those securitization
activities. Otherwise, a gain or loss is recognized on securitization by comparing the carrying amount of the transferred asset
with its fair value at the date of the transfer. For further information on derecognition of financial assets, refer to Notes 2 and 7 of
our 2022 Annual Consolidated Financial Statements.
Application of the effective interest method
Interest is recognized in Interest income and Interest expense in the Consolidated Statements of Income generally for all interest
bearing financial instruments using the effective interest method. The effective interest rate is the rate that discounts estimated
future cash flows over the expected life of the financial asset or liability to the net carrying amount upon initial recognition.
Significant judgment is applied in determining the effective interest rate due to uncertainty in the timing and amounts of future
cash flows.
Provisions
Provisions are liabilities of uncertain timing or amount and are recognized when we have a present legal or constructive
obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a
reliable estimate can be made of the amount of the obligation. Provisions are measured as the best estimate of the consideration
required to settle the present obligation at the reporting date. Significant judgment is required in determining whether a present
obligation exists and in estimating the probability, timing and amount of any outflows. We record provisions related to litigation,
asset retirement obligations and other items.
116
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
The forward-looking nature of these estimates requires us to use a significant amount of judgment in projecting the timing
and amount of future cash flows. We record our provisions on the basis of all available information at the end of the reporting
period and make adjustments on a quarterly basis to reflect current expectations. Should actual results differ from our
expectations, we may incur expenses in excess of the provisions recognized.
Insurance claims and policy benefit liabilities
Insurance claims and policy benefit liabilities represent current claims and estimates for future insurance policy benefits.
Liabilities for life insurance contracts are determined using the Canadian Asset Liability Method, which incorporates
assumptions for mortality, morbidity, policy lapses and surrenders, investment yields, policy dividends, operating and policy
maintenance expenses, and provisions for adverse deviation. Key assumptions are reviewed annually and updated in response
to actual experience and market conditions. Liabilities for property and casualty insurance represent estimated provisions for
reported and unreported claims. Liabilities for life and property and casualty insurance are included in Insurance claims and
policy benefit liabilities. Changes in Insurance claims and policy benefit liabilities are included in the Insurance policyholder
benefits, claims and acquisition expense in our Consolidated Statements of Income in the period in which the estimates change.
Refer to Note 15 of our 2022 Annual Consolidated Financial Statements for further information.
Income taxes
We are subject to income tax laws in various jurisdictions where we operate, and the complex tax laws are potentially subject to
different interpretations by us and the relevant taxation authority. Management judgment is applied in interpreting the relevant
tax laws, in assessing the probability of acceptance of our tax positions by the relevant tax authorities and in estimating the
expected timing and amount of the provision for current and deferred income taxes. A deferred tax asset or liability is determined
for each temporary difference based on the tax rates that are expected to be in effect in the period that the asset is realized or
the liability is settled, except for earnings related to our subsidiaries, branches, associates and interests in joint ventures where
the temporary differences will not reverse in the foreseeable future and we have the ability to control the timing of reversal.
On a quarterly basis, we review whether it is probable that the benefits associated with our deferred tax assets will be
realized, using both positive and negative evidence. Refer to Note 22 of our 2022 Annual Consolidated Financial Statements for
further information.
Future changes in accounting policy and disclosure
IFRS 17
Insurance Contracts
(IFRS 17)
In May 2017, the IASB issued IFRS 17 to establish a comprehensive insurance standard which provides guidance on the
recognition, measurement, presentation and disclosures of insurance contracts. IFRS 17 requires entities to measure insurance
contract liabilities at their current fulfillment values using one of three approaches depending on the nature of the contract. In
June 2020, the IASB issued amendments to IFRS 17, including deferral of the effective date by two years. This new standard will be
effective for us on November 1, 2023 and will be applied retrospectively with restatement of comparatives. If full retrospective
application to a group of contracts is impracticable, the modified retrospective or fair value approach may be used. To manage
the transition to IFRS 17, we established a comprehensive program and governance structure led by Finance and the Insurance
business that focuses on the evaluation of the impacts of the standard and implementation of policies, systems and processes
required for the adoption. Significant progress has been made in preparing for the implementation of IFRS 17. We expect the
adoption of IFRS 17 to affect the timing of earnings recognition for our insurance contracts and the carrying amount of our
insurance contract liabilities. We continue to assess the impacts of adopting IFRS 17 on our Consolidated Financial Statements.
Controls and procedures
Disclosure controls and procedures
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed
by us in reports filed or submitted under Canadian and U.S. securities laws is recorded, processed, summarized and reported
within the time periods specified under those laws and include controls and procedures that are designed to ensure that
information is accumulated and communicated to management, including the President and Chief Executive Officer, and the
Chief Financial Officer, to allow timely decisions regarding required disclosure.
As of October 31, 2022, management evaluated, under the supervision of and with the participation of the President and Chief
Executive Officer and the Chief Financial Officer, the effectiveness of our disclosure controls and procedures as defined under
rules adopted by the U.S. SEC. Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of October 31, 2022.
Internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with IFRS. However, because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements on a timely basis. See Management’s Report on
Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm.
There were no changes in our internal control over financial reporting during the year ended October 31, 2022 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Related party transactions
In the ordinary course of business, we provide normal banking services and operational services, and enter into other
transactions with associated and other related corporations, including our joint venture entities, on terms similar to those
offered to non-related parties. We grant loans to directors, officers and other employees at rates normally accorded to preferred
clients. In addition, we offer deferred share and other plans to non-employee directors, executives and certain other key
employees. For further information, refer to Notes 12 and 26 of our audited 2022 Annual Consolidated Financial Statements.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
117
Supplementary information
Selected annual information
Table 70
(Millions of Canadian dollars, except per share amounts)
2022
2021
2020
Total revenue
$
48,985
$
49,693
$
47,181
Net income attributable to:
Shareholders
15,794
16,038
11,432
Non-controlling interest
13
12
5
$
15,807
$
16,050
$
11,437
Basic earnings per share
$
11.08
$
11.08
$
7.84
Diluted earnings per share
11.06
11.06
7.82
Dividends declared per common shares
4.96
4.32
4.29
Total assets
$1,917,219
$1,706,323
$1,624,548
Deposits
1,208,814
1,100,831
1,011,885
118
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Net interest income on average assets and liabilities
Table 71
Average balances
Interest
Average rate
(Millions of Canadian dollars, except for percentage amounts) (1)
2022
2021
2022
2021
2022
2021
Assets
Deposits with other banks
Canada
$
13,119
$
10,580
$
582
$
106
4.44%
1.00%
U.S.
81,962
56,973
911
63
1.11
0.11
Other International
22,819
22,244
204
136
0.89
0.61
117,900
89,797
1,697
305
1.44
0.34
Securities
Trading
135,117
128,977
4,754
3,736
3.52
2.90
Investment, net of applicable allowance
150,384
131,612
2,308
1,141
1.53
0.87
285,501
260,589
7,062
4,877
2.47
1.87
Asset purchased under reverse repurchase agreements and securities borrowed
360,068
317,997
5,447
1,309
1.51
0.41
Loans
(2)
Canada
Retail
478,696
441,380
15,146
13,658
3.16
3.09
Wholesale
103,034
86,978
5,344
3,557
5.19
4.09
581,730
528,358
20,490
17,215
3.52
3.26
U.S.
136,937
110,314
4,037
2,880
2.95
2.61
Other International
49,630
40,619
2,038
1,559
4.11
3.84
768,297
679,291
26,565
21,654
3.46
3.19
Total interest-earning assets
1,531,766
1,347,674
40,771
28,145
2.66
2.09
Non-interest-bearing deposits with other banks
99,564
120,154
–
–
–
–
Customers’ liability under acceptances
18,354
19,410
–
–
–
–
Other assets
237,167
190,963
–
–
–
–
Total assets
$ 1,886,851
$ 1,678,200
$ 40,771
$ 28,145
2.16%
1.68%
Liabilities and shareholders’ equity
Deposits
(3)
Canada
$
684,452
$
626,549
$
8,660
$
4,700
1.27%
0.75%
U.S.
153,039
132,833
1,044
231
0.68
0.17
Other International
101,058
97,355
1,047
517
1.04
0.53
938,549
856,737
10,751
5,448
1.15
0.64
Obligations related to securities sold short
39,079
33,566
2,409
1,809
6.16
5.39
Obligations related to assets sold under repurchase agreements and securities
loaned
315,871
275,870
4,351
574
1.38
0.21
Subordinated debentures
10,133
9,174
288
179
2.84
1.95
Other interest-bearing liabilities
26,000
23,486
255
133
0.98
0.57
Total interest-bearing liabilities
1,329,632
1,198,833
18,054
8,143
1.36
0.68
Non-interest-bearing deposits
226,376
202,316
–
–
–
–
Acceptances
18,409
19,516
–
–
–
–
Other liabilities
209,890
165,286
–
–
–
–
Total liabilities
$ 1,784,307
$ 1,585,951
$ 18,054
$
8,143
1.01%
0.51%
Equity
$
102,544
$
92,250
n.a.
n.a.
n.a.
n.a.
Total liabilities and shareholders’ equity
$ 1,886,851
$ 1,678,200
$ 18,054
$
8,143
0.96%
0.49%
Net interest income and margin
$ 1,886,851
$ 1,678,200
$ 22,717
$ 20,002
1.20%
1.19%
Net interest income and margin (average earning assets, net)
(4)
Canada
$
870,147
$
793,130
$ 15,761
$ 13,947
1.81%
1.76%
U.S.
437,357
349,840
5,423
4,447
1.24
1.27
Other International
224,261
204,706
1,533
1,608
0.68
0.79
Total
$ 1,531,765
$ 1,347,676
$ 22,717
$ 20,002
1.48%
1.48%
(1)
Insurance segment assets and liabilities are included in Other assets and Other liabilities, respectively.
(2)
Interest income includes loan fees of $1,033 million (2021 – $888 million; 2020 – $797 million).
(3)
Deposits include personal chequing and savings deposits with average balances of $279 billion (2021 – $258 billion; 2020 – $218 billion), interest expense of $712 million
(2021 – $175 million; 2020 – $498 million) and average rates of 0.26% (2021 – 0.07%; 2020 – 0.2%). Deposits also include term deposits with average balances of $500 billion
(2021 – $437 billion; 2020 – $443 billion), interest expense of $7,323 million (2021 – $4,487 million; 2020 – $6,774 million) and average rates of 1.46% (2021 – 1.03%;
2020 – 1.53%).
(4)
Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
n.a.
not applicable
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
119
Change in net interest income
Table 72
2022 vs. 2021
2021 vs. 2020
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)
$
25
$
451
$
476
$
(27)
$
18
$
(9)
U.S.
(3)
28
820
848
93
(190)
(97)
Other international
(3)
4
64
68
–
104
104
Securities
Trading
178
840
1,018
(95)
(791)
(886)
Investment, net of applicable allowance
163
1,004
1,167
51
(776)
(725)
Asset purchased under reverse repurchase
agreements and securities borrowed
173
3,965
4,138
(583)
(2,776)
(3,359)
Loans
Canada
(3)
Retail
(3)
1,155
333
1,488
1,343
(2,219)
(876)
Wholesale
(3)
657
1,130
1,787
(281)
(341)
(622)
U.S.
(3)
695
462
1,157
(44)
(110)
(154)
Other international
(3)
346
133
479
116
(230)
(114)
Total interest income
$
3,424
$
9,202
$ 12,626
$
573
$
(7,311)
$
(6,738)
Liabilities
Deposits
Canada
(3)
434
3,526
3,960
167
(2,845)
(2,678)
U.S.
(3)
35
778
813
167
(594)
(427)
Other international
(3)
20
510
530
30
(260)
(230)
Obligations related to securities sold short
297
303
600
(145)
(246)
(391)
Obligations related to assets sold under repurchase
agreements and securities loaned
83
3,694
3,777
(279)
(1,769)
(2,048)
Subordinated debentures
19
90
109
(10)
(91)
(101)
Other interest-bearing liabilities
14
108
122
(10)
(20)
(30)
Total interest expense
$
902
$
9,009
$
9,911
$
(80)
$
(5,825)
$
(5,905)
Net interest income
$
2,522
$
193
$
2,715
$
653
$
(1,486)
$
(833)
(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 73
As at October 31 (Millions of Canadian dollars)
2022
2021
Canada
(1)
Residential mortgages
$ 383,797
$
354,169
Personal
79,422
78,232
Credit cards
19,778
17,235
Small business
12,669
12,003
Retail
495,666
461,639
Wholesale
126,751
107,750
$ 622,417
$
569,389
U.S.
(1)
Retail
47,402
35,601
Wholesale
114,799
86,041
162,201
121,642
Other International
(1)
Retail
6,683
6,358
Wholesale
50,289
44,148
56,972
50,506
Total loans and acceptances
$ 841,590
$
741,537
Total allowance for credit losses
(3,798)
(4,164)
Total loans and acceptances, net of allowance for credit losses
$ 837,792
$
737,373
(1)
Geographic information is based on residence of borrower.
120
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Loans and acceptances by portfolio and sector
Table 74
As at October 31 (Millions of Canadian dollars)
2022
2021
Residential mortgages
$ 418,796
$
380,332
Personal
97,709
93,441
Credit cards
20,577
17,822
Small business
12,669
12,003
Retail
$ 549,751
$
503,598
Agriculture
10,105
9,250
Automotive
8,770
6,198
Banking
7,016
7,734
Consumer discretionary
19,405
14,806
Consumer staples
6,940
6,142
Oil and gas
5,959
5,283
Financial services
41,353
29,192
Financing products
13,781
10,273
Forest products
1,094
931
Governments
5,632
6,677
Industrial products
10,537
7,193
Information technology
5,232
3,569
Investments
19,952
19,392
Mining and metals
2,223
984
Public works and infrastructure
3,006
1,890
Real estate and related
79,506
66,798
Other services
24,393
20,550
Telecommunication and media
7,176
5,047
Transportation
6,542
6,251
Utilities
11,847
8,699
Other sectors
1,370
1,080
Wholesale
$ 291,839
$
237,939
Total loans and acceptances
$ 841,590
$
741,537
Total allowance for credit losses
(3,798)
(4,164)
Total loans and acceptances, net of allowance for credit losses
$ 837,792
$
737,373
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
121
Gross impaired loans by portfolio and geography
Table 75
As at October 31 (Millions of Canadian dollars, except for percentage amounts)
2022
2021
Residential mortgages
$
560
$
645
Personal
200
197
Small business
138
109
Retail
898
951
Agriculture
$
18
$
11
Automotive
9
8
Banking
1
–
Consumer discretionary
254
274
Consumer staples
122
32
Oil and gas
57
131
Financial services
96
77
Financing products
–
–
Forest products
7
4
Governments
3
25
Industrial products
77
35
Information technology
5
5
Investments
9
31
Mining and metals
12
3
Public works and infrastructure
16
6
Real estate and related
322
314
Other services
246
220
Telecommunication and media
8
6
Transportation
6
137
Utilities
–
–
Other sectors
27
32
Wholesale
1,295
1,351
Acquired credit-impaired loans
6
6
Total GIL
(1)
$
2,199
$
2,308
Canada
(2)
Residential mortgages
$
352
$
443
Personal
174
164
Small business
138
109
Retail
664
716
Agriculture
17
11
Automotive
6
5
Banking
1
–
Consumer discretionary
69
107
Consumer staples
40
25
Oil and gas
10
48
Financial services
4
–
Financing products
–
–
Forest products
7
4
Governments
3
25
Industrial products
28
31
Information technology
3
3
Investments
2
–
Mining and metals
4
3
Public works and infrastructure
7
5
Real estate and related
88
157
Other services
56
110
Telecommunication and media
5
5
Transportation
6
16
Utilities
–
–
Other sectors
–
–
Wholesale
356
555
Total
$
1,020
$
1,271
U.S.
(2)
Retail
$
34
$
23
Wholesale
674
412
Total
$
708
$
435
Other International
(2)
Retail
$
200
$
212
Wholesale
271
390
Total
$
471
$
602
Total GIL
$
2,199
$
2,308
Allowance on impaired loans
(669)
(697)
Net impaired loans
$
1,530
$
1,611
GIL as a % of loans and acceptances
Residential mortgages
0.13%
0.17%
Personal
0.20%
0.21%
Small business
1.09%
0.91%
Retail
0.16%
0.19%
Wholesale
0.45%
0.57%
Total
0.26%
0.31%
Allowance on impaired loans as a % of GIL
30.41%
30.21%
(1)
Past due loans greater than 90 days not included in impaired loans were $170 million in 2022 (2021 – $137 million). For further details, refer to Note 5 of our 2022 Annual
Consolidated Financial Statements.
(2)
Geographic information is based on residence of borrower.
122
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Provision for credit losses by portfolio and geography
Table 76
For the year ended October 31 (Millions of Canadian dollars, except for percentage amounts)
2022
2021
Residential mortgages
$
13
$
34
Personal
259
243
Credit cards
333
296
Small business
43
31
Retail
648
604
Agriculture
$
1
$
(5)
Automotive
3
(5)
Banking
(3)
–
Consumer discretionary
47
7
Consumer staples
35
(14)
Oil and gas
(2)
(51)
Financial services
3
2
Financing products
–
–
Forest products
1
(5)
Governments
(1)
2
Industrial products
(6)
2
Information technology
(8)
24
Investments
3
(3)
Mining and metals
9
(5)
Public works and infrastructure
5
2
Real estate and related
32
30
Other services
25
53
Telecommunication and media
(1)
9
Transportation
(16)
32
Utilities
1
(1)
Other sectors
3
(1)
Wholesale
131
73
Acquired credit–impaired loans
(1)
1
Total PCL on impaired loans
$
778
$
678
Canada
(1)
Residential mortgages
$
15
$
24
Personal
271
254
Credit cards
326
288
Small business
43
31
Retail
655
597
Agriculture
1
(4)
Automotive
3
(5)
Banking
1
–
Consumer discretionary
36
11
Consumer staples
9
–
Oil and gas
(21)
(19)
Financial services
1
–
Financing products
–
–
Forest products
1
(5)
Governments
(1)
2
Industrial products
9
2
Information technology
1
2
Investments
2
–
Mining and metals
2
–
Public works and infrastructure
–
2
Real estate and related
23
26
Other services
9
62
Telecommunication and media
1
2
Transportation
1
10
Utilities
–
–
Other sectors
–
–
Wholesale
78
86
Total
$
733
$
683
U.S.
(1)
Retail
$
2
$
7
Wholesale
68
(10)
Total
$
70
$
(3)
Other International
(1)
Retail
$
(9)
$
–
Wholesale
(16)
(2)
Total
$
(25)
$
(2)
Total PCL on impaired loans
$
778
$
678
Total PCL on performing loans
(281)
(1,350)
Total PCL on other financial assets
(13)
(81)
Total PCL
$
484
$
(753)
PCL on loans as a % of average net loans and acceptances
0.06%
(0.10)%
PCL on impaired loans as a % of average net loans and acceptances
(1)
0.10%
0.10%
(1)
Geographic information is based on residence of borrower.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
123
Allowance on loans by portfolio and geography
(1)
Table 77
As at and for the year ended October 31 (Millions of Canadian dollars, except percentage amounts)
2022
2021
Allowance against impaired loans
Canada
(2)
Residential mortgages
$
44
$
45
Personal
85
71
Small business
48
34
Retail
$
177
$
150
Agriculture
$
2
$
3
Automotive
4
1
Banking
–
–
Consumer discretionary
27
9
Consumer staples
10
5
Oil and gas
7
29
Financial services
1
–
Financing products
–
–
Forest products
1
1
Governments
1
3
Industrial products
12
9
Information technology
2
1
Investments
1
–
Mining and metals
2
1
Public works and infrastructure
4
2
Real estate and related
25
27
Other services
12
81
Telecommunication and media
1
1
Transportation
3
9
Utilities
–
–
Other sectors
–
–
Wholesale
$
115
$
182
Total
$
292
$
332
U.S.
(2)
Retail
$
2
$
3
Wholesale
175
126
Total
$
177
$
129
Other International
(2)
Retail
$
98
$
107
Wholesale
102
129
Total
$
200
$
236
Total allowance on impaired loans
$
669
$
697
Allowance on performing loans
Residential mortgages
$
300
$
278
Personal
946
991
Credit cards
893
875
Small business
146
143
Retail
$ 2,285
$ 2,287
Wholesale
$ 1,227
$ 1,435
Total allowance on performing loans
$ 3,512
$ 3,722
Total allowance on loans
$ 4,181
$ 4,419
Key ratios
Allowance on loans as a % of loans and acceptances
0.50%
0.60%
Net write-offs as a % of average net loans and acceptances
0.10%
0.11%
(1)
Includes loans, acceptances, and commitments.
(2)
Geographic information is based on residence of borrower.
124
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Credit quality information by Canadian province
(1)
Table 78
As at and for the year ended October 31 (Millions of Canadian dollars)
2022
2021
Loans and acceptances
Atlantic provinces
(2)
$
30,709
$
29,078
Quebec
73,743
68,595
Ontario
300,477
268,317
Alberta
73,638
71,506
Other Prairie provinces
(3)
35,699
33,956
B.C. and territories
(4)
108,151
97,937
Total loans and acceptances in Canada
$ 622,417
$ 569,389
Gross impaired loans
Atlantic provinces
(2)
$
65
$
97
Quebec
172
198
Ontario
323
379
Alberta
233
321
Other Prairie provinces
(3)
121
173
B.C. and territories
(4)
106
103
Total GIL in Canada
$
1,020
$
1,271
PCL on impaired loans
Atlantic provinces
(2)
$
20
$
22
Quebec
47
22
Ontario
529
483
Alberta
48
83
Other Prairie provinces
(3)
39
39
B.C. and territories
(4)
50
34
Total PCL on impaired loans in Canada
$
733
$
683
(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 2022
125
Glossary
Acceptances
A bill of exchange or negotiable instrument
drawn by the borrower for payment at
maturity and accepted by a bank. The
acceptance constitutes a guarantee of
payment by the bank and can be traded in the
money market. The bank earns a “stamping
fee” for providing this guarantee.
Allowance for credit losses (ACL)
The amount deemed adequate by
management to absorb expected credit losses
as at the balance sheet date. The allowance is
established for all financial assets subject to
impairment assessment, including certain
loans, debt securities, customers’ liability
under acceptances, financial guarantees, and
undrawn loan commitments. The allowance is
changed by the amount of provision for credit
losses recorded, which is charged to income,
and decreased by the amount of write-offs net
of recoveries in the period.
Asset-backed securities (ABS)
Securities created through the securitization
of a pool of assets, for example auto loans or
credit card loans.
Assets under administration (AUA)
Assets administered by us, which are
beneficially owned by clients, unless otherwise
noted. Services provided in respect of assets
under administration are of an administrative
nature, including safekeeping, collecting
investment income, settling purchase and sale
transactions, and record keeping.
Assets under management (AUM)
Assets managed by us, which are beneficially
owned by clients, unless otherwise noted.
Services provided in respect of assets under
management include the selection of
investments and the provision of investment
advice. We have assets under management
that are also administered by us and included
in assets under administration.
Attributed capital
Attributed capital is based on the Basel III
regulatory capital requirements and economic
capital.
Auction rate securities (ARS)
Debt securities whose interest rates are
regularly reset through an auction process.
Average earning assets, net
Average earning assets include interest-
bearing deposits with other banks, securities,
net of applicable allowance, assets purchased
under reverse repurchase agreements and
securities borrowed, loans, net of allowance,
cash collateral and margin deposits. Insurance
assets, and all other assets not specified are
excluded. The averages are based on the daily
balances for the period.
Basis point (bp)
One one-hundredth of a percentage point
(.01%).
Collateral
Assets pledged as security for a loan or other
obligation. Collateral can take many forms,
such as cash, highly rated securities, property,
inventory, equipment and receivables.
Collateralized debt obligation (CDO)
Securities with multiple tranches that are
issued by structured entities and
collateralized by debt obligations including
bonds and loans. Each tranche offers a varying
degree of risk and return so as to meet
investor demand.
Commercial mortgage-backed securities
(CMBS)
Securities created through the securitization
of commercial mortgages.
Commitments to extend credit
Unutilized amount of credit facilities available
to clients either in the form of loans, bankers’
acceptances and other on-balance sheet
financing, or through off-balance sheet
products such as guarantees and letters of
credit.
Common Equity Tier 1 (CET1) capital
A regulatory Basel III capital measure
comprised mainly of common shareholders’
equity less regulatory deductions and
adjustments for goodwill and intangibles,
defined benefit pension fund assets, shortfall
in allowances and other specified items.
Common Equity Tier 1 capital ratio
A risk-based capital measure calculated as
CET1 capital divided by risk-weighted assets.
Covered bonds
Full recourse on-balance sheet obligations
issued by banks and credit institutions that
are fully collateralized by assets over which
investors enjoy a priority claim in the event of
an issuer’s insolvency.
Credit default swaps (CDS)
A derivative contract that provides the
purchaser with a one-time payment should the
referenced entity/entities default (or a similar
triggering event occur).
Derivative
A contract between two parties, which
requires little or no initial investment and
where payments between the parties are
dependent upon the movements in price of an
underlying instrument, index or financial rate.
Examples of derivatives include swaps,
options, forward rate agreements and futures.
The notional amount of the derivative is the
contract amount used as a reference point to
calculate the payments to be exchanged
between the two parties, and the notional
amount itself is generally not exchanged by
the parties.
Dividend payout ratio
Common dividends as a percentage of net
income available to common shareholders.
Dividend yield
Dividends per common share divided by the
average of the high and low share price in the
relevant period.
Earnings per share (EPS), basic
Calculated as net income available to common
shareholders divided by the average number
of shares outstanding.
Earnings per share (EPS), diluted
Calculated as net income available to common
shareholders divided by the average number
of shares outstanding adjusted for the dilutive
effects of stock options and other convertible
securities.
Efficiency Ratio
Non-interest expense as a percentage of total
revenue.
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)
Assets are considered to be HQLA if they can
be easily and immediately converted into cash
at little or no loss of value during a time of
stress.
Impaired loans
Loans are classified as impaired when there
has been a deterioration of credit quality to
the extent that management no longer has
reasonable assurance of timely collection of
the full amount of principal and interest in
accordance with the contractual terms of the
loan agreement. Credit card balances are not
classified as impaired as they are directly
written off after payments are 180 days past
due.
International Financial Reporting Standards
(IFRS)
IFRS are principles-based standards,
interpretations and the framework adopted by
the International Accounting Standards Board.
Leverage Ratio
A Basel III regulatory measure, the ratio
divides Tier 1 capital by the sum of total assets
plus specified off-balance sheet items.
Liquidity Coverage Ratio (LCR)
The Liquidity Coverage Ratio is a Basel III
metric that measures the sufficiency of HQLA
available to meet net short-term financial
obligations over a thirty day period in an acute
stress scenario.
126
Royal Bank of Canada: Annual Report 2022
Management’s Discussion and Analysis
Loan-to-value (LTV) ratio
Calculated based on the total facility amount
for the residential mortgage and RBC
Homeline Plan
®
product divided by the value
of the related residential property.
Master netting agreement
An agreement between us and a counterparty
designed to reduce the credit risk of multiple
derivative transactions through the creation of
a legal right of offset of exposure in the event
of a default.
Net interest income
The difference between what is earned on
assets such as loans and securities and what
is paid on liabilities such as deposits and
subordinated debentures.
Net interest margin (on average earning
assets, net)
Calculated as net interest income divided by
average earning assets, net.
Net Stable Funding Ratio (NSFR)
The Net Stable Funding Ratio is a Basel III
metric that measures the sufficiency of
available stable funding to meet the minimum
coverage level of required stable funding.
Normal course issuer bid (NCIB)
A program for the repurchase of our own
shares for cancellation through a stock
exchange that is subject to the various rules of
the relevant stock exchange and securities
commission.
Notional amount
The contract amount used as a reference point
to calculate payments for derivatives.
Off-balance sheet financial instruments
A variety of arrangements offered to clients,
which include credit derivatives, written put
options, backstop liquidity facilities, stable
value products, financial standby letters of
credit, performance guarantees, credit
enhancements, mortgage loans sold with
recourse, commitments to extend credit,
securities lending, documentary and
commercial letters of credit, sponsor member
guarantees, securities lending
indemnifications and indemnifications.
Office of the Superintendent of Financial
Institutions Canada (OSFI)
The primary regulator of federally chartered
financial institutions and federally
administered pension plans in Canada. OSFI’s
mission is to safeguard policyholders,
depositors and pension plan members from
undue loss.
Operating leverage
The difference between our revenue growth
rate and non-interest expense growth rate.
Options
A contract or a provision of a contract that
gives one party (the option holder) the right,
but not the obligation, to perform a specified
transaction with another party (the option
issuer or option writer) according to specified
terms.
Provision for credit losses (PCL)
The amount charged to income necessary to
bring the allowance for credit losses to a level
determined appropriate by management. This
includes provisions on performing and
impaired financial assets.
PCL on loans ratio
PCL on loans ratio is calculated using PCL on
loans as a percentage of average net loans
and acceptances.
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
Risk weights prescribed by OSFI are used to
calculate RWA for the credit risk exposures.
Credit assessments by OSFI-recognized
external credit rating agencies of S&P,
Moody’s, Fitch and DBRS are used to risk-
weight our Sovereign and Bank exposures
based on the standards and guidelines issued
by OSFI. For our Business and Retail
exposures, we use the standard risk weights
prescribed by OSFI.
Structured entities
A structured entity is an entity in which voting
or similar rights are not the dominant factor in
deciding who controls the entity, such as when
the activities that significantly affect the
entity’s returns are directed by means of
contractual arrangements. Structured entities
often have restricted activities, narrow and
well defined objectives, insufficient equity to
finance their activities, and financing in the
form of multiple contractually-linked
instruments.
Taxable equivalent basis (teb)
Income from certain specified tax advantaged
sources (eligible Canadian taxable corporate
dividends) is increased to a level that would
make it comparable to income from taxable
sources. There is an offsetting adjustment in
the tax provision, thereby generating the same
after-tax net income.
Tier 1 capital
Tier 1 capital comprises predominantly of CET1
capital, with additional Tier 1 items such as
preferred shares, limited recourse capital
notes and non-controlling interests in
subsidiaries Tier 1 instruments.
Tier 2 capital
Tier 2 capital consists mainly of subordinated
debentures that meet certain criteria, certain
loan loss allowances and non-controlling
interests in subsidiaries’ Tier 2 instruments.
Total Loss Absorbing Capacity (TLAC)
The aggregate of Tier 1 capital, Tier 2 capital,
and external TLAC instruments which allow
conversion in whole or in part into common
shares under the Canada Deposit Insurance
Corporation Act and meet all of the eligibility
criteria under the TLAC guideline.
TLAC ratio
The risk-based TLAC ratio is defined as TLAC
divided by total risk-weighted assets.
TLAC Leverage Ratio
The TLAC leverage ratio is defined as TLAC
divided by the Leverage ratio exposure.
Total capital and total capital ratio
Total capital is defined as the total of Tier 1
and Tier 2 capital. The total capital ratio is
calculated by dividing total capital by risk-
weighted assets.
Tranche
A security class created whereby the risks and
returns associated with a pool of assets are
packaged into several classes of securities
offering different risk and return profiles from
those of the underlying asset pool. Tranches
are typically rated by ratings agencies, and
reflect both the credit quality of underlying
collateral as well as the level of protection
based on the tranches’ relative subordination.
Unattributed capital
Unattributed capital represents common
equity in excess of common equity attributed
to our business segments and is reported in
the Corporate Support segment.
Value-at-Risk (VaR)
A generally accepted risk-measurement
concept that uses statistical models based on
historical information to estimate within a
given level of confidence the maximum loss in
market value we would experience in our
trading portfolio from an adverse one-day
movement in market rates and prices.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2022
127
EDTF recommendations index
We aim to present transparent, high-quality risk disclosures by providing disclosures in this 2022 Annual Report and
Supplementary Financial Information package (SFI), and Pillar 3 Report, in accordance with recommendations from the FSB’s
Enhanced Disclosure Task Force (EDTF). Information within the SFI and Pillar 3 Report is not and should not be considered
incorporated by reference into this 2022 Annual Report.
The following index summarizes our disclosure by EDTF recommendation:
Location of disclosure
Type of Risk
Recommendation
Disclosure
Annual Report page
SFI page
General
1
Table of contents for EDTF risk disclosure
128
1
2
Define risk terminology and measures
60-65, 126-127
–
3
Top and emerging risks
58-60
–
4
New regulatory ratios
105-110
–
Risk governance,
risk management
and business
model
5
Risk management organization
60-65
–
6
Risk culture
60-65
–
7
Risk in the context of our business activities
113
–
8
Stress testing
63-64, 76
–
Capital adequacy
and risk-weighted
assets (RWA)
9
Minimum Basel III capital ratios and
Domestic systemically important bank
surcharge
105-110
–
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
–
20
12
Capital strategic planning
105-110
–
13
RWA by business segments
–
21
14
Analysis of capital requirement, and related
measurement model information
66-69
*
15
RWA credit risk and related risk
measurements
–
*
16
Movement of risk-weighted assets by risk
type
–
21
17
Basel back-testing
63, 66-67
32
Liquidity
18
Quantitative and qualitative analysis of our
liquidity reserve
83-84, 88-89
–
Funding
19
Encumbered and unencumbered assets by
balance sheet category, and contractual
obligations for rating downgrades
84, 87
–
20
Maturity analysis of consolidated total
assets, liabilities and off-balance sheet
commitments analyzed by remaining
contractual maturity at the balance sheet
date
91-92
–
21
Sources of funding and funding strategy
84-86
–
Market risk
22
Relationship between the market risk
measures for trading and non-trading
portfolios and the balance sheet
80-81
–
23
Decomposition of market risk factors
76-81
–
24
Market risk validation and back-testing
76
–
25
Primary risk management techniques
beyond reported risk measures and
parameters
76-79
–
Credit risk
26
Bank’s credit risk profile
66-75, 175-182
22-32, *
Quantitative summary of aggregate credit
risk exposures that reconciles to the
balance sheet
120-125
*
27
Policies for identifying impaired loans
68-70, 115, 147-149
–
28
Reconciliation of the opening and closing
balances of impaired loans and
impairment allowances during the year
–
24, 29
29
Quantification of gross notional exposure
for OTC derivatives or exchange-traded
derivatives
71
33
30
Credit risk mitigation, including collateral
held for all sources of credit risk
69-70
*
Other
31
Other risk types
94-104
–
32
Publicly known risk events
98-99, 219-220
–
*
These disclosure requirements are satisfied or partially satisfied by disclosures provided in our Pillar 3 Report for the quarter ended October 31, 2022 and for the year
ended October 31, 2021.
128
Royal Bank of Canada: Annual Report 2022
Index for Enhanced Disclosure Task Force recommendations
REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS
Reports
130
Management’s Responsibility for Financial Reporting
130
Management’s Report on Internal Control over
Financial Reporting
131
Independent Auditor’s Report
135
Report of Independent Registered Public Accounting
Firm (PCAOB ID 271)
Consolidated Financial Statements
138
Consolidated Balance Sheets
139
Consolidated Statements of Income
140
Consolidated Statements of Comprehensive Income
141
Consolidated Statements of Changes in Equity
142
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
143
Note 1
General information
143
Note 2
Summary of significant accounting
policies, estimates and judgments
158
Note 3
Fair value of financial instruments
171
Note 4
Securities
175
Note 5
Loans and allowance for credit losses
182
Note 6
Significant acquisition
182
Note 7
Derecognition of financial assets
183
Note 8
Structured entities
187
Note 9
Derivative financial instruments and
hedging activities
197
Note 10
Premises and equipment
198
Note 11
Goodwill and other intangible assets
200
Note 12
Joint ventures and associated companies
200
Note 13
Other assets
201
Note 14
Deposits
201
Note 15
Insurance
204
Note 16
Segregated funds
204
Note 17
Employee benefits – Pension and other
post-employment benefits
209
Note 18
Other liabilities
209
Note 19
Subordinated debentures
210
Note 20
Equity
212
Note 21
Share-based compensation
214
Note 22
Income taxes
216
Note 23
Earnings per share
217
Note 24
Guarantees, commitments, pledged
assets and contingencies
219
Note 25
Legal and regulatory matters
220
Note 26
Related party transactions
222
Note 27
Results by business segment
223
Note 28
Nature and extent of risks arising from
financial instruments
224
Note 29
Capital management
225
Note 30
Offsetting financial assets and financial
liabilities
227
Note 31
Recovery and settlement of on-balance
sheet assets and liabilities
228
Note 32
Parent company information
229
Note 33
Subsequent events
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
129
Management’s Responsibility for Financial Reporting
The accompanying consolidated financial statements of Royal Bank of Canada were prepared by management, which is
responsible for the integrity and fairness of the information presented, including the many amounts that must of necessity be
based on estimates and judgments. These consolidated financial statements were prepared in accordance with the
Bank Act
(Canada) and International Financial Reporting Standards as issued by the International Accounting Standards Board. Financial
information appearing throughout our Management’s Discussion and Analysis is consistent with these consolidated financial
statements.
Our internal controls are designed to provide reasonable assurance that transactions are authorized, assets are
safeguarded and proper records are maintained. These controls include quality standards in hiring and training of employees,
policies and procedures manuals, a corporate code of conduct and accountability for performance within appropriate and well-
defined areas of responsibility.
The system of internal controls is further supported by a compliance function, which is designed to ensure that we and our
employees comply with securities legislation and conflict of interest rules, and by an internal audit staff, which conducts periodic
audits of all aspects of our operations.
The Board of Directors oversees management’s responsibilities for financial reporting through an Audit Committee, which is
composed entirely of independent directors. This Committee reviews our consolidated financial statements and recommends
them to the Board for approval. Other key responsibilities of the Audit Committee include reviewing our existing internal control
procedures and planned revisions to those procedures, and advising the directors on auditing matters and financial reporting
issues. Our Chief Compliance Officer and Chief Internal Auditor have full and unrestricted access to the Audit Committee.
The Office of the Superintendent of Financial Institutions Canada (OSFI) examines and inquires into our business and affairs
as deemed necessary to determine whether the provisions of the
Bank Act
are being complied with, and that we are in sound
financial condition. In carrying out its mandate, OSFI strives to protect the rights and interests of our depositors and creditors.
PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm appointed by our shareholders upon the
recommendation of the Audit Committee and Board, has performed an independent audit of the consolidated financial
statements in accordance with Canadian generally accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States) as stated in their Independent Auditor’s Report and Report of Independent
Registered Public Accounting Firm, respectively. The auditors have full and unrestricted access to the Audit Committee to discuss
their audit and related findings.
David I. McKay
President and Chief Executive Officer
Nadine Ahn
Chief Financial Officer
Toronto, November 29, 2022
Management’s Report on Internal Control over Financial Reporting
Management of Royal Bank of Canada is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the President and Chief
Executive Officer and Chief Financial Officer and effected by the Board of Directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards
Board. It includes those policies and procedures that:
•
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, 2022, based on the
criteria set forth in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on that evaluation, management concluded that, as of October 31, 2022, internal control over
financial reporting was effective based on the criteria established in the
Internal Control – Integrated Framework (2013).
The effectiveness of our internal control over financial reporting as of October 31, 2022, has been audited by
PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, as stated in their Report of Independent
Registered Public Accounting Firm, which appears herein.
David I. McKay
President and Chief Executive Officer
Nadine Ahn
Chief Financial Officer
Toronto, November 29, 2022
130
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Independent Auditor’s Report
To the Shareholders and Board of Directors of Royal Bank of Canada
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position
of Royal Bank of Canada and its subsidiaries (together, the Bank) as of October 31, 2022 and 2021, and its financial performance
and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the
International Accounting Standards Board (IFRS).
What we have audited
The Bank’s consolidated financial statements comprise:
•
the consolidated balance sheets as of October 31, 2022 and 2021;
•
the consolidated statements of income for the years then ended;
•
the consolidated statements of comprehensive income for the years then ended;
•
the consolidated statements of changes in equity for the years then ended;
•
the consolidated statements of cash flows for the years then ended; and
•
the notes to the consolidated financial statements, which include significant accounting policies and other explanatory
information.
Certain required disclosures have been presented elsewhere in the Management’s Discussion and Analysis, rather than in the
notes to the consolidated financial statements. These disclosures are cross-referenced from the consolidated financial
statements and are identified as audited.
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those
standards are further described in the
Auditor’s responsibilities for the audit of the consolidated financial statements
section of
our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Bank in accordance with the ethical requirements that are relevant to our audit of the consolidated
financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated
financial statements for the year ended October 31, 2022. These matters were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on
these matters.
Key audit matter
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
$4,214 million as of October 31, 2022 and represents
management’s estimate of expected credit losses on financial
assets as of the balance sheet date, of which a significant
portion relates to financial assets categorized as Stage 1 and
Stage 2. Performing financial assets are categorized as Stage 1
from initial recognition to the date on which the asset has
experienced a significant increase in credit risk relative to its
initial recognition. Performing financial assets transfer into
Stage 2 following a significant increase in credit risk relative to
the initial recognition. Financial assets are categorized as
Stage 3 when considered to be credit-impaired. As disclosed by
management, the measurement of expected credit losses is a
complex calculation that involves a large number of
interrelated inputs and assumptions such as borrower risk
ratings, forward-looking macroeconomic conditions, scenario
design and the weights assigned to each scenario. The
probability of default, loss given default and exposure at
default inputs are modelled based on the macroeconomic
variables that are most closely correlated with credit losses.
Management’s estimation of expected credit losses in Stage 1
and Stage 2 considers five distinct future macroeconomic
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 2022
131
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 the
scenarios.
•
The assignment of borrower risk ratings for
samples of loans.
Goodwill Impairment Assessment of the Caribbean Banking
Cash Generating Unit (CGU)
Refer to Note 2 - Summary of significant accounting policies,
estimates and judgments and Note 11 - Goodwill and other
intangible assets to the consolidated financial statements.
The goodwill allocated to the Caribbean Banking CGU was
$1,759 million. Management conducts a goodwill impairment
test as of August 1 of each year by comparing the carrying
amount of each CGU to its recoverable amount. The
recoverable amount of a CGU is represented by its value in use
(VIU), except in circumstances where the carrying amount of a
CGU exceeds its VIU. In such cases, the greater of the CGU’s
fair value less costs of disposal (FVLCD) and its VIU is the
recoverable amount.
Management estimated the recoverable amount of the
Caribbean Banking CGU based on its FVLCD. Management
calculated the FVLCD using a discounted cash flow method
that projects future cash flows over a 5-year period based on
management forecasts, adjusted to approximate the
considerations of a prospective third-party buyer. Cash flows
beyond the initial 5-year period are assumed by management
to increase at a constant rate using a nominal long-term
growth rate. The discount rate used to determine the present
value of the Caribbean Banking CGU’s projected future cash
flows is based on the bank-wide cost of capital, adjusted for
the risks to which the CGU is exposed.
As of August 1, 2022, management determined that the
recoverable amount was 109% of its carrying amount.
Management also considered reasonably possible alternative
scenarios, including market comparable transactions, which
yielded valuations ranging from an immaterial deficit to an
immaterial surplus.
Management uses significant judgment to determine inputs to
the discounted cash flow model. If the future cash flows and
other assumptions in future periods deviate significantly from
the current amounts used in management’s impairment
testing, the value of goodwill could become impaired.
Our approach to addressing the matter included the following
procedures, among others:
•
Testing the effectiveness of controls relating to
management’s goodwill impairment test, including controls
over the determination of the recoverable amount of the
Caribbean Banking CGU.
•
Testing management’s process for determining the
recoverable amount of the CGU, which consisted of:
O
Evaluating the appropriateness of the discounted
cash flow model.
O
Testing the completeness and accuracy of certain
underlying data used in the model.
O
Evaluating the reasonableness of certain
assumptions used by management, related to future
cash flows, which involved evaluating the
consistency with:
•
Current and past performance of the CGU.
•
External market and industry data.
O
Evaluating consistency of the recoverable amount
with market comparable transactions.
O
Professionals with specialized skill and knowledge
assisted us in evaluating:
•
The appropriateness of management’s
discounted cash flow model.
•
The consistency of the recoverable amount of the
CGU with market comparable transactions.
132
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Key audit matter
How our audit addressed the key audit matter
We considered this a key audit matter due to:
•
The significant judgment required by management
when determining the recoverable amount of the CGU,
including projecting future cash flows.
•
A high degree of auditor judgment and subjectivity in
performing procedures and evaluating audit evidence
related to management’s calculation of the
recoverable amount of the CGU.
•
The audit effort involved the use of professionals with
specialized skill and knowledge.
Uncertain Tax Positions
Refer to Note 2 - Summary of significant accounting policies,
estimates and judgments and Note 22 - Income taxes to the
consolidated financial statements.
The Bank is subject to income tax laws in various jurisdictions
where it operates and the complex tax laws are potentially
subject to different interpretations by management and the
relevant taxation authorities. As disclosed by management,
significant judgment is required in the interpretation of the
relevant tax laws, and in assessing the probability of
acceptance of the Bank’s tax positions to determine tax
provisions, which includes management’s best estimate of
uncertain tax positions that are under audit or appeal by the
relevant taxation authorities. Management performs a review
on a quarterly basis to incorporate its best assessment based
on information available, but additional liability and income
tax expense could result based on the acceptance of the Bank’s
tax positions by the relevant tax authorities.
In some cases, the Bank has received reassessments denying
the tax deductibility of dividends from transactions including
those with Tax Indifferent Investors.
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
Evaluating the appropriateness of the methods used.
O
Testing the completeness and accuracy of underlying
data used in the estimate.
O
Reviewing correspondence with relevant taxation
authorities.
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.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated
financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are
required to report that fact. We have nothing to report in this regard.
Responsibilities of management and those charged with governance for the consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance
with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Bank’s ability to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting
unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
133
Those charged with governance are responsible for overseeing the Bank’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally
accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and
maintain professional skepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or
error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and
appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is
higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations,
or the override of internal control.
•
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control.
•
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by management.
•
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on
the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s
report. However, future events or conditions may cause the Bank to cease to continue as a going concern.
•
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the underlying transactions and events in a manner that
achieves fair presentation.
•
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within
the Bank to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision
and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit
and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements
regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to
bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most
significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters.
We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when,
in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse
consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is Samuel May.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
November 29, 2022
134
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Royal Bank of Canada
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Royal Bank of Canada and its subsidiaries (together, the
Bank) as of October 31, 2022 and 2021, and the related consolidated statements of income, comprehensive income, changes in
equity and cash flows for the years then ended, including the related notes (collectively referred to as the consolidated financial
statements). We also have audited the Bank’s internal control over financial reporting as of October 31, 2022, based on criteria
established in
Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Bank as of October 31, 2022 and 2021, and its financial performance and its cash flows for the years then ended in
conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in
our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of October 31,
2022, based on criteria established in
Internal Control – Integrated Framework
(2013) issued by the COSO.
Basis for Opinions
The Bank’s management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on
the Bank’s consolidated financial statements and on the Bank’s internal control over financial reporting based on our audits. We
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Bank in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. An entity’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the entity; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
entity are being made only in accordance with authorizations of management and directors of the entity; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Credit Losses for Financial Assets Categorized as Stage 1 and Stage 2 (Stage 1 and Stage 2 ACL)
As described in Notes 2, 4 and 5 to the consolidated financial statements, the Bank’s allowance for credit losses for financial
assets was $4,214 million as of October 31, 2022 and represents management’s estimate of expected credit losses on financial
assets as of the balance sheet date, of which a significant portion relates to financial assets categorized as Stage 1 and Stage 2.
Performing financial assets are categorized as Stage 1 from initial recognition to the date on which the asset has experienced a
significant increase in credit risk relative to its initial recognition. Performing financial assets transfer into Stage 2 following a
significant increase in credit risk relative to the initial recognition. Financial assets are categorized as Stage 3 when considered
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
135
to be credit-impaired. As disclosed by management, the measurement of expected credit losses is a complex calculation that
involves a large number of interrelated inputs and assumptions such as borrower risk ratings, forward-looking macroeconomic
conditions, scenario design and the weights assigned to each scenario. The probability of default, loss given default and
exposure at default inputs are modelled based on the macroeconomic variables that are most closely correlated with credit
losses. Management’s estimation of expected credit losses in Stage 1 and Stage 2 considers five distinct future macroeconomic
scenarios, each of which includes a forecast of relevant macroeconomic variables, designed to capture a wide range of possible
outcomes and which are probability-weighted according to management’s expectation of the relative likelihood of the range of
outcomes that each scenario represents at the reporting date. Significant management judgment is required in making
assumptions and estimations when calculating the Stage 1 and Stage 2 ACL.
The principal considerations for our determination that performing procedures relating to the Stage 1 and Stage 2 ACL is a critical
audit matter are (i) the significant judgment required by management when estimating the Stage 1 and Stage 2 ACL; (ii) a high
degree of auditor judgment and subjectivity in performing procedures related to management’s assumptions for (a) designing
future macroeconomic scenarios, (b) forecasting certain macroeconomic variables, (c) probability-weighting scenarios, and
(d) assigning borrower risk ratings; (iii) the significant audit effort necessary to evaluate audit evidence as the estimation of the
Stage 1 and Stage 2 ACL is a complex calculation that involves a large volume of data, interrelated inputs and assumptions, some
of which are model-based; and (iv) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
estimation of the Stage 1 and Stage 2 ACL, including controls over (i) the probability of default, loss given default and exposure at
default models; (ii) the design of future macroeconomic scenarios, the forecasting of certain macroeconomic variables, and the
probability-weighting of these scenarios; (iii) the assignment of borrower risk ratings; and (iv) the completeness and accuracy of
certain data inputs underlying the Stage 1 and Stage 2 ACL calculation. These procedures also included, among others, testing
management’s process for estimating the Stage 1 and Stage 2 ACL. This consisted of (i) testing the completeness and accuracy of
certain underlying data used in the estimation of the Stage 1 and Stage 2 ACL; and (ii) with the assistance of professionals with
specialized skill and knowledge, evaluating (a) the appropriateness of the probability of default, loss given default and exposure
at default models used in the estimation of the Stage 1 and Stage 2 ACL, and (b) the reasonableness of significant inputs and
assumptions used in the estimation of the Stage 1 and Stage 2 ACL related to (1) the design of future macroeconomic scenarios,
(2) certain forecasted macroeconomic variables, (3) the probability-weights assigned to the scenarios, and (4) the assignment of
borrower risk ratings for samples of loans.
Goodwill Impairment Assessment of the Caribbean Banking Cash Generating Unit (CGU)
As described in Notes 2 and 11 to the consolidated financial statements, the goodwill allocated to the Caribbean Banking CGU was
$1,759 million. Management conducts a goodwill impairment test as of August 1 of each year by comparing the carrying amount of
each CGU to its recoverable amount. The recoverable amount of a CGU is represented by its value in use (VIU), except in
circumstances where the carrying amount of a CGU exceeds its VIU. In such cases, the greater of the CGU’s fair value less costs
of disposal (FVLCD) and its VIU is the recoverable amount. Management estimated the recoverable amount of the Caribbean
Banking CGU based on its FVLCD. Management calculated the FVLCD using a discounted cash flow method that projects future
cash flows over a 5-year period based on management forecasts, adjusted to approximate the considerations of a prospective
third-party buyer. Cash flows beyond the initial 5-year period are assumed by management to increase at a constant rate using a
nominal long-term growth rate. The discount rate used to determine the present value of the Caribbean Banking CGU’s projected
future cash flows is based on the bank-wide cost of capital, adjusted for the risks to which the CGU is exposed. As of August 1,
2022, management determined that the recoverable amount was 109% of its carrying amount. Management also considered
reasonably possible alternative scenarios, including market comparable transactions, which yielded valuations ranging from an
immaterial deficit to an immaterial surplus. Management uses significant judgment to determine inputs to the discounted cash
flow model. If the future cash flows and other assumptions in future periods deviate significantly from the current amounts used
in management’s impairment testing, the value of goodwill could become impaired.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment
of the Caribbean Banking CGU is a critical audit matter are (i) the significant judgment required by management when
determining the recoverable amount of the CGU, including projecting future cash flows; (ii) a high degree of auditor judgment
and subjectivity in performing procedures and evaluating audit evidence related to management’s calculation of the recoverable
amount of the CGU; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to
management’s goodwill impairment test, including controls over the determination of the recoverable amount of the Caribbean
Banking CGU. These procedures also included, among others, testing management’s process for determining the recoverable
amount of the CGU which consisted of (i) evaluating the appropriateness of the discounted cash flow model; (ii) testing the
completeness and accuracy of certain underlying data used in the model; (iii) evaluating the reasonableness of certain
assumptions used by management related to future cash flows, which involved evaluating the consistency with (a) current and
past performance of the CGU, and (b) external market and industry data; and (iv) evaluating consistency of the recoverable
amount with market comparable transactions. Professionals with specialized skill and knowledge were used to assist in
evaluating the appropriateness of management’s discounted cash flow model and the consistency of the recoverable amount of
the CGU with market comparable transactions.
Uncertain Tax Positions
As described in Note 2 to the consolidated financial statements, the Bank is subject to income tax laws in various jurisdictions
where it operates and the complex tax laws are potentially subject to different interpretations by management and the relevant
taxation authorities. As disclosed by management, significant judgment is required in the interpretation of the relevant tax laws,
and in assessing the probability of acceptance of the Bank’s tax positions to determine tax provisions, which includes
136
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
management’s best estimate of uncertain tax positions that are under audit or appeal by the relevant taxation authorities.
Management performs a review on a quarterly basis to incorporate its best assessment based on information available, but
additional liability and income tax expense could result based on the acceptance of the Bank’s tax positions by the relevant tax
authorities. In some cases, as described in Note 22 to the consolidated financial statements, the Bank has received
reassessments denying the tax deductibility of dividends from transactions including those with Tax Indifferent Investors.
The principal considerations for our determination that performing procedures relating to uncertain tax positions is a critical
audit matter are (i) the significant judgment required by management, including a high degree of estimation uncertainty, when
(a) interpreting the relevant tax laws, and (b) assessing the probability of acceptance of the Bank’s tax positions, which includes
management’s best estimate of uncertain tax positions that are under audit or appeal by relevant taxation authorities; (ii) a high
degree of auditor judgment and subjectivity in performing procedures and evaluating the uncertain tax positions; and (iii) the
audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
evaluation of uncertain tax positions and the impact on tax provisions. These procedures also included, among others, testing
management’s process for (i) assessing the probability of acceptance of the Bank’s tax positions; and (ii) estimating provisions
relating to uncertain tax positions, if applicable, which reflects management’s best estimate of uncertain tax positions that are
under audit or appeal by relevant taxation authorities. This consisted of (i) evaluating the appropriateness of the methods used;
(ii) testing the completeness and accuracy of underlying data used in the estimate; (iii) reviewing correspondence with relevant
taxation authorities; (iv) making inquiries of the Bank’s internal and external legal counsel; and (v) evaluating, with the
assistance of professionals with specialized skill and knowledge, the application of relevant tax laws, the reasonableness of
management’s assessment of whether it is probable that the relevant tax authorities will accept the Bank’s tax positions, and
evidence used by management.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
November 29, 2022
We have served as the Bank’s auditor since 2016.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
137
Consolidated Balance Sheets
As at
(Millions of Canadian dollars)
October 31
2022
October 31
2021
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)
(3,753 )
(4,089 )
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
$ 1,917,219
$ 1,706,323
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
$ 1,917,219
$ 1,706,323
The accompanying notes are an integral part of these Consolidated Financial Statements.
David I. McKay
Frank Vettese
President and Chief Executive Officer
Director
138
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Consolidated Statements of Income
For the year ended
(Millions of Canadian dollars, except per share amounts)
October 31
2022
October 31
2021
Interest and dividend income
(Note 3)
Loans
$
$
Securities
Assets purchased under reverse repurchase agreements and securities borrowed
Deposits and other
Interest expense
(Note 3)
Deposits and other
Other liabilities
Subordinated debentures
Net interest income
Non-interest income
Insurance premiums, investment and fee income
(Note 15)
Trading revenue
Investment management and custodial fees
Mutual fund revenue
Securities brokerage commissions
Service charges
Underwriting and other advisory fees
Foreign exchange revenue, other than trading
Card service revenue
Credit fees
Net gains on investment securities
Share of profit in joint ventures and associates
(Note 12)
Other
Total revenue
Provision for credit losses
(Notes 4 and 5)
(753 )
Insurance policyholder benefits, claims and acquisition expense
(Note 15)
Non-interest expense
Human resources
(Note 17 and 21)
Equipment
Occupancy
Communications
Professional fees
Amortization of other intangibles
(Note 11)
Other
Income before income taxes
Income taxes
(Note 22)
Net income
$
$
Net income attributable to:
Shareholders
$
$
Non-controlling interests
$
$
Basic earnings per share
(in dollars)
(Note 23)
$
$
Diluted earnings per share
(in dollars)
(Note 23)
Dividends per common share
(in dollars)
The accompanying notes are an integral part of these Consolidated Financial Statements.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
139
Consolidated Statements of Comprehensive Income
For the year ended
(Millions of Canadian dollars)
October 31
2022
October 31
2021
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
(2,241 )
Provision for credit losses recognized in income
(16 )
(9 )
Reclassification of net losses (gains) on debt securities and loans at fair value through other
comprehensive income to income
(12 )
(117 )
(2,269 )
Foreign currency translation adjustments
Unrealized foreign currency translation gains (losses)
(4,316 )
Net foreign currency translation gains (losses) from hedging activities
(1,449 )
Reclassification of losses (gains) on foreign currency translation to income
(18 )
(7 )
Reclassification of losses (gains) on net investment hedging activities to income
(1 )
(2,584 )
Net change in cash flow hedges
Net gains (losses) on derivatives designated as cash flow hedges
Reclassification of losses (gains) on derivatives designated as cash flow hedges to income
Items that will not be reclassified subsequently to income:
Remeasurements of employee benefit plans
Net fair value change due to credit risk on financial liabilities designated at fair value through
profit or loss
Net gains (losses) on equity securities designated at fair value through other
comprehensive income
Total other comprehensive income (loss), net of taxes
Total comprehensive income (loss)
$
$
Total comprehensive income attributable to:
Shareholders
$
$
Non-controlling interests
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
140
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Consolidated Statements of Changes in Equity
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
$
$ 17,728
$
(39 )
$
(73 )
$ 71,795
$
(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
$
$ 17,318
$
(5 )
$
(334 )
$ 78,037
$
(2,357 )
$
$
$
$
$
$ 108,175
For the year ended October 31, 2021
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
$
$
$
(3 )
$
(129 )
$
$
(139 )
$
$
(1,079 )
$
$
$
$
Changes in equity
Issues of share capital and other equity instruments
–
–
(5 )
–
–
–
–
–
Common shares purchased for cancellation
–
–
–
–
–
–
–
–
–
–
–
–
Redemption of preferred shares and other equity instruments
(1,475 )
–
–
–
–
–
–
–
–
(1,475 )
–
(1,475 )
Sales of treasury shares and other equity instruments
–
–
–
–
–
–
–
–
Purchases of treasury shares and other equity instruments
–
–
(683 )
(4,060 )
–
–
–
–
–
(4,743 )
–
(4,743 )
Share-based compensation awards
–
–
–
–
(6 )
–
–
–
–
(6 )
–
(6 )
Dividends on common shares
–
–
–
–
(6,158 )
–
–
–
–
(6,158 )
–
(6,158 )
Dividends on preferred shares and distributions on other
equity instruments
–
–
–
–
(257 )
–
–
–
–
(257 )
(3 )
(260 )
Other
–
–
–
–
–
–
–
–
(10 )
Net income
–
–
–
–
–
–
–
–
Total other comprehensive income (loss), net of taxes
–
–
–
–
(2,577 )
(881 )
(7 )
Balance at end of period
$
$
$
(39 )
$
(73 )
$
$
(88 )
$
$
$
$
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
141
Consolidated Statements of Cash Flows
For the year ended
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Cash flows from operating activities
Net income
$
$
Adjustments for non-cash items and others
Provision for credit losses
(753 )
Depreciation
Deferred income taxes
Amortization and impairment of other intangibles
Net changes in investments in joint ventures and associates
(108 )
(127 )
Losses (Gains) on investment securities
(43 )
(151 )
Losses (Gains) on disposition of business
(100 )
(26 )
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
(509 )
Current income taxes
(3,336 )
Derivative assets
(58,898 )
Derivative liabilities
(18,488 )
Trading securities
(8,931 )
(3,164 )
Loans, net of securitizations
(102,653 )
(54,987 )
Assets purchased under reverse repurchase agreements and securities borrowed
(9,942 )
Obligations related to assets sold under repurchase agreements and securities loaned
(12,030 )
Obligations related to securities sold short
(2,330 )
Deposits, net of securitizations
Brokers and dealers receivable and payable
Other
Net cash from (used in) operating activities
Cash flows from investing activities
Change in interest-bearing deposits with banks
(28,373 )
(40,618 )
Proceeds from sales and maturities of investment securities
Purchases of investment securities
(122,964 )
(123,547 )
Net acquisitions of premises and equipment and other intangibles
(2,500 )
(2,186 )
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
(57,054 )
(57,348 )
Cash flows from financing activities
Issuance of subordinated debentures
Repayment of subordinated debentures
(192 )
(2,500 )
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 )
(1,475 )
Sales of treasury shares
Purchases of treasury shares
(5,701 )
(4,743 )
Dividends paid on shares and distributions paid on other equity instruments
(6,960 )
(6,420 )
Dividends/distributions paid to non-controlling interests
(5 )
(3 )
Change in short-term borrowings of subsidiaries
(14 )
Repayment of lease liabilities
(629 )
(621 )
Net cash from (used in) financing activities
(2,185 )
(5,928 )
Effect of exchange rate changes on cash and due from banks
(4,152 )
(2,810 )
Net change in cash and due from banks
(41,449 )
(5,042 )
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 with central banks and other regulatory authorities. The total balances were $2 billion as at October 31, 2022 (October 31, 2021 –
$2 billion; October 31, 2020 – $3 billion).
The accompanying notes are an integral part of these Consolidated Financial Statements.
142
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Note 1
General information
Banking, Wealth Management, Insurance, Investor & Treasury Services and Capital Markets products and services on a global
basis. Refer to Note 27 for further details on our business segments.
The parent bank, Royal Bank of Canada Schedule I Bank under the Bank Act (Canada) incorporated and domiciled in
office is located at 1 Place Ville-Marie, Montreal, Quebec, Canada. Our common shares are listed on the Toronto Stock Exchange
and New York Stock Exchange with the ticker symbol RY.
These Consolidated Financial Statements are prepared in compliance with International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards Board (IASB). Unless otherwise stated, monetary amounts are stated
in Canadian dollars. Tabular information is stated in millions of dollars, except as noted. These Consolidated Financial
Statements also comply with Subsection 308 of the
Bank Act
(Canada), which states that, except as otherwise specified by the
Office of the Superintendent of Financial Institutions Canada (OSFI), our Consolidated Financial Statements are to be prepared in
accordance with IFRS. The accounting policies outlined in Note 2 have been consistently applied to all periods presented.
On November 29, 2022, the Board of Directors authorized the Consolidated Financial Statements for issue.
Note 2
Summary of significant accounting policies, estimates and judgments
The significant accounting policies used in the preparation of these Consolidated Financial Statements, including the accounting
requirements prescribed by OSFI, are summarized below. These accounting policies conform, in all material respects, to IFRS.
The same accounting policies have been applied to all periods presented.
General
Use of estimates and assumptions
In preparing our Consolidated Financial Statements, management is required to make subjective estimates and assumptions that
affect the reported amount of assets, liabilities, net income and related disclosures. Estimates made by management are based
on historical experience and other assumptions that are believed to be reasonable. Key sources of estimation uncertainty
include: determination of fair value of financial instruments, allowance for credit losses, insurance claims and policy benefit
liabilities, pensions and other post-employment benefits, income taxes, goodwill and other intangible assets, and provisions.
Accordingly, actual results may differ from these and other estimates thereby impacting our future Consolidated Financial
Statements. Refer to the relevant accounting policies in this Note for details on our use of estimates and assumptions.
Significant judgments
In preparation of these Consolidated Financial Statements, management is required to make significant judgments that affect
the carrying amounts of certain assets and liabilities, and the reported amounts of revenues and expenses recorded during the
period. Significant judgments have been made in the following areas and discussed as noted in the Consolidated Financial
Statements:
Consolidation of structured entities
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
Note 11
Basis of consolidation
Our Consolidated Financial Statements include the assets and liabilities and results of operations of the parent company, Royal
Bank of Canada, and its subsidiaries including certain structured entities, after elimination of intercompany transactions,
balances, revenues and expenses.
Consolidation
Subsidiaries are those entities, including structured entities, over which we have control. We control an entity when we are
exposed, or have rights, to variable returns from our involvement with the entity and have the ability to affect those returns
through our power over the investee. We have power over an entity when we have existing rights that give us the current ability
to direct the activities that most significantly affect the entity’s returns (relevant activities). Power may be determined on the
basis of voting rights or, in the case of structured entities, other contractual arrangements.
We are not deemed to control an entity when we exercise power over an entity in an agency capacity. In determining
whether we are acting as an agent, we consider the overall relationship between us, the investee and other parties to the
arrangement with respect to the following factors: (i) the scope of our decision-making power; (ii) the rights held by other
parties; (iii) the remuneration to which we are entitled; and (iv) our exposure to variability of returns.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
143
Note 2
Summary of significant accounting policies, estimates and judgments
(continued)
The determination of control is based on the current facts and circumstances and is continuously assessed. In some
circumstances, different factors and conditions may indicate that different parties control an entity depending on whether those
factors and conditions are assessed in isolation or in totality. Significant judgment is applied in assessing the relevant factors
and conditions in totality when determining whether we control an entity. Specifically, judgment is applied in assessing whether
we have substantive decision-making rights over the relevant activities and whether we are exercising our power as a principal
or an agent.
We consolidate all subsidiaries from the date we obtain control and cease consolidation when an entity is no longer
controlled by us. Our consolidation conclusions affect the classification and amount of assets, liabilities, revenues and expenses
reported in our Consolidated Financial Statements.
Non-controlling interests in subsidiaries that we consolidate are shown on our Consolidated Balance Sheets as a separate
component of equity which is distinct from equity attributable to our shareholders. The net income attributable to
non-controlling interests is separately disclosed in our Consolidated Statements of Income.
Investments in joint ventures and associates
Our investments in associated corporations and limited partnerships over which we have significant influence are accounted for
using the equity method. The equity method is also applied to our interests in joint ventures over which we have joint control.
Under the equity method of accounting, investments are initially recorded at cost, and the carrying amount is increased or
decreased to recognize our share of the investee’s net profit or loss, including our proportionate share of the investee’s Other
comprehensive income (OCI), subsequent to the date of acquisition.
Non-current assets held for sale and discontinued operations
Non-current assets (and disposal groups) are classified as held for sale if their carrying amounts will be recovered principally
through a sale transaction rather than through continuing use. This condition is satisfied when the asset is available for immediate
sale in its present condition, management is committed to the sale, and it is highly probable to occur within one year. Non-current
assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount and fair value
less costs to sell and if significant, are presented separately from other assets on our Consolidated Balance Sheets.
A disposal group is classified as a discontinued operation if it meets the following conditions: (i) it is a component that can
be distinguished operationally and financially from the rest of our operations and (ii) it represents either a separate major line of
business or is part of a single coordinated plan to dispose of a separate major line of business or geographical area of
operations. Disposal groups classified as discontinued operations are presented separately from our continuing operations in
our Consolidated Statements of Income.
Financial Instruments
Classification of financial assets
Financial assets are measured at initial recognition at fair value, and are classified and subsequently measured at fair value
through profit or loss (FVTPL), fair value through other comprehensive income (FVOCI) or amortized cost based on our business
model for managing the financial instruments and the contractual cash flow characteristics of the instrument.
Debt instruments are measured at amortized cost if both of the following conditions are met and the asset is not designated
as FVTPL: (a) the asset is held within a business model that is Held-to-Collect (HTC) as described below, and (b) the contractual
terms of the instrument give rise to cash flows that are solely payments of principal and interest on the principal amount
outstanding (SPPI).
Debt instruments are measured at FVOCI if both of the following conditions are met and the asset is not designated as
FVTPL: (a) the asset is held within a business model that is Held-to-Collect-and-Sell (HTC&S) as described below, and (b) the
contractual terms of the instrument give rise, on specified dates, to cash flows that are SPPI.
All other debt instruments are measured at FVTPL.
Equity instruments are measured at FVTPL, unless the asset is not held for trading purposes and we make an irrevocable
election to designate the asset as FVOCI. This election is made on an instrument-by-instrument basis.
Business model assessment
We determine our business models at the level that best reflects how we manage portfolios of financial assets to achieve our
business objectives. Judgment is used in determining our business models, which is supported by relevant, objective evidence
including:
•
How the economic activities of our businesses generate benefits, for example through trading revenue, enhancing yields
or hedging funding or other costs and how such economic activities are evaluated and reported to key management
personnel;
•
The significant risks affecting the performance of our businesses, for example, market risk, credit risk, or other risks as
described in the Risk Management section of Management’s Discussion and Analysis, and the activities undertaken to
manage those risks;
•
Historical and future expectations of sales of the loans or securities portfolios managed as part of a business model;
and
•
The compensation structures for managers of our businesses, to the extent that these are directly linked to the
economic performance of the business model.
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.
144
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
SPPI assessment
Instruments held within a HTC or HTC&S business model are assessed to evaluate if their contractual cash flows are comprised
of solely payments of principal and interest. SPPI payments are those which would typically be expected from basic lending
arrangements. Principal amounts include par repayments from lending and financing arrangements, and interest primarily
relates to basic lending returns, including compensation for credit risk and the time value of money associated with the principal
amount outstanding over a period of time. Interest can also include other basic lending risks and costs (for example, liquidity
risk, servicing or administrative costs) associated with holding the financial asset for a period of time, and a profit margin.
Where the contractual terms introduce exposure to risk or variability of cash flows that are inconsistent with a basic lending
arrangement, the related financial asset is classified and measured at FVTPL.
Securities
Trading securities include all securities that are classified as FVTPL by nature and securities designated as FVTPL. Obligations to
deliver trading securities sold but not yet purchased are recorded as liabilities and carried at fair value. Realized and unrealized
gains and losses on these securities are generally recorded as Non-interest income – Trading revenue or Non-interest income –
Other. Dividends and interest income accruing on Trading securities are recorded in Interest and dividend income. Interest and
dividends accrued on securities sold short are recorded in Interest expense.
Investment securities include all securities classified as FVOCI and amortized cost. All investment securities are initially
recorded at fair value and subsequently measured according to the respective classification.
Investment securities carried at amortized cost are measured using the effective interest method, and are presented net of
any allowance for credit losses, calculated in accordance with our policy for Allowance for credit losses, as described below.
Interest income, including the amortization of premiums and discounts on securities measured at amortized cost are recorded in
Interest and dividend income. Impairment gains or losses recognized on amortized cost securities are recorded in Provision for
credit losses (PCL). When a debt instrument measured at amortized cost is sold, the difference between the sale proceeds and
the amortized cost of the security at the time of the sale is recorded as Net gains on Investment securities in Non-interest
income.
Debt securities carried at FVOCI are measured at fair value with unrealized gains and losses arising from changes in fair value
included in Other components of equity. Impairment gains and losses are included in PCL and correspondingly reduce the
accumulated changes in fair value included in Other components of equity. When a debt instrument measured at FVOCI is sold, the
cumulative gain or loss is reclassified from Other components of equity to Net gains on Investment securities in Non-interest income.
Equity securities carried at FVOCI are measured at fair value. Unrealized gains and losses arising from changes in fair value
are recorded in Other components of equity and not subsequently reclassified to profit or loss when realized. Dividends from
FVOCI equity securities are recognized in Interest and dividend income.
We account for all of our securities using settlement date accounting and changes in fair value between the trade date and
settlement date are reflected in income for securities measured at FVTPL, and changes in the fair value of securities measured at
FVOCI between the trade and settlement dates are recorded in OCI except for changes in foreign exchange rates on debt
securities, which are recorded in Non-interest income-Other.
Fair value option
A financial instrument with a reliably measurable fair value can be designated as FVTPL (the fair value option) on its initial recognition
even if the financial instrument was not acquired or incurred principally for the purpose of selling or repurchasing. The fair value
option can be used for financial assets if it eliminates or significantly reduces a measurement or recognition inconsistency that would
otherwise arise from measuring assets or liabilities, or recognizing related gains and losses on a different basis (an accounting
mismatch). The fair value option can be elected for financial liabilities if: (i) the election eliminates an accounting mismatch; (ii) the
financial liability is part of a portfolio that is managed on a fair value basis, in accordance with a documented risk management or
investment strategy; or (iii) there is an embedded derivative in the financial or non-financial host contract and the derivative is not
closely related to the host contract. These instruments cannot be reclassified out of the FVTPL category while they are held or issued.
Financial assets designated as FVTPL are recorded at fair value and any unrealized gain or loss arising due to changes in fair value is
included in Trading revenue or Non-interest income – Other, depending on our business purpose for holding the financial asset.
Financial liabilities designated as FVTPL are recorded at fair value and fair value changes attributable to changes in our own
credit risk are recorded in OCI. Own credit risk amounts recognized in OCI will not be reclassified subsequently to net income.
The remaining fair value changes not attributable to changes in our own credit risk are recorded in Trading revenue or
Non-interest income – Other, depending on our business purpose for holding the financial liability. Upon initial recognition, if we
determine that presenting the effects of own credit risk changes in OCI would create or enlarge an accounting mismatch in net
income, the full fair value change in our debt designated as FVTPL is recognized in net income. To make that determination, we
assess whether we expect that the effects of changes in the liability’s credit risk will be offset in profit or loss by a change in the
fair value of another financial instrument measured at FVTPL. Such an expectation is based on an economic relationship between
the characteristics of the liability and the characteristics of the other financial instrument. The determination is made at initial
recognition and is not reassessed. To determine the fair value adjustments on our debt instruments designated as FVTPL, we
calculate the present value of the instruments based on the contractual cash flows over the term of the arrangement by using
our effective funding rate at the beginning and end of the period.
Determination of fair value
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. We determine fair value by incorporating all factors
that market participants would consider in setting a price, including commonly accepted valuation approaches.
The Board of Directors provides oversight on valuation of financial instruments, primarily through the Audit Committee and
Risk Committee. The Audit Committee reviews the presentation and disclosure of financial instruments that are measured at fair
value, while the Risk Committee assesses the adequacy of governance structures and control processes for the valuation of
these instruments.
We have established policies, procedures and controls for valuation methodologies and techniques to ensure that fair value
is reasonably estimated. Major valuation processes and controls include, but are not limited to, profit and loss decomposition,
independent price verification (IPV) and model validation standards. These control processes are managed by either Finance or
Group Risk Management and are independent of the relevant businesses and their trading functions. Profit and loss
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
145
Note 2
Summary of significant accounting policies, estimates and judgments
(continued)
decomposition is a process to explain the fair value changes of certain positions and is performed daily for trading portfolios. All
fair value instruments are subject to IPV, a process whereby trading function valuations are verified against external market
prices and other relevant market data. Market data sources include traded prices, brokers and price vendors. We give priority to
those third-party pricing services and prices having the highest and most consistent accuracy. The level of accuracy is
determined over time by comparing third-party price values to traders’ or system values, to other pricing service values and,
when available, to actual trade data. Quoted prices for identical instruments from pricing services or brokers are generally not
adjusted unless there are issues such as stale prices. If multiple quotes for identical instruments are received, fair value is based
on an average of the prices received or the quote from the most reliable vendor, after the outlier prices that fall outside of the
pricing range are removed. Other valuation techniques are used when a price or quote is not available. Some valuation
processes use models to determine fair value. We have a systematic and consistent approach to control the use of models.
Valuation models are approved for use within our model risk management framework. The framework addresses, among other
things, model development standards, validation processes and procedures and approval authorities. Model validation ensures
that a model is suitable for its intended use and sets parameters for its use. All models are revalidated regularly by qualified
personnel who are independent of the model design and development. Annually our model risk profile is reported to the Board of
Directors.
IFRS 13
Fair Value Measurement
permits an exception, through an accounting policy choice, to measure the fair value of a
portfolio of financial instruments on a net open risk position basis when certain criteria are met. We have elected to use this
policy choice to determine the fair value of certain portfolios of financial instruments, primarily derivatives, based on a net
exposure to market or credit risk.
We record valuation adjustments to appropriately reflect counterparty credit quality of our derivative portfolio, differences
between the actual counterparty collateral discount curve and standard overnight index swap (OIS) discounting for
collateralized derivatives, funding valuation adjustments (FVA) for uncollateralized and under-collateralized over-the-counter
(OTC) derivatives, unrealized gains or losses at inception of the transaction, bid-offer spreads, unobservable parameters and
model limitations. These adjustments may be subjective as they require significant judgment in the input selection, such as
implied probability of default (PD) and recovery rate, and are intended to arrive at a fair value that is determined based on
assumptions that market participants would use in pricing the financial instrument. The realized price for a transaction may be
different from its recorded value, previously estimated using management judgment. Valuation adjustments may therefore
impact unrealized gains and losses recognized in Non-interest income – Trading revenue or Other.
Valuation adjustments are recorded for the credit risk of our derivative portfolios in order to arrive at their fair values. Credit
valuation adjustments (CVA) take into account our counterparties’ creditworthiness, the current and potential future
mark-to-market of transactions and the effects of credit mitigants such as master netting and collateral agreements. CVA
amounts are derived from estimates of exposure at default (EAD), PD, recovery rates on a counterparty basis and market and
credit factor correlations. EAD is the value of expected derivative related assets and liabilities at the time of default, estimated
through modelling using underlying risk factors. PD is implied from the market prices for credit protection and the credit ratings
of the counterparty. When market data is unavailable, it is estimated by incorporating assumptions and adjustments that market
participants would use for determining fair value using these inputs. Correlation is the statistical measure of how credit and
market factors may move in relation to one another. Correlation is estimated using historical data. CVA is calculated daily and
changes are recorded in Non-interest income – Trading revenue.
FVA are also calculated to incorporate the cost and benefit of funding in the valuation of uncollateralized and under-
collateralized OTC derivatives. Future expected cash flows of these derivatives are discounted to reflect the cost and benefit of
funding the derivatives by using a funding curve, implied volatilities and correlations as inputs.
Where required, a valuation adjustment is made to reflect the unrealized gain or loss at inception of a financial instrument
contract where the fair value of that financial instrument is not obtained from a quoted market price or cannot be evidenced by
other observable market transactions based on a valuation technique incorporating observable market data.
A bid-offer valuation adjustment is required when a financial instrument is valued at the mid-market price, instead of the bid
or offer price for asset or liability positions, respectively. The valuation adjustment takes into account the spread from the
mid-market price to either the bid or offer price.
Some valuation models require parameter calibration from such factors as market observable option prices. The calibration
of parameters may be sensitive to factors such as the choice of instruments or optimization methodology. A valuation
adjustment is also estimated to mitigate the uncertainties of parameter calibration and model limitations.
In determining fair value, a hierarchy is used which prioritizes the inputs to valuation techniques. The fair value hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). Determination of fair value based on this hierarchy requires the use of observable market
data whenever available. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we
have the ability to access at the measurement date. Level 2 inputs include quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model inputs that are either
observable, or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3
inputs are one or more inputs that are unobservable and significant to the fair value of the asset or liability. Unobservable inputs
are used to measure fair value to the extent that observable inputs are not available at the measurement date. The availability of
inputs for valuation may affect the selection of valuation techniques. The classification of a financial instrument in the hierarchy
for disclosure purposes is based upon the lowest level of input that is significant to the measurement of fair value.
Where observable prices or inputs are not available, management judgment is required to determine fair values by
assessing other relevant sources of information such as historical data, proxy information from similar transactions, and through
extrapolation and interpolation techniques. For more complex or illiquid instruments, significant judgment is required in the
determination of the model used, the selection of model inputs, and in some cases the application of valuation adjustments to
the model value or quoted price for inactively traded financial instruments, as the selection of model inputs may be subjective
and the inputs may be unobservable. Unobservable inputs are inherently uncertain as there is little or no market data available
from which to determine the level at which the transaction would occur under normal business circumstances. Appropriate
parameter uncertainty and market risk valuation adjustments for such inputs and other model risk valuation adjustments are
assessed in all such instances.
146
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Loans
Loans are debt instruments recognized initially at fair value and are subsequently measured in accordance with the
Classification of financial assets policy provided above. The majority of our loans are carried at amortized cost using the
effective interest method, which represents the gross carrying amount less allowance for credit losses.
Interest on loans is recognized in Interest income using the effective interest method. The estimated future cash flows used in
this calculation include those determined by the contractual term of the asset and all fees that are considered to be integral to the
effective interest rate. Also included in this amount are transaction costs and all other premiums or discounts. Fees that relate to
activities such as originating, restructuring or renegotiating loans are deferred and recognized as Interest income over the
expected term of such loans using the effective interest method. Where there is a reasonable expectation that a loan will be
originated, commitment and standby fees are also recognized as interest income over the expected term of the resulting loans
using the effective interest method. Otherwise, such fees are recorded as other liabilities and amortized into Non-interest income
over the commitment or standby period. Future prepayment fees on mortgage loans are not included as part of the effective
interest rate at origination. If prepayment fees are received on a renewal of a mortgage loan before maturity, the fee is included as
part of the effective interest rate, and if not renewed, the prepayment fee is recognized in interest income at the prepayment date.
For loans carried at amortized cost or FVOCI, impairment losses are recognized at each balance sheet date in accordance
with the three-stage impairment model outlined below.
Allowance for credit losses
An allowance for credit losses (ACL) is established for all financial assets, except for financial assets classified or designated as
FVTPL and equity securities designated as FVOCI, which are not subject to impairment assessment. Assets subject to impairment
assessment include loans, debt securities, interest-bearing deposits with banks, customers’ liability under acceptances, accounts
and accrued interest receivable, and finance and operating lease receivables. ACL on loans measured at amortized cost is
presented in Allowance for loan losses. ACL on debt securities measured at FVOCI is presented in Other components of equity.
Other financial assets carried at amortized cost are presented net of ACL on our Consolidated Balance Sheets.
Off-balance sheet items subject to impairment assessment include financial guarantees and undrawn loan commitments.
ACL on off-balance sheet items is separately calculated and included in Other Liabilities – Provisions.
We measure the ACL on each balance sheet date according to a three-stage expected credit loss impairment model:
•
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.
Expected life
For instruments in Stage 2 or Stage 3, loss allowances reflect expected credit losses over the expected remaining lifetime of the
instrument. For most instruments, the expected life is limited to the remaining contractual life.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
147
Note 2
Summary of significant accounting policies, estimates and judgments
(continued)
An exemption is provided for certain instruments with the following characteristics: (a) the instrument includes both a loan
and undrawn commitment component; (b) we have the contractual ability to demand repayment and cancel the undrawn
commitment; and (c) our exposure to credit losses is not limited to the contractual notice period. For products in scope of this
exemption, the expected life may exceed the remaining contractual life and is the period over which our exposure to credit losses
is not mitigated by our normal credit risk management actions. This period varies by product and risk category and is estimated
based on our historical experience with similar exposures and consideration of credit risk management actions taken as part of
our regular credit review cycle. Products in scope of this exemption include credit cards, overdraft balances and certain revolving
lines of credit. Judgment is required in determining the instruments in scope for this exemption and estimating the appropriate
remaining life based on our historical experience and credit risk mitigation practices.
Assessment of significant increase in credit risk
The assessment of significant increase in credit risk requires significant judgment. Movements between Stage 1 and Stage 2 are
based on whether an instrument’s credit risk as at the reporting date has increased significantly relative to the date it was
initially recognized. For the purposes of this assessment, credit risk is based on an instrument’s lifetime PD, not the losses we
expect to incur. The assessment is generally performed at the instrument level.
Our assessment of significant increases in credit risk is performed at least quarterly based on three factors. If any of the
following factors indicates that a significant increase in credit risk has occurred, the instrument is moved from Stage 1 to Stage 2:
(1)
We have established thresholds for significant increases in credit risk based on both a percentage and absolute change
in lifetime PD relative to initial recognition. For our wholesale portfolio, a decrease in the borrower’s risk rating is also
required to determine that credit risk has increased significantly.
(2)
Additional qualitative reviews are performed to assess the staging results and make adjustments, as necessary, to
better reflect the positions whose credit risk has increased significantly.
(3)
Instruments which are 30 days past due are generally considered to have experienced a significant increase in credit
risk, even if our other metrics do not indicate that a significant increase in credit risk has occurred.
The thresholds for movement between Stage 1 and Stage 2 are symmetrical. After a financial asset has transferred to Stage 2, if
its credit risk is no longer considered to have significantly increased relative to its initial recognition, the financial asset will
move back to Stage 1.
For certain instruments with low credit risk as at the reporting date, it is presumed that credit risk has not increased
significantly relative to initial recognition. Credit risk is considered to be low if the instrument has a low risk of default, and the
borrower has the ability to fulfill their contractual obligations both in the near term and in the longer term, including periods of
adverse changes in the economic or business environment. Certain interest-bearing deposits with banks, assets purchased under
reverse repurchase agreements, insurance policy loans, and liquidity facilities extended to our multi-seller conduits have been
identified as having low credit risk.
Use of forward-looking information
The measurement of expected credit losses for each stage and the assessment of significant increase in credit risk considers
information about past events and current conditions as well as reasonable and supportable projections of future events and
economic conditions. The estimation and application of forward-looking information requires significant judgment.
The PD, LGD and EAD inputs used to estimate Stage 1 and Stage 2 credit loss allowances are modelled based on the
macroeconomic variables (or changes in macroeconomic variables) that are most closely correlated with credit losses in the
relevant portfolio. Each macroeconomic scenario used in our expected credit loss calculation includes a projection of all
relevant macroeconomic variables used in our models for a five year period, subsequently reverting to long-run averages.
Macroeconomic variables used in our expected credit loss models include, but are not limited to, unemployment rates, gross
domestic product growth rates, equity return indices, commodity prices, and Canadian housing prices. Depending on their usage
in the models, macroeconomic variables may be projected at a country, province/state or more granular level.
Our estimation of expected credit losses in Stage 1 and Stage 2 is a discounted probability-weighted estimate that considers
a minimum of three future macroeconomic scenarios. Our base case scenario is based on macroeconomic forecasts published
by our internal economics group. Upside and downside scenarios vary relative to our base case scenario based on reasonably
possible alternative macroeconomic conditions. Additional and more severe downside scenarios are designed to capture a
broader range of potential credit losses in certain sectors. Scenario design, including the identification of additional downside
scenarios, occurs at least on an annual basis and more frequently if conditions warrant.
Scenarios are designed to capture a wide range of possible outcomes and weighted according to our best estimate of the
relative likelihood of the range of outcomes that each scenario represents. Scenario weights take into account historical
frequency, current trends, and forward-looking conditions and are updated on a quarterly basis. All scenarios considered are
applied to all portfolios subject to expected credit losses with the same probabilities.
Our assessment of significant increases in credit risk is based on changes in probability-weighted forward-looking lifetime
PDs as at the reporting date, using the same macroeconomic scenarios as the calculation of expected credit losses.
Definition of default
The definition of default used in the measurement of expected credit losses is consistent with the definition of default used for
our internal credit risk management purposes. Our definition of default may differ across products and consider both
quantitative and qualitative factors, such as the terms of financial covenants and days past due. For retail and wholesale
borrowers, except as detailed below, default occurs when the borrower is more than 90 days past due on any material obligation
to us, and/or we consider the borrower unlikely to make their payments in full without recourse action on our part, such as taking
formal possession of any collateral held. For certain credit card balances, default occurs when payments are 180 days past due.
For these balances, the use of a period in excess of 90 days past due is reasonable and supported by observable data on write-off
and recovery rates experienced on historical credit card portfolios. The definition of default used is applied consistently from
period to period and to all financial instruments unless it can be demonstrated that circumstances have changed such that
another definition of default is more appropriate.
148
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Credit-impaired financial assets (Stage 3)
Financial assets are assessed for credit-impairment at each balance sheet date and more frequently when circumstances
warrant further assessment. Evidence of credit-impairment may include indications that the borrower is experiencing significant
financial difficulty, probability of bankruptcy or other financial reorganization, as well as a measurable decrease in the estimated
future cash flows evidenced by the adverse changes in the payments status of the borrower or economic conditions that
correlate with defaults.
An asset that is in Stage 3 will move back to Stage 2 when, as at the reporting date, it is no longer
considered to be credit-impaired. The asset will transfer back to Stage 1 when its credit risk at the reporting date is no longer
considered to have increased significantly from initial recognition, which could occur during the same reporting period as the
transfer from Stage 3 to Stage 2.
When a financial asset has been identified as credit-impaired, expected credit losses are measured as the difference
between the asset’s gross carrying amount and the present value of estimated future cash flows discounted at the instrument’s
original effective interest rate. For impaired financial assets with drawn and undrawn components, expected credit losses also
reflect any credit losses related to the portion of the loan commitment that is expected to be drawn down over the remaining life
of the instrument.
When a financial asset is credit-impaired, interest ceases to be recognized on the regular accrual basis, which accrues
income based on the gross carrying amount of the asset. Rather, interest income is calculated by applying the original effective
interest rate to the amortized cost of the asset, which is the gross carrying amount less the related ACL.
ACL for credit-impaired loans in Stage 3 are established at the borrower level, where losses related to impaired loans are
identified on individually significant loans, or collectively assessed and determined through the use of portfolio-based rates,
without reference to particular loans.
Individually assessed loans (Stage 3)
When individually significant loans are identified as impaired, we reduce the carrying value of the loans to their estimated
realizable value by recording an individually assessed ACL to cover identified credit losses. The individually assessed ACL
reflects the expected amount of principal and interest calculated under the terms of the original loan agreement that will not be
recovered, and the impact of time delays in collecting principal and/or interest (time value of money). The estimated realizable
value for each individually significant loan is the present value of expected future cash flows discounted using the original
effective interest rate for each loan. When the amounts and timing of future cash flows cannot be estimated with reasonable
reliability, the estimated realizable amount may be determined using observable market prices for comparable loans, the fair
value of collateral underlying the loans, and other reasonable and supported methods based on management judgment.
Individually-assessed allowances are established in consideration of a range of possible outcomes, which may include
macroeconomic or non-macroeconomic scenarios, to the extent relevant to the circumstances of the specific borrower being
assessed. Assumptions used in estimating expected future cash flows reflect current and expected future economic conditions
and are generally consistent with those used in Stage 1 and Stage 2 measurement.
Significant judgment is required in assessing evidence of credit-impairment and estimation of the amount and timing of
future cash flows when determining expected credit losses. Changes in the amount expected to be recovered would have a direct
impact on PCL and may result in a change in the ACL.
Collectively assessed loans (Stage 3)
Loans that are collectively assessed are grouped on the basis of similar risk characteristics, taking into account loan type,
industry, geographic location, collateral type, past due status and other relevant factors.
The collectively-assessed ACL reflects: (i) the expected amount of principal and interest calculated under the terms of the
original loan agreement that will not be recovered, and (ii) the impact of time delays in collecting principal and/or interest (time
value of money).
The expected principal and interest collection is estimated on a portfolio basis and references historical loss experience of
comparable portfolios with similar credit risk characteristics, adjusted for the current environment and expected future
conditions. A portfolio specific coverage ratio is applied against the impaired loan balance in determining the collectively-
assessed ACL. The time value of money component is calculated by using the discount factors applied to groups of loans sharing
common characteristics. The discount factors represent the expected recovery pattern of the comparable group of loans, and
reflect the historical experience of these groups adjusted for current and expected future economic conditions and/or industry
factors. Significant judgment is required in assessing evidence of impairment and estimation of the amount and timing of future
cash flows when determining expected credit losses. Changes in the amount expected to be recovered would have a direct
impact on PCL and may result in a change in the ACL.
Write-off of loans
Loans and the related ACL are written off, either partially or in full, when there is no realistic prospect of recovery. Where loans
are secured, they are generally written off after receipt of any proceeds from the realization of collateral. In circumstances where
the net realizable value of any collateral has been determined and there is no reasonable expectation of further recovery, write
off may be earlier. For credit cards, the balances and related ACL are generally written off when payment is 180 days past due.
Personal loans are generally written off at 150 days past due.
Modifications
The original terms of a financial asset may be renegotiated or otherwise modified, resulting in changes to the contractual terms
of the financial asset that affect the contractual cash flows. The treatment of such modifications is primarily based on the
process undertaken to execute the renegotiation and the nature and extent of the expected changes. In the normal course of
business, modifications which are performed for credit reasons, primarily related to troubled debt restructurings, are generally
treated as modifications of the original financial asset. Modifications which are performed for other than credit reasons are
generally considered to be an expiry of the original cash flows; accordingly, such renegotiations are treated as a derecognition of
the original financial asset and recognition of a new financial asset.
If a modification of terms does not result in derecognition of the financial asset, the carrying amount of the financial asset is
recalculated as the present value of the renegotiated or modified contractual cash flows, discounted at the original effective
interest rate and a gain or loss is recognized. The financial asset continues to be subject to the same assessments for significant
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
149
Note 2
Summary of significant accounting policies, estimates and judgments
(continued)
increase in credit risk relative to initial recognition and credit-impairment, as described above. A modified financial asset will
transfer out of Stage 3 if the conditions that led to it being identified as credit-impaired are no longer present and relate
objectively to an event occurring after the original credit-impairment was recognized. A modified financial asset will transfer out
of Stage 2 when it no longer satisfies the relative thresholds set to identify significant increases in credit risk, which are based on
changes in its lifetime PD, days past due and other qualitative considerations. The financial asset continues to be monitored for
significant increases in credit risk and credit-impairment.
If a modification of terms results in derecognition of the original financial asset and recognition of the new financial asset,
the new financial asset will generally be recorded in Stage 1, unless it is determined to be credit-impaired at the time of the
renegotiation. For the purposes of assessing for significant increases in credit risk, the date of initial recognition for the new
financial asset is the date of the modification.
Derivatives
When derivatives are embedded in other financial instruments or host contracts, such combinations are known as hybrid
instruments. Some of the cash flows of a hybrid instrument vary in a way similar to a stand-alone derivative. If the host contract
is a financial asset within the scope of IFRS 9
Financial Instruments
(IFRS 9), the classification and measurement criteria are
applied to the entire hybrid instrument as described in the Classification of financial assets section of Note 2. If the host contract
is a financial liability or an asset that is not within the scope of IFRS 9, embedded derivatives are separately recognized if the
economic characteristics and risks of the embedded derivative are not clearly and closely related to the host contract, unless an
election has been made to elect the fair value option, as described above. The host contract is accounted for in accordance with
the relevant standards.
Derivatives are primarily used in trading activities. Derivatives are also used to manage our exposure to interest, currency,
credit and other market risks. The most frequently used derivative products are interest rate and foreign exchange swaps,
options, futures and forward rate agreements, equity swaps and credit derivatives. All derivative instruments are recorded on our
Consolidated Balance Sheets at fair value.
When derivatives are used in trading activities, the realized and unrealized gains and losses on these derivatives are
recognized in Trading revenue in Non-interest income. Derivatives with positive fair values are reported as Derivative assets and
derivatives with negative fair values are reported as Derivative liabilities. In accordance with our policy for offsetting financial
assets and financial liabilities, the net fair value of certain derivative assets and liabilities are reported as an asset or liability, as
appropriate. Valuation adjustments are included in the fair value of Derivative assets and Derivative liabilities. Premiums paid
and premiums received are shown in Derivative assets and Derivative liabilities, respectively.
When derivatives are used to manage our own exposures, we determine for each derivative whether hedge accounting can
be applied, as discussed in the Hedge accounting section below.
Derecognition of financial assets
Financial assets are derecognized from our Consolidated Balance Sheets when our contractual rights to the cash flows from the
assets have expired, when we retain the rights to receive the cash flows of the assets but assume an obligation to pay those cash
flows to a third party subject to certain pass-through requirements or when we transfer our contractual rights to receive the cash
flows and substantially all of the risk and rewards of the assets have been transferred. When we retain substantially all of the
risks and rewards of the transferred assets, the transferred assets are not derecognized from our Consolidated Balance Sheets
and are accounted for as secured financing transactions. When we neither retain nor transfer substantially all risks and rewards
of ownership of the assets, we derecognize the assets if control over the assets is relinquished. If we retain control over the
transferred assets, we continue to recognize the transferred assets to the extent of our continuing involvement.
Management judgment is applied in determining whether the contractual rights to the cash flows from the transferred assets
have expired or whether we retain the rights to receive cash flows on the assets but assume an obligation to pay for those cash
flows. We derecognize transferred financial assets if we transfer substantially all the risks and rewards of the ownership in the
assets. When assessing whether we have transferred substantially all of the risk and rewards of the transferred assets,
management considers the Bank’s exposure before and after the transfer with the variability in the amount and timing of the net
cash flows of the transferred assets. In transfers in which we retain the servicing rights, management has applied judgment in
assessing the benefits of servicing against market expectations. When the benefits of servicing are greater than fair value, a
servicing asset is recognized in Other assets in our Consolidated Balance Sheets. When the benefits of servicing are less than fair
value, a servicing liability is recognized in Other liabilities in our Consolidated Balance Sheets.
Derecognition of financial liabilities
We derecognize a financial liability from our Consolidated Balance Sheets when our obligation specified in the contract expires,
or is discharged or cancelled. We recognize the difference between the carrying amount of a financial liability transferred and the
consideration paid in our Consolidated Statements of Income.
Interest
Interest is recognized in Interest income and Interest expense in the Consolidated Statements of Income for all interest-bearing
financial instruments. The effective interest rate is the rate that discounts estimated future cash flows over the expected life of
the financial asset or liability to the net carrying amount upon initial recognition. Significant judgment is applied in determining
the effective interest rate due to uncertainty in the timing and amounts of future cash flows.
Dividend income
Dividend income is recognized when the right to receive payment is established. This is the ex-dividend date for listed equity
securities, and usually the date when shareholders have approved the dividend for unlisted equity securities.
Transaction costs
Transaction costs are expensed as incurred for financial instruments classified or designated as FVTPL. For other financial
instruments, transaction costs are capitalized on initial recognition. For financial assets and financial liabilities measured at
150
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
amortized cost, capitalized transaction costs are amortized through net income over the estimated life of the instrument using
the effective interest method. For financial assets measured at FVOCI that do not have fixed or determinable payments and no
fixed maturity, capitalized transaction costs are recognized in net income when the asset is derecognized or becomes impaired.
Offsetting financial assets and financial liabilities
Financial assets and financial liabilities are offset on the Consolidated Balance Sheets when there exists both a legally
enforceable right to offset the recognized amounts and an intention to settle on a net basis, or realize the asset and settle the
liability simultaneously.
Assets purchased under reverse repurchase agreements and sold under repurchase agreements
We purchase securities under agreements to resell (reverse repurchase agreements) and take possession of these securities. We
monitor the market value of the securities purchased and additional collateral is obtained when appropriate. We have the right
to liquidate the collateral held in the event of counterparty default. Reverse repurchase agreements are treated as collateralized
lending transactions. We also sell securities under agreements to repurchase (repurchase agreements), which are treated as
collateralized borrowing transactions. The securities received under reverse repurchase agreements and securities delivered
under repurchase agreements are not recognized on, or derecognized from, our Consolidated Balance Sheets, respectively,
unless the risks and rewards of ownership are obtained or relinquished.
Reverse repurchase agreements and repurchase agreements are carried on our Consolidated Balance Sheets at the
amounts at which the securities were initially acquired or sold, except when they are classified or designated as FVTPL and are
recorded at fair value. Interest earned on reverse repurchase agreements is included in Interest income, and interest incurred on
repurchase agreements is included in Interest expense in our Consolidated Statements of Income. Changes in fair value for
reverse repurchase agreements and repurchase agreements classified or designated as FVTPL are included in Trading revenue or
Other in Non-interest income.
Hedge accounting
We have elected to continue to apply the hedge accounting principles under IAS 39 instead of those under IFRS 9.
We use derivatives and non-derivatives in our hedging strategies to manage our exposure to interest rate, currency, credit
and other market risks. Where hedge accounting can be applied, a hedge relationship is designated and documented at inception
to detail the particular risk management objective and strategy for undertaking the hedge transaction. The documentation
identifies the specific asset, liability or anticipated cash flows being hedged, the risk that is being hedged, the type of hedging
instrument used and how effectiveness will be assessed. We assess, both at the inception of the hedge and on an ongoing basis,
whether the hedging instruments are ‘highly effective’ in offsetting changes in the fair value or cash flows of the hedged items. A
hedge is regarded as highly effective only if the following criteria are met: (i) at inception of the hedge and throughout its life, the
hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk,
and (ii) actual results of the hedge are within a pre-determined range. We perform effectiveness testing to demonstrate that the
relationship has been and is expected to be effective over the remaining term of the hedge. In the case of hedging a forecast
transaction, the transaction must have a high probability of occurring and must present an exposure to variations in cash flows
that could ultimately affect the reported net profit or loss. Hedge accounting is discontinued when it is determined that the
hedging instrument is no longer effective as a hedge, the hedging instrument or hedged item is terminated or sold, or the forecast
transaction is no longer deemed highly probable. Refer to Note 9 for the fair value of derivatives and non-derivative instruments
categorized by their hedging relationships, as well as derivatives that are not designated in hedging relationships.
Until the hedging relationships impacted by the Interest rate benchmark reform (the Reform) fully transition to alternative
benchmark rates (ABRs), our prospective effectiveness testing is based on existing hedged cash flows or hedged risks and any
ineffectiveness arising from retrospective testing does not result in a discontinuation of the hedge. Additionally, effectiveness
testing is applied separately to hedged items referencing ABRs and hedged items referencing interbank offered rates (IBORs),
which include USD London Interbank Offered Rate (USD LIBOR) and Canadian Dollar Offered Rate (CDOR), in accordance with
the Phase 2 amendments to IFRS 9
Financial Instruments
, IAS 39
Financial Instruments: Recognition and Measurement
, IFRS 7
Financial Instruments: Disclosures
, IFRS 4
Insurance contracts
, and IFRS 16
Leases
(the Amendments). Subsequently, when these
relationships fully transition to ABRs, and provided qualifying criteria are met, we will amend the related hedge documentation
for the ABR risk, including consequential changes to the description of the hedging instrument(s), the hedged item(s), and the
method for assessing hedge effectiveness, without discontinuing the existing hedging relationships.
Fair value hedges
In a fair value hedging relationship, the carrying value of the hedged item is adjusted for changes in fair value attributable to the
hedged risk and recognized in Non-interest income. Changes in fair value of the hedged item, to the extent that the hedging
relationship is effective, are offset by changes in the fair value of the hedging derivative, which are also recognized in
Non-interest income. When hedge accounting is discontinued, the carrying value of the hedged item is no longer adjusted and the
cumulative fair value adjustments to the carrying value of the hedged items are amortized to Net income over the expected
remaining life of the hedged items.
We predominantly use interest rate swaps to hedge our exposure to changes in a fixed interest rate instrument’s fair value
caused by changes in interest rates. Until the hedging relationships impacted by the Reform fully transition to ABRs, we apply
hedge accounting to IBOR rates which may not be contractually specified when that rate is separately identifiable and reliably
measurable at inception of the hedge relationship.
Cash flow hedges
In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging derivative, net of taxes, is
recognized in OCI and reclassified to profit or loss as the associated hedged forecast transaction occurs, while the ineffective
portion is recognized in Non-interest income. When hedge accounting is discontinued, the cumulative amounts previously
recognized in OCI are reclassified to Net interest income during the periods when the variability in the cash flows of the hedged
item affects Net interest income. Unrealized gains and losses on derivatives are reclassified immediately to Net income when the
hedged item is sold or terminated early, or when the forecast transaction is no longer expected to occur.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
151
Note 2
Summary of significant accounting policies, estimates and judgments
(continued)
We predominantly use interest rate swaps to hedge the variability in cash flows related to a variable-rate asset or liability.
Until the hedging relationships impacted by the Reform fully transition to ABRs, we treat the highly probable hedged IBORs based
cash flows of groups of similar assets or liabilities with similar risk characteristics as unchanged as a result of the Reform. In
addition, associated cash flow hedge reserves are not recycled into net income solely due to changes related to the transition
from IBORs to ABRs. Subsequently, when some items in the group transition to ABRs before other items, the individual hedged
items are allocated to subgroups based on the benchmark interest rate being hedged. We test hedge effectiveness based on the
defined subgroups, in accordance with the Amendments, if eligibility requirements are met. If a subgroup fails the eligibility
requirements, we would discontinue hedge accounting prospectively for the hedging relationship in its entirety.
Net investment hedges
In hedging our foreign currency exposure to a net investment in a foreign operation, the effective portion of foreign exchange
gains and losses on the hedging instruments, net of applicable taxes, is recognized in OCI and the ineffective portion is
recognized in Non-interest income. The amounts, or a portion thereof, previously recognized in Other components of equity are
recognized in Net income on the disposal, or partial disposal, of the foreign operation.
We use foreign exchange contracts and foreign currency-denominated liabilities to manage our foreign currency exposures
to net investments in foreign operations having a functional currency other than the Canadian dollar.
Guarantees
Financial guarantee contracts are contracts that contingently require us to make specified payments (in cash, other assets, our
own shares or provision of services) to reimburse the holder for a loss it incurs because a specified debtor fails to make payment
when due in accordance with the original or modified terms of a debt instrument. Liabilities are recognized on our Consolidated
Balance Sheets at the inception of a guarantee for the fair value of the obligation undertaken in issuing the guarantee. Financial
guarantees are subsequently remeasured at the higher of (i) the amount of expected credit losses and (ii) the amount initially
recognized less, when appropriate, the cumulative amount of income recognized.
If the financial guarantee contract meets the definition of a derivative, it is measured at fair value at each balance sheet
date and reported under Derivatives on our Consolidated Balance Sheets.
Insurance and segregated funds
Premiums from long-duration contracts, primarily life, health and annuity insurance (life insurance), are recognized when due in
Non-interest income – Insurance premiums, investment and fee income. Premiums from short-duration contracts, primarily
property and casualty, and fees for administrative services are recognized in Insurance premiums, investment and fee income
over the related contract period. Unearned premiums of the short-duration contracts, representing the unexpired portion of
premiums, are reported in Other liabilities. Investments made by our insurance operations are classified as FVOCI instruments
and amortized cost instruments, except for investments supporting the policy benefit liabilities on life insurance contracts and a
portion of property and casualty contracts. These are designated as FVTPL with changes in fair value reported in Insurance
premiums, investment and fee income.
Insurance claims and policy benefit liabilities represent current claims and estimates for future insurance policy benefits.
Liabilities for life insurance contracts are determined using the Canadian Asset Liability Method (CALM), which incorporates
assumptions for mortality, morbidity, policy lapses and surrenders, investment yields, policy dividends, operating and policy
maintenance expenses and provisions for adverse deviation. These assumptions are reviewed at least annually and updated in
response to actual experience and market conditions. Liabilities for property and casualty insurance represent estimated
provisions for reported and unreported claims. Liabilities for life and property and casualty insurance are included in Insurance
claims and policy benefit liabilities. Changes in Insurance claims and policy benefit liabilities are included in the Insurance
policyholder benefits, claims and acquisition expense in our Consolidated Statements of Income in the period in which the
estimates change.
Premiums ceded for reinsurance and reinsurance recoveries on policyholder benefits and claims incurred are reported in
income and expense as appropriate. Reinsurance recoverables, which relate to paid benefits and unpaid claims, are included in
Other assets.
Acquisition costs for new insurance contracts consist of commissions, premium taxes, certain underwriting costs and other
costs that vary with the acquisition of new contracts. Deferred acquisition costs for life insurance products are implicitly
recognized in Insurance claims and policy benefit liabilities by CALM. For property and casualty insurance, these costs are
classified as Other assets and amortized over the policy term.
Segregated funds are lines of business in which we issue an insurance contract where the benefit amount is directly linked to
the market value of the investments held in the underlying fund. The contractual arrangement is such that the underlying
segregated fund assets are registered in our name but the segregated fund policyholders bear the risks and rewards of the funds’
investment performance. Liabilities for these contracts are calculated based on contractual obligations using actuarial
assumptions and are at least equivalent to the surrender or transfer value calculated by reference to the value of the relevant
underlying funds or indices. Segregated funds’ assets and liabilities are separately presented on our Consolidated Balance
Sheets. As the segregated fund policyholders bear the risks and rewards of the funds’ performance, investment income earned by
the segregated funds and expenses incurred by the segregated funds are offset and are not separately presented in our
Consolidated Statements of Income. Fee income we earn from segregated funds includes management fees, mortality, policy
administration and surrender charges, and these fees are recorded in Non-interest income – Insurance premiums, investment
and fee income. We provide minimum death benefit and maturity value guarantees on segregated funds. The liability associated
with these minimum guarantees is recorded in Insurance claims and policy benefit liabilities.
Liability adequacy tests are performed for all insurance contract portfolios at each balance sheet date to ensure the
adequacy of insurance contract liabilities. Current best estimates of future contractual cash flows, claims handling and
administration costs, and investment returns from the assets backing the liabilities are taken into account in the tests. When the
test results indicate that there is a deficiency in liabilities, the deficiency is charged immediately to our Consolidated Statements
of Income by writing down the deferred acquisition costs in Other assets and/or increasing Insurance claims and policy benefit
liabilities.
152
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Employee benefits – Pensions and other post-employment benefits
Our defined benefit pension expense, which is included in Non-interest expense – Human resources, consists of the cost of
employee pension benefits for the current year’s service, net interest on the net defined benefit liability (asset), past service cost
and gains or losses on settlement. Remeasurements of the net defined benefit obligation, which comprise actuarial gains and
losses and return on plan assets (excluding amounts included in net interest on the net defined benefit liability), are recognized
immediately in OCI in the period in which they occur. Actuarial gains and losses comprise experience adjustments (the effects of
differences between the previous actuarial assumptions and what has actually occurred), as well as the effects of changes in
actuarial assumptions. Amounts recognized in OCI will not be reclassified subsequently to net income. Past service cost is the
change in the present value of the defined benefit obligation resulting from a plan amendment or curtailment and is charged
immediately to income.
For each defined benefit pension plan, we recognize the present value of our defined benefit obligations less the fair value of
the plan assets as a defined benefit liability reported in Other liabilities – Employee benefit liabilities on our Consolidated
Balance Sheets. For plans where there is a net defined benefit asset, the amount is reported as an asset in Other assets –
Employee benefit assets on our Consolidated Balance sheets.
The calculation of defined benefit expenses and obligations requires significant judgment as the recognition is dependent on
discount rates and various actuarial assumptions such as healthcare cost trend rates, projected salary increases, retirement age
and mortality and termination rates. Due to the long-term nature of these plans, such estimates and assumptions are subject to
inherent risks and uncertainties. For our pension and other post-employment benefit plans, the discount rate is determined by
reference to market yields on high quality corporate bonds. Since the discount rate is based on currently available yields, and
involves management’s assessment of market liquidity, it is only a proxy for future yields. Actuarial assumptions, set in
accordance with current practices in the respective countries of our plans, may differ from actual experience as country specific
statistics are only estimates of future employee behaviour. These assumptions are determined by management and are reviewed
by actuaries at least annually. Changes to any of the above assumptions may affect the amounts of benefits obligations,
expenses and remeasurements that we recognize.
Our contributions to defined contribution pension plans are expensed when employees have rendered services in exchange
for such contributions. Defined contribution pension expense is included in Non-interest expense – Human resources.
Share-based compensation
We offer share-based compensation plans to certain key employees and to our non-employee directors.
To account for stock options granted to employees, compensation expense is recognized over the applicable vesting period
with a corresponding increase in equity. Fair value is determined by using option valuation models, which take into account the
exercise price of the option, the current share price, the risk free interest rate, the expected volatility of the share price over the
life of the option and other relevant factors. When the options are exercised, the exercise price proceeds together with the
amount initially recorded in equity are credited to common shares. Our other share-based compensation plans include
performance deferred share plans and deferred share unit plans for key employees (the Plans). The obligations for the Plans are
accrued over their vesting periods. The Plans are settled in cash.
For cash-settled awards, our accrued obligations are adjusted to their fair value at each balance sheet date. For share-
settled awards, our expected obligations recognized in equity are based on the fair value of our common shares at the date of
grant. Changes in our obligations, net of related hedges, are recorded as Non-interest expense – Human resources in our
Consolidated Statements of Income with a corresponding increase in Other liabilities for cash-settled awards and in Retained
earnings for share-settled awards. Compensation expense is recognized in the year the awards are earned by plan participants
based on the vesting schedule of the relevant plans, net of estimated forfeitures.
The compensation cost attributable to options and awards granted to employees who are eligible to retire or will become
eligible to retire during the vesting period, is recognized immediately if the employee is eligible to retire on the grant date or over
the period between the grant date and the date the employee becomes eligible to retire.
Our contributions to the employee savings and share ownership plans are expensed as incurred.
Income taxes
Income tax comprises current tax and deferred tax and is recognized in our Consolidated Statements of Income except to the
extent that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current income tax payable on profits is recognized as an expense based on the applicable tax laws in each jurisdiction in
the period in which profits arise, calculated using tax rates enacted or substantively enacted by the balance sheet date. Deferred
tax is recognized on temporary differences between the carrying amounts of assets and liabilities for accounting and tax
purposes. A deferred income tax asset or liability is determined for each temporary difference, except for earnings related to our
subsidiaries, branches, associates and interests in joint ventures where the temporary differences will not reverse in the
foreseeable future and we have the ability to control the timing of reversal. Deferred tax assets and liabilities are determined
based on the tax rates that are expected to be in effect in the period that the asset is realized or the liability is settled, based on
tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date. Current tax assets and
liabilities are offset when they are levied by the same taxation authority on either the same taxable entity or different taxable
entities within the same tax reporting group (which intends to settle on a net basis), and when there is a legal right to offset.
Deferred tax assets and liabilities are offset when the same conditions are satisfied. Our Consolidated Statements of Income
include items that are non-taxable or non-deductible for income tax purposes and, accordingly, this causes the income tax
provision to be different from what it would be if based on statutory rates.
Deferred income taxes accumulated as a result of temporary differences and tax loss carryforwards are included in Other
assets and Other liabilities. On a quarterly basis, we review our deferred income tax assets to determine whether it is probable
that the benefits associated with these assets will be realized; this review involves evaluating both positive and negative
evidence.
We are subject to income tax laws in various jurisdictions where we operate, and the complex tax laws are potentially
subject to different interpretations by us and the relevant taxation authorities. Significant judgment is required in the
interpretation of the relevant tax laws and in assessing the probability of acceptance of our tax positions to determine our tax
provision, which includes our best estimate of uncertain tax positions that are under audit or appeal by the relevant tax
authorities. We perform a review on a quarterly basis to incorporate our best assessment based on information available, but
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
153
Note 2
Summary of significant accounting policies, estimates and judgments
(continued)
additional liability and income tax expense could result based on the acceptance of our tax positions by the relevant tax
authorities.
The determination of our deferred tax asset or liability also requires significant management judgment as the recognition is
dependent on our projection of future taxable profits and tax rates that are expected to be in effect in the period the asset is
realized or the liability is settled. Any changes in our projection will result in changes in deferred tax assets or liabilities on our
Consolidated Balance Sheets, and also deferred tax expense on our Consolidated Statements of Income.
Business combinations, goodwill and other intangibles
All business combinations are accounted for using the acquisition method. Non-controlling interests, if any, are recognized at
their proportionate share of the fair value of identifiable assets and liabilities, unless otherwise indicated. Identifiable intangible
assets are recognized separately from goodwill and included in Other intangibles. Goodwill represents the excess of the price
paid for the business acquired over the fair value of the net identifiable assets acquired on the date of acquisition.
Goodwill
Goodwill is allocated to cash-generating units or groups of cash-generating units for the purpose of impairment testing, which is
undertaken at the lowest level at which goodwill is monitored for internal management purposes. Impairment testing is
performed annually as at August 1, or more frequently if there are objective indicators of impairment, by comparing the
recoverable amount of a cash-generating unit (CGU) with its carrying amount. The recoverable amount of a CGU is the higher of
its value in use (VIU) and its fair value less costs of disposal (FVLCD). VIU is the present value of the expected future cash flows
from a CGU. FVLCD is the amount obtainable from the sale of a CGU in an orderly transaction between market participants, less
disposal costs. The fair value of a CGU is estimated using valuation techniques such as a discounted cash flow method, adjusted
to reflect the considerations of a prospective third-party buyer. External evidence such as binding sale agreements or recent
transactions for similar businesses within the same industry is considered to the extent that it is available.
Significant judgment is involved in estimating the model inputs used to determine the recoverable amount of our CGUs, in
particular future cash flows, discount rates and terminal growth rates, due to the uncertainty in the timing and amount of cash
flows and the forward-looking nature of these inputs. Future cash flows are based on financial plans agreed by management
which are estimated based on forecast results, business initiatives, planned capital investments and returns to shareholders.
Discount rates are based on the bank-wide cost of capital, adjusted for CGU-specific risks and currency exposure as reflected by
differences in expected inflation. Bank-wide cost of capital is based on the Capital Asset Pricing Model, the Dividend Growth
Model and peer analysis. CGU-specific risks include country risk, business/operational risk, geographic risk (including political
risk, devaluation risk, and government regulation), currency risk, and price risk (including product pricing risk and inflation).
Terminal growth rates are based on the long-term steady state growth expectations in the countries within which the CGU
operates. If the future cash flows and other assumptions in future periods deviate significantly from the current amounts used in
our impairment testing, the value of our goodwill could become impaired, with any such impairment loss recognized in
Non-interest expense.
The carrying amount of a CGU includes the carrying amount of assets, liabilities and goodwill allocated to the CGU. If the
recoverable amount is less than the carrying value, the impairment loss is allocated first to reduce the carrying amount of any
goodwill allocated to the CGU and then to the other non-financial assets of the CGU proportionately based on the carrying
amount of each asset. Any impairment loss is charged to income in the period in which the impairment is identified. Goodwill is
stated at cost less accumulated impairment losses. Subsequent reversals of goodwill impairment are prohibited.
Upon disposal of a portion of a CGU, the carrying amount of goodwill related to the portion of the CGU sold is included in the
determination of gains or losses on disposal. The carrying amount is determined based on the relative fair value of the disposed
portion to the total CGU.
Other intangibles
Intangible assets represent identifiable non-monetary assets and are acquired either separately or through a business
combination, or generated internally. Intangible assets acquired through a business combination are recognized separately from
goodwill when they are separable or arise from contractual or other legal rights, and their fair value can be measured reliably.
The cost of a separately acquired intangible asset includes its purchase price and directly attributable costs of preparing the
asset for its intended use. In respect of internally generated intangible assets, cost includes all directly attributable costs
necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management.
Research and development costs that are not eligible for capitalization are expensed. After initial recognition, an intangible asset
is carried at its cost less any accumulated amortization and accumulated impairment losses, if any. Intangible assets with a
finite-life are amortized on a straight-line basis over their estimated useful lives as follows: computer software – 3 to 10 years;
and customer list and relationships – 10 to 20 years. We do not have any intangible assets with indefinite lives.
Intangible assets are assessed for indicators of impairment at each reporting period. If there is an indication that an
intangible asset may be impaired, an impairment test is performed by comparing the carrying amount of the intangible asset to
its recoverable amount. Where it is not possible to estimate the recoverable amount of an individual asset, we estimate the
recoverable amount of the CGU to which the asset belongs. If the recoverable amount of the asset (or CGU) is less than its
carrying amount, the carrying amount of the intangible asset is written down to its recoverable amount as an impairment loss.
An impairment loss recognized previously is reversed if there is a change in the estimates used to determine the recoverable
amount of the asset (or CGU) since the last impairment loss was recognized. If an impairment loss is subsequently reversed, the
carrying amount of the asset (or CGU) is revised to the lower of its recoverable amount and the carrying amount that would have
been determined (net of amortization) had there been no prior impairment.
Due to the subjective nature of these estimates, significant judgment is required in determining the useful lives and
recoverable amounts of our intangible assets, and assessing whether certain events or circumstances constitute objective
evidence of impairment. Estimates of the recoverable amounts of our intangible assets rely on certain key inputs, including
future cash flows and discount rates. Future cash flows are based on sales projections and allocated costs which are estimated
based on forecast results and business initiatives. Discount rates are based on the bank-wide cost of capital, adjusted for asset-
specific risks. Changes in these assumptions may impact the amount of impairment loss recognized in Non-interest expense.
154
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Other
Translation of foreign currencies
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at rates prevailing at the
balance sheet date. Foreign exchange gains and losses resulting from the translation and settlement of these items are
recognized in Non-interest income in the Consolidated Statements of Income.
Non-monetary assets and liabilities that are measured at historical cost are translated into Canadian dollars at historical
rates.
Assets and liabilities of our foreign operations with functional currencies other than Canadian dollars are translated into
Canadian dollars at rates prevailing at the balance sheet date, and income and expenses of these foreign operations are
translated at average rates of exchange for the reporting period.
Unrealized gains or losses arising as a result of the translation of our foreign operations along with the effective portion of
related hedges are reported in Other components of equity on an after-tax basis. Upon disposal or partial disposal of a foreign
operation, an appropriate portion of the accumulated net translation gains or losses is included in Non-interest income.
Premises and equipment
Premises and equipment includes land, buildings, leasehold improvements, computer equipment, furniture, fixtures and other
equipment, and are stated at cost less accumulated depreciation, except for land which is not depreciated, and accumulated
impairment losses. Cost comprises the purchase price, any costs directly attributable to bringing the asset to the location and
condition necessary for its intended use, and the initial estimate of any disposal costs. Depreciation is recorded principally on a
straight–line basis over the estimated useful lives of the assets, which are 25 to 50 years for buildings, 3 to 10 years for computer
equipment, and 5 to 10 years for furniture, fixtures and other equipment. The amortization period for leasehold improvements is
the lesser of the useful life of the leasehold improvements or the lease term plus the first renewal period, if reasonably assured
of renewal. Depreciation methods, useful lives, and residual values are reassessed at each reporting period and adjusted as
appropriate. Gains and losses on disposal are recorded in Non–interest income.
Premises and equipment are assessed for indicators of impairment at each reporting period. If there is an indication that an
asset may be impaired, an impairment test is performed by comparing the asset’s carrying amount to its recoverable amount.
After the recognition of impairment, the depreciation charge is adjusted in future periods to reflect the asset’s revised
carrying amount. If an impairment is later reversed, the carrying amount of the asset is revised to the lower of the asset’s
recoverable amount and the carrying amount that would have been determined (net of depreciation) had there been no prior
impairment loss. The depreciation charge in future periods is adjusted to reflect the revised carrying amount.
Right-of-use assets are also included in premises and equipment.
Leasing
At inception of a contract, we assess whether a contract is or contains a lease. A contract is, or contains, a lease if the contract
conveys the right to obtain substantially all of the economic benefits from, and direct the use of, an identified asset for a period
of time in return for consideration.
When we are the lessee in a lease arrangement, we initially record a right-of-use asset and corresponding lease liability,
except for short-term leases and leases of low-value assets. Short-term leases are leases with a lease term of 12 months or less.
Low-value assets are unspecialized, common, technologically unsophisticated, widely available, and widely used
non-infrastructure assets. For short-term leases and leases of low-value assets, we record the lease payments as an operating
expense on a straight-line basis over the lease term.
Where we are reasonably certain to exercise extension and termination options, they are included in the lease term.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement
date, discounted at our incremental borrowing rate. The lease liability is subsequently measured at amortized cost using the
effective interest method, recorded in Interest expense.
The right-of-use asset is initially measured based on the initial amount of the lease liability, adjusted for lease payments
made on or before the commencement date, initial direct costs incurred, and an estimate of costs to dismantle, remove, or
restore the asset, less any lease incentives received. Costs related to dismantling and removing leasehold improvements are
capitalized as part of the leasehold improvement asset (rather than the right-of-use asset of the lease) when the leasehold
improvements are separately capitalized.
The right-of-use asset is depreciated to the earlier of the lease term and the useful life, unless ownership will transfer to RBC
or we are reasonably certain to exercise a purchase option, in which case the useful life of the right-of-use asset is used. We
apply IAS 36 Impairment of assets to determine whether a right-of-use asset is impaired and account for any identified
impairment loss as described in the premises and equipment accounting policies above.
Provisions
Provisions are liabilities of uncertain timing or amount and are recognized when we have a present legal or constructive
obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a
reliable estimate can be made of the amount of the obligation. Provisions are measured as the best estimate of the consideration
required to settle the present obligation at the reporting date. Significant judgment is required in determining whether a present
obligation exists and in estimating the probability, timing and amount of any outflows. We record provisions related to litigation,
asset retirement obligations and other items.
We are required to estimate the results of ongoing legal proceedings, and expenses to be incurred to dispose of capital
assets. The forward-looking nature of these estimates requires us to use a significant amount of judgment in projecting the
timing and amount of future cash flows. We record our provisions on the basis of all available information at the end of the
reporting period and make adjustments on a quarterly basis to reflect current expectations. It may not be possible to predict the
resolution of these matters or the timing of their ultimate resolution. Should actual results differ from our expectations, we may
incur expenses in excess of the provisions recognized. Where appropriate, we apply judgment in limiting the extent of our
provisions-related disclosures as not to prejudice our positions in matters of dispute.
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party,
such as an insurer, a separate asset is recognized if it is virtually certain that reimbursement will be received.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
155
Note 2
Summary of significant accounting policies, estimates and judgments
(continued)
Commissions and fees
Commissions and fees primarily relate to Investment management and custodial fees, Mutual fund revenue, Securities brokerage
commissions, Services charges, Underwriting and other advisory fees, Card service revenue and Credit fees, and are recognized
based on the applicable service contracts with clients.
Investment management and custodial fees and Mutual fund revenue are generally calculated as a percentage of daily or
period-end net asset values (NAV) based on the terms of the contract with clients and are received monthly, quarterly,
semiannually or annually, depending on the terms of the contract. Investment management and custodial fees are generally
derived from assets under management (AUM) when our clients solicit the investment capabilities of an investment manager or
from assets under administration (AUA) where the investment strategy is directed by the client or a designated third-party
manager. Mutual fund revenue is generally derived from the daily NAV of the mutual funds. Investment management and
custodial fees and Mutual fund revenue are recognized over time when the service is provided to the client, provided that it is
highly probable that a significant reversal in the amount of revenue recognized will not occur.
Commissions earned on Securities brokerage services and Service charges that are related to the provision of specific
transaction-type services are recognized when the service is fulfilled. Where services are provided over time, revenue is
recognized as the services are provided.
Underwriting and other advisory fees primarily relate to underwriting of new issuances of debt or equity and various
advisory services. Underwriting fees are generally expressed as a percentage of the funds raised through issuance and are
recognized when the service has been completed. Advisory fees vary depending on the scope and type of engagement and can be
fixed in nature or contingent on a future event. Advisory fees are recognized over the period in which the service is provided and
are recognized only to the extent that it is highly probable that a significant reversal in the amount of revenue will not occur.
Card service revenue primarily includes interchange revenue and annual card fees. Interchange revenue is calculated as a
fixed percentage of the transaction amount and recognized when the card transaction is settled. Annual card fees are fixed fees
and are recognized over a 12 month period.
Credit fees are primarily earned for arranging syndicated loans and making credit available on undrawn facilities. The timing
of the recognition of credit fees varies based on the nature of the services provided.
When service fees and other costs are incurred in relation to commissions and fees earned, we record these costs on a gross
basis in either Non-interest expense – Other or Non-interest expense – Human resources based on our assessment of whether we
have primary responsibility to fulfill the contract with the client and have discretion in establishing the price for the commissions
and fees earned, which may require judgment.
Earnings per share
Earnings per share is computed by dividing Net income available to common shareholders by the weighted average number of
common shares outstanding for the period. Net income available to common shareholders is determined after deducting
dividend entitlements of preferred shareholders and distributions on other equity instruments, any gains (losses) on redemption
of preferred shares and other equity instruments net of related income taxes and the net income attributable to non-controlling
interests.
Diluted earnings per share reflects the potential dilution that could occur if additional common shares are assumed to be
issued under securities or contracts that entitle their holders to obtain common shares in the future, to the extent such
entitlement is not subject to unresolved contingencies. For contracts that may be settled in cash or in common shares at our
option, diluted earnings per share is calculated based on the assumption that such contracts will be settled in shares. Income
and expenses associated with these types of contracts are excluded from the Net income available to common shareholders, and
the additional number of shares that would be issued is included in the diluted earnings per share calculation. For stock options
whose exercise price is less than the average market price of our common shares, using the treasury stock method, they are
assumed to be exercised and the proceeds are used to repurchase common shares at the average market price for the period.
The incremental number of common shares issued under stock options and repurchased from proceeds is included in the
calculation of diluted earnings per share.
Share capital and other equity instruments
We classify a financial instrument that we issue as a financial asset, financial liability or an equity instrument in accordance with
the substance of the contractual arrangement.
Our common shares held by us are classified as treasury shares in equity and accounted for at weighted average cost. Upon
the sale of treasury shares, the difference between the sale proceeds and the cost of the shares is recognized in Retained
earnings. Financial instruments issued by us are classified as equity instruments when there is no contractual obligation to
transfer cash or other financial assets. Incremental costs directly attributable to the issue of equity instruments are included in
equity as a deduction from the proceeds, net of tax. Financial instruments that will be settled by a variable number of our
common shares upon their conversion by the holders as well as the related accrued distributions are classified as liabilities on
our Consolidated Balance Sheets. Dividends and yield distributions on these instruments are classified as Interest expense in our
Consolidated Statements of Income. For compound instruments comprised of both liability and equity components, the liability
component is initially measured at fair value with any residual amount assigned to the equity component.
Future changes in accounting policy and disclosure
The following standard has been issued, but is not yet effective for us.
IFRS 17
Insurance Contracts
(IFRS 17)
In May 2017, the IASB issued IFRS 17 to establish a comprehensive insurance standard which provides guidance on the
recognition, measurement, presentation and disclosures of insurance contracts. IFRS 17 requires entities to measure insurance
contract liabilities at their current fulfillment values using one of three approaches depending on the nature of the contract. In
June 2020, the IASB issued amendments to IFRS 17, including deferral of the effective date by two years. This new standard will be
effective for us on November 1, 2023 and will be applied retrospectively with restatement of comparatives. If full retrospective
156
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
application to a group of contracts is impracticable, the modified retrospective or fair value approach may be used. To manage
the transition to IFRS 17, we established a comprehensive program and governance structure led by Finance and the Insurance
business that focuses on the evaluation of the impacts of the standard and implementation of policies, systems and processes
required for the adoption. Significant progress has been made in preparing for the implementation of IFRS 17. We expect the
adoption of IFRS 17 to affect the timing of earnings recognition for our insurance contracts and the carrying amount of our
insurance contract liabilities. We continue to assess the impacts of adopting IFRS 17 on our Consolidated Financial Statements.
Updates related to interest rate benchmark reform
On May 16, 2022, Refinitiv Benchmark Services (UK) Limited (RBSL), the administrator of CDOR, announced that the calculation
and publication of all tenors of CDOR will permanently cease immediately following a final publication on June 28, 2024. The
cessation announcement triggered fallback provisions related to our CDOR-linked products, including certain loans, bonds, and
derivatives, and defined the dates of their transition to ABRs. The fixed spreads to be used in the transition to the relevant ABR
for each CDOR setting were also defined for certain of our CDOR-linked products as a result of the announcement.
Progress in and risks arising from the transition to ABRs
To manage our transition to ABRs, we have implemented a comprehensive enterprise-wide program and governance structure
that addresses the key areas of impact including contract remediation, funding and liquidity planning, risk management,
financial reporting and valuation, systems, processes and client education and communication. Transition activities are focused
on two broad streams of work: (i) developing new ABR linked products, and (ii) conversion of existing USD LIBOR and CDOR
based contracts to ABRs. Our program timelines are ultimately dependent on broader market acceptance of products that
reference the new ABRs and our clients’ readiness and ability to adopt the replacement products. Significant matters that we
continue to evaluate include client product offerings, short and long-term funding strategies, and our hedging programs. We
continue to work towards the recommended target dates for the cessation of USD LIBOR and CDOR based products provided by
our regulators and are on track with our transition activities to move to ABRs.
The following tables show the Bank’s significant exposures to financial instruments referencing benchmark interest rates subject
to the Reform that have yet to transition to ABRs. These include financial instruments referencing USD LIBOR maturing after
June 30, 2023 and CDOR maturing after June 28, 2024. In the normal course of business, our derivative notional amounts may
fluctuate with minimal impact to our IBOR conversion plans.
As at
October 31, 2022
October 31, 2021
(Millions of Canadian dollars)
Non-derivative
financial assets
(1)
Non-derivative
financial liabilities
(2)
Derivative
notional
(3)
Non-derivative
financial assets
(1)
Non-derivative
financial liabilities
(2)
Derivative
notional
(3), (4)
USD LIBOR
$
57,494
$
1,468
$ 5,550,175
$
68,325
$
1,420
$ 4,901,854
CDOR
(5)
18,493
18,572
2,004,444
9,226
14,797
1,307,071
$
75,987
$
20,040
$ 7,554,619
$
77,551
$
16,217
$ 6,208,925
Cross currency swaps
USD LIBOR – CDOR
n.a.
n.a.
$
222,256
n.a.
n.a.
$
206,953
n.a.
n.a.
$
222,256
n.a.
n.a.
$
206,953
$
75,987
$
20,040
$ 7,776,875
$
77,551
$
16,217
$ 6,415,878
(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)
The notional amount for cross currency swaps between USD LIBOR and CDOR are presented separately in the Cross currency swaps section of this table.
(4)
Amounts have been updated from those previously presented to reflect the regulatory developments related to the cessation of CDOR and transition of non-USD LIBOR
financial instruments.
(5)
Includes our exposure to financial instruments referencing interest rates substantially similar to CDOR.
n.a.
not applicable
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, 2022
October 31, 2021
Authorized and committed undrawn commitments
USD LIBOR
$
59,271
$
122,437
CDOR
(1), (2)
26,913
15,644
$
86,184
$
138,081
(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.
Consistent with our transition plan, our exposure to non-derivative financial assets, non-derivative financial liabilities, derivative
notional and undrawn balances of loan commitments referencing non-USD LIBOR interest rates is no longer material to our
financial statements (October 31, 2021 – $3.6 billion, $3.4 billion, $2,975.4 billion and $3.0 billion, respectively). We continue to
manage significant exposures to benchmarks that have no announced plans for cessation or further reform, including the EURO
Interbank Offered Rate (EURIBOR) and Australian Bank Bill Swap Rate (BBSW), which are excluded from the tables above.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
157
Note 3
Fair value of financial instruments
Carrying value and fair value of financial instruments
The following tables provide a comparison of the carrying and fair values for each classification of financial instruments.
Embedded derivatives are presented on a combined basis with the host contracts. For measurement purposes, they are carried
at fair value when conditions requiring separation are met.
As at October 31, 2022
Carrying value and fair value
Carrying value
Fair value
(Millions of Canadian dollars)
Financial
instruments
classified as
FVTPL
Financial
instruments
designated as
FVTPL
Financial
instruments
classified as
FVOCI
Financial
instruments
designated as
FVOCI
Financial
instruments
measured at
amortized cost
Financial
instruments
measured at
amortized cost
Total
carrying
amount
Total
fair value
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
158
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
As at October 31, 2021
Carrying value and fair value
Carrying value
Fair value
(Millions of Canadian dollars)
Financial
instruments
classified as
FVTPL
Financial
instruments
designated as
FVTPL
Financial
instruments
classified as
FVOCI
Financial
instruments
designated as
FVOCI
Financial
instruments
measured at
amortized cost
Financial
instruments
measured at
amortized cost
Total
carrying
amount
Total
fair value
Financial assets
Interest-bearing deposits with banks
$
–
$
56,896
$
–
$
–
$
22,742
$
22,742
$
79,638
$
79,638
Securities
Trading
125,801
13,439
–
–
–
–
139,240
139,240
Investment, net of applicable allowance
–
–
77,802
533
67,149
66,823
145,484
145,158
125,801
13,439
77,802
533
67,149
66,823
284,724
284,398
Assets purchased under reverse repurchase
agreements and securities borrowed
265,011
–
–
–
42,892
42,892
307,903
307,903
Loans, net of applicable allowance
Retail
–
241
327
–
500,621
502,277
501,189
502,845
Wholesale
8,428
2,769
813
–
204,376
204,683
216,386
216,693
8,428
3,010
1,140
–
704,997
706,960
717,575
719,538
Other
Derivatives
95,541
–
–
–
–
–
95,541
95,541
Other assets
(1)
4,109
–
–
–
58,483
58,483
62,592
62,592
Financial liabilities
Deposits
Personal
$
321
$
18,328
$
343,839
$
344,040
$
362,488
$
362,689
Business and government
(2)
739
131,630
563,984
565,106
696,353
697,475
Bank
(3)
–
17,251
24,739
24,743
41,990
41,994
1,060
167,209
932,562
933,889
1,100,831
1,102,158
Other
Obligations related to securities sold short
37,841
–
–
–
37,841
37,841
Obligations related to assets sold under
repurchase agreements and securities
loaned
–
236,147
26,054
26,054
262,201
262,201
Derivatives
91,439
–
–
–
91,439
91,439
Other liabilities
(4)
654
171
64,746
64,749
65,571
65,574
Subordinated debentures
–
–
9,593
9,601
9,593
9,601
(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.
Financial assets designated as fair value through profit or loss
For our financial assets designated as FVTPL, we measure the change in fair value attributable to changes in credit risk as the
difference between the total change in the fair value of the instrument during the period and the change in fair value calculated
using the appropriate risk-free yield curves. For the year ended October 31, 2022, the change in fair value during the period
attributable to changes in credit risk for positions still held was a loss of $662 million and the cumulative change in fair value
attributable to changes in credit risk for positions still held was a loss of $490 million. For the year ended October 31, 2021, the
change in fair value during the period attributable to changes in credit risk for positions still held was a gain of $613 million and
the cumulative change in fair value attributable to changes in credit risk for positions still held was a gain of $173 million. As at
October 31, 2022, the extent to which credit derivatives or similar instruments mitigate the maximum exposure to credit risk was
$589 million (October 31, 2021 – $484 million).
Financial liabilities designated as fair value through profit or loss
For our financial liabilities designated as FVTPL, we take into account changes in our own credit spread and the expected
duration of the instrument to measure the change in fair value attributable to changes in credit risk.
As at or for the year ended October 31, 2022
(1)
Contractual
maturity
amount
Carrying value
Difference
between
carrying value
and contractual
maturity amount
Changes in fair value attributable
to changes in credit risk included
in OCI for positions still held
(Millions of Canadian dollars)
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)
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
159
Note 3
Fair value of financial instruments
(continued)
As at or for the year ended October 31, 2021 (1)
Contractual
maturity
amount
Carrying value
Difference
between
carrying value
and contractual
maturity amount
Changes in fair value attributable
to changes in credit risk included
in OCI for positions still held
(Millions of Canadian dollars)
During the period
Cumulative (2)
Term deposits
Personal
$
18,205
$
18,328
$
123
$
(17)
$
72
Business and government
(3)
131,830
131,630
(200)
(75)
416
Bank
(4)
17,253
17,251
(2)
–
–
167,288
167,209
(79)
(92)
488
Obligations related to assets sold under
repurchase agreements and securities loaned
236,164
236,147
(17)
(8)
–
Other liabilities
171
171
–
–
–
$
403,623
$
403,527
$
(96)
$
(100)
$ 488
(1)
$97 million in changes in fair value attributable to changes in credit risk were recognized in income for the year ended October 31, 2022, and $97 million in cumulative
changes in credit risk were included in income for positions still held life-to-date (October 31, 2021 – $nil and $nil respectively).
(2)
The cumulative change is measured from the initial designation of the liabilities as FVTPL. For the year ended October 31, 2022, $3 million of fair value gains previously
included in OCI relate to financial liabilities derecognized during the year (October 31, 2021 – $25 million of fair value losses).
(3)
Business and government term deposits include amounts from regulated deposit-taking institutions other than regulated banks.
(4)
Bank term deposits refer to amounts from regulated banks and central banks.
Net gains (losses) from financial instruments classified and designated as fair value through profit or loss
Financial instruments classified as FVTPL, which includes mainly trading securities, derivatives, trading liabilities, and financial
assets and liabilities designated as FVTPL are measured at fair value with realized and unrealized gains and losses recognized in
Non-interest income.
For the year ended
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Net gains (losses)
(1)
Classified as fair value through profit or loss
(2)
$
(7,382)
$
3,447
Designated as fair value through profit or loss
(3)
8,543
(1,407)
$
1,161
$
2,040
By product line
(1)
Interest rate and credit
(4)
$
1,251
$
1,033
Equities
(843)
57
Foreign exchange and commodities
753
950
$
1,161
$
2,040
(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 $2,805 million (October 31, 2021 – losses of $14 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, 2022, $8,536 million of net fair value gains on financial liabilities designated as FVTPL, other than those attributable to changes in our own
credit risk, were included in Non-interest income (October 31, 2021 – losses of $1,408 million).
(4)
Includes gains (losses) recognized on cross currency interest rate swaps.
Net interest income from financial instruments
Interest and dividend income arising from financial assets and financial liabilities and the associated costs of funding are
reported in Net interest income.
For the year ended
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Interest and dividend income
(1), (2)
Financial instruments measured at fair value through profit or loss
$
10,999
$
4,551
Financial instruments measured at fair value through other comprehensive income
1,177
375
Financial instruments measured at amortized cost
28,595
23,219
40,771
28,145
Interest expense
(1)
Financial instruments measured at fair value through profit or loss
$
8,336
$
2,865
Financial instruments measured at amortized cost
(3)
9,718
5,278
18,054
8,143
Net interest income
$
22,717
$
20,002
(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 $601 million (October 31, 2021 – $576 million), and Interest expense of $6 million (October 31, 2021 – $4 million).
(2)
Includes dividend income for the year ended October 31, 2022 of $2,954 million (October 31, 2021 – $2,436 million), which is presented in Interest and dividend income in
the Consolidated Statements of Income.
(3)
Includes interest expense on lease liabilities for the year ended October 31, 2022 of $112 million (October 31, 2021 – $110 million).
160
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Fee income arising from financial instruments
For the year ended October 31, 2022, we earned $6,118 million in fees from banking services (October 31, 2021 – $5,583 million). For
the year ended October 31, 2022, we also earned $14,932 million in fees from investment management, trust, custodial,
underwriting, brokerage and other similar fiduciary services to retail and institutional clients (October 31, 2021 – $15,167 million).
These fees are included in Non-interest income.
Fair value of assets and liabilities measured at fair value on a recurring basis and classified using the fair value hierarchy
As at
October 31, 2022
October 31, 2021
Fair value
measurements using
Netting
adjustments
Fair value
Fair value
measurements using
Netting
adjustments
Fair value
(Millions of Canadian dollars)
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
Financial assets
Interest-bearing deposits with banks
$
–
$ 84,468
$
–
$
$
84,468
$
–
$ 56,896
$
–
$
$
56,896
Securities
Trading
Debt issued or guaranteed by:
Canadian government (1)
Federal
15,024
3,779
–
18,803
8,977
2,380
–
11,357
Provincial and municipal
–
13,257
–
13,257
–
11,068
–
11,068
U.S. federal, state, municipal and agencies (1), (2)
1,254
35,570
4
36,828
215
22,738
25
22,978
Other OECD government (3)
1,325
3,452
–
4,777
2,729
5,730
–
8,459
Mortgage-backed securities (1)
–
2
–
2
–
4
–
4
Asset-backed securities
Non-CDO securities (4)
–
1,308
2
1,310
–
891
2
893
Corporate debt and other debt
–
21,162
7
21,169
–
23,085
25
23,110
Equities
46,592
3,593
1,874
52,059
56,826
3,015
1,530
61,371
64,195
82,123
1,887
148,205
68,747
68,911
1,582
139,240
Investment
Debt issued or guaranteed by:
Canadian government (1)
Federal
1,226
2,555
–
3,781
1,973
1,730
–
3,703
Provincial and municipal
–
2,124
–
2,124
–
3,132
–
3,132
U.S. federal, state, municipal and agencies (1), (2)
440
43,918
–
44,358
12
34,815
–
34,827
Other OECD government
–
5,144
–
5,144
–
5,956
–
5,956
Mortgage-backed securities (1)
–
2,860
28
2,888
–
2,727
20
2,747
Asset-backed securities
CDO
–
7,524
–
7,524
–
7,074
–
7,074
Non-CDO securities
–
524
–
524
–
586
–
586
Corporate debt and other debt
–
25,569
151
25,720
–
19,625
152
19,777
Equities
36
395
397
828
46
153
334
533
1,702
90,613
576
92,891
2,031
75,798
506
78,335
Assets purchased under reverse repurchase agreements and
securities borrowed
–
264,665
–
264,665
–
265,011
–
265,011
Loans
–
9,673
1,692
11,365
–
11,501
1,077
12,578
Other
Derivatives
Interest rate contracts
–
39,804
263
40,067
–
33,857
320
34,177
Foreign exchange contracts
–
99,424
13
99,437
–
41,224
74
41,298
Credit derivatives
–
388
–
388
–
34
–
34
Other contracts
3,939
14,786
62
18,787
3,175
17,955
26
21,156
Valuation adjustments
–
(2,100)
45
(2,055)
–
(819)
9
(810)
Total gross derivatives
3,939
152,302
383
156,624
3,175
92,251
429
95,855
Netting adjustments
(2,185)
(2,185)
(314)
(314)
Total derivatives
154,439
95,541
Other assets
1,221
2,141
15
3,377
1,474
2,635
–
4,109
$71,057
$685,985
$
4,553
$
(2,185)
$ 759,410
$75,427
$573,003
$
3,594
$
(314)
$ 651,710
Financial liabilities
Deposits
Personal
$
–
$ 22,016
$
241
$
$
22,257
$
–
$ 18,498
$
151
$
$
18,649
Business and government
–
152,566
–
152,566
–
132,369
–
132,369
Bank
–
7,196
–
7,196
–
17,251
–
17,251
Other
Obligations related to securities sold short
16,383
19,128
–
35,511
18,345
19,496
–
37,841
Obligations related to assets sold under repurchase agreements and
securities loaned
–
248,835
–
248,835
–
236,147
–
236,147
Derivatives
Interest rate contracts
–
39,592
1,122
40,714
–
28,566
955
29,521
Foreign exchange contracts
–
94,310
145
94,455
–
40,484
27
40,511
Credit derivatives
–
125
–
125
–
120
–
120
Other contracts
3,847
16,663
847
21,357
3,699
17,456
419
21,574
Valuation adjustments
–
(967)
(8)
(975)
–
38
(11)
27
Total gross derivatives
3,847
149,723
2,106
155,676
3,699
86,664
1,390
91,753
Netting adjustments
(2,185)
(2,185)
(314)
(314)
Total derivatives
153,491
91,439
Other liabilities
341
(632)
–
(291)
258
560
7
825
$20,571
$598,832
$
2,347
$
(2,185)
$ 619,565
$22,302
$510,985
$
1,548
$
(314)
$ 534,521
(1)
As at October 31, 2022, residential and commercial mortgage-backed securities (MBS) included in all fair value levels of trading securities were $12,273 million and $nil
(October 31, 2021 – $13,124 million and $nil), respectively, and in all fair value levels of Investment securities were $23,362 million and $2,755 million (October 31, 2021 –
$13,542 million and $2,592 million), respectively.
(2)
United States (U.S.).
(3)
Organisation for Economic Co-operation and Development (OECD).
(4)
Collateralized debt obligations (CDO).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
161
Note 3
Fair value of financial instruments
(continued)
Fair values of our significant assets and liabilities measured on a recurring basis are determined and classified in the fair value
hierarchy table using the following valuation techniques and inputs.
Interest-bearing deposits with banks
The majority of our Interest-bearing deposits with banks are designated as FVTPL. These FVTPL deposits are composed of short-
dated deposits placed with banks, and are included in Interest-bearing deposits with banks in the fair value hierarchy table. The
fair values of these instruments are determined using the discounted cash flow method. The inputs to the valuation models
include interest rate swap curves and credit spreads, where applicable. They are classified as Level 2 instruments in the
hierarchy as the inputs are observable.
Government bonds (Canadian, U.S. and other OECD governments)
Government bonds are included in Canadian government debt, U.S. federal, state, municipal and agencies debt, Other OECD
government debt and Obligations related to securities sold short in the fair value hierarchy table. The fair values of government
issued or guaranteed debt securities in active markets are determined by reference to recent transaction prices, broker quotes,
or third-party vendor prices and are classified as Level 1 in the hierarchy. The fair values of securities that are not traded in
active markets are based on either security prices, or valuation techniques using implied yields and risk spreads derived from
prices of actively traded and similar government securities. Securities with observable prices or rate inputs as compared to
transaction prices, dealer quotes or vendor prices are classified as Level 2 in the hierarchy. Securities where inputs are
unobservable are classified as Level 3 in the hierarchy.
Corporate and U.S. municipal bonds
The fair values of corporate and U.S. municipal bonds, which are included in Corporate debt and other debt, U.S. federal, state,
municipal and agencies debt and Obligations related to securities sold short in the fair value hierarchy table, are determined
using either recently executed transaction prices, broker quotes, pricing services, or in certain instances, the discounted cash
flow method using rate inputs such as benchmark yields (CDOR, Secured Overnight Financing Rate (SOFR) and other similar
reference rates) and risk spreads of comparable securities. Securities with observable prices or rate inputs are classified as
Level 2 in the hierarchy. Securities where inputs are unobservable are classified as Level 3 in the hierarchy.
Asset-backed securities and Mortgage-backed securities
Asset-backed securities (ABS) and MBS are included in Asset-backed securities, Mortgage-backed securities, Canadian
government debt, U.S. federal, state, municipal and agencies debt, and Obligations related to securities sold short in the fair
value hierarchy table. Inputs for valuation of ABS and MBS are, when available, traded prices, dealer or lead manager quotes,
broker quotes and vendor prices of the identical securities. When prices of the identical securities are not readily available, we
use industry standard models with inputs such as discount margins, yields, default, prepayment and loss severity rates that are
implied from transaction prices, dealer quotes or vendor prices of comparable instruments. Where security prices and inputs are
observable, ABS and MBS are classified as Level 2 in the hierarchy. Otherwise, they are classified as Level 3 in the hierarchy.
Equities
Equities consist of listed and unlisted common shares, private equities, mutual funds and hedge funds with certain redemption
restrictions and are included in equities and obligations for securities sold short. The fair values of common shares are based on
quoted prices in active markets, where available, and are classified as Level 1 in the hierarchy. Where quoted prices in active
markets are not readily available, fair value is determined based on quoted market prices for similar securities or through
valuation techniques, such as multiples of earnings and the discounted cash flow method with forecasted cash flows and
discount rate as inputs. Private equities are classified as Level 3 in the hierarchy as their inputs are not observable. Hedge funds
are valued using Net Asset Values (NAV). If we can redeem a hedge fund at NAV prior to the next quarter end, the fund is
classified as Level 2 in the hierarchy. Otherwise, it is classified as Level 3 in the hierarchy.
Loans
Loans include base metal loans, corporate loans, banker acceptances and asset-backed financing loans. Fair values are
determined based on market prices, if available, or discounted cash flow method using the following inputs: market interest
rates, base metal commodity prices, market based spreads of assets with similar credit ratings and terms to maturity, LGD,
expected default frequency implied from credit derivative prices, if available, and relevant pricing information such as
contractual rate, origination and maturity dates, redemption price, coupon payment frequency and day count convention. Loans
with market prices or observable inputs are classified as Level 2 in the hierarchy and loans with unobservable inputs that have
significant impacts on the fair values are classified as Level 3 in the hierarchy.
Derivatives
The fair values of exchange-traded derivatives, such as interest rate and equity options and futures, are based on quoted market
prices and are typically classified as Level 1 in the hierarchy. OTC derivatives primarily consist of interest rate contracts, foreign
exchange contracts and credit derivatives. The exchange-traded or OTC interest rate, foreign exchange and equity derivatives
are included in Interest rate contracts, Foreign exchange contracts and Other contracts, respectively, in the fair value hierarchy
table. The fair values of OTC derivatives are determined using valuation models when quoted market prices or third-party
consensus pricing information are not available. The valuation models, such as discounted cash flow method or Black-Scholes
option model, incorporate observable or unobservable inputs for interest and foreign exchange rates, equity and commodity
prices (including indices), credit spreads, corresponding market volatility levels, and other market-based pricing factors. Other
adjustments to fair value include bid-offer, CVA, FVA, OIS, parameter and model uncertainties, and unrealized gain or loss at
inception of a transaction. A derivative instrument is classified as Level 2 in the hierarchy if observable market inputs are
available or the unobservable inputs are not significant to the fair value. Otherwise, it is classified as Level 3 in the hierarchy.
Securities borrowed or purchased under resale agreements and securities loaned or sold under repurchase agreements
In the fair value hierarchy table, these instruments are included in Assets purchased under reverse repurchase agreements and
securities borrowed, and Obligations related to assets sold under repurchase agreements and securities loaned. The fair values
162
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
of these contracts are determined using valuation techniques such as the discounted cash flow method using interest rate
curves as inputs. They are classified as Level 2 instruments in the hierarchy as the inputs are observable.
Deposits
A majority of our deposits are measured at amortized cost but certain deposits are designated as FVTPL. These FVTPL deposits
include deposits taken from clients, issuances of certificates of deposits and promissory notes, and interest rate and equity
linked notes. The fair values of these instruments are determined using the discounted cash flow method and derivative option
valuation models. The inputs to the valuation models include benchmark yield curves, credit spreads, interest rates, equity and
interest rate volatility, dividends and correlation, where applicable. They are classified as Level 2 or 3 instruments in the
hierarchy, depending on the significance of the unobservable credit spreads, volatility, dividend and correlation rates.
Quantitative information about fair value measurements using significant unobservable inputs (Level 3 Instruments)
The following table presents fair values of our significant Level 3 financial instruments, valuation techniques used to determine
their fair values, ranges and weighted averages of unobservable inputs.
As at October 31, 2022 (Millions of Canadian dollars, except for prices, percentages and ratios)
Fair value
Range of input values
(1), (2)
Products
Reporting line in the fair value
hierarchy table
Assets
Liabilities
Valuation
techniques
Significant
unobservable
inputs
(3)
Low
High
Weighted
average /
Inputs
distribution
Corporate debt and related
derivatives
Price-based
Prices
$
1.00
$ 111.90
$
85.64
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
investments and related
equity derivatives
Market comparable
EV/EBITDA multiples
3.97X
14.31X
8.59X
Equities
2,271
Price-based
P/E multiples
8.47X
24.04X
12.46X
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
interest-rate-linked
structured notes
(6), (7)
Discounted cash flows
Interest rates
1.88%
4.49%
High
Derivative related assets
270
Option pricing model
CPI swap rates
1.98%
2.59%
Even
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
notes
(6), (7)
Discounted cash flows
Dividend yields
(0.63)%
8.28%
Lower
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
Other liabilities
–
Total
$ 4,553
$
2,347
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
163
Note 3
Fair value of financial instruments
(continued)
As at October 31, 2021 (Millions of Canadian dollars, except for prices, percentages and ratios)
Fair value
Range of input values
(1), (2)
Products
Reporting line in the fair value
hierarchy table
Assets
Liabilities
Valuation
techniques
Significant
unobservable
inputs
(3)
Low
High
Weighted
average /
Inputs
distribution
Corporate debt and related
derivatives
Price-based
Prices
$
29.18
$ 127.09
$
96.36
Corporate debt and other debt
$
27
Discounted cash flows
Credit spread
1.15%
6.92%
4.04%
Loans
1,077
Credit enhancement
11.92%
15.90%
13.25%
Derivative related liabilities
$
9
Government debt and
municipal bonds
Corporate debt and other debt
150
Discounted cash flows
Yields
3.91%
8.17%
5.91%
Private equities, hedge fund
investments and related
equity derivatives
Market comparable
EV/EBITDA multiples
8.82X
26.00X
9.16X
Equities
1,864
Price-based
P/E multiples
9.40X
38.00X
10.96X
Derivative related liabilities
2
Discounted cash flows
EV/Rev multiples
1.14X
20.80X
5.40X
Liquidity discounts
(4)
10.00%
40.00%
16.40%
Discount rate
10.65%
10.65%
10.65%
NAV / prices
(5)
n.a.
n.a.
n.a.
Interest rate derivatives and
interest-rate-linked
structured notes
(6), (7)
Discounted cash flows
Interest rates
0.13%
2.46%
High
Derivative related assets
367
Option pricing model
CPI swap rates
1.76%
2.42%
Even
Derivative related liabilities
974
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
notes
(6), (7)
Discounted cash flows
Dividend yields
0.00%
6.37%
Lower
Derivative related assets
25
Option pricing model
Equity (EQ)-EQ correlations
32.00%
95.00%
Middle
Deposits
151
EQ-FX correlations
(60.60)%
27.30%
Middle
Derivative related liabilities
381
EQ volatilities
8.00%
128.00%
Upper
Other
(8)
Asset-backed securities
2
Derivative related assets
37
Other assets
–
Mortgage-backed securities
20
U.S. state, municipal and
agencies debt
25
Derivative related liabilities
24
Other liabilities
7
Total
$
3,594
$
1,548
(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 $373 million (October 31, 2021 – $385 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.
164
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Prepayment rates
A prepayment rate is the rate at which a loan will be repaid in advance of its expected amortization schedule. Prepayments
change the future cash flows of a loan. An increase in the prepayment rate in isolation will result in an increase in fair value when
the loan interest rate is lower than the current reinvestment rate, and a decrease in the prepayment rate in isolation will result in
a decrease in fair value when the loan interest rate is lower than the current reinvestment rate. Prepayment rates are generally
negatively correlated with interest rates.
Recovery and loss severity rates
A recovery rate is an estimation of the amount that can be collected in a loan default scenario. The recovery rate is the recovered
amount divided by the loan balance due, expressed as a percentage. The inverse concept of recovery is loss severity. Loss
severity rate is an estimation of the loan amount not collected when a loan defaults. The loss severity rate is the loss amount
divided by the loan balance due, expressed as a percentage. Generally, an increase in the recovery rate or a decrease in the loss
severity rate will increase the loan fair value, and vice versa.
Volatility rates
Volatility measures the potential variability of future prices and is often measured as the standard deviation of price movements.
Volatility is an input to option pricing models used to value derivatives and issued structured notes. Volatility is used in valuing
equity, interest rate, commodity and foreign exchange options. A higher volatility rate means that the underlying price or rate
movements are more likely to occur. Higher volatility rates may increase or decrease an option’s fair value depending on the
option’s terms. The determination of volatility rates is dependent on various factors, including but not limited to, the underlying’s
market price, the strike price and maturity.
Dividend yields
A dividend yield is the underlying equity’s expected dividends expressed as an annual percentage of its price. Dividend yield is
used as an input for forward equity price and option models. Higher dividend yields will decrease the forward price, and vice
versa. A higher dividend yield will increase or decrease an option’s value, depending on the option’s terms.
Correlation rates
Correlation is the linear relationship between the movements in two different variables. Correlation is an input to the valuation of
derivative contracts and issued structured notes when an instrument’s payout is determined by correlated variables. When
variables are positively correlated, an increase in one variable will result in an increase in the other variable. When variables are
negatively correlated, an increase in one variable will result in a decrease in the other variable. The referenced variables can be
within a single asset class or market (equity, interest rate, commodities, credit and foreign exchange) or between variables in
different asset classes (equity to foreign exchange, or interest rate to foreign exchange). Changes in correlation will either
increase or decrease a financial instrument’s fair value depending on the terms of the instrument.
Interest rates
An interest rate is the percentage amount charged on a principal or notional amount. Increasing interest rates will decrease the
discounted cash flow value of a financial instrument, and vice versa.
Consumer Price Index swap rates
A CPI swap rate is expressed as a percentage of an increase in the average price of a basket of consumer goods and services,
such as transportation, food and medical care. An increase in the CPI swap rate will cause inflation swap payments to be larger,
and vice versa.
EV/EBITDA multiples, P/E multiples, EV/Rev multiples, and liquidity discounts
Private equity valuation inputs include EV/EBITDA multiples, P/E multiples and EV/Rev multiples. These are used to calculate
either enterprise value or share value of a company based on a multiple of earnings or revenue estimates. Higher multiples
equate to higher fair values for all multiple types, and vice versa. A liquidity discount may be applied when few or no transactions
exist to support the valuations.
Credit Enhancement
Credit enhancement is an input to the valuation of securitized transactions and is the amount of loan loss protection for a senior
tranche. Credit enhancement is expressed as a percentage of the transaction sizes. An increase in credit enhancement will cause
the credit spread to decrease and the tranche fair value to increase, and vice versa.
Interrelationships between unobservable inputs
Unobservable inputs, including the above discount margin, default rate, prepayment rate, and recovery and loss severity rates,
may not be independent of each other. For example, the discount margin can be affected by a change in default rate, prepayment
rate, or recovery and loss severity rates. Discount margins will generally decrease when default rates decline or when recovery
rates increase.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
165
Note 3
Fair value of financial instruments
(continued)
Changes in fair value measurement for instruments measured on a recurring basis and categorized in Level 3
For the year ended October 31, 2022
(Millions of Canadian dollars)
Fair value
at beginning
of period
Gains
(losses)
included in
earnings
Gains
(losses)
included
in OCI
(1)
Purchases
(issuances)
Settlement
(sales) and
other
(2)
Transfers
into
Level 3
Transfers
out of
Level 3
Fair value
at end of
period
Gains
(losses) included
in earnings for
positions still held
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
For the year ended October 31, 2021
(Millions of Canadian dollars)
Fair value
at beginning
of period
Gains
(losses)
included in
earnings
Gains
(losses)
included
in OCI (1)
Purchases
(issuances)
Settlement
(sales) and
other (2)
Transfers
into
Level 3
Transfers
out of
Level 3
Fair value
at end of
period
Gains
(losses) included
in earnings for
positions still held
Assets
Securities
Trading
Debt issued or guaranteed by:
U.S. state, municipal and agencies
$
44
$
–
$
(2)
$
–
$
(17)
$
–
$
–
$
25
$
1
Asset-backed securities
Non-CDO securities
2
–
–
–
–
–
–
2
–
Corporate debt and other debt
30
(2)
–
12
(5)
14
(24)
25
(1)
Equities
1,261
96
(60)
338
(125)
26
(6)
1,530
164
1,337
94
(62)
350
(147)
40
(30)
1,582
164
Investment
Mortgage-backed securities
27
–
(7)
–
–
–
–
20
n.a.
Corporate debt and other debt
160
–
(12)
–
4
–
–
152
n.a.
Equities
335
–
34
5
(2)
–
(38)
334
n.a.
522
–
15
5
2
–
(38)
506
n.a.
Loans
1,070
(5)
(19)
264
(8)
73
(298)
1,077
30
Other
Net derivative balances
(3)
Interest rate contracts
(588)
84
(1)
5
(109)
(4)
(22)
(635)
84
Foreign exchange contracts
22
14
–
38
(25)
7
(9)
47
1
Other contracts
(301)
(20)
11
(142)
102
(276)
233
(393)
(10)
Valuation adjustments
40
–
–
6
(26)
–
–
20
–
Other assets
53
(39)
(2)
–
(12)
–
–
–
–
$
2,155
$
128
$
(58)
$
526
$
(223)
$
(160)
$
(164)
$
2,204
$
269
Liabilities
Deposits
$
(139)
$
(66)
$
5
$
(191)
$
51
$
(154)
$
343
$
(151)
$
6
Other
Other liabilities
(38)
22
1
–
8
–
–
(7)
23
$
(177)
$
(44)
$
6
$
(191)
$
59
$
(154)
$
343
$
(158)
$
29
(1)
These amounts include the foreign currency translation gains or losses arising on consolidation of foreign subsidiaries relating to the Level 3 instruments, where
applicable. The unrealized gains on Investment securities recognized in OCI were $50 million for the year ended October 31, 2022 (October 31, 2021 – gains of $46 million)
excluding the translation gains or losses arising on consolidation.
(2)
Other includes amortization of premiums or discounts recognized in net income.
(3)
Net derivatives as at October 31, 2022 included derivative assets of $383 million (October 31, 2021 – $429 million) and derivative liabilities of $2,106 million (October 31, 2021 –
$1,390 million).
n.a.
not applicable
166
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Transfers between fair value hierarchy levels for instruments carried at fair value on a recurring basis
Transfers between Level 1 and Level 2, and transfers into and out of Level 3 are assumed to occur at the end of the period. For an
asset or a liability that transfers into Level 3 during the period, the entire change in fair value for the period is excluded from the
Gains (losses) included in earnings for positions still held column of the above reconciliation, whereas for transfers out of Level 3
during the period, the entire change in fair value for the period is included in the same column of the above reconciliation.
Transfers between Level 1 and 2 are dependent on whether fair value is obtained on the basis of quoted market prices in active
markets (Level 1).
During the year ended October 31, 2022, there were no significant transfers out of Level 1 to Level 2. During the year ended
October 31, 2021, transfers out of Level 1 to Level 2 included Obligations related to securities sold short of $498 million.
During the year ended October 31, 2022, there were no significant transfers out of Level 2 to Level 1. During the year ended
October 31, 2021, transfers out of Level 2 to Level 1 included Obligations related to securities sold short of $130 million.
Transfers between Level 2 and Level 3 are primarily due to either a change in the market observability for an input, or a change in
an unobservable input’s significance to a financial instrument’s fair value.
During the year ended October 31, 2022, significant transfers out of Level 2 to Level 3 included:
•
$777 million of Loans, due to changes in the market observability of inputs.
•
$227 million of OTC equity options in Other contracts comprised of $57 million of derivative related assets and
$284 million of derivative related liabilities, due to changes in the market observability of inputs and changes in the
significance of unobservable inputs.
•
$127 million of loan underwriting commitments in derivative related liabilities of Other contracts, due to changes in the
market observability of inputs.
During the year ended October 31, 2021, significant transfers out of Level 2 to Level 3 included:
•
$277 million of OTC equity options in Other contracts comprised of $17 million of derivative related assets and
$294 million of derivative related liabilities, due to changes in the market observability of inputs and changes in the
significance of unobservable inputs.
•
$154 million of Personal deposits, due to changes in the significance of unobservable inputs.
During the year ended October 31, 2022, there were no significant transfers out of Level 3 to Level 2.
During the year ended October 31, 2021, significant transfers out of Level 3 to Level 2 included:
•
$298 million of Loans, due to changes in the significance of unobservable inputs.
•
$245 million of OTC equity options in Other contracts comprised of $69 million of derivative related assets and
$314 million of derivative related liabilities, due to changes in the market observability of inputs and changes in the
significance of unobservable inputs.
•
$343 million of Personal deposits, due to changes in the significance of unobservable inputs.
Positive and negative fair value movements of Level 3 financial instruments from using reasonably possible alternative
assumptions
A financial instrument is classified as Level 3 in the fair value hierarchy if one or more of its unobservable inputs may
significantly affect the measurement of its fair value. In preparing the financial statements, appropriate levels for these
unobservable input parameters are chosen so that they are consistent with prevailing market evidence or management
judgment. Due to the unobservable nature of the prices or rates, there may be uncertainty about the valuation of these Level 3
financial instruments.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
167
Note 3
Fair value of financial instruments
(continued)
The following table summarizes the impacts to fair values of Level 3 financial instruments using reasonably possible
alternative assumptions. This sensitivity disclosure is intended to illustrate the potential impact of the relative uncertainty in the
fair value of Level 3 financial instruments. In reporting the sensitivities below, we offset balances in instances where: (i) the move
in valuation factors cause an offsetting positive and negative fair value movement, (ii) both offsetting instruments are in Level 3,
and (iii) exposures are managed and reported on a net basis. With respect to overall sensitivity, it is unlikely in practice that all
reasonably possible alternative assumptions would simultaneously be realized.
As at
October 31, 2022
October 31, 2021
(Millions of Canadian dollars)
Level 3
fair value
Positive fair value
movement from
using reasonably
possible
alternatives
Negative fair value
movement from
using reasonably
possible
alternatives
Level 3
fair value
Positive fair value
movement from
using reasonably
possible
alternatives
Negative fair value
movement from
using reasonably
possible
alternatives
Securities
Trading
Debt issued or guaranteed by:
U.S. state, municipal and
agencies
$
4
$
–
$
–
$
25
$
–
$
(1)
Asset-backed securities
2
–
–
2
–
–
Corporate debt and other debt
7
–
–
25
1
(1)
Equities
1,874
27
(23)
1,530
19
(16)
Investment
Mortgage-backed securities
28
4
(4)
20
4
(4)
Corporate debt and other debt
151
12
(10)
152
14
(13)
Equities
397
38
(39)
334
33
(34)
Loans
1,692
60
(62)
1,077
23
(24)
Derivatives
383
5
(3)
429
7
(5)
Other assets
15
–
–
–
–
–
$
4,553
$
146
$
(141)
$
3,594
$
101
$
(98)
Deposits
$
(241)
$
9
$
(9)
$
(151)
$
–
$
–
Derivatives
(2,106)
55
(57)
(1,390)
30
(77)
Other
Other liabilities
–
–
–
(7)
–
–
$
(2,347)
$
64
$
(66)
$
(1,548)
$
30
$
(77)
Sensitivity results
As at October 31, 2022, the effects of applying other reasonably possible alternative assumptions to the Level 3 asset positions
would be an increase of $146 million and a reduction of $141 million in fair value, of which $54 million and $53 million would be
recorded in Other components of equity, respectively. The effects of applying these assumptions to the Level 3 liability positions
would result in a decrease of $64 million and an increase of $66 million in fair value.
Level 3 valuation inputs and approaches to developing reasonably possible alternative assumptions
The following is a summary of the unobservable inputs used in the valuation of the Level 3 instruments and our approaches to
developing reasonably possible alternative assumptions used to determine sensitivity.
Financial assets or
liabilities
Sensitivity methodology
Asset-backed securities,
corporate debt, government
debt, municipal bonds and
loans
Sensitivities are determined based on adjusting, plus or minus one standard deviation, the
bid-offer spreads or input prices if a sufficient number of prices is received, adjusting input
parameters such as credit spreads or using high and low vendor prices as reasonably possible
alternative assumptions.
Private equities, hedge fund
investments and related
equity derivatives
Sensitivity of direct private equity investments is determined by (i) adjusting the discount rate
by 2% when the discounted cash flow method is used to determine fair value, (ii) adjusting the
price multiples based on the range of multiples of comparable companies when price-multiples-
based models are used, or (iii) using an alternative valuation approach. The private equity fund,
hedge fund and related equity derivative NAVs are provided by the fund managers, and as a
result, there are no other reasonably possible alternative assumptions for these investments.
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.
168
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Fair value for financial instruments that are carried at amortized cost and classified using the fair value hierarchy
As at October 31, 2022
Fair value
approximates
carrying value
(1)
Fair value may not approximate carrying value
Fair value measurements using
Total
fair value
(Millions of Canadian dollars)
Level 1
Level 2
Level 3
Total
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
As at October 31, 2021
Fair value
approximates
carrying value
(1)
Fair value may not approximate carrying value
Fair value measurements using
Total
fair value
(Millions of Canadian dollars)
Level 1
Level 2
Level 3
Total
Interest-bearing deposits with banks
$
22,742
$
–
$
–
$
–
$
–
$
22,742
Amortized cost securities
(2)
–
1,025
65,798
–
66,823
66,823
Assets purchased under reverse
repurchase agreements and
securities borrowed
31,368
–
11,524
–
11,524
42,892
Loans
Retail
68,377
–
429,672
4,228
433,900
502,277
Wholesale
16,228
–
184,055
4,400
188,455
204,683
84,605
–
613,727
8,628
622,355
706,960
Other assets
57,859
–
489
135
624
58,483
196,574
1,025
691,538
8,763
701,326
897,900
Deposits
Personal
272,675
–
70,908
457
71,365
344,040
Business and government
418,185
–
146,334
587
146,921
565,106
Bank
16,943
–
7,792
8
7,800
24,743
707,803
–
225,034
1,052
226,086
933,889
Obligations related to assets sold
under repurchase agreements and
securities loaned
26,054
–
–
–
–
26,054
Other liabilities
55,495
–
1,256
7,998
9,254
64,749
Subordinated debentures
–
–
9,545
56
9,601
9,601
$
789,352
$
–
$
235,835
$
9,106
$
244,941
$
1,034,293
(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 2022
169
Note 3
Fair value of financial instruments
(continued)
Amortized cost securities
Fair values of government bonds, corporate bonds, and ABS are based on quoted prices. Fair values of certain Non-OECD
government bonds are based on vendor prices or the discounted cash flow method with yield curves of other countries’
government bonds as inputs. For ABS, where market prices are not available, the fair value is determined using the discounted
cash flow method. The inputs to the valuation model generally include market interest rates, spreads and yields derived from
comparable securities, prepayment, and LGD.
Assets purchased under reverse repurchase agreements and securities borrowed, and Obligations related to assets sold
under repurchase agreements and securities loaned
Valuation methods used for the long-term instruments are described in the Fair value of assets and liabilities measured on a
recurring basis and classified using the fair value hierarchy section of this note. The carrying values of short-term instruments
generally approximate their fair values.
Loans – Retail
Retail loans include residential mortgages, personal and small business loans and credit cards. For residential mortgages, and
personal and small business loans, we segregate the portfolio based on certain attributes such as product type, contractual
interest rate, term to maturity and credit scores, if applicable. Fair values of these loans are determined by the discounted cash
flow method using applicable inputs such as prevailing interest rates, contractual and posted client rates, client discounts, credit
spreads, prepayment rates and loan-to-value (LTV) ratios. Fair values of credit card receivables are also calculated based on a
discounted cash flow method with portfolio yields, write-offs and monthly payment rates as inputs. The carrying values of short-
term and variable rate loans generally approximate their fair values.
Loans – Wholesale
Where market prices are available, wholesale loans are valued based on market prices. Otherwise, fair value is determined by
the discounted cash flow method using the following inputs: market interest rates and market based spreads of assets with
similar credit ratings and terms to maturity, LGD, expected default frequency implied from credit default swap prices, if available,
and relevant pricing information such as contractual rate, origination and maturity dates, redemption price, coupon payment
frequency and date convention.
Deposits
Deposits are comprised of demand, notice, and term deposits which include senior deposit notes we have issued to provide us
with long-term funding. Fair values of term deposits are determined by one of several valuation techniques: (i) for term deposits
and similar instruments, we segregate the portfolio based on term to maturity. Fair values of these instruments are determined
by the discounted cash flow method using inputs such as client rates for new sales of the corresponding terms; and (ii) for senior
deposit notes, we use actual traded prices, vendor prices or the discounted cash flow method using a market interest rate curve
and our funding spreads as inputs. The carrying values of demand, notice, and short-term term deposits generally approximate
their fair values.
Other assets and Other liabilities
Other assets and Other liabilities include receivables and payables relating to certain commodities. Fair values of the commodity
receivables and payables are calculated by the discounted cash flow method using applicable inputs such as market interest
rates, counterparties’ credit spreads, our funding spreads, commodity forward prices and spot prices.
Subordinated debentures
Fair values of Subordinated debentures are based on market prices, dealer quotes or vendor prices when available. Where prices
cannot be observed, fair value is determined using the discounted cash flow method, with applicable inputs such as market
interest rates and credit spreads.
170
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Note 4
Securities
Carrying value of securities
As at October 31, 2022
Term to maturity
(1)
(Millions of Canadian dollars)
Within
3 months
3 months
to 1 year
1 year to
5 years
5 years to
10 years
Over
10 years
With no
specific
maturity
Total
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
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
171
Note 4
Securities
(continued)
As at October 31, 2021
Term to maturity
(1)
(Millions of Canadian dollars)
Within
3 months
3 months
to 1 year
1 year to
5 years
5 years to
10 years
Over
10 years
With no
specific
maturity
Total
Trading
(2)
Debt issued or guaranteed by:
Canadian government
$
1,244
$
4,252
$
6,187
$
3,339
$ 7,403
$
–
$ 22,425
U.S. federal, state, municipal and
agencies
2,381
1,616
6,203
4,092
8,686
–
22,978
Other OECD government
2,049
2,073
1,231
294
2,812
–
8,459
Mortgage-backed securities
–
–
–
–
4
–
4
Asset-backed securities
288
27
275
116
187
–
893
Corporate debt and other debt
Bankers’ acceptances
316
135
–
–
–
–
451
Other
(3)
2,317
2,526
5,433
3,716
8,667
–
22,659
Equities
61,371
61,371
8,595
10,629
19,329
11,557
27,759
61,371
139,240
Fair value through other comprehensive
income
(2)
Debt issued or guaranteed by:
Canadian government
Federal
Amortized cost
161
1,180
1,382
592
526
–
3,841
Fair value
161
1,178
1,375
544
445
–
3,703
Yield
(4)
0.4%
0.7%
1.8%
0.9%
2.4%
–
1.3%
Provincial and municipal
Amortized cost
3
283
1,326
158
1,558
–
3,328
Fair value
3
283
1,322
158
1,366
–
3,132
Yield
(4)
4.2%
2.6%
2.4%
1.7%
2.9%
–
2.6%
U.S. federal, state, municipal and
agencies
Amortized cost
1,131
5,010
7,960
2,380
18,197
–
34,678
Fair value
1,132
5,013
7,960
2,446
18,276
–
34,827
Yield
(4)
–
0.9%
0.4%
2.6%
1.3%
–
1.1%
Other OECD government
Amortized cost
176
1,274
4,498
1
–
–
5,949
Fair value
176
1,274
4,505
1
–
–
5,956
Yield
(4)
1.7%
1.0%
1.3%
3.9%
–
–
1.2%
Mortgage-backed securities
Amortized cost
–
–
56
55
2,646
–
2,757
Fair value
–
–
56
55
2,636
–
2,747
Yield
(4)
–
–
1.2%
1.3%
1.2%
–
1.2%
Asset-backed securities
Amortized cost
–
–
–
4,719
2,935
–
7,654
Fair value
–
–
–
4,719
2,941
–
7,660
Yield
(4)
–
–
–
1.2%
1.3%
–
1.3%
Corporate debt and other debt
Amortized cost
5,965
2,597
9,676
1,451
42
–
19,731
Fair value
5,965
2,599
9,699
1,463
51
–
19,777
Yield
(4)
0.9%
1.2%
1.5%
0.8%
3.6%
–
1.2%
Equities
Cost
242
242
Fair value
(5)
533
533
Amortized cost
7,436
10,344
24,898
9,356
25,904
242
78,180
Fair value
7,437
10,347
24,917
9,386
25,715
533
78,335
Amortized cost
(2)
Debt issued or guaranteed by:
Canadian government
453
2,979
17,589
3,601
194
–
24,816
Yield
(4)
1.1%
1.5%
1.5%
2.0%
1.7%
–
1.5%
U.S. federal, state, municipal and
agencies
1,093
274
3,718
2,767
19,559
–
27,411
Yield
(4)
–
1.0%
1.0%
2.1%
1.3%
–
1.3%
Other OECD government
1,914
1,212
2,790
58
–
–
5,974
Yield
(4)
–
1.3%
0.8%
1.1%
–
–
–
Asset-backed securities
–
–
320
336
7
–
663
Yield
(4)
–
–
0.5%
1.7%
1.4%
–
1.1%
Corporate debt and other debt
1,133
2,072
4,424
633
23
–
8,285
Yield
(4)
1.0%
1.2%
1.6%
2.0%
4.7%
–
1.4%
Amortized cost, net of allowance
4,593
6,537
28,841
7,395
19,783
–
67,149
Fair value
4,597
6,567
28,701
7,311
19,647
–
66,823
Total carrying value of securities
$
20,625
$
27,513
$ 73,087
$
28,338
$73,257
$ 61,904
$284,724
(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.
172
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Unrealized gains and losses on securities at FVOCI
(1), (2)
As at
October 31, 2022
October 31, 2021
(Millions of Canadian dollars)
Cost/
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Cost/
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Debt issued or guaranteed by:
Canadian government
Federal
(3)
$
4,081
$
1
$
(301)
$
3,781
$
3,841
$
1
$
(139)
$
3,703
Provincial and municipal
2,685
6
(567)
2,124
3,328
3
(199)
3,132
U.S. federal, state, municipal
and agencies
(3)
46,034
343
(2,019)
44,358
34,678
353
(204)
34,827
Other OECD government
5,154
7
(17)
5,144
5,949
8
(1)
5,956
Mortgage-backed securities
(3)
2,985
1
(98)
2,888
2,757
2
(12)
2,747
Asset-backed securities
CDO
7,741
3
(220)
7,524
7,074
1
(1)
7,074
Non-CDO securities
547
–
(23)
524
580
6
–
586
Corporate debt and other debt
25,852
51
(183)
25,720
19,731
57
(11)
19,777
Equities
551
284
(7)
828
242
292
(1)
533
$
95,630
$
696
$
(3,435)
$ 92,891
$
78,180
$
723
$
(568)
$ 78,335
(1)
Excludes $77,127 million of held-to-collect securities as at October 31, 2022 that are carried at amortized cost, net of allowance for credit losses (October 31, 2021 –
$67,149 million).
(2)
Gross unrealized gains and losses includes $(19) million of allowance for credit losses on debt securities at FVOCI as at October 31, 2022 (October 31, 2021 – $(9) million)
recognized in income and Other components of equity.
(3)
The majority of the MBS are residential. Cost/Amortized cost, Gross unrealized gains, Gross unrealized losses and Fair value related to commercial MBS are
$2,846 million, $1 million, $92 million and $2,755 million, respectively as at October 31, 2022 (October 31, 2021 – $2,603 million, $1 million, $12 million and $2,592 million,
respectively).
Allowance for credit losses on investment securities
The following tables reconcile the opening and closing allowance for debt securities at FVOCI and amortized cost by stage.
Reconciling items include the following:
•
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 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, 2022
October 31, 2021
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
$
2
$
1
$
(12)
$
(9)
$
12
$
–
$
(4)
$
8
Provision for credit losses
Model changes
–
–
–
–
(4)
–
–
(4)
Transfers to stage 1
1
(1)
–
–
1
(1)
–
–
Transfers to stage 2
–
–
–
–
–
–
–
–
Transfers to stage 3
–
–
–
–
–
–
–
–
Purchases
3
–
–
3
8
–
–
8
Sales and maturities
(1)
–
–
(1)
(10)
(1)
–
(11)
Changes in risk, parameters and exposures
(2)
1
(10)
(11)
(4)
3
(9)
(10)
Exchange rate and other
–
–
(1)
(1)
(1)
–
1
–
Balance at end of period
$
3
$
1
$
(23)
$ (19)
$
2
$
1
$
(12)
$ (9)
(1)
Expected credit losses on debt securities at FVOCI are not separately recognized on the Consolidated Balance Sheets as the related securities are recorded at fair value.
The cumulative amount of credit losses recognized in income is presented in Other components of equity.
(2)
Reflects changes in the allowance for purchased credit impaired securities.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
173
Note 4
Securities
(continued)
Allowance for credit losses – securities at amortized cost
For the year ended
October 31, 2022
October 31, 2021
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
$
5
$
18
$
–
$
23
$
10
$
19
$
–
$ 29
Provision for credit losses
Model changes
–
–
–
–
(4)
–
–
(4)
Transfers to stage 1
–
–
–
–
–
–
–
–
Transfers to stage 2
–
–
–
–
–
–
–
–
Transfers to stage 3
–
–
–
–
–
–
–
–
Purchases
11
–
–
11
9
–
–
9
Sales and maturities
(1)
–
–
(1)
(1)
–
–
(1)
Changes in risk, parameters and exposures
(7)
(6)
–
(13)
(9)
1
–
(8)
Exchange rate and other
–
2
–
2
–
(2)
–
(2)
Balance at end of period
$
8
$
14
$
–
$
22
$
5
$
18
$
–
$ 23
Credit risk exposure by internal risk rating
The following table presents the fair value of debt securities at FVOCI and gross carrying amount of securities at amortized cost.
Risk ratings are based on internal ratings used in the measurement of expected credit losses, as at the reporting date, as outlined
in the internal ratings maps in the Credit risk section of Management’s Discussion and Analysis.
As at
October 31, 2022
October 31, 2021
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
$ 91,177
$
56
$
–
$ 91,233
$ 77,147
$
82
$
–
$ 77,229
Non-investment grade
680
–
–
680
423
–
–
423
Impaired
–
–
150
150
–
–
150
150
91,857
56
150
92,063
77,570
82
150
77,802
Items not subject to impairment
(2)
828
533
$ 92,891
$ 78,335
Securities at amortized cost
Investment grade
$ 76,035
$
–
$
–
$ 76,035
$ 66,033
$
–
$
–
$ 66,033
Non-investment grade
898
216
–
1,114
928
211
–
1,139
Impaired
–
–
–
–
–
–
–
–
76,933
216
–
77,149
66,961
211
–
67,172
Allowance for credit losses
8
14
–
22
5
18
–
23
Amortized cost
$ 76,925
$ 202
$
–
$ 77,127
$ 66,956
$ 193
$
–
$ 67,149
(1)
Reflects $150 million of purchased credit impaired securities (October 31, 2021 – $150 million).
(2)
Investment securities at FVOCI not subject to impairment represent equity securities designated as FVOCI.
174
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Note 5
Loans and allowance for credit losses
Loans by geography and portfolio net of allowance
As at October 31, 2022
(Millions of Canadian dollars)
Canada
United
States
Other
International
Total
Allowance for
loan losses
(1)
Total net
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)
As at October 31, 2021
(Millions of Canadian dollars)
Canada
United
States
Other
International
Total
Allowance for
loan losses
(1)
Total net
of allowance
Retail
(2)
Residential mortgages
$
354,169
$
23,423
$
2,740
$ 380,332
$
(416)
$
379,916
Personal
78,232
11,794
3,415
93,441
(973)
92,468
Credit cards
(3)
17,235
384
203
17,822
(852)
16,970
Small business
(4)
12,003
–
–
12,003
(168)
11,835
Wholesale
(2), (5)
88,083
86,028
43,955
218,066
(1,680)
216,386
Total loans
$
549,722
$
121,629
$
50,313
$ 721,664
$
(4,089)
$
717,575
Undrawn loan commitments – Retail
240,242
3,713
1,989
245,944
(136)
Undrawn loan commitments – Wholesale
107,070
189,177
75,331
371,578
(105)
(1)
Excludes allowance for loans measured at FVOCI of $5 million (October 31, 2021 – $14 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, 2022
Maturity term
(1)
Rate sensitivity
(Millions of Canadian dollars)
Under
1 year
(2)
1 to 5
years
Over 5
years
Total
Floating
Fixed
Rate
Non-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
As at October 31, 2021
Maturity term
(1)
Rate sensitivity
(Millions of Canadian dollars)
Under
1 year
(2)
1 to 5
years
Over 5
years
Total
Floating
Fixed
Rate
Non-rate-
sensitive
Total
Retail
$ 249,363
$ 222,408
$ 31,827
$ 503,598
$ 166,910
$ 329,185
$
7,503
$ 503,598
Wholesale
174,345
33,882
9,839
218,066
36,143
179,588
2,335
218,066
Total loans
$ 423,708
$ 256,290
$ 41,666
$ 721,664
$ 203,053
$ 508,773
$
9,838
$ 721,664
Allowance for loan losses
(4,089)
(4,089)
Total loans net of allowance for loan losses
$ 717,575
$ 717,575
(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 2022
175
Note 5
Loans and allowance for credit losses
(continued)
Allowance for credit losses
For the year ended
October 31, 2022
October 31, 2021
(Millions of Canadian dollars)
Balance at
beginning
of period
Provision
for credit
losses
Net
write-offs
(1)
Exchange
rate and
other
Balance
at end
of period
Balance at
beginning
of period
Provision
for credit
losses
Net
write-offs
(1)
Exchange
rate and
other
Balance
at end
of period
Retail
Residential mortgages
$
416
$
27
$
(24)
$
13
$
432
$
518
$
(43)
$
(27)
$
(32)
$
416
Personal
1,079
211
(248)
1
1,043
1,309
23
(247)
(6)
1,079
Credit cards
875
348
(332)
2
893
1,246
(72)
(297)
(2)
875
Small business
177
31
(23)
9
194
140
12
(23)
48
177
Wholesale
1,797
(90)
(136)
3
1,574
2,795
(560)
(200)
(238)
1,797
Customers’ liability under
acceptances
75
(30)
–
–
45
107
(32)
–
–
75
$
4,419
$
497
$
(763)
$
28
$4,181
$
6,115
$
(672)
$
(794)
$
(230)
$ 4,419
Presented as:
Allowance for loan losses
$
4,089
$3,753
$
5,639
$ 4,089
Other liabilities – Provisions
241
378
363
241
Customers’ liability under
acceptances
75
45
107
75
Other components of equity
14
5
6
14
(1)
Loans written-off are generally subject to continued collection efforts for a period of time following write-off. The contractual amount outstanding on loans written-off
during the year ended October 31, 2022 that are no longer subject to enforcement activity was $53 million (October 31, 2021 – $93 million).
The following table reconciles the opening and closing allowance for each major product of loans and commitments as
determined by our modelled, scenario-weighted allowance and the application of expert credit judgment as applicable.
Reconciling items include the following:
•
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.
176
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Allowance for credit losses – Retail and wholesale loans
For the year ended
October 31, 2022
October 31, 2021
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
$
186
$
92
$
138
$
416
$
206
$
160
$
152
$
518
Provision for credit losses
Model changes
(21)
10
–
(11)
(6)
(5)
–
(11)
Transfers to stage 1
113
(98)
(15)
–
205
(182)
(23)
–
Transfers to stage 2
(14)
23
(9)
–
(14)
18
(4)
–
Transfers to stage 3
(2)
(25)
27
–
(2)
(44)
46
–
Originations
159
–
–
159
113
–
–
113
Maturities
(23)
(9)
–
(32)
(30)
(24)
–
(54)
Changes in risk, parameters and
exposures
(167)
68
10
(89)
(284)
178
15
(91)
Write-offs
–
–
(38)
(38)
–
–
(37)
(37)
Recoveries
–
–
14
14
–
–
10
10
Exchange rate and other
4
4
5
13
(2)
(9)
(21)
(32)
Balance at end of period
$
235
$
65
$
132
$
432
$
186
$
92
$
138
$
416
Personal
Balance at beginning of period
$
422
$
569
$
88
$
1,079
$
480
$
733
$
96
$
1,309
Provision for credit losses
Model changes
(3)
–
–
(3)
(1)
–
–
(1)
Transfers to stage 1
609
(607)
(2)
–
710
(706)
(4)
–
Transfers to stage 2
(120)
121
(1)
–
(97)
97
–
–
Transfers to stage 3
(2)
(47)
49
–
(3)
(58)
61
–
Originations
106
–
–
106
128
–
–
128
Maturities
(70)
(99)
–
(169)
(96)
(130)
–
(226)
Changes in risk, parameters and
exposures
(660)
724
213
277
(697)
633
186
122
Write-offs
–
–
(374)
(374)
–
–
(387)
(387)
Recoveries
–
–
126
126
–
–
140
140
Exchange rate and other
3
–
(2)
1
(2)
–
(4)
(6)
Balance at end of period
$
285
$
661
$
97
$
1,043
$
422
$
569
$
88
$
1,079
Credit cards
Balance at beginning of period
$
233
$
642
$
–
$
875
$
364
$
882
$
–
$
1,246
Provision for credit losses
Model changes
(2)
–
–
(2)
–
–
–
–
Transfers to stage 1
495
(495)
–
–
723
(723)
–
–
Transfers to stage 2
(95)
95
–
–
(105)
105
–
–
Transfers to stage 3
(2)
(325)
327
–
(4)
(309)
313
–
Originations
10
–
–
10
6
–
–
6
Maturities
(5)
(29)
–
(34)
(7)
(31)
–
(38)
Changes in risk, parameters and
exposures
(458)
826
6
374
(742)
719
(17)
(40)
Write-offs
–
–
(503)
(503)
–
–
(460)
(460)
Recoveries
–
–
171
171
–
–
163
163
Exchange rate and other
1
2
(1)
2
(2)
(1)
1
(2)
Balance at end of period
$
177
$
716
$
–
$
893
$
233
$
642
$
–
$
875
Small business
Balance at beginning of period
$
88
$
55
$
34
$
177
$
78
$
29
$
33
$
140
Provision for credit losses
Model changes
–
–
–
–
3
1
–
4
Transfers to stage 1
27
(27)
–
–
57
(57)
–
–
Transfers to stage 2
(17)
17
–
–
(11)
11
–
–
Transfers to stage 3
(1)
(4)
5
–
(1)
(2)
3
–
Originations
32
–
–
32
36
–
–
36
Maturities
(22)
(24)
–
(46)
(21)
(22)
–
(43)
Changes in risk, parameters and
exposures
(43)
50
38
45
(77)
64
28
15
Write-offs
–
–
(32)
(32)
–
–
(32)
(32)
Recoveries
–
–
9
9
–
–
9
9
Exchange rate and other
9
6
(6)
9
24
31
(7)
48
Balance at end of period
$
73
$
73
$
48
$
194
$
88
$
55
$
34
$
177
Wholesale
Balance at beginning of period
$
566
$
794
$
437
$
1,797
$
995
$
1,132
$
668
$
2,795
Provision for credit losses
Model changes
(14)
(3)
–
(17)
1
24
–
25
Transfers to stage 1
415
(411)
(4)
–
581
(576)
(5)
–
Transfers to stage 2
(78)
80
(2)
–
(132)
161
(29)
–
Transfers to stage 3
(3)
(62)
65
–
(4)
(60)
64
–
Originations
641
–
–
641
601
–
–
601
Maturities
(439)
(345)
–
(784)
(488)
(500)
–
(988)
Changes in risk, parameters and
exposures
(504)
503
71
70
(931)
689
44
(198)
Write-offs
–
–
(202)
(202)
–
–
(253)
(253)
Recoveries
–
–
66
66
–
–
53
53
Exchange rate and other
13
29
(39)
3
(57)
(76)
(105)
(238)
Balance at end of period
$
597
$
585
$
392
$
1,574
$
566
$
794
$
437
$
1,797
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
177
Note 5
Loans and allowance for credit losses
(continued)
Key inputs and assumptions
The measurement of expected credit losses is a complex calculation that involves a large number of interrelated inputs and
assumptions and the allowance is not sensitive to any one single factor alone. The key drivers of changes in expected credit
losses include the following:
•
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 weights 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 significant
increases in credit risk since origination as well as in the measurement of our weighted allowance for credit losses due to
uncertainty related to the pace and level of deterioration in economic forecasts.
Internal risk ratings
Internal risk ratings are assigned according to the risk management framework outlined under the headings Wholesale credit risk
and Retail credit risk of the Credit risk section of Management’s Discussion and Analysis. Changes in internal risk ratings are
primarily reflected in the PD parameters, which are estimated based on our historical loss experience at the relevant risk
segment or risk rating level, adjusted for forward-looking information.
Scenario design and weightings
Our estimation of expected credit losses in Stage 1 and Stage 2 considers five distinct future macroeconomic scenarios.
Scenarios are designed to capture a wide range of possible outcomes and are weighted according to our expectation of the
relative likelihood of the range of outcomes that each scenario represents at the reporting date. We weight each scenario to take
into account historical frequency, current trends, and forward-looking conditions which will change over time. The base case
scenario is based on forecasts of the expected rate, value or yield for each relevant macroeconomic variable. The upside and
downside scenarios are set by adjusting our base projections to construct reasonably possible scenarios and weightings that are
more optimistic and pessimistic, respectively, than the base case. Two additional downside scenarios capture the non-linear
nature of potential credit losses across our portfolios.
The impact of each of our five scenarios varies across our portfolios given the portfolios have different sensitivities to
movements in each macroeconomic variable. We reassessed our scenario weights to increase weight to the downside scenarios
relative to October 31, 2021 in order to reflect the uncertainty and downside risk of deeper recessions than contemplated in our
base scenario.
The impact of weighting these multiple scenarios increased our ACL on performing loans, relative to our base scenario, by
$738 million at October 31, 2022 (October 31, 2021 – $726 million).
Forward looking macroeconomic variables
The PD, LGD and EAD inputs used to estimate Stage 1 and Stage 2 credit loss allowances are modelled based on the
macroeconomic variables (or changes in macroeconomic variables) that are most closely correlated with credit losses in the
relevant portfolio. Each macroeconomic scenario used in our expected credit loss calculation includes a projection of all
relevant macroeconomic variables used in our models for a five year horizon, reverting to long-run averages generally within the
2 to 5 year period. Depending on their usage in the models, macroeconomic variables are projected at a country, province/state
or more granular level. These include one or more of the variables described below, which differ by portfolio and region.
Our allowance for credit losses reflects our economic outlook as at October 31, 2022. Subsequent changes to this forecast and
related estimates will be reflected in our allowance for credit losses in future periods.
Our base scenario reflects rising unemployment rates, high inflation, production capacity limits, supply chain pressures, and
increased expectations for central banks to continue increasing interest rates which results in moderate recessions expected in
Canada and the U.S. in calendar 2023. Our base scenario also reflects declining housing prices in Canada.
Downside scenarios, including two additional and more severe downside scenarios designed for the energy and real estate
sectors, reflect the possibility of a more severe macroeconomic shock beginning in calendar Q1 2023 relative to our base
scenario. Conditions are expected to deteriorate from calendar Q4 2022 levels for up to 18 months, followed by a recovery for the
remainder of the period. These scenarios assume monetary policy responses that return the economy to a long-run, sustainable
growth rate within the forecast period. The possibility of a deeper recession and a more prolonged recovery as compared to our
base scenario, including further monetary policy responses to elevated inflation rates which may increase credit risk, is reflected
in our general downside scenario.
The upside scenario reflects slightly stronger economic growth than the base scenario, without prompting a further
offsetting monetary policy response as compared to our base scenario, followed by a return to a long-run sustainable growth
rate within the forecast period.
178
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
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 2022 unemployment rates are expected to rise to 5.6% in Canada and
3.9% in the U.S., peaking by Q4 2023 at 6.8% in Canada and 5.1% in the U.S., and reverting to the long run equilibrium towards
the latter end of the forecast horizon.
Canada Unemployment Rate
(1)
Q4-2021
Q1-2022
Q2-2022
Q3-2022
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
Q1-2027
Q2-2027
Q3-2027
Q4-2026
Range of alternative scenarios (October 31, 2022)
Base scenario (October 31, 2021)
Base scenario (October 31, 2022)
(1)
Represents the avera
g
e quarterly unemployment level over the calendar quarters presented.
3
5
7
11
9
%
2
4
6
8
10
%
U.S. Unemployment Rate
(1)
Range of alternative scenarios (October 31, 2022)
Base scenario (October 31, 2021)
Base scenario (October 31, 2022)
(1)
Represents the avera
g
e quarterly unemployment level over the calendar quarters presented.
Q4-2021
Q1-2022
Q2-2022
Q3-2022
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
Q3-2027
Q3-2026
Q4-2026
Q1-2027
Q2-2027
•
Gross Domestic Product (GDP)
– In our base forecast, we expect Canadian and U.S GDP growth to slow and for both regions
to experience moderate recessions during the first half of calendar 2023. GDP in calendar Q4 2023 is expected to be 0.2%
below Q4 2022 levels in Canada, and 0.4% below such levels in the U.S.
1.9
2.5
Trillions of Canadian dollars
2.4
2.3
2.2
2.1
2.0
Range of alternative scenarios (October 31, 2022)
Base scenario (October 31, 2021)
Base scenario (October 31, 2022)
Canada Real GDP
(1)
(1)
Represents the seasonally adjusted annual rate indexed to 2012 Canadian dollars over the calendar
quarters presented.
Q4-2021
Q1-2022
Q2-2022
Q3-2022
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
Q4-2026
Q1-2027
Q2-2027
Q3-2027
18.0
18.5
19.5
19.0
20.5
20.0
21.5
21.0
22.5
22.0
Range of alternative scenarios (October 31, 2022)
Base scenario (October 31, 2022)
Base scenario (October 31, 2021)
(1)
Represents the seasonally adjusted annual rate indexed to 2012 U.S dollars over the calendar
quarters presented.
Q4-2021
Q1-2022
Q2-2022
Q3-2022
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
Q4-2026
Q1-2027
Q2-2027
Q3-2027
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 $88 per barrel over the
next 12 months from calendar Q4 2022 and $72 per barrel in the following 2 to 5 years. The range of average prices in our
alternative downside and upside scenarios is $29 to $114 per barrel for the next 12 months and $42 to $77 per barrel for the
following 2 to 5 years. As at October 31, 2021, our base forecast included an average price of $71 per barrel for the next
12 months and $56 per barrel for the following 2 to 5 years.
•
Canadian housing price
index
– In our base forecast, we expect housing prices to decrease by (1.0)% over the next
12 months from calendar Q4 2022, with a compound annual growth rate of 5.2% for the following 2 to 5 years. The range of
annual housing price growth (contraction) in our alternative real estate downside and upside scenarios is (30.0)% to 10.9%
over the next 12 months and 4.2% to 9.5% for the following 2 to 5 years. As at October 31, 2021 our base forecast included
housing price growth of 0.1% from calendar Q4 2021 for the next 12 months and 4.1% for the following 2 to 5 years.
The primary variables driving credit losses in our retail portfolios are Canadian unemployment rates, Canadian housing price
index and Canadian GDP. The Canadian overnight interest rate also impacts our retail portfolios. Our wholesale portfolios are
affected by all of the variables discussed above; however, the specific variables differ by sector. Other variables also impact our
wholesale portfolios including, but not limited to, Canadian and U.S. 10 year BBB corporate bond credit spreads, Canadian and
U.S. 10 year government bond yields, U.S. 10 year BBB corporate bond yield, Canadian consumer confidence index, Canadian and
U.S. commercial real estate price indices, U.S. housing price index, and natural gas prices (Henry Hub).
Increases in the following macroeconomic variables will generally correlate with higher expected credit losses: Canadian
and U.S. unemployment rates, Canadian overnight interest rates, Canadian and U.S. 10 year BBB corporate bond credit spreads,
Canadian and U.S. 10 year government bond yields, and U.S. 10 year BBB corporate bond yield.
Increases in the following macroeconomic variables will generally correlate with lower expected credit losses: Canadian and
U.S. housing price indices, Canadian and U.S. GDP, Canadian consumer confidence index, Canadian and U.S. commercial real
estate price indices, and oil and natural gas prices.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
179
Note 5
Loans and allowance for credit losses
(continued)
Transfers between stages
Transfers between Stage 1 and Stage 2 are based on the assessment of significant increases in credit risk relative to initial
recognition, as described in Note 2. The impact of moving from 12 months expected credit losses to lifetime expected credit
losses, or vice versa, varies by product and is dependent on the expected remaining life at the date of the transfer. Stage
transfers may result in significant fluctuations in expected credit losses.
The following table illustrates the impact of staging on our ACL by comparing our allowance if all performing loans were in
Stage 1 to the actual ACL recorded on these assets.
As at
October 31, 2022
October 31, 2021
ACL – All performing
loans in Stage 1
Impact of
staging
Stage 1 and 2
ACL
ACL – All performing
loans in Stage 1
Impact of
staging
Stage 1 and 2
ACL
Performing loans
(1)
$
2,373
$
1,094
$
3,467
$
2,521
$
1,125
$
3,646
(1)
Represents loans and commitments in Stage 1 and Stage 2.
180
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Credit risk exposure by internal risk rating
The following table presents the gross carrying amount of loans measured at amortized cost, and the full contractual amount of
undrawn loan commitments subject to the impairment requirements of IFRS 9. Risk ratings are based on internal ratings used in
the measurement of expected credit losses as at the reporting date, as outlined in the internal ratings maps for Wholesale and
Retail facilities in the Credit risk section of Management’s Discussion and Analysis.
As at
October 31, 2022
October 31, 2021
(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
$ 340,716
$
2,573
$
–
$ 343,289
$ 310,334
$
1,507
$
–
$ 311,841
Medium risk
15,035
1,932
–
16,967
15,152
2,051
–
17,203
High risk
1,188
3,125
–
4,313
3,343
634
–
3,977
Not rated
(2)
51,915
1,304
–
53,219
45,512
913
–
46,425
Impaired
–
–
560
560
–
–
645
645
408,854
8,934
560
418,348
374,341
5,105
645
380,091
Items not subject to impairment
(3)
448
241
Total
$ 418,796
$ 380,332
Loans outstanding – Personal
Low risk
$
73,339
$
2,575
$
–
$
75,914
$
72,267
$
698
$
–
$
72,965
Medium risk
5,482
3,780
–
9,262
4,974
4,551
–
9,525
High risk
836
1,660
–
2,496
687
1,045
–
1,732
Not rated
(2)
9,733
104
–
9,837
8,934
88
–
9,022
Impaired
–
–
200
200
–
–
197
197
Total
$
89,390
$
8,119
$
200
$
97,709
$
86,862
$
6,382
$
197
$
93,441
Loans outstanding – Credit cards
Low risk
$
15,088
$
83
$
–
$
15,171
$
12,864
$
24
$
–
$
12,888
Medium risk
1,418
1,911
–
3,329
1,646
1,645
–
3,291
High risk
39
1,255
–
1,294
136
937
–
1,073
Not rated
(2)
751
32
–
783
527
43
–
570
Total
$
17,296
$
3,281
$
–
$
20,577
$
15,173
$
2,649
$
–
$
17,822
Loans outstanding – Small business
Low risk
$
8,571
$
838
$
–
$
9,409
$
8,609
$
274
$
–
$
8,883
Medium risk
1,512
1,130
–
2,642
1,583
979
–
2,562
High risk
102
375
–
477
227
218
–
445
Not rated
(2)
3
–
–
3
4
–
–
4
Impaired
–
–
138
138
–
–
109
109
Total
$
10,188
$
2,343
$
138
$
12,669
$
10,423
$
1,471
$
109
$
12,003
Undrawn loan commitments – Retail
Low risk
$ 247,620
$
1,041
$
–
$ 248,661
$ 229,516
$
574
$
–
$ 230,090
Medium risk
9,021
246
–
9,267
9,475
133
–
9,608
High risk
876
367
–
1,243
1,205
97
–
1,302
Not rated
(2)
5,668
118
–
5,786
4,854
90
–
4,944
Total
$ 263,185
$
1,772
$
–
$ 264,957
$ 245,050
$
894
$
–
$ 245,944
Wholesale – Loans outstanding
Investment grade
$
88,513
$
202
$
–
$
88,715
$
62,975
$
226
$
–
$
63,201
Non-investment grade
145,908
15,758
–
161,666
117,396
15,146
–
132,542
Not rated
(2)
11,789
360
–
12,149
9,339
430
–
9,769
Impaired
–
–
1,301
1,301
–
–
1,357
1,357
246,210
16,320
1,301
263,831
189,710
15,802
1,357
206,869
Items not subject to impairment
(3)
10,136
11,197
Total
$ 273,967
$ 218,066
Undrawn loan commitments –
Wholesale
Investment grade
$ 284,481
$
179
$
–
$ 284,660
$ 246,539
$
1,122
$
–
$ 247,661
Non-investment grade
126,225
10,657
–
136,882
108,063
12,377
–
120,440
Not rated
(2)
3,692
1
–
3,693
3,476
1
–
3,477
Total
$ 414,398
$ 10,837
$
–
$ 425,235
$ 358,078
$ 13,500
$
–
$ 371,578
(1)
As at October 31, 2022, 88% of credit-impaired loans were either fully or partially collateralized (October 31, 2021 – 86%). For details on the types of collateral held against
credit-impaired assets and our policies on collateral, refer to the Credit risk mitigation section of Management’s Discussion and Analysis.
(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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
181
Note 5
Loans and allowance for credit losses
(continued)
Loans past due but not impaired
(1), (2)
As at
October 31, 2022
October 31, 2021
(Millions of Canadian dollars)
30 to 89 days
90 days
and greater
Total
30 to 89 days
90 days
and greater
Total
Retail
$
1,328
$
168
$ 1,496
$
1,105
$
137
$ 1,242
Wholesale
1,279
2
1,281
1,230
–
1,230
$
2,607
$
170
$ 2,777
$
2,335
$
137
$ 2,472
(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
sale or refinancing. Past due loans arising from administrative processes are not representative of the borrowers’ ability to meet their payment obligations.
Note 6
Significant acquisition
Wealth Management
On September 27, 2022, we completed the acquisition of 100% of the issued share capital of Brewin Dolphin Holdings PLC (Brewin
Dolphin) via our subsidiary, RBC Wealth Management (Jersey) Holdings Limited. Brewin Dolphin provides discretionary wealth
management services in the U.K., Ireland and the Channel Islands. Brewin Dolphin’s business gives us a platform to significantly
transform our wealth management business in the U.K., Ireland and the Channel Islands, and provides us with the opportunity to
position the combined businesses as a premier integrated wealth management provider to private and institutional clients.
Total consideration of £1,591 million ($2,341 million) as of the date of close consisted of £1,564 million ($2,302 million) in cash,
as well as amounts related to share based compensation. Based on the estimated fair values, our preliminary purchase price
allocation assigns $3,279 million to assets and $938 million to liabilities, including customer relationship intangible assets of
$1,292 million and goodwill of $913 million, which is allocated to our International Wealth Management and Global Asset
Management CGUs and is not deductible for tax purposes. Goodwill reflects the expected synergies from the combined
businesses and the expected growth of the Wealth Management segment. The estimates for the fair values of the assets acquired
and liabilities assumed may be retroactively adjusted to reflect new information obtained about facts and circumstances that
existed as at the acquisition date during the measurement period.
The results of the acquisition have been consolidated from the date of close and included in our Wealth Management
segment.
Note 7
Derecognition of financial assets
We enter into transactions in which we transfer financial assets such as loans or securities to structured entities or other third
parties. The majority of assets transferred under repurchase agreements, securities lending agreements, and in our Canadian
residential mortgage securitization transactions do not qualify for derecognition as we continue to be exposed to substantially
all of the risks and rewards of the transferred assets, such as prepayment, credit, price, interest rate and foreign exchange risks.
Transferred financial assets derecognized
Government relief programs
To support our clients through unprecedented times due to the COVID-19 pandemic, we participated in government relief
programs in Canada and in the U.S.
Under the Canadian Emergency Business Account program, we provided interest-free loans to existing eligible small
business clients funded by the Export Development Bank of Canada (EDC). As we do not retain substantially all of the risks and
rewards of the financial assets, and all cash flows are passed through to the EDC, these loans are not recognized on our
Consolidated Balance Sheets. The application window for the CEBA program closed on June 30, 2021.
Transferred financial assets
not derecognized
Securitization of Canadian residential mortgage loans
We periodically securitize insured Canadian residential mortgage loans through the creation of MBS pools under the National
Housing Act MBS (NHA MBS) program. All loans securitized under the NHA MBS program are required to be insured by the
Canadian Mortgage and Housing Corporation (CMHC) or a third-party insurer. We require the borrower to pay for mortgage
insurance when the loan amount is greater than 80% of the original appraised value of the property (LTV ratio). For residential
mortgage loans securitized under this program with LTV ratios less than 80%, we are required to insure the mortgages at our own
expense. Under the NHA MBS program, we are responsible for making all payments due on our issued MBS, regardless of whether
we collect the necessary funds from the mortgagor or the insurer. When a borrower defaults on a mortgage, we submit a claim to
the insurer if the amount recovered from the collection or foreclosure process is lower than the sum of the principal balance,
accrued interest and collection costs on the outstanding loan. The insurance claim process is managed by the insurance provider
in accordance with the insurer’s policies and covers the entire unpaid loan balance plus generally up to 12 months of interest,
selling costs and other eligible expenses. If an insurance claim is denied, a loss is recognized in Provision for credit losses in our
Consolidated Statements of Income. The amount recorded as a loss is not significant to our Consolidated Financial Statements
and no significant losses were incurred due to legal action arising from mortgage defaults during 2022 and 2021.
We sell the NHA MBS pools primarily to Canada Housing Trust, a government-sponsored structured entity under the Canada
Mortgage Bond (CMB) program. The entity periodically issues CMBs, which are guaranteed by the government, and sells them to
third-party investors. Proceeds of the CMB issuances are used by the entity to purchase the NHA MBS pools from eligible NHA
MBS issuers who participate in the issuance of a particular CMB series. Our continuing involvement includes servicing the
underlying residential mortgage loans we have securitized, either ourselves or through a third-party servicer. We also act as
182
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
counterparty in interest rate swap agreements where we pay the entity the interest due to CMB investors and receive the interest
on the underlying MBS and reinvested assets. As part of the swaps, we are also required to maintain a principal reinvestment
account for principal payments received on the underlying mortgage loans to meet the repayment obligation upon maturity of
the CMB. We reinvest the collected principal payments in permitted investments as outlined in the swap agreements.
We have determined that certain of the NHA MBS program loans transferred to the entity do not qualify for derecognition as
we have not transferred substantially all of the risks and rewards of ownership. As a result, these transferred MBS continue to be
classified as residential mortgage loans and recognized on our Consolidated Balance Sheets. The cash received for these
transferred MBS is treated as a secured borrowing and a corresponding liability is recorded in Deposits – Business and
government on our Consolidated Balance Sheets.
Securities sold under repurchase agreements and securities loaned
We also enter into transactions such as repurchase agreements and securities lending agreements where we transfer assets under
agreements to repurchase them at a future date and retain substantially all of the risks and rewards associated with the assets. These
transferred assets remain on our Consolidated Balance Sheets and are accounted for as collateralized borrowing transactions.
The following table provides information on the carrying amount and fair value of the transferred assets that did not qualify for
derecognition, and their associated liabilities.
As at
October 31, 2022
October 31, 2021
(Millions of Canadian dollars)
Canadian
residential
mortgage
loans
(1), (2)
Securities
sold under
repurchase
agreements
(3)
Securities
loaned
(3)
Total
Canadian
residential
mortgage
loans
(1), (2)
Securities
sold under
repurchase
agreements
(3)
Securities
loaned
(3)
Total
Carrying amount of transferred
assets that do not qualify for
derecognition
$
32,812
$
258,615
$
15,332
$ 306,759
$
34,052
$
252,920
$
9,281
$ 296,253
Carrying amount of associated
liabilities
32,177
258,615
15,332
306,124
33,769
252,920
9,281
295,970
Fair value of transferred assets
$
31,174
$
258,615
$
15,332
$ 305,121
$
34,142
$
252,920
$
9,281
$ 296,343
Fair value of associated
liabilities
30,900
258,615
15,332
304,847
34,073
252,920
9,281
296,274
Fair value of net position
$
274
$
–
$
–
$
274
$
69
$
–
$
–
$
69
(1)
Includes Canadian residential mortgage loans transferred primarily to Canada Housing Trust at the initial securitization and other permitted investments used for
funding requirements after the initial securitization.
(2)
CMB investors have legal recourse only to the transferred assets, and do not have recourse to our general assets.
(3)
Does not include over-collateralization of assets pledged.
Note 8
Structured entities
In the normal course of business, we engage in a variety of financial transactions with structured entities to support our
financing and investing needs as well as those of our clients. A structured entity is an entity in which voting or similar rights are
not the dominant factor in deciding control. Structured entities are generally created to achieve a narrow and well defined
objective with restrictions around their ongoing activities. We consolidate a structured entity when we control the entity in
accordance with our accounting policy as described in Note 2. In other cases, we may sponsor or have an interest in such an
entity but may not consolidate it.
Consolidated structured entities
We consolidate the following structured entities, whose assets and liabilities are recorded on our Consolidated Balance Sheets.
Third-party investors in these structured entities generally have recourse only to the assets of the related entity and do not have
recourse to our general assets unless we breach our contractual obligations to those entities. In the ordinary course of business,
the assets of each consolidated structured entity can generally only be used to settle the obligations of that entity.
RBC-administered multi-seller conduits
We generally do not maintain ownership in the multi-seller conduits that we administer and generally do not have rights to, or
control of, their assets. However, we issue asset-backed commercial paper (ABCP) through a multi-seller conduit that does not
have an expected loss investor with substantive power to direct the significant operating activities of the conduit. This conduit is
consolidated because we have exposure to variability of returns from performance in the multi-seller arrangements through
providing transaction-specific and program-wide liquidity, credit and loan facilities to the conduit and have decision-making
power over the relevant activities. As of October 31, 2022, $1,826 million of financial assets held by the conduit was included in
Loans (October 31, 2021 – $1,076 million) and $1,284 million of ABCP issued by the conduit was included in Deposits (October 31,
2021 – $665 million) on our Consolidated Balance Sheets.
Credit card securitization vehicle
We securitize a portion of our credit card receivables through a structured entity on a revolving basis. The entity purchases
co-ownership interests in a pool of credit card receivables and issues senior and subordinated term notes collateralized by that
co-ownership interest in the underlying pool of credit card receivables. Investors who purchase the term notes have recourse
only to that co-ownership interest in the underlying pool of credit card receivables.
We continue to service the credit card receivables and perform an administrative role for the entity. We also retain risk in
the underlying pool of credit card receivables through our retained interest in the transferred assets, the cash reserve balance
we fund from time to time, and also through certain subordinated notes which we retain. Additionally, we may own some senior
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
183
Note 8
Structured entities
(continued)
notes as investments or for market-making activities and we act as counterparty to interest rate and cross currency swap
agreements which hedge the entity’s interest rate and currency risk exposure.
We consolidate the structured entity because we have decision-making power over the timing and size of future issuances
and other relevant activities which were predetermined by us at inception. We also obtain significant funding benefits and are
exposed to variability from the performance of the underlying credit card receivables through our retained interest. As at
October 31, 2022, $6 billion of notes issued by our credit card securitization vehicle were included in Deposits on our
Consolidated Balance Sheets (October 31, 2021 – $3 billion).
Collateralized commercial paper vehicle
We established a funding vehicle that provides loans to us and finances those loans by issuing commercial paper to third-party
investors. The structured entity’s commercial paper carries an equivalent credit rating to RBC because we are obligated to
advance funds to the entity in the event there are insufficient funds from other sources to settle maturing commercial paper. We
pledge collateral to secure the loans and are exposed to the market and credit risks of the pledged securities.
We consolidate the structured entity because we have decision-making power over the relevant activities, are the sole
borrower from the structure, and are exposed to a majority of the residual ownership risks through the credit support provided.
As at October 31, 2022, $14 billion of commercial paper issued by the vehicle was included in Deposits on our Consolidated
Balance Sheets (October 31, 2021 – $13 billion).
Covered bonds
We periodically transfer mortgages to RBC Covered Bond Guarantor Limited Partnership (the Guarantor LP) to support funding
activities and asset coverage requirements under our covered bonds program. The Guarantor LP was created to guarantee
interest and principal payments under the covered bond program. The covered bonds guaranteed by the Guarantor LP are direct,
unsecured and unconditional obligations of RBC; therefore, investors have a claim against the Bank which will continue if the
covered bonds are not paid by the Bank and the mortgage assets in the Guarantor LP are insufficient to satisfy the obligations
owing on the covered bonds. We act as general partner, limited partner, swap counterparty, lender and liquidity provider to the
Guarantor LP, servicer for the underlying mortgages as well as the registered issuer of the covered bonds.
We consolidate the Guarantor LP as we have the decision-making power over the relevant activities through our role as
general partner and are exposed to variability from the performance of the underlying mortgages. As at October 31, 2022, the
total amount of mortgages transferred and outstanding was $121 billion (October 31, 2021 – $80 billion) and $43 billion of covered
bonds were recorded as Deposits on our Consolidated Balance Sheets (October 31, 2021 – $37 billion).
Municipal bond TOB structures
We sell taxable and tax-exempt municipal bonds into Tender Option Bond (TOB) structures, which consist of a bond that is credit
enhanced by us and purchased by a TOB trust. The TOB trust finances the purchase from us by issuing floating-rate certificates to
short-term investors and a residual certificate that is purchased by us. We are the remarketing agent for the floating-rate
certificates and provide a liquidity facility to the short-term investors which requires us to purchase any certificates tendered but
not successfully remarketed. We credit enhance the bond purchased by the TOB trust with a letter of credit under which we are
required to extend funding if there are any losses on the underlying bonds. We earn interest on the residual certificate and
receive market-based fees for acting as remarketing agent and providing the liquidity facility and letter of credit.
We consolidate the TOB trust when we are the holder of the residual certificate as we have decision-making power over the
relevant activities, including the selection of the underlying municipal bonds and the ability to terminate the structure, and are
exposed to variability from the performance of the underlying municipal bonds. As at October 31, 2022, $6 billion of municipal
bonds were included in Investment securities related to consolidated TOB structures (October 31, 2021 – $7 billion) and a
corresponding $7 billion of floating-rate certificates were included in Deposits on our Consolidated Balance Sheets
(October 31, 2021 – $7 billion).
RBC managed investment funds
We are sponsors and investment managers of mutual and pooled funds, which give us the ability to direct the investment
decisions of the funds. We consolidate those mutual and pooled funds in which our interests, which include direct investment in
seed capital plus management or performance fees, indicate that we are acting as a principal. As at October 31, 2022, $524 million
of Trading securities held in the consolidated funds (October 31, 2021 – $514 million) and $363 million of Other liabilities
representing the fund units held by third parties (October 31, 2021 – $365 million) were recorded on our Consolidated Balance
Sheets.
Unconsolidated structured entities
We have interests in certain structured entities that we do not consolidate but have recorded assets and liabilities on our
Consolidated Balance Sheets related to our transactions and involvement with these entities.
184
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
The following table presents the assets and liabilities recorded on our Consolidated Balance Sheets and our maximum
exposure to loss related to our interests in unconsolidated structured entities. It also presents the size of each class of
unconsolidated structured entity, as measured by the total assets of the entities in which we have an interest.
As at October 31, 2022
(Millions of Canadian dollars)
Multi-seller
conduits
(1)
Structured
finance
Non-RBC
managed
investment
funds
Third-party
securitization
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
Derivatives
$
171
$
–
$
–
$
–
$
–
$
171
$
171
$
–
$
–
$
–
$
–
$
171
Maximum exposure to loss
(2)
$
48,260
$
8,658
$
3,758
$
14,339
$
5,523
$
80,538
Total assets of unconsolidated structured entities
$
47,289
$ 26,543
$ 548,320
$
64,361
$ 554,573
$
1,241,086
As at October 31, 2021
(Millions of Canadian dollars)
Multi-seller
conduits
(1)
Structured
finance
Non-RBC
managed
investment
funds
Third-party
securitization
vehicles
Other
Total
On-balance sheet assets
Securities
$
12
$
–
$
3,047
$
–
$
537
$
3,596
Loans
–
4,569
–
6,855
1,453
12,877
Derivatives
17
–
–
–
108
125
Other assets
–
27
–
–
363
390
$
29
$
4,596
$
3,047
$
6,855
$
2,461
$
16,988
On-balance sheet liabilities
Derivatives
$
93
$
–
$
–
$
–
$
–
$
93
$
93
$
–
$
–
$
–
$
–
$
93
Maximum exposure to loss
(2)
$
40,893
$
8,361
$
3,651
$
12,214
$
4,057
$
69,176
Total assets of unconsolidated structured entities
$
40,074
$
19,881
$
506,699
$
80,458
$
392,348
$
1,039,460
(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 $32 billion as at October 31, 2022 (October 31, 2021 –
$25 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.
Below is a description of our involvement with each significant class of unconsolidated structured entity.
Multi-seller conduits
We administer multi-seller ABCP conduit programs. Multi-seller conduits primarily purchase financial assets from clients and
finance those purchases by issuing ABCP.
In certain multi-seller conduit arrangements, we do not maintain any ownership of the multi-seller conduits that we
administer and have no rights to, or control of, its assets. As the administrative agent, we earn a residual fee for providing
services such as coordinating funding activities, transaction structuring, documentation, execution and monitoring. The ABCP
issued by each multi-seller conduit is in the conduit’s own name with recourse to the financial assets owned by the multi-seller
conduit, and is non-recourse to us except through our participation in liquidity and/or credit enhancement facilities.
We provide transaction-specific and program-wide liquidity facilities to the multi-seller conduits. In addition, we provide
program-wide credit enhancement to the multi-seller conduits which obligate us to purchase assets or advance funds in the
event the multi-seller conduit does not otherwise have funds from other sources, such as from the liquidity facilities, to settle
maturing ABCP. In some cases, we or another third party may provide transaction-specific credit enhancement which can take
various forms. We receive market-based fees for providing these liquidity and credit facilities.
For certain transactions, we act as counterparty to various hedging contracts to facilitate our clients’ securitization of fixed
rate and/or foreign currency denominated assets through the conduits. These may take the form of forward contracts, interest
rate swaps or cross currency swaps. These derivatives expose us to foreign exchange and interest rate risks that are centrally
managed by our foreign exchange trading and swap desks, respectively, and credit risk on the underlying assets that is mitigated
by the credit enhancement described below.
Each transaction is structured with transaction-specific first loss protection provided by the third-party seller. This
enhancement can take various forms, including but not limited to overcollateralization, excess spread, subordinated classes of
financial assets, guarantees or letters of credit. The amount of this enhancement varies but is generally designed to cover a
multiple of historical losses.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
185
Note 8
Structured entities
(continued)
An unrelated third party (expected loss investor) absorbs losses, up to a maximum contractual amount, that may occur in
the future on the assets in the multi-seller conduits before the multi-seller conduits’ debt holders and us. In return for assuming
this multi-seller conduit first-loss position, each multi-seller conduit pays the expected loss investor a return commensurate with
its risk position. The expected loss investor has substantive power to direct the majority of the activities which significantly
impact the conduit’s economic performance, including initial selection and approval of the asset purchase commitments and
liquidity facilities, approval of renewal and amendment of these transactions and facilities, sale or transfer of assets, ongoing
monitoring of asset performance, mitigation of losses, and management of the ABCP liabilities.
We do not consolidate these multi-seller conduits as we do not control the conduits as noted above.
Structured finance
We participate in certain municipal bond TOB structures that we do not consolidate. These structures are similar to those
consolidated municipal bond TOB structures described above; however, the residual certificates are held by third parties. We provide
liquidity facilities for the benefit of floating-rate certificate holders which may be drawn if certificates are tendered but not able to be
remarketed. For a portion of these trusts, we also provide a letter of credit for the underlying bonds held in the trust. We do not have
decision-making power over the relevant activities of the structures; therefore, we do not consolidate these structures.
We provide senior warehouse financing to unaffiliated structured entities that are established by third parties to acquire
loans for the purposes of issuing a term collateralized loan obligation (CLO) transaction. Subordinated financing is provided
during the warehouse phase by either the collateral manager or third-party investors. Subordinated financing serves as the first
loss tranche which absorbs losses prior to ourselves as the senior lender. We act as the arranger and placement agent for the
term CLO transaction. Proceeds from the sale of the term CLO are used to repay our senior warehouse financing, at which point
we have no further involvement with the transaction. We do not consolidate these CLO structures as we do not have decision-
making power over the relevant activities of the entity, which include the initial selection and subsequent management of the
underlying debt portfolio.
We provide senior financing to unaffiliated structured entities that are established by third parties to acquire loans.
Subordinated financing is provided by either the collateral manager or third-party investors. Subordinated financing serves as
the first loss tranche which absorbs losses prior to ourselves as the senior lender. These facilities tend to be longer in term than
the CLO warehouse facilities and benefit from credit enhancement generally designed to cover a multiple of historical losses. We
do not consolidate these structures as we do not have decision making power over the relevant activities of the entity, which
include the initial selection and subsequent management of the underlying debt portfolio.
Non-RBC managed investment funds
We enter into fee-based equity derivative transactions with third parties including mutual funds, unit investment trusts and other
investment funds. These transactions provide their investors with the desired exposure to reference funds, and we economically
hedge our exposure to these derivatives by investing in those reference funds. We also act as custodian for several funds. We do
not consolidate those reference funds that are managed by third parties as we do not have power to direct their investing
activities.
We provide liquidity facilities to certain third-party investment funds. The funds issue unsecured variable-rate preferred
shares and invest in portfolios of tax-exempt municipal bonds. Undrawn liquidity commitments expose us to the liquidity risk of
the preferred shares and drawn commitments expose us to the credit risk of the underlying municipal bonds. We do not
consolidate these third-party managed funds as we do not have power to direct their investing activities.
Third-party securitization vehicles
We hold interests in securitization vehicles that provide funding to certain third parties on whose behalf the entities were created. The
activities of these entities are limited to the purchase and sale of specified financial assets from the sponsor. We, as well as other
financial institutions, are obligated to provide funding up to our maximum commitment level and are exposed to credit losses on the
underlying assets after various credit enhancements. Enhancements can take various forms, including but not limited to
overcollateralization, excess spread, subordinated classes of financial assets, guarantees or letters of credit. The amount of this
enhancement varies but is generally designed to cover a multiple of historical losses. We do not consolidate these entities as we do
not have decision-making power over the relevant activities, including the entities’ investing and financing activities.
Other
Other unconsolidated structured entities include managed investment funds, credit investment products and tax credit funds.
We are sponsors and investment managers of mutual and pooled funds, which gives us the ability to direct the investment
decisions of the funds. We do not consolidate those mutual and pooled funds if we exercise our decision-making power as an
agent on behalf of other unit holders.
We use structured entities to generally transform credit derivatives into cash instruments, to distribute credit risk and to
create customized credit products to meet investors’ specific requirements. We enter into derivative contracts, including credit
derivatives, to purchase protection from these entities (credit protection) and convert various risk factors such as yield, currency
or credit risk of underlying assets to meet the needs of the investors. We act as sole arranger and swap provider for certain
entities and, in some cases, fulfill other administrative functions for the entities. We do not consolidate these credit investment
product entities as we do not have decision-making power over the relevant activities, which include selection of the collateral
and reference portfolio, and are not exposed to a majority of the benefits or risks of the entities.
We created certain funds to pass through tax credits received from underlying low-income housing, historic rehabilitation
real estate projects to third parties, new market tax credits or renewable energy tax credits to third parties (tax credit funds). We
are sponsors of the tax credit funds as a result of our responsibility to manage the funds, arrange the financing, and perform the
administrative duties of these tax credit funds. We do not consolidate the tax credit funds as the third-party investors in these
funds have the decision-making power to select the underlying investments and are exposed to the majority of the residual
ownership and tax risks of the funds.
We also purchase passive interests in renewable energy tax credit entities created and controlled by third parties. We do not
consolidate these third-party funds as we do not have decision-making power over the relevant activities and our investments
are managed as part of larger portfolios which are held for trading purposes.
186
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Other interests in unconsolidated structured entities
In the normal course of business, we buy and sell passive interests in certain third-party structured entities, including mutual
funds, exchange traded funds, and government-sponsored ABS vehicles. Our investments in these entities are managed as part of
larger portfolios which are held for trading, liquidity or hedging purposes. We did not create or sponsor these entities and do not
have any decision-making power over their ongoing activities. Our maximum exposure to loss is limited to our on-balance sheet
investments in these entities, which are not included in the table above. As at October 31, 2022 and 2021, our investments in these
entities were included in Trading and Investment securities on our Consolidated Balance Sheets. Refer to Note 3 and Note 4 for
further details on our Trading and Investment securities.
Sponsored entities
We are a sponsor of certain structured entities in which we have interests but do not consolidate. In determining whether we are
a sponsor of a structured entity, we consider both qualitative and quantitative factors, including the purpose and nature of the
entity, our initial and continuing involvement and whether we hold subordinated interests in the entity. We are considered to be
the sponsor of certain credit investment products, tax credit entities, RBC managed mutual funds and a commercial mortgage
securitization vehicle. During the year ended October 31, 2022, we transferred commercial mortgages with a carrying amount of
$450 million (October 31, 2021 – $nil) to a sponsored securitization vehicle in which we did not have any interests as at the end of
the reporting period.
Financial support provided to structured entities
During the years ended October 31, 2022 and 2021, we have not provided any financial or non-financial support to any
consolidated or unconsolidated structured entities when we were not contractually obligated to do so. Furthermore, we have no
intention to provide such support in the future.
Note 9
Derivative financial instruments and hedging activities
Derivative instruments are categorized as either financial or non-financial derivatives. Financial derivatives are financial
contracts whose value is derived from an underlying interest rate, foreign exchange rate, credit risk, and equity or equity index.
Non-financial derivatives are contracts whose value is derived from a precious metal, commodity instrument or index. The
notional amount of derivatives represents the contract amount used as a reference point to calculate payments. Notional
amounts are generally not exchanged by counterparties, and do not reflect our EAD.
Financial derivatives
Forwards and futures
Forward contracts are non-standardized agreements that are transacted between counterparties in the OTC market, whereas
futures are standardized contracts with respect to amounts and settlement dates, and are traded on regular futures exchanges.
Examples of forwards and futures are described below.
Interest rate forwards (forward rate agreements) and futures are contractual obligations to buy or sell an interest-rate
sensitive financial instrument on a predetermined future date at a specified price.
Foreign exchange forwards and futures are contractual obligations to exchange one currency for another at a specified price
for settlement at a predetermined future date.
Equity forwards and futures are contractual obligations to buy or sell at a fixed value (the specified price) of an equity index,
a basket of stocks or a single stock at a predetermined future date.
Swaps
Swaps are OTC contracts in which two counterparties exchange a series of cash flows based on agreed upon rates applied to a
notional amount. Examples of swap agreements are described below.
Interest rate swaps are agreements where two counterparties exchange a series of payments based on different interest
rates applied to a notional amount in a single currency. Certain interest rate swaps are transacted and settled through clearing
houses which act as central counterparties. Cross currency swaps involve the exchange of fixed payments in one currency for the
receipt of fixed payments in another currency. Cross currency interest rate swaps involve the exchange of both interest and
notional amounts in two different currencies.
Equity swaps are contracts in which one counterparty agrees to pay or receive from the other cash flows based on changes
in the value of an equity index, a basket of stocks or a single stock.
Options
Options are contractual agreements under which the seller (writer) grants the purchaser the right, but not the obligation, either
to buy (call option) or sell (put option) a security, exchange rate, interest rate, or other financial instrument or commodity at a
specified price, at or by a predetermined future date. The seller (writer) of an option can also settle the contract by paying the
cash settlement value of the purchaser’s right. The seller (writer) receives a premium from the purchaser for this right. The
various option agreements that we enter into include but are not limited to interest rate options, foreign currency options, equity
options and index options.
Credit derivatives
Credit derivatives are OTC contracts that transfer credit risk related to an underlying financial instrument (referenced asset)
from one counterparty to another. Credit derivatives include credit default swaps, credit default baskets and total return swaps.
Credit default swaps provide protection against the decline in the value of the referenced asset as a result of specified credit
events such as default or bankruptcy. They are similar in structure to an option, whereby the purchaser pays a premium to the
seller of the credit default swap in return for payment contingent on a credit event affecting the referenced asset.
Credit default baskets are similar to credit default swaps except that the underlying referenced financial instrument is a
group of assets instead of a single asset.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
187
Note 9
Derivative financial instruments and hedging activities
(continued)
Total return swaps are contracts where one counterparty agrees to pay or receive from the other cash amounts based on
changes in the value of a referenced asset or group of assets, including any returns such as interest earned on these assets, in
exchange for amounts that are based on prevailing market funding rates.
Other derivative products
Other contracts are stable value and equity derivative contracts.
Non-financial derivatives
Other contracts also include non-financial derivative products such as precious metal and commodity derivative contracts in
both the OTC and exchange markets.
Derivatives issued for trading purposes
Most of our derivative transactions relate to client-driven sales and trading activities, and associated market risk hedging. Sales
activities include the structuring and marketing of derivative products to clients, enabling them to modify or reduce risks. Trading
involves market-making, positioning and arbitrage activities. Market-making involves quoting bid and offer prices to other
market participants with the intention of generating revenue based on spread and volume. Positioning involves the active
management of derivative transactions with the expectation of profiting from favourable movements in prices, rates, or indices.
Arbitrage activities involve identifying and profiting from price differentials between markets and product types. Any realized and
unrealized gains or losses on derivatives used for trading purposes are recognized immediately in Non-interest income – Trading
revenue.
Derivatives issued for other-than-trading purposes
We also use derivatives for purposes other than trading, primarily for hedging, in conjunction with the management of interest
rate, credit, equity and foreign exchange risk related to our funding, lending, investment activities and asset/liability
management.
Interest rate swaps are used to manage our exposure to interest rate risk by modifying the repricing or maturity
characteristics of existing and/or forecasted assets and liabilities, including funding and investment activities. Purchased options
are used to hedge redeemable deposits and other options embedded in consumer products. We manage our exposure to foreign
currency risk with cross currency swaps and foreign exchange forward contracts. We predominantly use credit derivatives to
manage our credit exposures. We mitigate industry sector concentrations and single-name exposures related to our credit
portfolio by purchasing credit derivatives to transfer credit risk to third parties.
Certain derivatives and cash instruments are specifically designated and qualify for hedge accounting. From time to time, we
also enter into derivative transactions to economically hedge certain exposures that do not otherwise qualify for hedge
accounting, or where hedge accounting is not considered economically feasible to implement. In such circumstances, changes in
fair value are reflected in Other income in Non-interest income.
Notional amount of derivatives by term to maturity (absolute amounts)
(1)
As at October 31, 2022
Term to maturity
(Millions of Canadian dollars)
Within
1 year
1 through
5 years
Over
5 years
Total
Trading
Other than
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
188
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
As at October 31, 2021
Term to maturity
(Millions of Canadian dollars)
Within
1 year
1 through
5 years
Over
5 years
Total
Trading
Other than
Trading
Over-the-counter contracts
Interest rate contracts
Forward rate agreements
$
866,704
$
161,835
$
158
$
1,028,697
$
1,015,263
$
13,434
Swaps
3,936,638
6,559,032
4,268,243
14,763,913
14,259,757
504,156
Options purchased
266,798
312,149
185,547
764,494
764,494
–
Options written
271,000
309,540
203,665
784,205
784,205
–
Foreign exchange contracts
Forward contracts
1,730,712
56,335
2,491
1,789,538
1,753,075
36,463
Cross currency swaps
82,316
57,968
72,864
213,148
204,789
8,359
Cross currency interest rate swaps
439,169
1,193,669
776,062
2,408,900
2,376,225
32,675
Options purchased
46,060
16,097
3,059
65,216
65,216
–
Options written
53,342
16,122
3,060
72,524
72,524
–
Credit derivatives
(2)
1,027
35,759
6,125
42,911
42,428
483
Other contracts
(3)
218,270
98,850
20,757
337,877
325,226
12,651
Exchange-traded contracts
Interest rate contracts
Futures – long positions
110,285
148,262
333
258,880
256,020
2,860
Futures – short positions
173,039
97,364
126
270,529
270,129
400
Options purchased
28,071
15,250
–
43,321
43,321
–
Options written
22,272
1,300
–
23,572
23,572
–
Foreign exchange contracts
Futures – long positions
129
–
–
129
129
–
Other contracts
391,339
84,135
1,175
476,649
476,649
–
$ 8,637,171
$ 9,163,667
$ 5,543,665
$ 23,344,503
$ 22,733,022
$ 611,481
(1)
The derivative notional amounts are determined using the standardized approach for measuring counterparty credit risk (SA-CCR) in accordance with the Capital
Adequacy Requirements (CAR).
(2)
Credit derivatives with a notional value of $1 billion (October 31, 2021 – $1 billion) are economic hedges. Trading credit derivatives comprise protection purchased of
$26 billion (October 31, 2021 – $25 billion) and protection sold of $17 billion (October 31, 2021 – $17 billion).
(3)
Other contracts exclude loan underwriting commitments of $6 billion (October 31, 2021 – $9 billion), which are not classified as derivatives under CAR guidelines.
Fair value of derivative instruments
(1)
As at
October 31, 2022
October 31, 2021
(Millions of Canadian dollars)
Positive
Negative
Positive
Negative
Held or issued for trading purposes
Interest rate contracts
Forward rate agreements
$
77
$
25
$
10
$
11
Swaps
25,690
21,608
28,400
23,136
Options purchased
12,056
–
4,580
–
Options written
–
12,201
–
5,258
37,823
33,834
32,990
28,405
Foreign exchange contracts
Forward contracts
37,734
37,631
11,404
11,515
Cross currency swaps
8,680
9,087
4,469
4,929
Cross currency interest rate swaps
49,758
38,230
23,208
22,382
Options purchased
2,623
–
1,021
–
Options written
–
2,571
–
978
98,795
87,519
40,102
39,804
Credit derivatives
388
125
34
115
Other contracts
18,474
21,084
20,827
21,253
155,480
142,562
93,953
89,577
Held or issued for other-than-trading purposes
Interest rate contracts
Swaps
2,244
6,880
1,187
1,116
2,244
6,880
1,187
1,116
Foreign exchange contracts
Forward contracts
268
237
305
260
Cross currency swaps
–
22
32
–
Cross currency interest rate swaps
374
6,677
859
447
642
6,936
1,196
707
Credit derivatives
–
–
–
5
Other contracts
313
273
329
321
3,199
14,089
2,712
2,149
Total gross fair values before:
158,679
156,651
96,665
91,726
Valuation adjustments determined on a pooled basis
(2,055)
(975)
(810)
27
Impact of netting agreements that qualify for balance sheet offset
(2,185)
(2,185)
(314)
(314)
$ 154,439
$ 153,491
$
95,541
$
91,439
(1)
The fair value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain
central counterparties.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
189
Note 9
Derivative financial instruments and hedging activities
(continued)
Fair value of derivative instruments by term to maturity
(1)
As at
October 31, 2022
October 31, 2021
(Millions of Canadian dollars)
Less than
1 year
1 through
5 years
Over
5 years
Total
Less than
1 year
1 through
5 years
Over
5 years
Total
Derivative assets
$ 56,050
56,792
41,597
$ 154,439
$ 27,771
28,029
39,741
$ 95,541
Derivative liabilities
58,504
54,361
40,626
153,491
26,766
27,938
36,735
91,439
(1)
The fair value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain
central counterparties.
Interest rate benchmark reform
(1)
We use interest rate contracts in fair value hedges and cash flow hedges to manage our exposure to interest rate risk of our
existing and/or forecast assets and liabilities. We also use foreign denominated deposit liabilities in net investment hedges to
manage the foreign exchange risk arising from our investments in foreign operations. The hedging instruments designated to
manage these risks reference IBORs in multiple jurisdictions and will be affected by the Reform as the markets transition to ABRs
as discussed in Note 2.
The following table presents the notional or principal amount of our hedging instruments which reference IBORs that will be
affected by the Reform as discussed in Note 2. The notional or principal amounts of our hedging instruments also approximates
the extent of the risk exposure we manage through hedging relationships:
As at
October 31, 2022
October 31, 2021
(Millions of Canadian dollars)
Notional/Principal
amounts
Notional/Principal
amounts
Interest rate contracts
USD LIBOR
$
40,208
$
38,730
GBP LIBOR
–
290
CDOR
114,159
76,931
Total Return Swaps
CDOR
801
390
Non-derivative instruments
USD LIBOR
237
215
$
155,405
$
116,556
(1)
Excludes interest rate contracts and non-derivative instruments which reference rates in multi-rate jurisdictions, including EURO Interbank Offered Rate and Australian
Bank Bill Swap Rate (BBSW).
Derivative-related credit risk
Credit risk from derivative transactions is generated by the potential for the counterparty to default on its contractual
obligations when one or more transactions have a positive market value to us. Therefore, derivative-related credit risk is
represented by the positive fair value of the instrument and is normally a small fraction of the contract’s notional amount.
We subject our derivative transactions to the same credit approval, limit and monitoring standards that we use for managing
other transactions that create credit exposure. This includes evaluating the creditworthiness of counterparties, and managing
the size, diversification and maturity structure of the portfolio. Credit utilization for all products is compared with established
limits on a continual basis and is subject to a standard exception reporting process. We use a single internal rating system for all
credit risk exposure, as outlined in the internal ratings maps in the Credit risk section of Management’s Discussion and Analysis.
Offsetting is a technique that can reduce credit exposure from derivatives and is generally facilitated through the use of
master netting agreements and achieved when specific criteria are met in accordance with our accounting policy in Note 2. A
master netting agreement provides for a single net settlement of all financial instruments covered by the agreement in the event
of default. However, credit risk is reduced only to the extent that our financial obligations to the same counterparty can be set off
against obligations of the counterparty to us. We maximize the use of master netting agreements to reduce derivative-related
credit exposure. Our overall exposure to credit risk that is reduced through master netting agreements may change substantially
following the reporting date as the exposure is affected by each transaction subject to the agreement as well as by changes in
underlying market rates. Measurement of our credit exposure arising out of derivative transactions is reduced to reflect the
effects of netting in cases where the enforceability of that netting is supported by appropriate legal analysis as documented in
our trading credit risk policies.
The use of collateral is another significant credit mitigation technique for managing derivative-related counterparty credit
risk. Mark-to-market provisions in our agreements with some counterparties, typically in the form of a Credit Support Annex,
provide us with the right to request that the counterparty pay down or collateralize the current market value of its derivatives
positions when the value exceeds a specified threshold amount.
Replacement cost and credit equivalent amounts are determined in accordance with OSFI’s non-modelled regulatory SA-CCR
under the CAR guidelines. The replacement cost represents the total fair value of all outstanding contracts in a gain position after
factoring in the master netting agreements and applicable margins, scaled by a regulatory factor. The credit equivalent amount
is defined as the replacement cost plus an additional amount for potential future credit exposure also scaled by a regulatory
factor. The risk-weighted equivalent is determined by applying appropriate risk-weights to the credit equivalent amount,
including those risk weights reflective of model approval under the internal ratings based approach.
190
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Derivative-related credit risk
(1)
As at
October 31, 2022
October 31, 2021
(Millions of Canadian dollars)
Replacement
cost
Credit
equivalent
amount
Risk-weighted
equivalent
(2)
Replacement
cost
Credit
equivalent
amount
Risk-weighted
equivalent
(2)
Over-the-counter contracts
Interest rate contracts
Forward rate agreements
$
46
$
76
$
5
$
9
$
64
$
20
Swaps
9,699
21,698
5,187
4,519
16,203
4,569
Options purchased
108
426
119
113
403
187
Options written
15
543
164
23
415
141
Foreign exchange contracts
Forward contracts
8,772
29,565
5,940
3,085
19,097
4,232
Swaps
6,072
22,188
4,556
2,621
16,484
4,092
Options purchased
536
1,111
340
177
510
145
Options written
28
313
86
2
196
43
Credit derivatives
299
766
114
913
2,234
213
Other contracts
5,196
20,457
7,520
7,668
26,567
10,480
Exchange-traded contracts
11,098
19,870
397
1,814
6,218
124
$
41,869
$117,013
$
24,428
$
20,944
$ 88,391
$
24,246
(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 $16 billion (October 31, 2021 – $18 billion).
Replacement cost of derivative instruments by risk rating and by counterparty type
As at October 31, 2022
Risk rating
(1)
Counterparty type
(2)
(Millions of Canadian dollars)
AAA, AA
A
BBB
BB or lower
Total
Banks
OECD
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
As at October 31, 2021
Risk rating
(1)
Counterparty type
(2)
(Millions of Canadian dollars)
AAA, AA
A
BBB
BB or lower
Total
Banks
OECD
governments
Other
Total
Gross positive fair values
$
22,801
$
37,938
$
16,333
$
19,593
$
96,665
$
42,361
$
15,964
$
38,340
$
96,665
Impact of master netting agreements and
applicable margins
20,545
33,257
12,050
9,869
75,721
41,554
15,731
18,436
75,721
Replacement cost (after netting
agreements)
$
2,256
$
4,681
$
4,283
$
9,724
$
20,944
$
807
$
233
$
19,904
$
20,944
(1)
Our internal risk ratings of AAA, AA, A and BBB represent investment grade ratings and ratings of BB or lower represent non-investment grade ratings, as outlined in the
internal ratings maps in the Credit risk section of Management’s Discussion and Analysis.
(2)
Counterparty type is defined in accordance with CAR guidelines.
Derivatives in hedging relationships
We apply hedge accounting to minimize volatility in earnings and capital caused by changes in interest rates or foreign exchange
rates. Interest rate and currency fluctuations will either cause assets and liabilities to appreciate or depreciate in market value
or cause variability in forecasted cash flows. When a hedging relationship is effective, gains, losses, revenue and expenses of the
hedging instrument will offset the gains, losses, revenue and expenses of the hedged item.
Derivatives used in hedging relationships are recorded in Other Assets – Derivatives or Other Liabilities – Derivatives on the
Balance Sheet. Foreign currency-denominated liabilities used in net investment hedging relationships are recorded in Deposits –
Business and Government and Subordinated debentures on the Balance Sheet. Gains and losses relating to hedging
ineffectiveness is recorded in Non-Interest income and amounts reclassified from hedge reserves in OCI to income is recorded in
Net-interest income for cash flow hedges and Non-interest income for net Investment hedges.
We assess and measure the effectiveness of a hedging relationship based on the change in the fair value or cash flows of the
derivative hedging instrument relative to the change in the fair value or cash flows of the hedged item attributable to the hedged
risk. When cash instruments are designated as hedges of foreign exchange risks, only changes in their value due to foreign
exchange risk are included in the assessment and measurement of hedge effectiveness.
Potential sources of ineffectiveness can be attributed to differences between hedging instruments and hedged items:
•
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 2022
191
Note 9
Derivative financial instruments and hedging activities
(continued)
Below is a description of our risk management strategy for each risk exposure that we decide to hedge:
Interest rate risk
We use interest rate contracts to manage our exposure to interest rate risk by modifying the repricing characteristics of existing
and/or forecasted assets and liabilities, including funding and investment activities. The swaps are designated in either a fair
value hedge or a cash flow hedge and predominantly reference IBORs across multiple jurisdictions. Certain swaps will be
affected by the Reform as the market transitions to ABRs.
For fair value hedges, we use interest rate contracts to manage the fair value movements of our fixed-rate instruments due
to changes in benchmark interest. The interest rate swaps are entered into on a one-to-one basis to manage the benchmark
interest rate risk, and its terms are critically matched to the specified fixed rate instruments.
We also use interest rate swaps in fair value hedges to manage interest rate risk from residential mortgage assets and
funding liabilities. Our exposure from this portfolio changes with the origination of new loans, repayments of existing loans, and
sale of securitized mortgages. Accordingly, we have adopted dynamic hedging for that portfolio, in which the hedge relationship
is rebalanced on a more frequent basis, such as on a bi-weekly or on a monthly basis.
For cash flow hedges, we use interest rate swaps to manage the exposure to cash flow variability of our variable rate
instruments as a result of changes in benchmark interest rates. The variable rate instruments and forecast transactions which
reference certain IBORs will be affected by the Reform. Whilst some of the interest rate derivatives are entered into on a
one-to-one basis to manage a specific exposure, other interest rate derivatives may be entered into for managing interest rate
risks of a portfolio of assets and liabilities.
Foreign exchange risk
We manage our exposure to foreign currency risk with cross currency swaps in a cash flow hedge, and foreign exchange forward
contracts in a net investment hedge. Certain cash instruments may also be designated in a net investment hedge, where
applicable.
For cash flow hedges, we use cross currency swaps and forward contracts to manage the cash flow variability arising from
fluctuations in foreign exchange rates on our issued foreign denominated fixed rate liabilities and highly probable forecasted
transactions. The maturity profile and repayment terms of these swaps are matched to those of our foreign denominated
exposures to limit our cash flow volatility from changes in foreign exchange rates.
For net investment hedges, we use a combination of foreign exchange forwards and cash instruments, such as foreign
denominated deposit liabilities, some of which reference IBORs that will be affected by the Reform, to manage our foreign
exchange risk arising from our investments in foreign operations. Our most significant exposures include USD, GBP and Euro.
When hedging net investments in foreign operations using foreign exchange forwards, only the undiscounted spot element of the
foreign exchange forward is designated as the hedging instrument. Accordingly, changes in the fair value of the hedging
instrument as a result of changes in forward rates and the effects of discounting are not included in the hedging effectiveness
assessment. Foreign operations are only hedged to the extent of the principal of the foreign denominated deposit liabilities or
notional amount of the derivative; we generally do not expect to incur significant ineffectiveness on hedges of net investments in
foreign operations.
Equity price risk
We use total return swaps in cash flow hedges to mitigate the cash flow variability of the expected payment associated with our
cash settled share-based compensation plan for certain key employees by exchanging interest payments for indexed RBC share
price change and dividend returns.
Credit risk
We predominantly use credit derivatives to economically hedge our credit exposures. We mitigate industry sector concentrations
and single-name exposures related to our credit portfolio by purchasing credit derivatives to transfer credit risk to third parties.
Derivative instruments designated in hedging relationships
The following table presents the fair values of the derivative instruments and the principal amounts of the non-derivative
liabilities, categorized by their hedging relationships, as well as derivatives that are not designated in hedging relationships.
Derivatives and non-derivative instruments
(1)
As at
October 31, 2022
October 31, 2021
Designated as hedging instruments
in hedging relationships
Not designated
in a hedging
relationship
Designated as hedging instruments
in hedging relationships
Not designated
in a hedging
relationship
(Millions of Canadian dollars)
Fair value
Cash flow
Net
investment
Fair value
Cash flow
Net
investment
Assets
Derivative instruments
$
247
$
57
$
36
$
154,099
$
66
$
9
$
98
$
95,368
Liabilities
Derivative instruments
27
–
126
153,338
131
20
18
91,270
Non-derivative instruments
–
–
25,798
n.a.
–
–
27,157
n.a.
(1)
The fair value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain
central counterparties.
n.a.
not applicable
192
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
The following tables provide the remaining term to maturity analysis of the notional amounts and the weighted average rates of
the hedging instruments and their carrying amounts by types of hedging relationships:
Fair value hedges
As at October 31, 2022
Notional amounts
Carrying amount
(1)
(Millions of Canadian dollars, except average rates)
Within
1 year
1 through
5 years
Over
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%
As at October 31, 2021
Notional amounts
Carrying amount
(1)
(Millions of Canadian dollars, except average rates)
Within
1 year
1 through
5 years
Over
5 years
Total
Assets
Liabilities
Interest rate risk
Interest rate contracts
Hedge of fixed rate assets
$
10,503
$
25,008
$
6,568
$
42,079
$
19
$
116
Hedge of fixed rate liabilities
8,939
44,870
11,646
65,455
47
15
Weighted average fixed interest rate
Hedge of fixed rate assets
0.8%
0.7%
1.9%
0.9%
Hedge of fixed rate liabilities
1.5%
1.2%
1.5%
1.3%
(1)
The carrying value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain
central counterparties.
Cash flow hedges
As at October 31, 2022
Notional amounts
Carrying amount
(1)
(Millions of Canadian dollars, except average rates)
Within
1 year
1 through
5 years
Over
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
As at October 31, 2021
Notional amounts
Carrying amount
(1)
(Millions of Canadian dollars, except average rates)
Within
1 year
1 through
5 years
Over
5 years
Total
Assets
Liabilities
Interest rate risk
Interest rate contracts
Hedge of variable rate assets
$
57,304
$
28,707
$
4,112
$
90,123
$
–
$
–
Hedge of variable rate liabilities
16,659
55,556
13,784
85,999
–
–
Weighted average fixed interest rate
Hedge of variable rate assets
0.5%
1.0%
1.2%
0.7%
Hedge of variable rate liabilities
0.8%
1.2%
1.5%
1.2%
Foreign exchange risk
Cross currency swaps
$
–
$
183
$
–
$
183
$
9
$
–
Weighted average CAD-EUR exchange rate
n.a.
1.52
n.a.
1.52
(1)
The carrying value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain
central counterparties.
n.a.
not applicable
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
193
Note 9
Derivative financial instruments and hedging activities
(continued)
Net investment hedges
As at October 31, 2022
Notional/Principal
Carrying amount
(Millions of Canadian dollars, except average rates)
Within
1 year
1 through
5 years
Over
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
As at October 31, 2021
Notional/Principal
Carrying amount
(Millions of Canadian dollars, except average rates)
Within
1 year
1 through
5 years
Over
5 years
Total
Assets
Liabilities
Foreign exchange risk
Foreign currency liabilities
$
433
$
26,294
$
401
$
27,128
n.a.
$
27,157
Weighted average CAD-USD exchange rate
1.32
1.29
1.30
1.29
Weighted average CAD-EUR exchange rate
–
1.51
1.48
1.51
Weighted average CAD-GBP exchange rate
–
1.72
–
1.72
Forward contracts
$
4,951
$
–
$
–
$
4,951
$
98
$
18
Weighted average CAD-USD exchange rate
1.26
n.a.
n.a.
1.26
Weighted average CAD-EUR exchange rate
1.45
n.a.
n.a.
1.45
Weighted average CAD-GBP exchange rate
1.73
n.a.
n.a.
1.73
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, 2022
Carrying amount
Accumulated amount of fair
value adjustments on the
hedged item included in the
carrying amount
(Millions of Canadian dollars)
Assets
Liabilities
Assets
Liabilities
Balance sheet items:
Changes in fair
values used for
calculating hedge
ineffectiveness
Interest rate risk
Fixed rate assets
(1)
$52,216
$
–
$ (3,285)
$
–
Securities – Investment, net of
applicable allowance; Loans – Retail;
Loans – Wholesale
$
(3,695)
Fixed rate liabilities
(1)
–
86,738
–
(5,924)
Deposits – Business and government;
Subordinated debentures
Deposits – Bank
5,742
As at and for the year ended October 31, 2021
Carrying amount
Accumulated amount of fair
value adjustments on the
hedged item included in the
carrying amount
(Millions of Canadian dollars)
Assets
Liabilities
Assets
Liabilities
Balance sheet items:
Changes in fair
values used for
calculating hedge
ineffectiveness
Interest rate risk
Fixed rate assets
(1)
$ 42,810
$
–
$
(78)
$
–
Securities – Investment, net of
applicable allowance; Loans – Retail;
Loans – Wholesale
$
(1,027)
Fixed rate liabilities
(1)
–
65,355
–
(59)
Deposits – Business and government;
Subordinated debentures
1,842
(1)
As at October 31, 2022, the accumulated amount of fair value hedge adjustments remaining in the Balance Sheet for hedged items that have ceased to be adjusted for
hedging gains and losses is a loss of $486 million for fixed-rate assets and a loss of $25 million for fixed-rate liabilities (October 31, 2021 – gain of $125 million and loss of
$62 million, respectively).
194
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Cash flow and net investment hedges – assets and liabilities designated as hedged items
Balance sheet items:
Changes in fair
values used for
calculating hedge
ineffectiveness
Cash flow hedge/foreign
currency translation reserve
(Millions of Canadian dollars)
Continuing hedges
Discontinued
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;
Asset purchased under reverse
repurchase agreements and securities borrowed
Variable rate liabilities
Deposits – Business and government;
Deposits – Personal;
(6,895)
5,471
2,231
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)
Balance sheet items:
Changes in fair
values used for
calculating hedge
ineffectiveness
Cash flow hedge/foreign
currency translation reserve
(Millions of Canadian dollars)
Continuing hedges
Discontinued
hedges
Cash flow hedges
Interest rate risk
Variable rate assets
Securities – Investment, net of
applicable allowance; Loans – Retail
$
614
$
(402)
$
206
Variable rate liabilities
Deposits – Business and government;
Deposits – Personal
(2,641)
1,310
(399)
Foreign exchange risk
Fixed rate assets
Securities – Investment, net of
applicable allowance; Loans – Retail
(98)
1
–
Net investment hedges
Foreign exchange risk
Foreign subsidiaries
n.a.
(2,331)
(4,032)
(421)
n.a.
not applicable
Effectiveness of designated hedging relationships
For the year ended October 31, 2022
(Millions of Canadian dollars)
Change in fair value
of hedging
instrument
Hedge
ineffectiveness
recognized in
income
(1)
Changes in the value of
the hedging instrument
recognized in OCI
Amount reclassified
from hedge reserves
to income
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)
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
195
Note 9
Derivative financial instruments and hedging activities
(continued)
For the year ended October 31, 2021
(Millions of Canadian dollars)
Change in fair value
of hedging
instrument
Hedge
ineffectiveness
recognized in
income
(1)
Changes in the value of
the hedging instrument
recognized in OCI
Amount reclassified
from hedge reserves
to income
Fair value hedges
Interest rate risk
Interest rate contracts – fixed rate assets
$
929
$
(98)
n.a.
n.a.
Interest rate contracts – fixed rate liabilities
(1,802)
40
n.a.
n.a.
Cash flow hedges
Interest rate risk
Interest rate contracts – variable rate assets
(631)
(17)
$
(497)
$
279
Interest rate contracts – variable rate liabilities
2,579
9
1,949
(1,024)
Foreign exchange risk
Cross currency swap – fixed rate assets
98
–
98
103
Net investment hedges
Foreign exchange risk
Foreign currency liabilities
1,882
–
1,882
–
Forward contracts
449
–
449
1
(1)
Hedge ineffectiveness recognized in income included losses of $19 million that are excluded from the assessment of hedge effectiveness and are offset by economic
hedges (October 31, 2021 – $101 million).
n.a.
not applicable
Reconciliation of components of equity
The following table provides a reconciliation by risk category of each component of equity and an analysis of other
comprehensive income relating to hedge accounting:
For the year ended October 31, 2022
For the year ended October 31, 2021
(Millions of Canadian dollars)
Cash flow hedge
reserve
Foreign currency
translation reserve
Cash flow hedge
reserve
Foreign currency
translation reserve
Balance at the beginning of the year
$
566
$
2,055
$
(1,079)
$
4,632
Cash flow hedges
Effective portion of changes in fair value:
Interest rate risk
2,241
1,452
Foreign exchange risk
23
100
Equity price risk
(1)
306
Net amount reclassified to profit or loss:
Ongoing hedges:
Interest rate risk
(227)
505
Foreign exchange risk
(17)
(105)
Equity price risk
(23)
(271)
De-designated hedges:
Interest rate risk
530
240
Hedges of net investment in foreign
operations
Foreign exchange denominated debt
(1,768)
1,882
Forward foreign exchange contracts
(159)
449
Foreign currency translation differences
for foreign operations
5,085
(4,308)
Reclassification of losses (gains) on
foreign currency translation to income
(18)
(7)
Reclassification of losses (gains) on net
investment hedging activities to income
23
(1)
Tax on movements on reserves during the
period
(698)
470
(582)
(592)
Balance at the end of the year
$
2,394
$
5,688
$
566
$
2,055
196
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Note 10
Premises and equipment
For the year ended October 31, 2022
Owned by the Bank
(1)
Right-of-use lease assets
(Millions of Canadian dollars)
Land
Buildings
Computer
equipment
Furniture,
fixtures
and other
equipment
Leasehold
improvements
Work in
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
For the year ended October 31, 2021
Owned by the Bank
(1), (2)
Right–of–use lease assets
(Millions of Canadian dollars)
Land
Buildings
Computer
equipment
Furniture,
fixtures
and other
equipment
Leasehold
improvements
Work in
process
Buildings
Equipment
(2)
Total
Cost
Balance at beginning of period
$ 152
$
1,310
$
1,150
$
886
$
2,675
$
203
$
5,171
$
254
$ 11,801
Additions
1
–
28
6
94
388
379
109
1,005
Acquisition through business
combination
–
–
–
–
–
–
–
–
–
Transfers from work in
process
–
13
180
47
170
(410)
–
–
–
Disposals
(2)
(24)
(286)
(65)
(106)
(1)
(49)
(56)
(589)
Foreign exchange translation
(6)
(20)
(27)
(16)
(62)
(5)
(167)
1
(302)
Other
–
29
81
(85)
(17)
(5)
60
–
63
Balance at end of period
$ 145
$
1,308
$
1,126
$
773
$
2,754
$
170
$
5,394
$
308
$ 11,978
Accumulated depreciation
Balance at beginning of period
$
–
$
648
$
580
$
467
$
1,480 $
–
$
584
$
108
$
3,867
Depreciation
–
49
245
94
222
–
578
88
1,276
Disposals
–
(12)
(284)
(64)
(92)
–
(5)
(40)
(497)
Foreign exchange translation
–
(9)
(16)
(7)
(31)
–
(24)
1
(86)
Other
–
(12)
59
(63)
10
–
–
–
(6)
Balance at end of period
$
–
$
664
$
584
$
427
$
1,589
$
–
$
1,133
$
157
$
4,554
Net carrying amount at end of
period
$ 145
$
644
$
542
$
346
$
1,165
$
170
$
4,261
$
151
$
7,424
(1)
As at October 31, 2022, we had total contractual commitments of $185 million to purchase premises and equipment (October 31, 2021 – $162 million).
(2)
Certain amounts have been revised from those previously presented.
Lease payments
Total lease payments for the year ended October 31, 2022 were $1,213 million, of which $578 million or 48% relates to variable
payments and $635 million or 52% relates to fixed payments. Total lease payments for the year ended October 31, 2021 were
$1,259 million
,
of which $613 million or 49% relates to variable payments and $646 million or 51% relates to fixed payments.
Total variable lease payments not included in the measurement of lease liabilities were $571 million for the year ended
October 31, 2022 (October 31, 2021 – $603 million).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
197
Note 11
Goodwill and other intangible assets
Goodwill
For the year ended October 31, 2022
(Millions of
Canadian dollars)
Canadian
Banking
Caribbean
Banking
Canadian
Wealth
Management
Global Asset
Management
U.S. Wealth
Management
(including
City National)
International
Wealth
Management
Insurance
Investor &
Treasury
Services
Capital
Markets
Total
Balance at beginning of
period
$ 2,557
$
1,600
$
577
$
1,964
$
2,768
$
115
$
112
$
148
$ 1,013
$ 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
$
112
$
147
$ 1,099
$ 12,277
For the year ended October 31, 2021
(Millions of
Canadian dollars)
Canadian
Banking
Caribbean
Banking
Canadian
Wealth
Management
Global Asset
Management
U.S. Wealth
Management
(including
City National)
International
Wealth
Management
Insurance
Investor &
Treasury
Services
Capital
Markets
Total
Balance at beginning of
period
$
2,557
$
1,719
$
587
$
2,001
$
2,978
$
121
$
112
$
149
$ 1,078
$ 11,302
Acquisitions
–
–
–
–
–
–
–
–
–
–
Dispositions
–
(3)
–
–
–
(4)
–
–
–
(7)
Currency translations
–
(116)
(10)
(37)
(210)
(2)
–
(1)
(65)
(441)
Balance at end of period
$
2,557
$
1,600
$
577
$
1,964
$
2,768
$
115
$
112
$
148
$ 1,013
$ 10,854
We perform our annual impairment test by comparing the carrying amount of each CGU to its recoverable amount. The
recoverable amount of a CGU is represented by its VIU, except in circumstances where the carrying amount of a CGU exceeds its
VIU. In such cases, the greater of the CGU’s FVLCD and its VIU is the recoverable amount. Our annual impairment test is
performed as at August 1. The impact of subsequent acquisitions has also been considered in our impairment test.
In our 2022 and 2021 annual impairment tests, the recoverable amounts of our Caribbean Banking and International Wealth
Management CGUs were based on their FVLCD. The recoverable amounts of all other CGUs tested were based on their VIU.
Value in use
We calculate VIU using a five-year discounted cash flow method. Future cash flows are based on financial plans agreed by
management, estimated based on forecast results, business initiatives, capital required to support future cash flows and returns
to shareholders. Key drivers of future cash flows include net interest margins and average interest-earning assets. The values
assigned to these drivers over the forecast period are based on past experience, external and internal economic forecasts, and
management’s expectations of the impact of economic conditions on our financial results. Beyond the initial cash flow projection
period, cash flows are assumed to increase at a constant rate using a nominal long-term growth rate (terminal growth rate).
Terminal growth rates are based on the long-term steady state growth expectations in the countries within which the CGU
operates. The discount rates used to determine the present value of each CGU’s projected future cash flows are based on the
bank-wide cost of capital, adjusted for the risks to which each CGU is exposed. CGU-specific risks include: country risk, business/
operational risk, geographic risk (including political risk, devaluation risk, and government regulation), currency risk, and price
risk (including product pricing risk and inflation).
The estimation of VIU involves significant judgment in the determination of inputs to the discounted cash flow model and is
most sensitive to changes in future cash flows, discount rates and terminal growth rates applied to cash flows beyond the
forecast period. The sensitivity of the VIU to key inputs and assumptions used was tested by recalculating the recoverable
amount using reasonably possible changes to those parameters. As at August 1, 2022, no reasonably possible change in an
individual key input or assumption, as described, would result in a CGU’s carrying amount exceeding its recoverable amount
based on VIU.
198
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
The terminal growth rates and pre-tax discount rates used in our discounted cash flow models are summarized below.
As at
August 1, 2022
August 1, 2021
Discount
rate
(1)
Terminal
growth
rate
Discount
rate
(1)
Terminal
growth
rate
Group of cash generating units
Canadian Banking
11.0%
3.0%
9.4%
3.0%
Caribbean Banking
12.6
3.5
10.9
3.5
Canadian Wealth Management
11.8
3.0
10.5
3.0
Global Asset Management
11.8
3.0
10.5
3.0
U.S. Wealth Management (including City National)
12.8
3.0
11.1
3.0
International Wealth Management
(2)
n.m.
n.m.
n.m.
n.m.
Insurance
11.6
3.0
10.2
3.0
Investor & Treasury Services
11.8
3.0
9.9
3.0
Capital Markets
12.4
3.0
11.8
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 is determined using a multiples-based approach.
n.m. not meaningful
Fair value less costs of disposal – Caribbean Banking
As at August 1, 2022, the recoverable amount of our Caribbean Banking CGU, based on FVLCD, was 109% of its carrying amount
(August 1, 2021 – 123%). We calculated FVLCD using a discounted cash flow method that projects future cash flows over a 5-year
period. Cash flows are based on management forecasts, adjusted to approximate the considerations of a prospective third-party
buyer. Cash flows beyond the initial 5-year period are assumed to increase at a constant rate using a nominal long-term growth
rate. Future cash flows, terminal growth rates, and discount rates are based on the same factors noted above. The forecast
future cash flows were discounted using a pre-tax rate of 12.6% (August 1, 2021 – 10.9%), reflecting a higher interest rate
environment. This fair value measurement is categorized as level 3 in the fair value hierarchy as certain significant inputs are not
observable. We use significant judgment to determine inputs to the discounted cash flow model, which is most sensitive to
changes in future cash flows, discount rates and terminal growth rates.
We considered reasonably possible alternative scenarios, including market comparable transactions, which yielded
valuations ranging from an immaterial deficit to an immaterial surplus. The sensitivity of the FVLCD to key inputs and
assumptions was tested by recalculating the recoverable amount using reasonably possible change to those parameters. A
50 bps change in the terminal growth rate would increase and decrease the recoverable amount by $231 million and $203 million,
respectively. A 50 bps increase in the discount rate would decrease the recoverable amount by $267 million. A reduction in the
forecasted cash flows of 10% per annum would reduce the recoverable amount by $440 million. If future cash flows were reduced
by 8%, the recoverable amount would approximate the carrying amount. Changes in these assumptions have been applied
holding other individual factors constant. However, changes in one factor may be magnified or offset by related changes in other
assumptions as impacts to the recoverable amount are highly interdependent and changes in assumptions may not have a linear
effect on the recoverable amount of the CGU. In aggregate, the range of reasonably possible outcomes would not materially
affect the recoverable amount of the CGU.
Other intangible assets
For the year ended October 31, 2022
(Millions of Canadian dollars)
Internally
generated
software
Other
software
Core
deposit
intangibles
Customer
list and
relationships
In process
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
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
199
Note 11
Goodwill and other intangible assets
(continued)
For the year ended October 31, 2021
(Millions of Canadian dollars)
Internally
generated
software
(1)
Other
software
(1)
Core
deposit
intangibles
Customer
list and
relationships
(1)
In process
software
Total
Gross carrying amount
Balance at beginning of period
$
4,321
$
1,031
$
1,586
$
1,493
$
1,241
$
9,672
Additions
48
15
–
–
1,129
1,192
Acquisition through business combination
–
–
–
–
–
–
Transfers
1,022
69
–
–
(1,091)
–
Dispositions
(258)
(186)
–
(43)
(8)
(495)
Impairment losses
(157)
–
–
–
(9)
(166)
Currency translations
(83)
(43)
(112)
(41)
(29)
(308)
Other changes
(7)
8
–
5
3
9
Balance at end of period
$
4,886
$
894
$
1,474
$
1,414
$
1,236
$
9,904
Accumulated amortization
Balance at beginning of period
$
(2,529)
$
(630)
$
(793)
$
(968)
$
–
$
(4,920)
Amortization charge for the year
(898)
(138)
(150)
(101)
–
(1,287)
Dispositions
257
185
–
43
–
485
Impairment losses
137
–
–
–
–
137
Currency translations
45
24
58
29
–
156
Other changes
9
(13)
–
–
–
(4)
Balance at end of period
$
(2,979)
$
(572)
$
(885)
$
(997)
$
–
$
(5,433)
Net balance at end of period
$
1,907
$
322
$
589
$
417
$
1,236
$
4,471
(1)
Certain amounts have been revised from those previously presented.
Note 12
Joint ventures and associated companies
The following table summarizes the carrying value of our interests in joint ventures and associated companies accounted for
under the equity method as well as our share of the income of those entities.
Joint ventures
Associated companies
As at and for the year ended
(Millions of Canadian dollars)
October 31
2022
October 31
2021
October 31
2022
October 31
2021
Carrying amount
$
248
$
223
$
463
$
431
Share of:
Net income
$
103
$
107
$
7
$
23
We do not have any joint ventures or associated companies that are individually material to our financial results.
Certain of our subsidiaries, joint ventures and associates are subject to regulatory requirements of the jurisdictions in which
they operate. When these subsidiaries, joint ventures and associates are subject to such requirements, they may be restricted
from transferring to us our share of their assets in the form of cash dividends, loans or advances. As at October 31, 2022,
restricted net assets of these subsidiaries, joint ventures and associates were $44 billion (October 31, 2021 – $39 billion).
Note 13
Other assets
As at
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Accounts receivable and prepaids
$
4,250
$
5,056
Accrued interest receivable
4,703
2,195
Cash collateral
25,634
14,541
Commodity trading receivables
7,054
6,996
Deferred income tax asset
1,472
2,011
Employee benefit assets
3,331
2,640
Insurance-related assets
Collateral loans
524
615
Policy loans
85
87
Reinsurance assets
1,084
1,032
Other
12
62
Investments in joint ventures and associates
711
654
Margin deposits
14,684
11,441
Precious metals
1,772
1,619
Receivable from brokers, dealers and clients
3,299
3,395
Taxes receivable
6,933
4,891
Other
4,752
4,648
$ 80,300
$ 61,883
200
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Note 14
Deposits
As at
October 31, 2022
October 31, 2021
(Millions of Canadian dollars)
Demand
(1)
Notice
(2)
Term
(3)
Total
Demand
(1)
Notice
(2)
Term
(3)
Total
Personal
$
203,645
$ 64,743
$ 136,544
$
404,932
$
207,493
$
64,613
$
90,382
$
362,488
Business and government
348,004
17,855
394,011
759,870
356,020
20,800
319,533
696,353
Bank
10,458
490
33,064
44,012
12,549
449
28,992
41,990
$
562,107
$ 83,088
$ 563,619
$ 1,208,814
$
576,062
$
85,862
$ 438,907
$ 1,100,831
Non-interest-bearing
(4)
Canada
$
149,737
$
7,797
$
466
$
158,000
$
151,475
$
8,051
$
713
$
160,239
United States
52,702
–
–
52,702
54,021
–
–
54,021
Europe
(5)
620
–
–
620
632
–
–
632
Other International
7,840
–
–
7,840
8,002
–
–
8,002
Interest-bearing
(4)
Canada
305,779
17,982
409,586
733,347
315,464
19,857
312,987
648,308
United States
11,410
57,055
85,111
153,576
6,978
57,260
77,597
141,835
Europe
(5)
28,276
254
52,144
80,674
34,278
693
36,788
71,759
Other International
5,743
–
16,312
22,055
5,212
1
10,822
16,035
$
562,107
$ 83,088
$ 563,619
$ 1,208,814
$
576,062
$
85,862
$ 438,907
$ 1,100,831
(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, 2022, deposits denominated
in U.S. dollars, British pounds, Euro and other foreign currencies were $465 billion, $35 billion, $50 billion and $30 billion, respectively (October 31, 2021 – $399 billion,
$35 billion, $43 billion and $27 billion, respectively).
(5)
Europe includes the United Kingdom, Luxembourg, the Channel Islands, France and Italy.
Contractual maturities of term deposits
As at
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Within 1 year:
less than 3 months
$ 159,602
$ 133,776
3 to 6 months
61,996
64,062
6 to 12 months
156,531
83,871
1 to 2 years
49,225
45,532
2 to 3 years
42,809
29,204
3 to 4 years
27,609
24,573
4 to 5 years
33,835
25,329
Over 5 years
32,012
32,560
$ 563,619
$ 438,907
Aggregate amount of term deposits in denominations of one hundred thousand dollars or more
$ 521,000
$ 416,000
Average deposit balances and average rates of interest
For the year ended
October 31, 2022
October 31, 2021
(Millions of Canadian dollars, except for percentage amounts)
Average
balances
Average
rates
Average
balances
Average
rates
Canada
$
847,052
1.02%
$
772,875
0.61%
United States
207,436
0.50
180,230
0.13
Europe
81,824
1.03
77,217
0.55
Other International
28,613
0.72
28,731
0.33
$ 1,164,925
0.92%
$ 1,059,053
0.51%
Note 15
Insurance
Risk management
Insurance risk is the risk of fluctuations in the timing, frequency or severity of insured events, relative to our expectations at the
time of underwriting. We do not have a high degree of concentration risk due to our geographic diversity and business mix.
Concentration risk is not a major concern for the life insurance business as it does not have a material level of region-specific
characteristics. Reinsurance is also used for a majority of our Canadian insurance business to lower our risk profile and limit the
liability on a single claim. We manage underwriting and pricing risk through the use of underwriting guidelines which detail the
class, nature and type of business that may be accepted, pricing policies by product line and controls over policy wordings. The
risk that claims are handled or paid inappropriately is mitigated by using a range of information technology (IT) system controls
and manual processes conducted by experienced staff. These, together with a range of detailed policies and procedures, ensure
that all claims are handled in a timely, appropriate and accurate manner.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
201
Note 15
Insurance
(continued)
Reinsurance ceded
In the ordinary course of business, our insurance operations reinsure risks to other insurance and reinsurance companies in
order to lower our risk profile, limit loss exposure to large risks, and provide additional capacity for future growth. These ceding
reinsurance arrangements do not relieve our insurance subsidiaries from our direct obligations to the insured parties. We
evaluate the financial condition of the reinsurers and monitor our concentrations of credit risks to minimize our exposure to
losses from reinsurer insolvency. Reinsurance amounts (ceded premiums) included in Non-interest income are shown in the
table below.
Net premiums and claims
For the year ended
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Gross premiums
$
4,913
$
5,090
Premiums ceded to reinsurers
(260)
(250)
Net premiums
$
4,653
$
4,840
Gross claims and benefits
(1)
$
1,741
$
3,834
Reinsurers’ share of claims and benefits
(273)
(287)
Net claims
$
1,468
$
3,547
(1)
Includes the change in fair value of investments backing our policyholder liabilities.
Insurance claims and policy benefit liabilities
All actuarial assumptions are set in conjunction with Canadian Institute of Actuaries Standards of Practice and OSFI
requirements. The assumptions that have the greatest effect on the measurement of insurance liabilities, the processes used to
determine them and the assumptions used as at October 31, 2022 are as follows:
Mortality and morbidity – Mortality estimates are based on standard industry insured mortality tables, adjusted where
appropriate to reflect our own experience. Morbidity assumptions are made with respect to the rates of claim incidence and
claim termination for health insurance policies and are based on a combination of industry and our own experience.
Future investment yield – Assumptions are based on the current yield rate, a reinvestment assumption and an allowance for
future credit losses for each line of business, and are developed using interest rate scenario testing, including prescribed
scenarios for determination of minimum liabilities as set out in the actuarial standards.
Policyholder behaviour
– Under certain policies, the policyholder has a contractual right to change benefits and premiums, as
well as convert policies to permanent forms of insurance. All policyholders have the right to terminate their policies through
lapse. Lapses represent the termination of policies due to non-payment of premiums. Lapse assumptions are primarily based on
our recent experience adjusted for emerging industry experience where applicable.
Significant insurance assumptions
As at
October 31
2022
October 31
2021
Life Insurance
Canadian Insurance
Mortality rates
(1)
0.11%
0.12%
Morbidity rates
(2)
1.81
1.78
Future reinvestment yield
(3)
3.75
3.76
Lapse rates
(4)
0.50
0.50
International Insurance
Mortality rates
(1)
0.80
0.79
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).
202
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Insurance claims and policy benefit liabilities
The following table summarizes our gross and reinsurers’ share of insurance liabilities at the end of the year.
As at
October 31, 2022
October 31, 2021
(Millions of Canadian dollars)
Gross
Ceded
Net
Gross
Ceded
Net
Life insurance policyholder liabilities
Life, health and annuity
$ 11,481
$
902
$ 10,579
$
12,775
$
861
$
11,914
Investment contracts
(1)
41
–
41
42
–
42
$ 11,522
$
902
$ 10,620
$
12,817
$
861
$
11,956
Non-life insurance policyholder liabilities
Unearned premium provision
(1)
$
7
$
–
$
7
$
6
$
–
$
6
Unpaid claims provision
30
1
29
41
3
38
$
37
$
1
$
36
$
47
$
3
$
44
$ 11,559
$
903
$ 10,656
$
12,864
$
864
$
12,000
(1)
Liabilities for investment contracts and unearned premium provision are reported in Other liabilities on the Consolidated Balance Sheets.
Reconciliation of life insurance policyholder liabilities
For the year ended
October 31, 2022
October 31, 2021
(Millions of Canadian dollars)
Gross
Ceded
Net
Gross
Ceded
Net
Balances at beginning of period
$ 12,817
$
861
$ 11,956
$
12,123
$
752
$
11,371
New and in-force policies
(1)
(1,288)
(130)
(1,158)
775
108
667
Changes in assumption and methodology
(6)
171
(177)
(89)
1
(90)
Net change in investment contracts
(1)
–
(1)
8
–
8
Balances at end of period
$ 11,522
$
902
$ 10,620
$
12,817
$
861
$
11,956
(1)
Includes the change in fair value of investments backing our policyholder liabilities.
The net decrease in life insurance claims and policy benefit liabilities over the prior year was primarily attributable to market
movements on assets backing life insurance policyholder liabilities and asset and liability matching activities, partially offset by
business growth. During the year, we reviewed all key actuarial methods and assumptions which are used in determining the
policy benefit liabilities resulting in a $177 million net decrease to insurance liabilities comprised of: (i) a decrease of $225 million
for revised actuarial reserves on interest rate risk; (ii) an increase of $9 million due to reinsurance contract renegotiations;
(iii) an increase of $37 million arising from insurance risk related assumption updates largely due to mortality, morbidity, and
expense assumptions; and (iv) an increase of $2 million due to changes to valuation models and related data.
Sensitivity analysis
The following table presents the sensitivity of the level of insurance policyholder liabilities disclosed in this note to reasonably
possible changes in the actuarial assumptions used to calculate them. The percentage change in each variable is applied to a
range of existing actuarial modelling assumptions to derive the possible impact on net income. The analyses are performed
where a single assumption is changed while holding other assumptions constant, which is unlikely to occur in practice.
Net income impact
for the year ended
(Millions of Canadian dollars, except for percentage amounts)
Change in
variable
October 31
2022
October 31
2021
Increase in market interest rates
(1)
1%
$
(10)
$
(14)
Decrease in market interest rates
(1)
1
5
17
Increase in equity market values
(2)
10
6
8
Decrease in equity market values
(2)
10
(10)
(10)
Increase in maintenance expenses
(3)
5
(33)
(37)
Life Insurance
(3)
Adverse change in annuitant mortality rates
2
(166)
(287)
Adverse change in assurance mortality rates
2
(59)
(67)
Adverse change in morbidity rates
5
(181)
(213)
Adverse change in lapse rates
10
(199)
(253)
(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
increased liabilities due to an adverse change in the given assumption over the lifetime of all in-force policies.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
203
Note 16
Segregated funds
We offer certain individual variable insurance contracts that allow policyholders to invest in segregated funds. The investment
returns on these funds are passed directly to the policyholders. Amounts invested are at the policyholders’ risk, except where the
policyholders have selected options providing maturity and death benefit guarantees. A liability for the guarantees is recorded in
Insurance claims and policy benefit liabilities.
Segregated funds net assets are recorded at fair value. All of our segregated funds net assets are categorized as Level 1 in
the fair value hierarchy. The fair value of the segregated funds liabilities is equal to the fair value of the segregated funds net
assets. Segregated funds net assets and segregated funds liabilities are presented on separate lines on the Consolidated
Balance Sheets. The following tables present the composition of net assets and the changes in net assets for the year.
Segregated funds net assets
As at
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Cash
$
39
$
40
Investment in mutual funds
2,598
2,625
Other assets (liabilities), net
1
1
$
2,638
$
2,666
Changes in net assets
For the year ended
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Net assets at beginning of period
$
2,666
$
1,922
Additions (deductions):
Deposits from policyholders
859
975
Net realized and unrealized gains (losses)
(301)
381
Interest and dividends
56
51
Payment to policyholders
(573)
(604)
Management and administrative fees
(69)
(59)
Net assets at end of period
$
2,638
$
2,666
Note 17
Employee benefits – Pension and other post-employment benefits
Plan characteristics
We sponsor a number of programs that provide pension and post-employment benefits to eligible employees. The majority of
beneficiaries of the pension plans are located in Canada and other beneficiaries of the pension plans are primarily located in the
U.S., the U.K. and the Caribbean. The pension arrangements including investment, plan benefits and funding decisions are
governed by local pension committees or trustees, who are legally segregated from the Bank, or management. Significant plan
changes require the approval of the Board of Directors.
Our defined benefit pension plans provide pension benefits based on years of service, contributions and average earnings at
retirement. Our primary defined benefit pension plans are closed to new members. New employees are generally eligible to join
defined contribution pension plans. The specific features of these plans vary by location. We also provide supplemental
non-registered (non-qualified) pension plans for certain executives and senior management that are typically unfunded or
partially funded.
Our defined contribution pension plans provide pension benefits based on accumulated employee and Bank contributions.
The Bank contributions are based on a percentage of an employee’s annual earnings and a portion of the Bank contribution may
be dependent on the amount being contributed by the employee and their years of service.
Our primary other post-employment benefit plans provide health, dental, disability and life insurance coverage and cover a
number of current and retired employees who are mainly located in Canada. These plans are unfunded unless required by
legislation.
We measure our benefit obligations and pension assets as at October 31 each year. All plans are valued using the projected
unit-credit method. We fund our registered defined benefit pension plans in accordance with actuarially determined amounts
required to satisfy employee benefit obligations under current pension regulations. For our principal pension plan, the most
recent funding actuarial valuation was completed on January 1, 2022, and the next valuation will be completed on January 1, 2023.
For the year ended October 31, 2022, total contributions to our pension plans (defined benefit and defined contribution
plans) and other post-employment benefit plans were $427 million and $79 million (October 31, 2021 – $456 million and
$75 million), respectively. For 2023, total contributions to our pension plans and other post-employment benefit plans are
expected to be $341 million and $84 million, respectively.
Risks
By their design, the defined benefit pension and other post-employment benefit plans expose the Bank to various risks such as
investment performance, reductions in discount rates used to value the obligations, increased longevity of plan members, future
inflation levels impacting future salary increases as well as future increases in healthcare costs. These risks will reduce over time
due to the membership closure of our primary defined benefit pension plans and migration to defined contribution pension plans.
204
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
The following table presents the financial position related to all of our material pension and other post-employment benefit plans
worldwide, including executive retirement arrangements.
As at
October 31, 2022
October 31, 2021
(Millions of Canadian dollars)
Defined benefit
pension plans
Other post-
employment
benefit plans
Defined benefit
pension plans
Other post-
employment
benefit plans
Canada
Fair value of plan assets
$
14,310
$
–
$
16,698
$
–
Present value of defined benefit obligation
11,271
1,387
14,403
1,703
Net surplus (deficit)
$
3,039
$
(1,387)
$
2,295
$
(1,703)
International
Fair value of plan assets
$
716
$
–
$
1,005
$
–
Present value of defined benefit obligation
622
75
912
77
Net surplus (deficit)
$
94
$
(75)
$
93
$
(77)
Total
Fair value of plan assets
$
15,026
$
–
$
17,703
$
–
Present value of defined benefit obligation
11,893
1,462
15,315
1,780
Total net surplus (deficit)
$
3,133
$
(1,462)
$
2,388
$
(1,780)
Effect of asset ceiling
(8)
–
(6)
–
Total net surplus (deficit), net of effect of asset ceiling
$
3,125
$
(1,462)
$
2,382
$
(1,780)
Amounts recognized in our Consolidated Balance Sheets
Employee benefit assets
$
3,331
$
–
$
2,640
$
–
Employee benefit liabilities
(206)
(1,462)
(258)
(1,780)
Total net surplus (deficit), net of effect of asset ceiling
$
3,125
$
(1,462)
$
2,382
$
(1,780)
The following table presents an analysis of the movement in the financial position related to all of our material pension and other
post-employment benefit plans worldwide, including executive retirement arrangements.
As at or for the year ended
October 31, 2022
October 31, 2021
(Millions of Canadian dollars)
Defined benefit
pension plans
(1)
Other post-
employment
benefit plans
Defined benefit
pension plans
(1)
Other post-
employment
benefit plans
Fair value of plan assets at beginning of period
$
17,703
$
–
$
16,024
$
–
Interest income
580
–
432
–
Remeasurements
Return on plan assets (excluding interest income)
(2,931)
–
1,614
–
Change in foreign currency exchange rate
(62)
–
(21)
–
Contributions – Employer
177
79
221
75
Contributions – Plan participant
45
20
46
19
Payments
(610)
(99)
(594)
(94)
Payments – amount paid in respect of settlements
3
–
(2)
–
Business combinations/Disposals
135
–
(4)
–
Other
(14)
–
(13)
–
Fair value of plan assets at end of period
$
15,026
$
–
$
17,703
$
–
Benefit obligation at beginning of period
$
15,315
$
1,780
$
16,351
$
1,953
Current service costs
308
42
359
46
Past service costs
(1)
2
–
(1)
Gains and losses on settlements
(3)
–
2
–
Interest expense
496
63
439
57
Remeasurements
Actuarial losses (gains) from demographic
assumptions
(2)
(1)
–
(6)
Actuarial losses (gains) from financial assumptions
(3,797)
(341)
(1,253)
(184)
Actuarial losses (gains) from experience adjustments
83
(9)
(5)
(2)
Change in foreign currency exchange rate
(47)
6
(24)
(7)
Contributions – Plan participant
45
20
46
19
Payments
(610)
(99)
(594)
(94)
Payments – amount paid in respect of settlements
3
–
(2)
–
Business combinations/Disposals
103
(1)
(4)
(1)
Benefit obligation at end of period
$
11,893
$
1,462
$
15,315
$
1,780
Unfunded obligation
$
23
$
1,462
$
26
$
1,633
Wholly or partly funded obligation
11,870
–
15,289
147
Total benefit obligation
$
11,893
$
1,462
$
15,315
$
1,780
(1)
For pension plans with funding deficits, the benefit obligations and fair value of plan assets as at October 31, 2022 were $323 million and $117 million, respectively
(October 31, 2021 – $413 million and $155 million, respectively).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
205
Note 17
Employee benefits – Pension and other post-employment benefits
(continued)
Pension and other post-employment benefit expense
The following table presents the composition of our pension and other post-employment benefit expense related to our material
pension and other post-employment benefit plans worldwide.
For the year ended
Pension plans
Other post-employment
benefit plans
(Millions of Canadian dollars)
October 31
2022
October 31
2021
October 31
2022
October 31
2021
Current service costs
$
308
$
359
$
42
$
46
Past service costs
(1)
–
2
(1)
Gains and losses on settlements
(3)
2
–
–
Net interest expense (income)
(84)
7
63
57
Remeasurements of other long term benefits
–
–
(26)
(12)
Administrative expense
14
13
–
–
Defined benefit pension expense
$
234
$
381
$
81
$
90
Defined contribution pension expense
250
235
–
–
$
484
$
616
$
81
$
90
Service costs for the year ended October 31, 2022 totalled $305 million (October 31, 2021 – $356 million) for pension plans in Canada
and $2 million (October 31, 2021 – $3 million) for International plans. Net interest expense (income) for the year ended October 31,
2022 totalled $(83) million (October 31, 2021 – $7 million) for pension plans in Canada and $(1) million (October 31, 2021 – $nil) for
International plans.
Pension and other post-employment benefit remeasurements
The following table presents the composition of our remeasurements recorded in OCI related to our material pension and other
post-employment benefit plans worldwide.
For the year ended
Defined benefit pension
plans
Other post-employment
benefit plans
(Millions of Canadian dollars)
October 31
2022
October 31
2021
October 31
2022
October 31
2021
Actuarial (gains) losses:
Changes in demographic assumptions
$
(2)
$
–
$
(1)
$
(6)
Changes in financial assumptions
(3,797)
(1,253)
(319)
(177)
Experience adjustments
83
(5)
(5)
3
Return on plan assets (excluding interest based on discount rate)
2,931
(1,614)
–
–
Change in asset ceiling (excluding interest income)
2
5
–
–
$
(783)
$ (2,867)
$
(325)
$
(180)
Remeasurements recorded in OCI for the year ended October 31, 2022 were gains of $798 million (October 31, 2021 – gains of
$2,819 million) for pension plans in Canada and losses of $15 million (October 31, 2021 – gains of $48 million) for International plans.
Investment policy and strategies
Defined benefit pension plan assets are invested prudently in order to meet our longer-term pension obligations. The pension
plans’ investment strategy is to hold a diversified mix of investments by asset class and geographic location in order to reduce
investment-specific risk to the funded status while maximizing the expected returns to meet pension obligations. Investment of
the plan’s assets follows an asset/liability framework as investment is conducted with careful consideration of the pension
obligation’s sensitivity to interest rates and credit spreads which are key risk factors impacting the obligation’s value. Factors
taken into consideration in developing our asset mix include but are not limited to the following:
•
the nature of the underlying benefit obligations, including the duration and term profile of the liabilities;
•
the member demographics, including expectations for normal retirements, terminations, and deaths;
•
the financial position of the pension plans;
•
the diversification benefits obtained by the inclusion of multiple asset classes; and
•
expected asset returns, including asset and liability correlations, along with liquidity requirements of the plan.
To implement our asset mix policy, we may invest in debt securities, equity securities, and alternative investments. Our holdings
in certain investments, including common shares, debt securities rated lower than BBB and residential and commercial
mortgages, cannot exceed a defined percentage of the market value of our defined benefit pension plan assets. We may use
derivative instruments as either a synthetic investment to more efficiently replicate the performance of an underlying security, or
as a hedge against financial risks within the plan. To manage our credit risk exposure, where derivative instruments are not
centrally cleared, counterparties are required to meet minimum credit ratings and enter into collateral agreements.
Our defined benefit pension plan assets are primarily comprised of debt and equity securities and alternative investments.
Our equity securities generally have unadjusted quoted market prices in an active market (Level 1) and our debt securities
generally have quoted market prices for similar assets in an active market (Level 2). Alternative investments and other includes
cash, hedge funds, and private fund investments including infrastructure equity, real estate leases and private debt and equity. In
206
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
the case of private fund investments, no quoted market prices are usually available (Level 2 or Level 3). These fund assets are
either valued by an independent valuator or priced using observable market inputs.
During the year ended October 31, 2022, the management of defined benefit pension investments focused on increased
allocation to risk reducing investments and strategies, improving diversification, while striving to maintain expected investment
return. Over time, an increasing allocation to debt securities is being used to reduce asset/liability duration mismatch and hence
variability of the plan’s funded status due to interest rate movement. Longer maturity debt securities, given their price sensitivity
to movements in interest rates, are considered to be a good economic hedge to risk associated with the plan’s liabilities, which
are discounted using predominantly long maturity bond interest rates as inputs.
Asset allocation of defined benefit pension plans
(1)
,
(2)
As at
October 31, 2022
October 31, 2021
(Millions of Canadian dollars, except percentages)
Fair value
Percentage
of total
plan assets
Quoted
in active
market
(3)
Fair value
Percentage
of total
plan assets
Quoted
in active
market
(3)
Equity securities
Domestic
$
1,469
10%
100%
$
1,879
11%
100%
Foreign
2,799
19
100
4,202
24
100
Debt securities
Domestic government bonds
(4)
3,489
23
–
3,766
21
–
Foreign government bonds
114
1
–
71
–
–
Corporate and other bonds
3,171
21
–
3,844
22
–
Alternative investments and other
3,984
26
8
3,941
22
12
$
15,026
100%
30%
$
17,703
100%
37%
(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, 34% of our total plan assets would be classified as quoted
in an active market (October 31, 2021 – 41%).
(4)
Amounts are net of securities sold under repurchase agreements.
As at October 31, 2022, the plan assets include 0.7 million (October 31, 2021 – 1.0 million) of our common shares with a fair
value of $89 million (October 31, 2021 – $128 million) and $48 million (October 31, 2021 – $29 million) of our debt securities. For the
year ended October 31, 2022, dividends received on our common shares held in the plan assets were $4 million (October 31, 2021 –
$4 million).
Maturity profile
The following table presents the maturity profile of our defined benefit pension plan obligation.
(Millions of Canadian dollars, except participants and years)
As at October 31, 2022
Canada
International
Total
Number of plan participants
66,616
6,043
72,659
Actual benefit payments 2022
$
585
$
22
$
607
Benefits expected to be paid 2023
643
35
678
Benefits expected to be paid 2024
668
34
702
Benefits expected to be paid 2025
691
33
724
Benefits expected to be paid 2026
713
35
748
Benefits expected to be paid 2027
733
34
767
Benefits expected to be paid 2028-2032
3,907
189
4,096
Weighted average duration of defined benefit payments
12.4 years
15.1 years
12.5 years
Significant assumptions
Our methodologies to determine significant assumptions used in calculating the defined benefit pension and other post-
employment benefit expense are as follows:
Discount rate
For the Canadian pension and other post-employment benefit plans, all future expected benefit payments at each measurement
date are discounted at spot rates from a derived Canadian AA corporate bond yield curve. The derived curve is based on actual
short and mid-maturity corporate AA rates and extrapolated longer term rates. The extrapolated corporate AA rates are derived
from observed corporate A, corporate AA and provincial AA yields. For the International pension and other post-employment
benefit plans, all future expected benefit payments at each measurement date are discounted at spot rates from a local AA
corporate bond yield curve. Spot rates beyond 30 years are set to equal the 30-year spot rate. The discount rate is the equivalent
single rate that produces the same discounted value as that determined using the entire discount curve. This valuation
methodology does not rely on assumptions regarding reinvestment returns.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
207
Note 17
Employee benefits – Pension and other post-employment benefits
(continued)
Rate of increase in future compensation
The assumptions for increases in future compensation are developed separately for each plan, where relevant. Each assumption
is set based on the price inflation assumption and compensation policies in each market, as well as relevant local statutory and
plan-specific requirements.
Healthcare cost trend rates
Healthcare cost calculations are based on both short and long term trend assumptions established using the plan’s recent
experience as well as market expectations.
Weighted average assumptions to determine benefit obligation
As at
Defined benefit pension
plans
Other post-employment
benefit plans
October 31
2022
October 31
2021
October 31
2022
October 31
2021
Discount rate
5.4%
3.3%
5.5%
3.6%
Rate of increase in future compensation
3.0%
3.0%
n.a.
n.a.
Healthcare cost trend rates
(1)
– Medical
n.a.
n.a.
3.5%
3.4%
– 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, 2022
October 31, 2021
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
24.2
24.8
25.1
23.8
24.2
24.8
25.1
United Kingdom
23.4
25.4
24.7
26.8
23.6
25.4
25.3
27.2
Sensitivity analysis
Assumptions adopted can have a significant effect on the value of the obligations for defined benefit pension and other post-
employment benefit plans and are based on historical experience and market inputs. The increase (decrease) in obligation in the
following table has been determined for key assumptions assuming all other assumptions are held constant. In practice, this is
unlikely to occur, as changes in some of the assumptions may be correlated. The following table presents the sensitivity analysis
of key assumptions for 2022.
Increase (decrease)
in obligation
(Millions of Canadian dollars)
Defined benefit
pension plans
Other post-
employment
benefit plans
Discount rate
Impact of 100 bps increase in discount rate
$
(1,348)
$
(160)
Impact of 100 bps decrease in discount rate
1,649
198
Rate of increase in future compensation
Impact of 50 bps increase in rate of increase in future compensation
29
–
Impact of 50 bps decrease in rate of increase in future compensation
(31)
–
Mortality rate
Impact of an increase in longevity by one additional year
287
20
Healthcare cost trend rate
Impact of 100 bps increase in healthcare cost trend rate
n.a.
57
Impact of 100 bps decrease in healthcare cost trend rate
n.a.
(48)
n.a.
not applicable
208
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Note 18
Other liabilities
As at
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Accounts payable and accrued expenses
$
1,292
$
1,867
Accrued interest payable
5,019
2,178
Cash collateral
26,143
16,712
Commodity liabilities
10,038
7,916
Deferred income
3,660
3,518
Deferred income taxes
439
74
Dividends payable
1,856
1,622
Employee benefit liabilities
1,668
2,038
Insurance related liabilities
324
366
Lease liabilities
5,110
5,077
Negotiable instruments
1,715
1,774
Payable to brokers, dealers and clients
10,974
6,461
Payroll and related compensation
8,991
9,340
Precious metals certificates
557
613
Provisions
627
601
Short-term borrowings of subsidiaries
9,609
–
Taxes payable
2,136
3,403
Other
5,077
6,741
$
95,235
$
70,301
Note 19
Subordinated debentures
The debentures are unsecured obligations and are subordinated in right of payment to the claims of depositors and certain other
creditors. 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)
Interest
rate
Denominated in
foreign currency
(millions)
As at
Maturity
Earliest par value
redemption date
October 31
2022
October 31
2021
July 15, 2022
(1)
5.38%
US$150
$
–
$
188
June 8, 2023
9.30%
110
110
January 27, 2026
(2)
4.65%
US$1,500
1,884
1,916
November 1, 2027
(3)
November 1, 2022
4.75%
TT$300
60
55
July 25, 2029
(2)
July 25, 2024
2.74%
(4)
1,415
1,499
December 23, 2029
(2)
December 23, 2024
2.88%
(5)
1,412
1,489
June 30, 2030
(2)
June 30, 2025
2.09%
(6)
1,250
1,250
November 3, 2031
(2)
November 3, 2026
2.14%
(7)
1,637
1,717
May 3, 2032
(2)
May 3, 2027
2.94%
(8)
932
–
January 28, 2033
(2)
January 28, 2028
1.67%
(9)
875
943
October 1, 2083
Any interest payment date
(10)
224
224
June 29, 2085
Any interest payment date
(11)
US$174
237
215
$
10,036
$
9,606
Deferred financing costs
(11)
(13)
$
10,025
$
9,593
(1)
On July 15, 2022, all US$150 million of outstanding 5.38% subordinated debentures matured.
(2)
The notes include NVCC provisions, necessary for the notes to qualify as Tier 2 regulatory capital under Basel III. NVCC provisions require the conversion of the
instrument into a variable number of common shares in the event that OSFI deems the Bank non-viable or a federal or provincial government in Canada publicly
announces that the Bank has accepted or agreed to accept a capital injection. In such an event, each note is convertible into common shares pursuant to an automatic
conversion formula with a multiplier of 1.5 and a conversion price based on the greater of: (i) a floor price of $5.00 and (ii) the current market price of our common shares
based on the volume weighted average trading price of our common shares on the Toronto Stock Exchange. The number of shares issued is determined by dividing the
par value of the note (including accrued and unpaid interest on such note) by the conversion price and then times the multiplier.
(3)
On November 1, 2022, we redeemed all TT$300 million of outstanding 4.75% subordinated debentures due on November 1, 2027 for 100% of their principal amount plus
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 1.31% above the 3-month CDOR.
(7)
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.61% above the 3-month CDOR.
(8)
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.76% above the 3-month CDOR.
(9)
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.55% above the 3-month CDOR.
(10)
Interest at a rate of 0.40% above the 30-day Bankers’ Acceptance rate.
(11)
Interest at a rate of 0.25% above the U.S. dollar 3-month London Interbank Mean Rate (LIMEAN). In the event of a reduction of the annual dividend we declare on our
common shares, the interest payable on the debentures is reduced pro rata to the dividend reduction and the interest reduction is payable with the proceeds from the
sale of newly issued common shares.
All redemptions, cancellations and exchanges of subordinated debentures are subject to the consent and approval of OSFI.
Maturity schedule
The aggregate maturities of subordinated debentures, based on the maturity dates under the terms of issue, are as follows:
As at
(Millions of Canadian dollars)
October 31
2022
Within 1 year
$
110
1 to 5 years
1,884
5 to 10 years
6,706
Thereafter
1,336
$
10,036
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
209
Note 20
Equity
Share capital
Authorized share capital
Preferred – An unlimited number of First Preferred Shares and Second Preferred Shares without nominal or par value, issuable in
series; the aggregate consideration for which all the First Preferred Shares and all the Second Preferred Shares that may be
issued may not exceed $20 billion and $5 billion, respectively.
Common – An unlimited number of shares without nominal or par value may be issued.
Outstanding share capital
The following table details our common and preferred shares and other equity instruments outstanding.
As at and for the year ended
October 31, 2022
October 31, 2021
(Millions of Canadian dollars, except the number
of shares and as otherwise noted)
Number of
shares
(thousands)
Amount
Dividends
declared
per share
Number of
shares
(thousands)
Amount
Dividends
declared
per share
Common shares issued
Balance at beginning of period
1,425,187
$ 17,728
1,423,861
$ 17,628
Issued in connection with share-based
compensation plans
(1)
1,270
99
1,326
100
Purchased for cancellation
(2)
(40,866)
(509)
–
–
Balance at end of period
1,385,591
$ 17,318
$
4.96
1,425,187
$ 17,728
$
4.32
Treasury – common shares
Balance at beginning of period
(3)
(662)
$
(73)
(1,388)
$
(129)
Purchases
(48,437)
(5,183)
(37,603)
(4,060)
Sales
46,419
4,922
38,329
4,116
Balance at end of period
(3)
(2,680)
$
(334)
(662)
$
(73)
Common shares outstanding
1,382,911
$ 16,984
1,424,525
$ 17,655
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
Series BJ
(5)
–
–
0.33
6,000
150
1.31
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
(6)
750
750
4.20%
–
–
–
Non-cumulative, fixed rate/floating rate
Series C-2
15
23
US$ 67.50
15
23
US$ 67.50
Other equity instruments
Limited recourse capital notes (LRCNs)
(7)
Series 1
(8)
1,750
1,750
4.50%
1,750
1,750
4.50%
Series 2
(8)
1,250
1,250
4.00%
1,250
1,250
4.00%
Series 3
(8)
1,000
1,000
3.65%
1,000
1,000
3.65%
106,765
$
7,323
112,015
$
6,723
Treasury – preferred shares and other
equity instruments
Balance at beginning of period
(3)
(164)
$
(39)
(2)
$
(3)
Purchases
(2,811)
(518)
(6,306)
(683)
Sales
2,963
552
6,144
647
Balance at end of period
(3)
(12)
$
(5)
(164)
$
(39)
Preferred shares and other equity
instruments outstanding
106,753
$
7,318
111,851
$
6,684
(1)
Includes fair value adjustments to stock options of $6 million (October 31, 2021 – $11 million).
(2)
During the year ended October 31, 2022, we purchased common shares for cancellation at an average cost of $132.80 per share with a book value of $12.47 per share.
During the year ended October 31, 2021, we did not purchase for cancellation any common shares.
(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 February 24, 2022, we redeemed all 6 million of our issued and outstanding Non-Cumulative Fixed Rate First Preferred Shares Series BJ at a price of $25.75 per share.
(6)
On November 5, 2021, we issued 750 thousand Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BT, totalling $750 million.
(7)
Each series of LRCNs (LRCN Series) were issued at a $1,000 per note. The number of shares represent the number of notes issued and the dividends declared per share
represent the annual interest rate percentage applicable to the notes issued as at the reporting date.
(8)
In connection with the issuance of LRCN Series 1, we issued $1,750 million of Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BQ (Series BQ); in
connection with the issuance of LRCN Series 2, we issued $1,250 million of Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BR (Series BR); in connection
with the issuance of LRCN Series 3, we issued $1,000 million of Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BS (Series BS). The Series BQ, BR and BS
preferred shares were issued at a price of $1,000 per share and were issued to a consolidated trust to be held as trust assets in connection with each respective
LRCN Series.
210
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Significant terms and conditions of preferred shares and other equity instruments
As at October 31, 2022
Current
annual yield
Premium
Current
dividend
per share
(1)
Earliest
redemption
date
(2)
Issue date
Redemption
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)
3.60%
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.
(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 24th day of May and November. LRCN
Series 1 is redeemable during the period from October 24 to and including November 24, commencing in 2025 and every fifth year thereafter to the extent we redeem
Series BQ pursuant to their terms and subject to the consent of OSFI and requirements of the Bank Act (Canada).
(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.
not applicable
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
211
Note 20
Equity
(continued)
Restrictions on the payment of dividends
We are prohibited by the Bank Act (Canada) from declaring any dividends on our preferred or common shares when we are, or
would be placed as a result of the declaration, in contravention of the capital adequacy and liquidity regulations or any
regulatory directives issued under the Act. We may not pay dividends on our common shares at any time unless all dividends to
which preferred shareholders are then entitled have been declared and paid or set apart for payment.
Currently, these limitations do not restrict the payment of dividends on our preferred or common shares.
Dividend reinvestment plan
Our dividend reinvestment plan (DRIP) provides common and preferred shareholders with a means to receive additional
common shares rather than cash dividends. The plan is only open to shareholders residing in Canada or the U.S. The
requirements of our DRIP are satisfied through either open market share purchases or shares issued from treasury. During 2022
and 2021, the requirements of our DRIP were satisfied through open market share purchases.
Shares available for future issuances
As at October 31, 2022, 42.7 million common shares are available for future issue relating to our DRIP and potential exercise of
stock options and awards outstanding. In addition, we may issue up to 38.9 million common shares from treasury under the RBC
Umbrella Savings and Securities Purchase Plan that was approved by shareholders on February 26, 2009.
Note 21
Share-based compensation
Stock option plans
We have stock option plans for certain key employees. Under the plans, options are periodically granted to purchase common
shares. The exercise price for the majority of the grants is determined as the higher of the volume-weighted average of the
trading prices per board lot (100 shares) of our common shares on the Toronto Stock Exchange (i) on the day preceding the day
of grant; and (ii) the five consecutive trading days immediately preceding the day of grant. The exercise price for the remaining
grants is the closing market share price of our common shares on the New York Stock Exchange on the date of grant. All options
vest over a four-year period, and are exercisable for a period not exceeding 10 years from the grant date.
The compensation expense recorded for the year ended October 31, 2022, in respect of the stock option plans was $8 million
(October 31, 2021 – $6 million). The compensation expense related to non-vested options was $4 million at October 31, 2022
(October 31, 2021 – $3 million), to be recognized over the weighted average period of 2.0 years (October 31, 2021 – 2.0 years).
Analysis of the movement in the number and weighted average exercise price of options is set out below:
A summary of our stock option activity and related information
For the year ended
October 31, 2022
October 31, 2021
(Canadian dollars per share except share amounts)
Number of
options
(thousands)
Weighted
average
exercise price
(1)
Number of
options
(thousands)
Weighted
average
exercise price
(1)
Outstanding at beginning of period
7,055
$
92.27
6,973
$
86.02
Granted
1,184
129.99
1,251
106.00
Exercised
(2)
,
(3)
(684)
73.98
(1,150)
65.56
Forfeited in the period
(46)
104.28
(19)
93.23
Outstanding at end of period
7,509
$
100.07
7,055
$
92.27
Exercisable at end of period
3,502
$
87.15
3,273
$
80.38
(1)
The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rates as of October 31, 2022 and October 31, 2021.
For foreign currency-denominated options exercised during the year, the weighted average exercise prices are translated using exchange rates as at the settlement date.
(2)
Cash received for options exercised during the year was $51 million (October 31, 2021 – $75 million) and the weighted average share price at the date of exercise was
$134.10 (October 31, 2021 – $115.11).
(3)
New shares were issued for all stock options exercised in 2022 and 2021.
Options outstanding as at October 31, 2022 by range of exercise price
Options outstanding
Options exercisable
(Canadian dollars per share except
share amounts and years)
Number
outstanding
(thousands)
Weighted
average
exercise price
(1)
Weighted
average
remaining
contractual
life (years)
Number
exercisable
(thousands)
Weighted
average
exercise price
(1)
$48.22 – $74.39
890
$
70.05
2.31
890
$
70.05
$78.28 – $90.23
1,409
86.99
3.54
1,409
86.99
$96.55 – $102.33
1,743
98.90
5.19
1,203
99.96
$104.70 – $106.00
2,299
105.40
7.66
–
–
$129.99
1,168
129.99
9.12
–
–
7,509
$
100.07
5.91
3,502
$
87.15
(1)
The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rate as of October 31, 2022.
212
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
The weighted average fair value of options granted during the year ended October 31, 2022 was estimated at $7.80 (October 31,
2021 – $4.65). This was determined by applying the Black-Scholes model on the date of grant, taking into account the specific
terms and conditions under which the options are granted, such as the vesting period and expected share price volatility
estimated by considering the historic average share price volatility over a historical period corresponding to the expected option
life. The following assumptions were used to determine the fair value of options granted:
Weighted average assumptions
For the year ended
(Canadian dollars per share except percentages and years)
October 31
2022
October 31
2021
Share price at grant date
$ 128.48
$ 104.86
Risk-free interest rate
1.25%
0.48%
Expected dividend yield
3.66%
4.59%
Expected share price volatility
13%
14%
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, 2022, we contributed
$128 million (October 31, 2021 – $123 million), under the terms of these plans, towards the purchase of our common shares. As at
October 31, 2022, an aggregate of 36 million common shares were held under these plans (October 31, 2021 – 36 million common
shares).
Deferred share and other plans
We offer deferred share unit plans to executives, certain key employees and non-employee directors of the Bank. Under these
plans, participants may choose to receive all or a percentage of their annual variable short-term incentive bonus, commission, or
directors’ fee in the form of deferred share units (DSUs). The participants must elect to participate in the plan prior to the
beginning of the year. DSUs earn dividend equivalents in the form of additional DSUs at the same rate as dividends on common
shares. The participant is not allowed to convert the DSUs until retirement or termination of employment/directorship. The cash
value of the DSUs is equivalent to the market value of common shares when conversion takes place.
We also offer unit awards for certain key employees within Capital Markets. The bonus is invested as RBC share units and a
specified percentage vests on a specified number of anniversary dates each year. Each vested amount is paid in cash and is
based on the original number of share units granted plus accumulated dividends, valued using the average closing price of RBC
common shares during the five trading days immediately preceding the vesting date.
We offer performance deferred share award plans to certain key employees, all of which vest at the end of three years. Upon
vesting, the award is paid in cash and is based on the original number of RBC share units granted plus accumulated dividends
valued using the average closing price of RBC common shares during the five trading days immediately preceding the vesting
date. A portion of the award under certain plans may be increased or decreased up to 25%, depending on our total shareholder
return compared to a defined peer group of global financial institutions.
We maintain non-qualified deferred compensation plans for certain key employees in the U.S. These plans allow eligible
employees to defer a portion of their annual income and a variety of productivity and recruitment bonuses and allocate the
deferrals among specified fund choices, including a RBC Share Accounted fund that tracks the value of our common shares.
The following table presents the units granted under the deferred share and other plans for the year.
Units granted under deferred share and other plans
For the year ended
October 31, 2022
October 31, 2021
(Units and per unit amounts)
Units
granted
(thousands)
Weighted
average
fair value
per unit
Units
granted
(thousands)
Weighted
average
fair value
per unit
Deferred share unit plans
469
$ 131.49
462
$
113.34
Capital Markets compensation plan unit awards
3,794
125.22
4,066
128.95
Performance deferred share award plans
2,220
129.65
2,486
106.10
Deferred compensation plans
92
135.44
87
104.21
Other share-based plans
1,083
128.50
767
109.24
7,658
$ 127.48
7,868
$
118.62
Our liabilities for the awards granted under the deferred share and other plans are measured at fair value, determined based on
the quoted market price of our common shares and specified fund choices as applicable. Annually, our obligation is increased by
additional units earned by plan participants, and is reduced by forfeitures, cancellations, and the settlement of vested units. In
addition, our obligation is impacted by fluctuations in the market price of our common shares and specified fund units. For
performance deferred share award plans, the estimated outcome of meeting the performance conditions also impacts our
obligation.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
213
Note 21
Share-based compensation
(continued)
The following tables present the units that have been earned by the participants, our obligations for these earned units
under the deferred share and other plans, and the related compensation expenses (recoveries) recognized for the year.
Obligations under deferred share and other plans
As at
October 31, 2022
October 31, 2021
(Millions of Canadian dollars except units)
Units
(thousands)
Carrying
amount
Units
(thousands)
Carrying
amount
Deferred share unit plans
5,429
$
684
5,001
$
644
Capital Markets compensation plan unit awards
9,398
1,182
9,925
1,280
Performance deferred share award plans
6,006
757
6,216
801
Deferred compensation plans
(1)
2,537
319
2,574
331
Other share-based plans
1,772
218
1,724
216
25,142
$
3,160
25,440
$ 3,272
(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
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Deferred share unit plans
$
20
$
205
Capital Markets compensation plan unit awards
210
518
Performance deferred share award plans
273
506
Deferred compensation plans
(261)
627
Other share-based plans
91
142
$
333
$ 1,998
Note 22
Income taxes
Components of tax expense
For the year ended
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Income taxes (recoveries) in Consolidated Statements of Income
Current tax
Tax expense for current year
$ 4,151
$ 4,893
Adjustments for prior years
(230)
(92)
Recoveries arising from previously unrecognized tax loss, tax credit or temporary difference
of a prior period
–
(16)
3,921
4,785
Deferred tax
Origination and reversal of temporary difference
232
(216)
Effects of changes in tax rates
4
(4)
Adjustments for prior years
231
74
Recoveries arising from previously unrecognized tax loss, tax credit or temporary difference of a prior
period, net
(86)
(58)
381
(204)
4,302
4,581
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
(633)
(35)
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
2
(28)
Unrealized foreign currency translation gains (losses)
2
1
Net foreign currency translation gains (losses) from hedging activities
(478)
591
Reclassification of losses (gains) on net investment hedging activities to income
6
–
Net gains (losses) on derivatives designated as cash flow hedges
628
485
Reclassification of losses (gains) on derivatives designated as cash flow hedges to income
70
97
Remeasurements of employee benefit plans
287
796
Net fair value change due to credit risk on financial liabilities designated at fair value through profit
or loss
622
20
Net gains (losses) on equity securities designated at fair value through other comprehensive income
(3)
17
Share-based compensation awards
10
(17)
Distributions on other equity instruments and issuance costs
(45)
(42)
466
1,885
Total income taxes
$ 4,768
$ 6,466
214
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
The effective income tax rate of 21.4% decreased 80 bps, primarily due to higher tax-exempt income and an increase in income
from lower tax rate jurisdictions in the current year.
The following is an analysis of the differences between the income tax expense reflected in the Consolidated Statements of
Income and the amounts calculated at the Canadian statutory rate.
Reconciliation to statutory tax rate
For the year ended
(Millions of Canadian dollars, except for percentage amounts)
October 31, 2022
October 31, 2021
Income taxes at Canadian statutory tax rate
$ 5,269
26.2%
$
5,405
26.2%
Increase (decrease) in income taxes resulting from:
Lower average tax rate applicable to subsidiaries
(428)
(2.1)
(361)
(1.8)
Tax-exempt income from securities
(437)
(2.2)
(379)
(1.8)
Tax rate change
4
–
(4)
–
Other
(106)
(0.5)
(80)
(0.4)
Income taxes in Consolidated Statements of Income / effective tax rate
$ 4,302
21.4%
$
4,581
22.2%
Deferred tax assets and liabilities result from tax loss and tax credit carryforwards and temporary differences between the tax
basis of assets and liabilities and their carrying amounts on our Consolidated Balance Sheets.
Significant components of deferred tax assets and liabilities
As at and for the year ended October 31, 2022
(Millions of Canadian dollars)
Net asset
beginning of
period
Change
through
equity
Change
through
profit or loss
Exchange
rate
differences
Acquisitions/
disposals
Other
Net asset
end of
period
Net deferred tax asset/(liability)
Allowance for credit losses
$
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
As at and for the year ended October 31, 2021
(Millions of Canadian dollars)
Net asset
beginning of
period
Change
through
equity
Change
through
profit or loss
Exchange
rate
differences
Acquisitions/
disposals
Other
Net asset
end of
period
Net deferred tax asset/(liability)
Allowance for credit losses
$
1,362
$
–
$
(372)
$
(16)
$
–
$
–
$
974
Deferred compensation
1,269
17
396
(68)
–
–
1,614
Business realignment charges
9
–
2
–
–
–
11
Tax loss and tax credit carryforwards
204
–
40
(2)
–
–
242
Deferred (income) expense
(104)
6
205
3
–
–
110
Financial instruments measured at
fair value through other
comprehensive income
(68)
45
(1)
5
–
–
(19)
Premises and equipment and
intangibles
(784)
–
(82)
30
–
(836)
Pension and post-employment
related
592
(796)
45
(4)
–
–
(163)
Other
47
(12)
(29)
3
–
(5)
4
$
2,527
$
(740)
$
204
$
(49)
$
–
$
(5)
$
1,937
Comprising
Deferred tax assets
$
2,579
$
2,011
Deferred tax liabilities
(52)
(74)
$
2,527
$
1,937
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
215
Note 22
Income taxes
(continued)
The tax loss and tax credit carryforwards amount of deferred tax assets primarily relates to losses and tax credits in our
Canadian, U.S., and Caribbean operations. Deferred tax assets of $322 million were recognized at October 31, 2022 (October 31,
2021 – $242 million) in respect of tax losses and tax credits incurred in current or preceding years for which recognition is
dependent on the projection of future taxable profits. Management’s forecasts support the assumption that it is probable that
the results of future operations will generate sufficient taxable income to utilize the deferred tax assets. The forecasts rely on
continued liquidity and capital support to our business operations, including tax planning strategies implemented in relation to
such support.
As at October 31, 2022, unused tax losses and tax credits of $429 million and $130 million (October 31, 2021 – $384 million and
$207 million) available to be offset against potential tax adjustments or future taxable income were not recognized as deferred
tax assets. There are no unused tax losses that will expire within one year (October 31, 2021 – $nil), or in two to four years
(October 31, 2021 – $2 million) and there are $429 million of unused tax losses that will expire after four years (October 31, 2021 –
$382 million). There are no tax credits that will expire in one year (October 31, 2021 – $nil), $93 million that will expire in two to
four years (October 31, 2021 – $115 million) and $37 million that will expire after four years (October 31, 2021 – $92 million).
The amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in
joint ventures for which deferred tax liabilities have not been recognized in the parent bank is $26 billion as at October 31, 2022
(October 31, 2021 – $20 billion).
Tax examinations and assessments
During the year, we received a reassessment from the Canada Revenue Agency (CRA) in respect of the 2017 taxation year, which
suggests that Royal Bank of Canada owes additional taxes of approximately $237 million as they denied the deductibility of
certain dividends. The reassessment received during the year is consistent with the reassessments received for taxation years
2012 to 2016 of approximately $1,391 million of additional income taxes and the reassessments received for taxation years 2009 to
2011 of approximately $434 million of additional income taxes and interest in respect of the same matter. These amounts
represent the maximum additional taxes owing for those years.
Legislative amendments introduced in the 2015 Canadian Federal Budget resulted in disallowed deduction of dividends from
transactions with Taxable Canadian Corporations including those hedged with Tax Indifferent Investors, namely pension funds
and non-resident entities with prospective application effective May 1, 2017. The dividends to which the reassessments relate
include both dividends in transactions similar to those which are the target of the 2015 legislative amendments and dividends
which are unrelated to the legislative amendments.
It is possible that the CRA will reassess us for significant additional income tax for subsequent years on the same basis. In all
cases, we are confident that our tax filing position was appropriate and intend to defend ourselves vigorously.
Government of Canada Budget 2022
On April 7, 2022, the Government of Canada presented its 2022 budget, which included measures focused on ensuring banking
and life insurers’ groups help pay a portion of the costs of the Canadian federal government’s COVID-19 pandemic response. On
November 22, 2022, Bill C-32, Fall Economic Statement Implementation Act, 2022 (the Bill) received second reading in the House
of Commons. The Bill includes a Canada Recovery Dividend (CRD) and a permanent increase in the corporate income tax rate.
The CRD is a one-time 15% tax for 2022 determined based on the average taxable income above $1 billion for taxation years 2020
and 2021 and payable in equal installments over five years. The permanent increase in the corporate income tax rate is 1.5% on
taxable income above $100 million and would apply to taxation years that end after April 7, 2022.
The Bill is not yet substantively enacted and timing of enactment remains uncertain. Based on the draft legislation, which
remains subject to amendments prior to enactment, the CRD is expected to reduce net income by approximately $1 billion and
other comprehensive income by approximately $0.1 billion when substantively enacted.
Note 23
Earnings per share
For the year ended
(Millions of Canadian dollars, except share and per share amounts)
October 31
2022
October 31
2021
Basic earnings per share
Net income
$
15,807
$
16,050
Dividends on preferred shares and distributions on other equity instruments
(247)
(257)
Net income attributable to non-controlling interests
(13)
(12)
Net income available to common shareholders
$
15,547
$
15,781
Weighted average number of common shares (in thousands)
1,403,654
1,424,343
Basic earnings per share (in dollars)
$
11.08
$
11.08
Diluted earnings per share
Net income available to common shareholders
$
15,547
$
15,781
Weighted average number of common shares (in thousands)
1,403,654
1,424,343
Stock options
(1)
1,918
1,737
Issuable under other share-based compensation plans
462
655
Average number of diluted common shares (in thousands)
1,406,034
1,426,735
Diluted earnings per share (in dollars)
$
11.06
$
11.06
(1)
The dilutive effect of stock options was calculated using the treasury stock method. When the exercise price of options outstanding is greater than the average market
price of our common shares, the options are excluded from the calculation of diluted earnings per share. For the year ended October 31, 2022 and the year ended
October 31, 2021, no outstanding options were excluded from the calculation of diluted earnings per share.
216
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Note 24
Guarantees, commitments, pledged assets and contingencies
Guarantees and commitments
We use guarantees and other off-balance sheet credit instruments to meet the financing needs of our clients.
The table below summarizes our maximum exposure to credit losses related to our guarantees and commitments provided
to third parties. The maximum exposure to credit risk relating to a guarantee is the maximum risk of loss if there was a total
default by the guaranteed parties, without consideration of possible recoveries under recourse provisions, insurance policies or
from collateral held or pledged. The maximum exposure to credit risk relating to a commitment to extend credit is the full amount
of the commitment. In both cases, the maximum risk exposure is significantly greater than the amount recognized as a liability in
our Consolidated Balance Sheets.
Maximum exposure
to credit losses
As at
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Financial guarantees
Financial standby letters of credit
$ 20,291
$ 16,867
Commitments to extend credit
Backstop liquidity facilities
45,336
38,405
Credit enhancements
2,960
2,537
Documentary and commercial letters of credit
318
447
Other commitments to extend credit
284,602
248,522
Other credit-related commitments
Securities lending indemnifications
90,693
99,797
Performance guarantees
7,333
7,195
Sponsored member guarantees
1,241
142
Other
360
326
Our credit review process, our policy for requiring collateral security, and the types of collateral security held are generally the
same for guarantees and commitments as for loans. Our clients generally have the right to request settlement of, or draw on, our
guarantees and commitments within one year. However, certain guarantees can only be drawn if specified conditions are met.
These conditions, along with collateral requirements, are described below. We believe that it is highly unlikely that all or
substantially all of the guarantees and commitments will be drawn or settled within one year, and contracts may expire without
being drawn or settled.
Financial guarantees
Financial standby letters of credit
Financial standby letters of credit represent irrevocable assurances that we will make payments in the event that a client cannot
meet its payment obligations to the third party. For certain guarantees, the guaranteed party can request payment from us even
though the client has not defaulted on its obligations. These guarantees generally have a term of five to seven years.
Our policy for requiring collateral security with respect to these instruments and the types of collateral security held is
generally the same as for loans. When collateral security is taken, it is determined on an account-by-account basis according to
the risk of the borrower and the specifics of the transaction. Collateral security may include cash, securities and other assets
pledged.
Commitments to extend credit
Backstop liquidity facilities
Backstop liquidity facilities are provided to ABCP conduit programs administered by us and third parties as an alternative source
of financing in the event that such programs are unable to access commercial paper markets, or in limited circumstances, when
predetermined performance measures of the financial assets acquired or financed by these programs are not met. The average
remaining term of these liquidity facilities is approximately four years.
The terms of the backstop liquidity facilities do not require us to advance money to these programs in the event of
bankruptcy or insolvency and generally do not require us to purchase non-performing or defaulted assets.
Credit enhancements
We provide partial credit enhancement to multi-seller ABCP programs administered by us to protect commercial paper investors
in the event that the collections on the underlying assets together with the transaction-specific credit enhancements or the
liquidity facilities prove to be insufficient to pay for maturing commercial paper. Each of the asset pools is structured to achieve
a high investment grade credit profile through credit enhancements required to be provided by the third-party sellers related to
each transaction. The average remaining term of these credit facilities is approximately three years.
Documentary and commercial letters of credit
Documentary and commercial letters of credit, which are written undertakings by us on behalf of a client authorizing a third party
to draw drafts on us up to a stipulated amount under specific terms and conditions, where some are collateralized based on the
underlying agreement with the client and others are collateralized by cash deposits or other assets of the client.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
217
Note 24
Guarantees, commitments, pledged assets and contingencies
(continued)
Other commitments to extend credit
Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, reverse
repurchase agreements, bankers’ acceptances or letters of credit where we do not have the ability to unilaterally withdraw the
credit extended to the borrower.
Other credit-related commitments
Securities lending indemnifications
In securities lending transactions, we act as an agent for the owner of a security, who agrees to lend the security to a borrower
for a fee, under the terms of a pre-arranged contract. The borrower must fully collateralize the security loaned at all times. As
part of this custodial business, an indemnification may be provided to securities lending customers to ensure that the fair value
of securities loaned will be returned in the event that the borrower fails to return the borrowed securities and the collateral held
is insufficient to cover the fair value of those securities. These indemnifications normally terminate without being drawn upon.
The term of these indemnifications varies, as the securities loaned are recallable on demand. Collateral held for our securities
lending transactions typically includes cash, securities that are issued or guaranteed by the Canadian government, U.S.
government or other OECD countries or high quality debt or equity instruments.
Performance guarantees
Performance guarantees represent irrevocable assurances that we will make payments to third-party beneficiaries in the event
that a client fails to perform under a specified non-financial contractual obligation. Such obligations typically include works and
service contracts, performance bonds, and warranties related to international trade. The term of these guarantees can range up
to three to seven years.
Our policy for requiring collateral security with respect to these instruments and the types of collateral security held is
generally the same as for loans. When collateral security is taken, it is determined on an account-by-account basis according to
the risk of the borrower and the specifics of the transaction. Collateral security may include cash, securities and other assets
pledged.
Sponsored member guarantees
For certain overnight repurchase and reverse repurchase transactions, we act as a sponsoring member to eligible clients to clear
transactions through the Fixed Income Clearing Corporation (FICC). We also provide a guarantee to FICC for the prompt and full
payment and performance of our sponsored member clients’ respective obligations under the FICC rules. The guarantees are
fully collateralized by cash and securities issued or guaranteed by the U.S. government.
Indemnifications
In the normal course of our operations, we provide indemnifications which are often standard contractual terms to
counterparties in transactions such as purchase and sale contracts, fiduciary, agency, licensing, custodial and service
agreements, clearing system arrangements, participation as a member of exchanges, director/officer contracts and leasing
transactions. These indemnification agreements may require us to compensate the counterparties for costs incurred as a result
of changes in laws and regulations (including tax legislation) or as a result of litigation claims or statutory sanctions that may be
suffered by the counterparty as a consequence of the transaction. The terms of these indemnification agreements vary based on
the contract. The nature of the indemnification agreements prevents us from making a reasonable estimate of the maximum
potential amount we could be required to pay to counterparties. Historically, we have not made any significant payments under
such indemnifications.
Uncommitted amounts
Uncommitted amounts represent undrawn credit facilities for which we have the ability to unilaterally withdraw the credit
extended to the borrower at any time. These include both retail and commercial commitments. As at October 31, 2022, the total
balance of uncommitted amounts was $363 billion (October 31, 2021 – $333 billion).
Other commitments
We invest in private companies, directly or through third-party investment funds, including Small Business Investment
Companies, real estate funds and Low Income Housing Tax Credit funds. These funds are generally structured as closed-end
limited partnerships wherein we hold a limited partner interest. For the year ended October 31, 2022, we have unfunded
commitments of $1,421 million (October 31, 2021 – $1,396 million) representing the aggregate amount of cash we are obligated to
contribute as capital to these partnerships under the terms of the relevant contracts.
Pledged assets and collateral
In the ordinary course of business, we pledge assets and enter into collateral agreements with terms and conditions that are
usual and customary to our regular lending, borrowing and trading activities recorded on our Consolidated Balance Sheets. The
following are examples of our general terms and conditions on pledged assets and collateral:
•
The risks and rewards of the pledged assets reside with the pledgor.
•
The pledged asset is returned to the pledgor when the necessary conditions have been satisfied.
•
The right of the pledgee to sell or re-pledge the asset is dependent on the specific agreement under which the collateral
is pledged.
•
If there is no default, the pledgee must return the comparable asset to the pledgor upon satisfaction of the obligation.
218
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
We are also required to provide intraday pledges to the Bank of Canada when we use a real-time electronic wire transfer system
that continuously processes all Canadian dollar large-value or time-critical payments throughout the day. The pledged assets
earmarked for our Canadian dollar large-value or time-critical payments are normally released back to us at the end of the
settlement cycle each day. Therefore, the pledged assets amount is not included in the following table. For the year ended
October 31, 2022, we had on average $2 billion of assets pledged intraday to the Bank of Canada on a daily basis
(October 31, 2021 – $2 billion). There are infrequent occasions where we are required to take an overnight advance from the Bank
of Canada to cover a settlement requirement, in which case an equivalent value of the pledged assets would be used to secure
the advance. There were no overnight advances taken on October 31, 2022 and October 31, 2021.
Assets pledged against liabilities and collateral assets held or re-pledged
As at
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Sources of pledged assets and collateral
Bank assets
Loans
$
97,178
$
79,282
Securities
70,334
66,277
Other assets
40,318
25,981
207,830
171,540
Client assets
(1)
Collateral received and available for sale or re-pledging
465,484
454,844
Less: not sold or re-pledged
(9,192)
(17,436)
456,292
437,408
$ 664,122
$ 608,948
Uses of pledged assets and collateral
Securities borrowing and lending
$ 158,748
$ 154,699
Obligations related to securities sold short
45,288
46,151
Obligations related to securities lent or sold under repurchase agreements
274,392
263,005
Securitization
40,438
39,687
Covered bonds
62,905
46,699
Derivative transactions
49,556
31,941
Foreign governments and central banks
9,503
7,314
Clearing systems, payment systems and depositories
8,263
3,809
Other
15,029
15,643
$ 664,122
$ 608,948
(1)
Primarily relates to Obligations related to securities lent or sold under repurchase agreements, Securities lent and Derivative transactions.
Note 25
Legal and regulatory matters
We are a large global institution that is subject to many different complex legal and regulatory requirements that continue to
evolve. We are and have been subject to a variety of legal proceedings, including civil claims and lawsuits, regulatory
examinations, investigations, audits and requests for information by various governmental regulatory agencies and law
enforcement authorities in various jurisdictions. Some of these matters may involve novel legal theories and interpretations and
may be advanced under criminal as well as civil statutes, and some proceedings could result in the imposition of civil, regulatory
enforcement or criminal penalties. We review the status of all proceedings on an ongoing basis and will exercise judgment in
resolving them in such manner as we believe to be in our best interest. In many proceedings, it is inherently difficult to determine
whether any loss is probable or to reliably estimate the amount of any loss. This is an area of significant judgment and
uncertainty and the extent of our financial and other exposure to these proceedings after taking into account current provisions
could be material to our results of operations in any particular period. The following is a description of our significant legal
proceedings.
London interbank offered rate (LIBOR) litigation
Royal Bank of Canada and other U.S. dollar panel banks have been named as defendants in private lawsuits filed in the U.S. with
respect to the setting of U.S. dollar LIBOR including a number of class action lawsuits which have been consolidated before the
U.S. District Court for the Southern District of New York. The complaints in those private lawsuits assert claims against us and
other panel banks under various U.S. laws, including U.S. antitrust laws, the U.S. Commodity Exchange Act, and state law. On
December 30, 2021, the U.S. Court of Appeals for the Second Circuit issued an opinion affirming in part and reversing in part
certain district court rulings that had dismissed a substantial portion of the consolidated class action on jurisdictional grounds
and lack of standing. The Second Circuit remanded the matter to the district court for further proceedings consistent with its
decision.
Based on the facts currently known, it is not possible at this time for us to predict the ultimate outcome of these proceedings
or the timing of their resolution.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
219
Note 25
Legal and regulatory matters
(continued)
Royal Bank of Canada Trust Company (Bahamas) Limited proceedings
On April 13, 2015, a French investigating judge notified Royal Bank of Canada Trust Company (Bahamas) Limited (RBC Bahamas)
of the issuance of an
ordonnance de renvoi
referring RBC Bahamas and other unrelated persons to the French
tribunal
correctionnel
to face the charge of complicity in estate tax fraud relating to actions taken relating to a trust for which RBC
Bahamas serves as trustee. RBC Bahamas believes that its actions did not violate French law and contested the charge in the
French court. On January 12, 2017, the French court acquitted all parties including RBC Bahamas and on June 29, 2018, the French
appellate court affirmed the acquittals. The acquittals were appealed and on January 6, 2021, the French Supreme Court issued a
judgment reversing the decision of the French Court of Appeal and sent the case back to the French Court of Appeal for
rehearing. The Court of Appeal has scheduled a new trial to begin on September 18, 2023.
On October 28, 2016, Royal Bank of Canada was granted an exemption by the U.S. Department of Labor that allows Royal
Bank of Canada and its current and future affiliates to continue to qualify for the Qualified Professional Asset Manager (QPAM)
exemption under the Employee Retirement Income Security Act despite any potential conviction of RBC Bahamas in the French
proceeding for a temporary one year period from the date of conviction. In addition, the Department of Labor has proposed
amendments to the QPAM exemption. If the amendments are finalized as proposed, it is unclear how they would affect Royal
Bank of Canada’s ability to obtain relief beyond the one-year temporary exemption period.
RBC Bahamas continues to review the trustee’s and the trust’s legal obligations, including liabilities and potential liabilities
under applicable tax and other laws. Based on the facts currently known, it is not possible at this time to predict the ultimate
outcome of these matters; however, we believe that the ultimate resolution will not have a material effect on our consolidated
financial position, although it may be material to our results of operations in the period it occurs.
Foreign exchange matters
Beginning in 2015, putative class actions were brought against Royal Bank of Canada and/or RBC Capital Markets, LLC in the U.S.,
Canada, the United Kingdom and Brazil. These actions were each brought against multiple foreign exchange dealers and allege,
among other things, collusive behaviour in global foreign exchange trading. In August 2018, the U.S. District Court entered a final
order approving RBC Capital Markets, LLC’s pending settlement with class plaintiffs. In November 2018, certain institutional
plaintiffs who had previously opted-out of participating in the settlement filed their own lawsuit in the U.S. District Court (the
“Opt Out Action”). In May 2020, the U.S. District Court dismissed Royal Bank of Canada from the Opt Out Action. The plaintiffs
refiled their claim and in July 2021, the U.S. District Court granted a motion in favour of RBC Capital Markets, LLC to dismiss the
action, however, denied the motion as to Royal Bank of Canada.
Royal Bank of Canada has reached a settlement for an immaterial amount with respect to a U.S. action brought by a different
class of plaintiffs. The Canadian class actions have been settled.
In its discretion Royal Bank of Canada may choose to resolve claims, litigations, or similar matters at any time. Based on the
facts currently known, it is not possible at this time to predict the ultimate outcome of the Foreign Exchange Matters or the
timing of their ultimate resolution.
U.S. communications recordkeeping inquiry
In October 2022, our subsidiary RBC Capital Markets, LLC received a request for information and documents from the Securities
and Exchange Commission (SEC) concerning compliance with records preservation requirements relating to business
communications exchanged on electronic channels that have not been approved by RBC Capital Markets, LLC. RBC Capital
Markets, LLC is cooperating with the SEC’s inquiry. As has been publicly reported, the SEC is conducting similar inquiries into
recordkeeping practices at multiple other financial institutions.
Based on the facts currently known, it is not possible at this time to predict the ultimate outcome of this inquiry or the timing
of its resolution.
U.K. Competition and Markets Authority investigation
RBC Europe Limited is engaging with the U.K. Competition and Markets Authority in respect of an investigation of alleged anti-
competitive arrangements in the financial services sector between 2009 and 2013. The outcome and resulting financial impact of
this investigation is unknown and not reliably estimable.
Other matters
We are a defendant in a number of other actions alleging that certain of our practices and actions were improper. The lawsuits
involve a variety of complex issues and the timing of their resolution is varied and uncertain. Management believes that we will
ultimately be successful in resolving these lawsuits, to the extent that we are able to assess them, without material financial
impact to the Bank. This is, however, an area of significant judgment and the potential liability resulting from these lawsuits
could be material to our results of operations in any particular period.
Various other legal proceedings are pending that challenge certain of our other practices or actions. While this is an area of
significant judgment and some matters are currently inestimable, we consider that the aggregate liability, to the extent that we
are able to assess it, resulting from these other proceedings will not be material to our consolidated financial position or results
of operations.
Note 26
Related party transactions
Related parties
Related parties include associated companies over which we have direct or indirect control or have significant influence and
post-employment benefit plans for the benefit of our employees. Related parties also include key management personnel (KMP),
the Board of Directors (Directors), close family members of KMP and Directors, and entities which are, directly or indirectly,
controlled by or jointly controlled by KMP, Directors or their close family members.
220
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Key management personnel and Directors
KMP are defined as those persons having authority and responsibility for planning, directing and controlling our activities,
directly or indirectly. They include the senior members of our organization called the Group Executive (GE). The GE is comprised
of the President and Chief Executive Officer, and the Chief Officers and Group Heads, who report directly to him. The Directors do
not plan, direct, or control the activities of the entity; they oversee the management of the business and provide stewardship.
Compensation of Key management personnel and Directors
For the year ended
(Millions of Canadian dollars)
October 31
2022
(1)
October 31
2021
Salaries and other short-term employee benefits
(2)
$
27
$
19
Post-employment benefits
(3)
2
3
Share-based payments
40
35
$
69
$
57
(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, stock awards and shares held by Key management personnel, Directors and their close family members
As at
October 31, 2022
(1)
October 31, 2021 (2)
(Millions of Canadian dollars, except number of units)
No. of
units held
Value
No. of
units held
Value
Stock options
(3)
2,409,294
$
59
2,369,659
$
81
Other non-option stock based awards
(3)
914,496
115
983,004
127
RBC common and preferred shares
170,312
22
183,783
24
3,494,102
$ 196
3,536,446
$ 232
(1)
During the year ended October 31, 2022 certain executives, who were members of the Bank’s GE as at October 31, 2021, left the Bank and therefore were no longer part of
KMP. Total shareholdings and options held upon their departure was 569,470 units with a value of $34 million.
(2)
During the year ended October 31, 2021 certain directors, who were members of the Board of Directors as at October 31, 2020, retired. Total shareholdings held upon their
retirement was 21,723 units with a value of $3 million.
(3)
Directors do not receive stock options or any other non-option stock based awards.
Transactions, arrangements and agreements involving Key management personnel, Directors and their close family
members
In the normal course of business, we provide certain banking services to KMP, Directors, and their close family members. These
transactions were made on substantially the same terms, including interest rates and security, as for comparable transactions
with persons of a similar standing and did not involve more than the normal risk of repayment or present other unfavourable
features.
As at October 31, 2022, total loans to KMP, Directors and their close family members were $14 million (October 31, 2021 –
$14 million). We have no stage 3 allowance or provision for credit losses relating to these loans as at and for the years ended
October 31, 2022 and October 31, 2021. No guarantees, pledges or commitments have been given to KMP, Directors or their close
family members.
Joint ventures and associates
In the normal course of business, we provide certain banking and financial services to our joint ventures and associates,
including loans, interest and non-interest bearing deposits. These transactions meet the definition of related party transactions
and were made on substantially the same terms as for comparable transactions with third parties.
As at October 31, 2022, loans to joint ventures and associates were $251 million (October 31, 2021 – $340 million) and deposits
from joint ventures and associates were $20 million (October 31, 2021 – $13 million). We have no Stage 3 allowance or provision
for credit losses relating to loans to joint ventures and associates as at and for the years ended October 31, 2022 and October 31,
2021. $1 million of guarantees have been given to joint ventures and associates for the year ended October 31, 2022 (October 31,
2021 – $1 million).
Other transactions, arrangements or agreements involving joint ventures and associates
As at or for the year
ended
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Commitments and other contingencies
$
829
$ 1,017
Other fees received for services rendered
50
48
Other fees paid for services received
107
108
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
221
Note 27
Results by business segment
Composition of business segments
For management purposes, based on the products and services offered, we are organized into five business segments:
Personal & Commercial Banking, Wealth Management, Insurance, Investor & Treasury Services and Capital Markets.
Personal & Commercial Banking provides a broad suite of financial products and services to individuals and businesses for their
day-to-day banking, investing and financing needs through two businesses: Canadian Banking and Caribbean & U.S. Banking. In
Canada, we provide a broad suite of financial products and services through our large branch network, automated teller
machines, and mobile sales network. In the Caribbean and the U.S., we offer a broad range of financial products and services in
targeted markets. Non-interest income in Personal & Commercial Banking mainly comprises Service charges, Mutual fund
revenue and Card service revenue.
Wealth Management serves high net worth and ultra-high net worth individual and institutional clients with a comprehensive
suite of advice-based solutions and strategies to help them achieve their financial goals through our lines of businesses in
Canada, the U.S., the U.K., Europe and Asia, including Canadian Wealth Management, U.S. Wealth Management (including City
National), Global Asset Management, and International Wealth Management. Non-interest income in Wealth Management mainly
comprises Investment management and custodial fees, Mutual fund revenue and Securities brokerage commissions.
Insurance has operations in Canada and globally, operating under two business lines: Canadian Insurance and
International Insurance, providing a wide range of advice and solutions for individual and business clients including life, health,
wealth, home, auto, travel, annuities and reinsurance. In Canada, we offer our products and services through a wide variety of
channels, comprised of mobile advisors, advice centres, RBC Insurance
®
stores, and digital platforms as well as through
independent brokers and partners. Outside Canada, we operate in reinsurance and retrocession markets globally offering life,
disability and longevity reinsurance products. Non-interest income in Insurance comprises Insurance premiums, investment and
fee income.
Investor & Treasury Services offers custody, fund administration, shareholder services, private capital services, middle office
transaction banking (including trade finance, insourced solutions and services to broker dealers), and treasury and market
services (including cash/liquidity management, foreign exchange and securities finance). Non-interest income in Investor &
Treasury Services mainly comprises Investment management and custodial fees, and Foreign exchange revenue, other than
trading.
Capital Markets provides expertise in advisory & origination, sales & trading, and lending & financing to corporations,
institutional clients, asset managers, private equity firms and governments globally in our two main business lines: Corporate &
Investment Banking and Global Markets. In North America, we offer a full suite of products and services which include equity and
debt origination and distribution, advisory services, and sales & trading. Outside North America, we have a targeted strategic
presence in the U.K. & Europe, Australia, Asia & other markets aligned to our global expertise. In the U.K. & Europe, we offer a
diversified set of capabilities in key industry sectors of focus. In Australia and Asia, we compete with global and regional
investment banks in targeted areas aligned to our global expertise, including fixed income distribution and currencies trading,
secured financing, as well as corporate and investment banking. Non-interest income in Capital Markets mainly includes Trading
revenue, Underwriting and other advisory fees and Credit fees.
All other enterprise level activities that are not allocated to these five business segments, such as certain treasury and liquidity
management activities, including amounts associated with unattributed capital, and consolidation adjustments, including the
elimination of the Taxable equivalent basis (Teb) gross-up amounts, are included in Corporate Support. Teb adjustments gross
up income from certain tax-advantaged sources from Canadian taxable corporate dividends and U.S. tax credit investments
recorded in Capital Markets to their effective tax equivalent value with the corresponding offset recorded in the provision for
income taxes. Management believes that these Teb adjustments are necessary for Capital Markets to reflect how it is managed
and enhances the comparability of revenue across our taxable and tax-advantaged sources. Our use of Teb adjustments may not
be comparable to similarly adjusted amounts at other financial institutions. The Teb adjustment for the year ended October 31,
2022 was $572 million (October 31, 2021 – $518 million). Gains (losses) on economic hedges of our U.S. Wealth Management
(including City National) share-based compensation plans, which are reflected in revenue, and related variability in share-based
compensation expense driven by changes in the fair value of liabilities relating to these plans are also included in Corporate
Support as this presentation more closely aligns with how we view business performance and manage the underlying risks.
Geographic segments
For geographic reporting, our segments are grouped into Canada, the U.S. and Other International. Transactions are primarily
recorded in the location that best reflects the risk due to negative changes in economic conditions and prospects for growth due
to positive economic changes. This location frequently corresponds with the location of the legal entity through which the
business is conducted and the location of our clients. Transactions are recorded in the local currency and are subject to foreign
exchange rate fluctuations with respect to the movement in the Canadian dollar.
Management reporting framework
Our management reporting framework is intended to measure the performance of each business segment as if it were a stand-
alone business and reflects the way that the business segment is managed. This approach is intended to ensure that our
business segments’ results include all applicable revenue and expenses associated with the conduct of their business and
depicts how management views those results. We regularly monitor these segment results for the purpose of making decisions
about resource allocation and performance assessment. These items do not impact our consolidated results.
The expenses in each business segment may include costs or services directly incurred or provided on their behalf at the
enterprise level. For other costs not directly attributable to one of our business segments, we use a management reporting
framework that uses assumptions and methodologies for allocating overhead costs and indirect expenses to our business
222
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
segments and that assists in the attribution of capital and the transfer pricing of funds to our business segments in a manner that
consistently measures and aligns the economic costs with the underlying benefits and risks of that specific business segment.
Activities and business conducted between our business segments are generally at market rates. All other enterprise level
activities that are not allocated to our five business segments are reported under Corporate Support.
Our assumptions and methodologies used in our management reporting framework are periodically reviewed by us to
ensure that they remain valid. The capital attribution methodologies involve a number of assumptions that are revised
periodically.
For the year ended October 31, 2022
(Millions of Canadian dollars)
Personal &
Commercial
Banking
Wealth
Management
Insurance
Investor &
Treasury
Services
Capital
Markets
(1)
Corporate
Support
(1)
Total
Canada
United
States
Other
International
Net interest income
(2)
$
14,019
$
3,634
$
–
$
498
$
4,698
$
(132)
$
22,717
$ 15,761
$
5,423
$
1,533
Non-interest income
6,124
11,215
3,510
1,725
4,422
(728)
26,268
13,508
6,364
6,396
Total revenue
20,143
14,849
3,510
2,223
9,120
(860)
48,985
29,269
11,787
7,929
Provision for credit losses
463
34
–
(3)
(11)
1
484
600
60
(176)
Insurance policyholder benefits,
claims and acquisition expense
–
–
1,783
–
–
–
1,783
(466)
–
2,249
Non-interest expense
8,437
10,701
588
1,569
5,561
(247)
26,609
13,648
9,006
3,955
Net income (loss) before income
taxes
11,243
4,114
1,139
657
3,570
(614)
20,109
15,487
2,721
1,901
Income taxes (recoveries)
2,873
970
282
144
649
(616)
4,302
3,615
452
235
Net income
$
8,370
$
3,144
$
857
$
513
$
2,921
$
2
$
15,807
$ 11,872
$
2,269
$
1,666
Non-interest expense includes:
Depreciation and amortization
$
942
$
931
$
57
$
190
$
502
$
12
$
2,634
$
1,617
$
776
$
241
Impairment of other intangibles
11
2
2
1
2
–
18
11
5
2
Total assets
$ 602,824
$
174,964
$ 21,918
$263,362
$ 794,032
$
60,119
$1,917,219
$992,485
$570,255
$
354,479
Total assets include:
Additions to premises and
equipment and intangibles
$
394
$
2,265
$
49
$
84
$
256
$
630
$
3,678
$
1,263
$
666
$
1,749
Total liabilities
$ 602,741
$
174,986
$ 22,588
$263,206
$ 793,826
$ (48,303)
$1,809,044
$884,394
$570,266
$
354,384
For the year ended October 31, 2021
(Millions of Canadian dollars)
Personal &
Commercial
Banking
Wealth
Management
Insurance
Investor &
Treasury
Services
Capital
Markets
(1)
Corporate
Support
(1)
Total
Canada
United
States
Other
International
Net interest income
(2)
$
12,621
$
2,689
$
–
$
460
$
4,553
$
(321)
$
20,002
$
13,947
$
4,447
$
1,608
Non-interest income
5,725
10,607
5,600
1,704
5,634
421
29,691
15,454
8,083
6,154
Total revenue
18,346
13,296
5,600
2,164
10,187
100
49,693
29,401
12,530
7,762
Provision for credit losses
(187)
(47)
(1)
(8)
(509)
(1)
(753)
(203)
(277)
(273)
Insurance policyholder benefits,
claims and acquisition expense
–
–
3,891
–
–
–
3,891
2,036
–
1,855
Non-interest expense
7,978
9,929
596
1,589
5,427
405
25,924
12,897
9,107
3,920
Net income (loss) before income
taxes
10,555
3,414
1,114
583
5,269
(304)
20,631
14,671
3,700
2,260
Income taxes (recoveries)
2,708
788
225
143
1,082
(365)
4,581
3,599
649
333
Net income
$
7,847
$
2,626
$
889
$
440
$
4,187
$
61
$
16,050
$
11,072
$
3,051
$
1,927
Non-interest expense includes:
Depreciation and amortization
$
923
$
883
$
59
$
197
$
497
$
4
$
2,563
$
1,594
$
728
$
241
Impairment of other intangibles
5
3
1
2
18
–
29
16
11
2
Total assets
$
549,702
$
148,990
$
22,724
$ 240,055
$
692,278
$
52,574
$ 1,706,323
$ 964,747
$ 454,949
$
286,627
Total assets include:
Additions to premises and
equipment and intangibles
$
503
$
752
$
48
$
80
$
355
$
459
$
2,197
$
1,238
$
739
$
220
Total liabilities
$
549,619
$
149,096
$
22,966
$ 239,960
$
691,767
$
(45,847)
$ 1,607,561
$ 866,287
$ 454,903
$
286,371
(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.
Note 28
Nature and extent of risks arising from financial instruments
We are exposed to credit, market and liquidity and funding risks as a result of holding financial instruments. Our risk
measurement and objectives, policies and methodologies for managing these risks are disclosed in the shaded text along with
those tables specifically marked with an asterisk (*) in the Credit risk section of Management’s Discussion and Analysis. These
shaded text and tables are an integral part of these Consolidated Financial Statements.
Concentrations of credit risk exist if a number of our counterparties are engaged in similar activities, are located in the same
geographic region or have comparable economic characteristics such that their ability to meet contractual obligations would be
similarly affected by changes in economic, political or other conditions.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
223
Note 28
Nature and extent of risks arising from financial instruments
(continued)
Concentrations of credit risk indicate the relative sensitivity of our performance to developments affecting a particular
industry or geographic location. The amounts of credit exposure associated with certain of our on- and off-balance sheet
financial instruments are summarized in the following tables.
As at October 31, 2022
(Millions of Canadian dollars,
except percentage amounts)
Canada
%
United
States
%
Europe
%
Other
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
As at October 31, 2021
(Millions of Canadian dollars,
except percentage amounts)
Canada
%
United
States
%
Europe
%
Other
International
%
Total
On-balance sheet assets other
than derivatives
(1)
$
701,779
67%
$
213,389
20%
$
85,271
8%
$
49,001
5%
$
1,049,440
Derivatives before master
netting agreements
(2), (3)
19,927
21%
23,910
25%
45,717
47%
7,111
7%
96,665
$
721,706
63%
$
237,299
21%
$
130,988
11%
$
56,112
5%
$
1,146,105
Off-balance sheet credit
instruments
(4)
Committed and uncommitted
(5)
$
370,479
59%
$
196,692
32%
$
46,187
8%
$
9,335
1%
$
622,693
Other
82,010
66%
14,014
11%
26,920
22%
1,383
1%
124,327
$
452,489
61%
$
210,706
28%
$
73,107
10%
$
10,718
1%
$
747,020
(1)
Includes Assets purchased under reverse repurchase agreements and securities borrowed, Loans and Customers’ liability under acceptances. The largest concentrations
in Canada are Ontario at 56% (October 31, 2021 – 56%), the Prairies at 15% (October 31, 2021 – 16%), British Columbia and the territories at 15% (October 31, 2021 – 14%) and
Quebec at 10% (October 31, 2021 – 10%). No industry accounts for more than 20% (October 31, 2021 – 20%) of total on-balance sheet credit instruments with the exception
of Banking, which accounted for 26% (October 31, 2021 – 24%), and Government, which accounted for 32% (October 31, 2021 – 37%). The classification of our sectors aligns
with our view of credit risk by industry.
(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 45% and 55% of our total commitments (October 31, 2021 –
45% and 55%). The largest concentrations in the wholesale portfolio relate to Financial services at 15% (October 31, 2021 – 13%), Real estate and related at 12%
(October 31, 2021 – 10%), Utilities at 11% (October 31, 2021 – 10%), Other services at 7% (October 31, 2021 – 8%), and Oil and gas at 6% (October 31, 2021 – 6%). The
classification of our sectors aligns with our view of credit risk by industry.
Note 29
Capital management
Regulatory capital and capital ratios
OSFI formally establishes risk-based capital and leverage minimums and Total Loss Absorbing Capacity (TLAC) ratios for deposit-
taking institutions in Canada. We are required to calculate our capital ratios using the Basel III framework. Under Basel III,
regulatory capital includes Common Equity Tier 1 (CET1), Tier 1 and Tier 2 capital. CET1 capital mainly consists of common shares,
retained earnings and other components of equity. Regulatory adjustments under Basel III include deductions of goodwill and
other intangibles, certain deferred tax assets, defined benefit pension fund assets, investments in banking, financial and
insurance entities, and the shortfall of provisions to expected losses. Tier 1 capital comprises predominantly CET1 and Additional
Tier 1 items including non-cumulative preferred shares and LRCNs that meet certain criteria. Tier 2 capital includes subordinated
debentures that meet certain criteria, certain loan loss allowances and non-controlling interests in subsidiaries’ Tier 2
instruments. Total capital is the sum of Tier 1 and Tier 2 capital. External TLAC instruments comprise predominantly senior bail-in
debt, which includes eligible senior unsecured debt with an original term to maturity of greater than 400 days and remaining term
to maturity of greater than 365 days. TLAC available is defined as the sum of Total capital and other TLAC instruments.
Regulatory capital ratios are calculated by dividing CET1, Tier 1 and Total capital by risk-weighted assets. The leverage ratio
is calculated by dividing Tier 1 capital by an exposure measure. The exposure measure consists of total assets (excluding items
deducted from Tier 1 capital) and certain off-balance sheet items converted into credit exposure equivalents. Adjustments are
also made to derivatives and secured financing transactions to reflect credit and other risks.
224
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
During 2022 and 2021, we complied with all applicable capital, leverage and TLAC requirements, including the domestic stability
buffer, imposed by OSFI.
As at
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
October 31
2022
October 31
2021
Capital
(1)
CET1 capital
$
76,945
$
75,583
Tier 1 capital
84,242
82,246
Total capital
93,850
92,026
Risk-weighted assets (RWA) used in calculation of capital ratios
(1)
Credit risk
$ 496,898
$ 444,142
Market risk
35,342
34,806
Operational risk
77,639
73,593
Total RWA
$ 609,879
$ 552,541
Capital ratios and Leverage ratio
(1)
CET1 ratio
12.6%
13.7%
Tier 1 capital ratio
13.8%
14.9%
Total capital ratio
15.4%
16.7%
Leverage ratio
4.4%
4.9%
Leverage ratio exposure (billions)
$
1,898
$
1,662
TLAC available and ratios
(2), (3)
TLAC available
$ 160,961
n.a.
TLAC ratio
26.4%
n.a.
TLAC leverage ratio
8.5%
n.a.
(1)
Capital, RWA, and capital ratios are calculated using OSFI’s Capital Adequacy Requirements (CAR) guideline and the Leverage ratio is calculated using OSFI’s Leverage
Requirements (LR) guideline as updated in accordance with the regulatory guidance issued by OSFI in response to the COVID-19 pandemic. Both the CAR guideline and LR
guideline are based on the Basel III framework.
(2)
Effective November 1, 2021, OSFI requires Domestic Systemically Important Banks (D-SIBs) to meet minimum risk-based TLAC ratio and TLAC leverage ratio requirements
which are calculated using OSFI’s TLAC guideline.
(3)
The TLAC standard is applied at the resolution entity level which for us is deemed to be Royal Bank of Canada and its subsidiaries. A resolution entity and its subsidiaries
are collectively called a resolution group. Both the TLAC ratio and TLAC leverage ratio are calculated using the TLAC available as percentage of total RWA and leverage
exposure, respectively.
n.a.
not applicable
Note 30
Offsetting financial assets and financial liabilities
Offsetting within our Consolidated Balance Sheets may be achieved where financial assets and liabilities are subject to master
netting arrangements that provide the currently enforceable right of offset and where there is an intention to settle on a net
basis, or realize the assets and settle the liabilities simultaneously. For derivative contracts and repurchase and reverse
repurchase arrangements, this is generally achieved when there is a market mechanism for settlement (e.g., central counterparty
exchange or clearing house) which provides daily net settlement of cash flows arising from these contracts. Margin receivables
and margin payables are generally offset as they settle simultaneously through a market settlement mechanism.
Amounts that do not qualify for offsetting include master netting arrangements that only permit outstanding transactions
with the same counterparty to be offset in an event of default or occurrence of other predetermined events. Such master netting
arrangements include the International Swaps and Derivatives Association Master Agreement or certain derivative exchange or
clearing counterparty agreements for derivative contracts, global master repurchase agreement and global master securities
lending agreements for repurchase, reverse repurchase and other similar secured lending and borrowing arrangements.
The amount of financial collateral received or pledged subject to master netting arrangements or similar agreements but do
not qualify for offsetting refers to the collateral received or pledged to cover the net exposure between counterparties by
enabling the collateral to be realized in an event of default or the occurrence of other predetermined events. Certain amounts of
collateral are restricted from being sold or re-pledged unless there is an event of default or the occurrence of other
predetermined events.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
225
Note 30
Offsetting financial assets and financial liabilities
(continued)
The following tables provide the amount of financial instruments that have been offset on the Consolidated Balance Sheets
and the amounts that do not qualify for offsetting but are subject to enforceable master netting arrangements or similar
agreements. The amounts presented are not intended to represent our actual exposure to credit risk.
Financial instruments subject to enforceable master netting arrangements or similar agreements
As at October 31, 2022
Amounts subject to enforceable netting arrangements
Related amounts not
offset on the Consolidated
Balance Sheets
(1)
(Millions of Canadian dollars)
Gross amounts
of recognized
financial
instruments
Gross amounts
offset on the
Consolidated
Balance Sheets
Net amounts
presented in the
Consolidated
Balance Sheets
Impact of
master
netting
agreements
Financial
collateral
(2)
Net amounts
Amounts not
subject to
enforceable
netting
arrangements
Net amounts
presented
on the
Consolidated
Balance Sheets
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
(3)
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
(3
)
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
(Millions of Canadian dollars)
As at October 31, 2021
Amounts subject to enforceable netting arrangements
Related amounts not
offset on the Consolidated
Balance Sheets
(1)
Gross amounts
of recognized
financial
instruments
Gross amounts
offset on the
Consolidated
Balance Sheets
Net amounts
presented in the
Consolidated
Balance Sheets
Impact of
master
netting
agreements
Financial
collateral
(2)
Net amounts
Amounts not
subject to
enforceable
netting
arrangements
Net amounts
presented
on the
Consolidated
Balance Sheets
Financial assets
Assets purchased under reverse
repurchase agreements and
securities borrowed
$
384,439
$
77,028
$
307,411
$
101
$
305,071
$
2,239
$
492
$
307,903
Derivative assets
(3)
84,595
314
84,281
57,101
12,978
14,202
11,260
95,541
Other financial assets
412
240
172
1
61
110
–
172
$
469,446
$
77,582
$
391,864
$
57,203
$
318,110
$
16,551
$
11,752
$
403,616
Financial liabilities
Obligations related to assets sold
under repurchase agreements
and securities loaned
$
338,737
$
77,028
$
261,709
$
101
$
261,135
$
473
$
492
$
262,201
Derivative liabilities
(3)
77,514
314
77,200
57,101
10,503
9,596
14,239
91,439
Other financial liabilities
412
240
172
1
–
171
–
172
$
416,663
$
77,582
$
339,081
$
57,203
$
271,638
$
10,240
$
14,731
$
353,812
(1)
Financial collateral is reflected at fair value. The amount of financial instruments and financial collateral disclosed is limited to the net balance sheet exposure, and any
over-collateralization is excluded from the table.
(2)
Includes cash collateral of $20 billion (October 31, 2021 – $12 billion) and non-cash collateral of $316 billion (October 31, 2021 – $307 billion) received for financial assets
and cash collateral of $19 billion (October 31, 2021 – $9 billion) and non-cash collateral of $267 billion (October 31, 2021 – $262 billion) pledged for financial liabilities.
(3)
Includes cash margin of $3 billion (October 31, 2021 – $3 billion) that was offset against derivative assets and cash margin of $8 billion (October 31, 2021 – $3 billion) that
was offset against derivative liabilities on the Consolidated Balance Sheets.
226
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Note 31
Recovery and settlement of on-balance sheet assets and liabilities
The table below presents an analysis of assets and liabilities recorded on our Consolidated Balance Sheets by amounts to be
recovered or settled within one year and after one year, as at the balance sheet date, based on contractual maturities and
certain other assumptions outlined in the footnotes below. As warranted, we manage the liquidity risk of various products based
on historical behavioural patterns that are often not aligned with contractual maturities. Amounts to be recovered or settled
within one year, as presented below, may not be reflective of our long-term view of the liquidity profile of certain balance sheet
categories.
As at
October 31, 2022
October 31, 2021
(Millions of Canadian dollars)
Within one
year
After one
year
Total
Within one
year
After one
year
Total
Assets
Cash and due from banks
(1)
$
71,081
$
1,316
$
72,397
$
112,924
$
922
$
113,846
Interest-bearing deposits with
banks
108,011
–
108,011
79,638
–
79,638
Securities
Trading
(2)
139,810
8,395
148,205
129,206
10,034
139,240
Investment, net of applicable
allowance
26,540
143,478
170,018
29,831
115,653
145,484
Assets purchased under reverse
repurchase agreements and
securities borrowed
316,714
1,131
317,845
307,805
98
307,903
Loans
Retail
113,965
435,786
549,751
98,946
404,652
503,598
Wholesale
70,374
203,593
273,967
60,099
157,967
218,066
Allowance for loan losses
(3,753)
(4,089)
Segregated fund net assets
–
2,638
2,638
–
2,666
2,666
Other
Customers’ liability under
acceptances
17,827
17,827
19,793
5
19,798
Derivatives
(2)
151,928
2,511
154,439
93,409
2,132
95,541
Premises and equipment
59
7,155
7,214
28
7,396
7,424
Goodwill
–
12,277
12,277
–
10,854
10,854
Other intangibles
–
6,083
6,083
–
4,471
4,471
Other assets
66,071
14,229
80,300
47,634
14,249
61,883
$
1,082,380
$
838,592
$
1,917,219
$
979,313
$
731,099
$
1,706,323
Liabilities
Deposits
(3)
$
1,023,324
$
185,490
$
1,208,814
$
943,633
$
157,198
$
1,100,831
Segregated fund net liabilities
–
2,638
2,638
–
2,666
2,666
Other
Acceptances
17,872
–
17,872
19,868
5
19,873
Obligations related to securities
sold short
34,105
1,406
35,511
35,524
2,317
37,841
Obligations related to assets sold
under repurchase agreements
and securities loaned
273,001
946
273,947
261,533
668
262,201
Derivatives
(2)
140,808
12,683
153,491
89,804
1,635
91,439
Insurance claims and policy
benefit liabilities
1,904
9,607
11,511
1,867
10,949
12,816
Other liabilities
71,689
23,546
95,235
48,901
21,400
70,301
Subordinated debentures
110
9,915
10,025
188
9,405
9,593
$
1,562,813
$
246,231
$
1,809,044
$
1,401,318
$
206,243
$
1,607,561
(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 $562 billion (October 31, 2021 – $576 billion) are presented as within one year due to their being repayable on demand or at short notice on a
contractual basis. In practice, these deposits relate to a broad range of individuals and customer-types which form a stable base for our operations and liquidity needs.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
227
Note 32
Parent company information
The following table presents information regarding the legal entity of Royal Bank of Canada with its subsidiaries presented on an
equity accounted basis.
Condensed Balance Sheets
As at
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Assets
Cash and due from banks
$
48,062
$
97,617
Interest-bearing deposits with banks
84,680
56,896
Securities
174,615
153,780
Investments in bank subsidiaries and associated corporations
(1)
49,841
43,546
Investments in other subsidiaries and associated corporations
88,260
80,216
Assets purchased under reverse repurchase agreements and securities borrowed
132,829
125,590
Loans, net of allowance for loan losses
679,580
601,742
Net balances due from bank subsidiaries
(1)
7,172
–
Other assets
227,767
155,421
$
1,492,806
$
1,314,808
Liabilities and shareholders’ equity
Deposits
$
955,978
$
854,833
Net balances due to bank subsidiaries
(1)
–
28,201
Net balances due to other subsidiaries
36,701
38,309
Other liabilities
382,099
285,447
1,374,778
1,206,790
Subordinated debentures
9,964
9,351
Shareholders’ equity
108,064
98,667
$
1,492,806
$
1,314,808
(1)
Bank refers primarily to regulated deposit-taking institutions and securities firms.
Condensed Statements of Income and Comprehensive Income
For the year ended
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Interest and dividend income
(1)
$
27,791
$
19,793
Interest expense
12,846
5,615
Net interest income
14,945
14,178
Non-interest income
(2)
5,425
5,393
Total revenue
20,370
19,571
Provision for credit losses
579
(606)
Non-interest expense
10,175
9,466
Income before income taxes
9,616
10,711
Income taxes
2,276
2,088
Net income before equity in undistributed income of subsidiaries
7,340
8,623
Equity in undistributed income of subsidiaries
8,454
7,415
Net income
$
15,794
$
16,038
Other comprehensive income (loss), net of taxes
5,810
1,463
Total comprehensive income
$
21,604
$
17,501
(1)
Includes dividend income from investments in subsidiaries and associated corporations of $11 million (October 31, 2021 – $5 million).
(2)
Includes a nominal share of profit (loss) from associated corporations (October 31, 2021 – nominal).
228
Royal Bank of Canada: Annual Report 2022
Consolidated Financial Statements
Condensed Statements of Cash Flows
For the year ended
(Millions of Canadian dollars)
October 31
2022
October 31
2021
Cash flows from operating activities
Net income
$
15,794
$
16,038
Adjustments to determine net cash from operating activities:
Change in undistributed earnings of subsidiaries
(8,454)
(7,415)
Change in deposits, net of securitizations
101,145
72,196
Change in loans, net of securitizations
(78,288)
(46,194)
Change in trading securities
(10,348)
(8,756)
Change in obligations related to assets sold under repurchase agreements and
securities loaned
24,133
5,228
Change in assets purchased under reverse repurchase agreements and securities borrowed
(7,239)
8,447
Change in obligations related to securities sold short
3,024
2,405
Other operating activities, net
2,385
6,316
Net cash from (used in) operating activities
42,152
48,265
Cash flows from investing activities
Change in interest-bearing deposits with banks
(27,784)
(35,293)
Proceeds from sales and maturities of investment securities
59,304
70,260
Purchases of investment securities
(71,509)
(73,150)
Net acquisitions of premises and equipment and other intangibles
(1,180)
(1,093)
Change in cash invested in subsidiaries
(2,514)
(3,078)
Change in net funding provided to subsidiaries
(36,981)
(12,068)
Net cash from (used in) investing activities
(80,664)
(54,422)
Cash flows from financing activities
Issuance of subordinated debentures
1,000
2,750
Repayment of subordinated debentures
–
(2,500)
Issue of common shares, net of issuance costs
51
90
Common shares purchased for cancellation
(5,426)
–
Issue of preferred shares and other equity instruments, net of issuance costs
749
2,245
Redemption of preferred shares and other equity instruments
(155)
(1,475)
Dividends paid on shares and distributions paid on other equity instruments
(6,960)
(6,420)
Repayment of lease liabilities
(302)
(313)
Net cash from (used in) financing activities
(11,043)
(5,623)
Net change in cash and due from banks
(49,555)
(11,780)
Cash and due from banks at beginning of year
97,617
109,397
Cash and due from banks at end of year
$
48,062
$
97,617
Supplemental disclosure of cash flow information
Amount of interest paid
$
7,801
$
6,306
Amount of interest received
21,332
17,831
Amount of dividends received
2,618
2,185
Amount of income taxes paid
4,641
1,772
Note 33
Subsequent events
Acquisition
On November 29, 2022, we entered into an agreement to acquire 100% of the common shares of HSBC Bank Canada (HSBC
Canada) for an all-cash purchase price of $13.5 billion. In addition, we will purchase all of the existing preferred shares and
subordinated debt of HSBC Canada held directly or indirectly by HSBC Holdings plc at par value ($2.1 billion as of September 30,
2022). HSBC Canada is a premier Canadian personal and commercial bank focused on globally connected clients.
The transaction is expected to close by late 2023 and is subject to the satisfaction of customary closing conditions, including
regulatory approvals. The results of the acquired business will be consolidated from the date of close.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2022
229
Ten-year statistical review
Condensed Balance Sheets
(Millions of Canadian dollars)
(1)
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
Assets
Cash and due from banks
$
72,397
$
113,846
$
118,888
$
26,310
$
30,209
$
28,407
$
14,929
$
12,452
$
17,421
$
15,550
Interest-bearing deposits with banks
108,011
79,638
39,013
38,345
36,471
32,662
27,851
22,690
8,399
9,039
Securities, net of applicable allowance
(2)
318,223
284,724
275,814
249,004
222,866
218,379
236,093
215,508
199,148
182,710
Assets purchased under reverse repurchase
agreements and securities borrowed
317,845
307,903
313,015
306,961
294,602
220,977
186,302
174,723
135,580
117,517
Loans, net of allowance
819,965
717,575
660,992
618,856
576,818
542,617
521,604
472,223
435,229
408,850
Other
280,778
202,637
216,826
189,459
173,768
169,811
193,479
176,612
144,773
126,079
Total assets
$1,917,219
$1,706,323
$1,624,548
$1,428,935
$1,334,734
$1,212,853
$1,180,258
$1,074,208
$
940,550
$
859,745
Liabilities
Deposits
(3)
$1,208,814
$1,100,831
$1,011,885
$
886,005
$
836,197
$
789,036
$
757,589
$
697,227
$
614,100
$
563,079
Other
(3)
590,205
497,137
516,029
449,490
409,451
340,124
341,295
305,675
264,088
239,763
Subordinated debentures
10,025
9,593
9,867
9,815
9,131
9,265
9,762
7,362
7,859
7,443
Total liabilities
$1,809,044
$1,607,561
$1,537,781
$1,345,310
$1,254,779
$1,138,425
$1,108,646
$1,010,264
$
886,047
$
810,285
Equity attributable to shareholders
108,064
98,667
86,664
83,523
79,861
73,829
71,017
62,146
52,690
47,665
Non-controlling interest
111
95
103
102
94
599
595
1,798
1,813
1,795
Total equity
108,175
98,762
86,767
83,625
79,955
74,428
71,612
63,944
54,503
49,460
Total liabilities and equity
$1,917,219
$1,706,323
$1,624,548
$1,428,935
$1,334,734
$1,212,853
$1,180,258
$1,074,208
$
940,550
$
859,745
Condensed Income Statements
(Millions of Canadian dollars)
(1)
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
Net interest income
(3)
$
22,717
$
20,002
$
20,835
$
19,749
$
17,952
$
16,926
$
16,531
$
14,771
$
14,116
$
13,249
Non-interest income
(3), (4)
26,268
29,691
26,346
26,253
24,624
23,743
22,264
20,932
19,992
17,433
Total revenue
(4)
48,985
49,693
47,181
46,002
42,576
40,669
38,795
35,703
34,108
30,682
Provision for credit losses
(5)
484
(753)
4,351
1,864
1,307
1,150
1,546
1,097
1,164
1,237
Insurance policyholder benefits, claims and
acquisition expense
1,783
3,891
3,683
4,085
2,676
3,053
3,424
2,963
3,573
2,784
Non-interest expense
(4)
26,609
25,924
24,758
24,139
22,833
21,794
20,526
19,020
17,661
16,214
Net income
$
15,807
$
16,050
$
11,437
$
12,871
$
12,431
$
11,469
$
10,458
$
10,026
$
9,004
$
8,342
Other Statistics – reported
(Millions of Canadian dollars, except
percentages and per share amounts)
(1)
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
PROFITABILITY MEASURES
Earnings per shares – basic
$
11.08
$
11.08
$
7.84
$
8.78
$
8.39
$
7.59
$
6.80
$
6.75
$
6.03
$
5.53
– diluted
$
11.06
$
11.06
$
7.82
$
8.75
$
8.36
$
7.56
$
6.78
$
6.73
$
6.00
$
5.49
Return on common equity
(6), (7)
16.4%
18.6%
14.2%
16.8%
17.6%
17.0%
16.3%
18.6%
19.0%
19.7%
Return on risk-weighted assets
2.68%
2.90%
2.10%
2.52%
2.55%
2.49%
2.34%
2.45%
2.52%
2.67%
Efficiency ratio
(4)
54.3%
52.2%
52.5%
52.5%
53.6%
53.6%
52.9%
53.3%
51.8%
52.8%
KEY RATIOS
PCL on impaired loans as a % of average
net loans and acceptances
(8)
0.10%
0.10%
0.24%
0.27%
0.20%
0.21%
0.28%
0.24%
0.27%
0.31%
Net interest margin
(average earning assets, net)
(3), (6)
1.48%
1.48%
1.55%
1.61%
1.64%
1.69%
1.70%
1.71%
1.86%
1.88%
SHARE INFORMATION
Common shares outstanding (000s)
– end of period
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
1,441,722
Dividends declared per common share
$
4.96
$
4.32
$
4.29
$
4.07
$
3.77
$
3.48
$
3.24
$
3.08
$
2.84
$
2.53
Dividend yield
(9)
3.7%
3.8%
4.7%
4.1%
3.7%
3.8%
4.3%
4.1%
3.8%
4.0%
Dividend payout ratio
45%
39%
55%
46%
45%
46%
48%
46%
47%
46%
Book value per share
(10)
$
72.85
$
64.57
$
56.75
$
54.41
$
51.12
$
46.41
$
43.32
$
39.51
$
33.69
$
29.87
Common share price (RY on TSX)
(11)
$
126.05
$
128.82
$
93.16
$
106.24
$
95.92
$
100.87
$
83.80
$
74.77
$
80.01
$
70.02
Market capitalization (TSX)
(11)
174,316
183,507
132,518
151,933
138,009
146,554
124,476
107,925
115,393
100,903
Market price to book value
1.73
2.00
1.64
1.95
1.88
2.17
1.93
1.89
2.38
2.34
CAPITAL MEASURES – CONSOLIDATED
Common Equity Tier 1 capital ratio
12.6%
13.7%
12.5%
12.1%
11.5%
10.9%
10.8%
10.6%
9.9%
9.6%
Tier 1 capital ratio
13.8%
14.9%
13.5%
13.2%
12.8%
12.3%
12.3%
12.2%
11.4%
11.7%
Total capital ratio
15.4%
16.7%
15.5%
15.2%
14.6%
14.2%
14.4%
14.0%
13.4%
14.0%
Leverage ratio
4.4%
4.9%
4.8%
4.3%
4.4%
4.4%
4.4%
4.3%
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 2022 Annual
Report. Effective November 1, 2018, we adopted IFRS 15
Revenue from Contracts with Customers
. Results from periods prior to November 1, 2018 are reported in
accordance with IAS 18
Revenue
in this 2022 Annual Report. Effective November 1, 2017, we adopted IFRS 9
Financial Instruments
(IFRS 9). Results from periods prior to
November 1, 2017 are reported in accordance with IAS 39
Financial Instruments: Recognition and Measurement
(IAS 39) in this 2022 Annual Report.
(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.
n.a.
not applicable
230
Royal Bank of Canada: Annual Report 2022
Ten-year statistical review
Principal subsidiaries
(Millions of Canadian dollars)
As at October 31, 2022
Principal subsidiaries
(1)
Principal office address
(2)
Carrying value of
voting shares owned
by the Bank
(3)
Royal Bank Holding Inc.
Toronto, Ontario, Canada
$
77,914
RBC Direct Investing Inc.
Toronto, Ontario, Canada
RBC Insurance Holdings Inc.
Mississauga, Ontario, Canada
RBC Life Insurance Company
Mississauga, Ontario, Canada
R.B.C. Holdings (Bahamas) Limited
Nassau, New Providence, Bahamas
RBC Caribbean Investments Limited
George Town, Grand Cayman, Cayman Islands
Royal Bank of Canada Insurance
Company Ltd.
Camana Bay, Grand Cayman, Cayman Islands
Investment Holdings (Cayman) Limited
George Town, Grand Cayman, Cayman Islands
RBC (Barbados) Funding Ltd.
St. Michael, Barbados
Capital Funding Alberta Limited
Calgary, Alberta, Canada
RBC Global Asset Management Inc.
Toronto, Ontario, Canada
RBC Investor Services Trust
Toronto, Ontario, Canada
RBC Investor Services Bank S.A.
Esch-sur-Alzette, Luxembourg
RBC (Barbados) Trading Bank Corporation
St. James, Barbados
RBC U.S. Group Holdings LLC
(2)
Toronto, Ontario, Canada
27,655
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
Los Angeles, California, U.S.
RBC Dominion Securities Limited
Toronto, Ontario, Canada
13,535
RBC Dominion Securities Inc.
Toronto, Ontario, Canada
Royal Bank Mortgage Corporation
Toronto, Ontario, Canada
5,604
RBC Europe Limited
London, England
2,669
The Royal Trust Company
Montreal, Quebec, Canada
1,215
Royal Trust Corporation of Canada
Toronto, Ontario, Canada
486
(1)
The Bank directly or indirectly controls each subsidiary.
(2)
Each subsidiary is incorporated or organized under the laws of the state or country in which the principal office is situated, except for RBC U.S. Group Holdings LLC and
RBC USA Holdco Corporation which are incorporated under the laws of the State of Delaware, U.S. and RBC Capital Markets, LLC, which is organized under the laws of the
State of Minnesota, U.S.
(3)
The carrying value of voting shares is stated as the Bank’s equity in such investments.
Principal subsidiaries
Royal Bank of Canada: Annual Report 2022
231
Shareholder Information
Corporate headquarters
Street address:
Royal Bank of Canada
200 Bay Street
Toronto, Ontario M5J 2J5
Canada
Tel: 1-888-212-5533
Mailing address:
P.O. Box 1
Royal Bank Plaza
Toronto, Ontario M5J 2J5
Canada
website: rbc.com
Transfer Agent and Registrar
Main Agent:
Computershare Trust Company
of Canada
1500 Robert-Bourassa Blvd.
Suite 700
Montreal, Quebec H3A 3S8
Canada
Tel: 1-866-586-7635 (Canada and
the U.S.) or 514-982-7555
(International)
Fax: 514-982-7580
website: computershare.com/rbc
Co-Transfer Agent (U.S.):
Computershare Trust
Company, N.A.
250 Royall Street
Canton, Massachusetts 02021
U.S.A.
Co-Transfer Agent (U.K.):
Computershare Investor
Services PLC
Securities Services – Registrars
P.O. Box 82, The Pavilions,
Bridgwater Road,
Bristol BS99 6ZZ
U.K.
Stock exchange listings
(Symbol: RY)
Common shares are listed on:
Canada – Toronto Stock
Exchange (TSX)
U.S. – New York Stock Exchange
(NYSE)
Switzerland – Swiss Exchange
(SIX)
Preferred shares AZ, BB, BD, BF,
BH, BI and BO are listed on the
TSX. The related depository
shares of the series C-2 preferred
shares are listed on the NYSE.
Valuation day price
For Canadian income tax purposes,
Royal Bank of Canada’s common
stock was quoted at $29.52 per share
on the Valuation Day (December 22,
1971). This is equivalent to $7.38 per
share after adjusting for the
two-for-one stock split of March 1981
and the two-for- one stock split of
February 1990. The one-for-one stock
dividends in October 2000 and
April 2006 did not affect the
Valuation Day amount for our
common shares.
Shareholder contacts
For dividend information, change
in share registration or address,
lost stock certificates, tax forms,
estate transfers or dividend
reinvestment, please contact:
Computershare Trust Company
of Canada
100 University Avenue, 8th Floor
Toronto, Ontario M5J 2Y1
Canada
Tel: 1-866-586-7635 (Canada and
the U.S.) or 514-982-7555
(International)
Fax: 1-888-453-0330 (Canada and
the U.S.) or 416-263-9394
(International)
email: service@computershare.com
Financial analysts, portfolio
managers, institutional
investors
For financial information inquiries,
please contact:
Investor Relations
Royal Bank of Canada
200 Bay Street
South Tower
Toronto, Ontario M5J 2J5
Canada
Tel: 416-955-7808
email: invesrel@rbc.com
or visit our website at
rbc.com/investorrelations
Direct deposit service
Shareholders in Canada and the
U.S. may have their common
share dividends deposited
directly to their bank account by
electronic funds transfer. To
arrange for this service, please
contact our Transfer Agent and
Registrar, Computershare Trust
Company of Canada.
Eligible dividend designation
For purposes of the
Income Tax
Act
(Canada) and any
corresponding provincial and
territorial tax legislation, all
dividends (and deemed
dividends) paid by RBC to
Canadian residents on both its
common and preferred shares,
are designated as “eligible
dividends”, unless stated
otherwise.
Common share repurchases
We are engaged in a normal
course issuer bid (NCIB) which
allows us to repurchase for
cancellation up to 45 million
common shares during the
period spanning from December
8, 2021 to December 7, 2022,
when the bid expires, or such
earlier date as we may
complete the purchases
pursuant to our Notice of
Intention to Make a NCIB filed
with the Toronto Stock
Exchange.
We determine the amount and
timing of purchases under the
NCIB, subject to prior
consultation with the Office of
the Superintendent of
Financial Institutions. For
further details, refer to the
Capital management section.
A copy of our Notice of Intention
to Make a NCIB may be
obtained, without charge, by
contacting our Corporate
Secretary at our Toronto
mailing address.
2023 Quarterly earnings
release dates
First quarter
March 1
Second quarter
May 25
Third quarter
August 24
Fourth quarter
November 30
2023 Annual Meeting
The Annual Meeting of Common
Shareholders will be held on
Wednesday, April 5, 2023.
Dividend dates for 2023
Subject to approval by the Board of Directors
Record
dates
Payment
dates
Common and preferred shares series
AZ, BB, BD, BF, BH, BI and BO
January 26
April 25
July 26
October 26
February 24
May 24
August 24
November 24
Preferred shares series C-2
(US$)
January 27
April 28
July 28
October 27
February 7
May 8
August 8
November 7
Preferred shares series BT
February 15
August 17
February 24
August 24
Governance
Summaries of the significant ways in which corporate governance
practices followed by RBC differ from corporate governance practices
required to be followed by U.S. domestic companies under the NYSE
listing standards are available on our website at rbc.com/governance.
Information contained in or otherwise accessible through the websites mentioned in this report to shareholders does not form a part of this report. All references
to websites are inactive textual references and are for your information only.
Trademarks used in this report include the LION & GLOBE Symbol, ROYAL BANK OF CANADA, RBC, RBC CAPITAL MARKETS, RBC FUTURE LAUNCH, RBC GLOBAL
ASSET MANAGEMENT, RBC INSURANCE, RBC HOMELINE PLAN, RBC PAYEDGE, RBC TECH FOR NATURE, RBC VANTAGE, RBC WEALTH MANAGEMENT, RBCx,
MYADVISOR, InvestEase, AIDEN, OWNR, NOMI, NOMI INSIGHTS, NOMI FIND & SAVE Dr. Bill, MYDOH, Avion Rewards, RBCxMUSIC, AVION, and VANTAGE SNAPSHOT
which are trademarks of Royal Bank of Canada used by Royal Bank of Canada and/or by its subsidiaries under license. All other trademarks mentioned in this
report which are not the property of Royal Bank of Canada, are owned by their respective holders.
232
Royal Bank of Canada: Annual Report 2022
Shareholder information
rbc.com/ar2022
81104 (12/2022)
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, 2022 and 2021; and
b)
the accompanying management discussion & analysis for the fiscal year ended October 31, 2022
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, 2022
/s/ David McKay
David McKay
President and Chief Executive Officer
/s/ Nadine Ahn
Nadine Ahn
Chief Financial Officer