EX-99.2 3 d709665dex992.htm EX-99.2 EX-99.2

 

Exhibit 99.2

LOGO

 

 

Royal Bank of Canada second quarter 2019 results

 

All amounts are in Canadian dollars and are based on financial statements prepared in compliance with International Accounting Standard 34 Interim Financial Reporting, unless otherwise noted.

 

LOGO

TORONTO, May 23, 2019 — Royal Bank of Canada (RY on TSX and NYSE) today reported net income of $3,230 million for the quarter ended April 30, 2019, up $170 million or 6% from the prior year, with solid diluted EPS(1) growth of 7%. Results reflected strong earnings growth in Capital Markets, Personal & Commercial Banking and Wealth Management. These were partially offset by lower earnings in Investor & Treasury Services and Insurance. Results this quarter also reflected continued investments in talent, and digital and technology initiatives.

Compared to last quarter, net income was up $58 million with higher earnings in Capital Markets, partially offset by lower earnings in Personal & Commercial Banking, Wealth Management, Insurance, and Investor & Treasury Services. Personal & Commercial Banking and Wealth Management results were impacted by three less days in the quarter.

Provisions for credit losses (PCL) on impaired loans ratio of 29 basis points (bps) was up 1 bp compared to last quarter due to higher PCL on impaired loans on a couple of accounts in our Canadian Banking commercial portfolio. This was partially offset by lower PCL in Capital Markets, which included higher provisions in the previous quarter related to one account in the utilities sector. Our capital position remained strong, with a Common Equity Tier 1 (CET1) ratio of 11.8%, up 40 bps from last quarter mainly due to strong internal capital generation.

 

 

“Our consistent earnings growth is a testament to the strength of our diversified business model and our strategy to transform the bank to create more value for clients. We continue to make strategic investments to drive long-term growth for shareholders, guided by our clear purpose of helping clients thrive and communities prosper.”

– Dave McKay, RBC President and Chief Executive Officer    

 

 

       
LOGO  

• Net income of $3,230 million

• Diluted EPS(1) of $2.20

• ROE(2) of 17.5%

• CET1 ratio of 11.8%

 

     

h  6%

h  7%

¯  60 bps

h  90 bps

   
       
LOGO  

• Net income of $3,230 million

• Diluted EPS(1) of $2.20

• ROE(2) of 17.5%

• CET1 ratio of 11.8%

 

     

h  2%

h  2%

h  80 bps

h  40 bps

   
       
LOGO  

• Net income of $6,402 million

• Diluted EPS(1) of $4.34

• ROE(2) of 17.1%

 

     

h  5%

h  7%

¯  60 bps

   

 

(1)

Earnings per share (EPS).

(2)

Return on Equity (ROE). This measure does not have a standardized meaning under GAAP. For further information, refer to the Key performance and non-GAAP measures section of this Q2 2019 Report to Shareholders.

 

 

Table of contents

 

 

 


 

2        Royal Bank of Canada        Second Quarter 2019

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 three and six month periods ended or as at April 30, 2019, compared to the corresponding periods in the prior fiscal year and the three month period ended January 31, 2019. This MD&A should be read in conjunction with our unaudited Interim Condensed Consolidated Financial Statements for the quarter ended April 30, 2019 (Condensed Financial Statements) and related notes and our 2018 Annual Report. This MD&A is dated May 22, 2019. All amounts are in Canadian dollars, unless otherwise specified, and are based on financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), unless otherwise noted.

Additional information about us, including our 2018 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 does not form part of this report. All references in this report to websites are inactive textual references and are for your information only.

 

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 Q2 2019 Report to Shareholders, 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., European and global economies, the regulatory environment in which we operate, and the risk environment including our liquidity and funding risk, 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”, “plan” and “project” and similar expressions of future or conditional verbs such as “will”, “may”, “should”, “could” or “would”.

By their very nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties, which give rise to the possibility that our predictions, forecasts, projections, expectations or conclusions will not prove to be accurate, that our assumptions may not be correct and that our financial performance objectives, vision and strategic goals will not be achieved. We caution readers not to place undue reliance on these statements as a number of risk factors could cause our actual results to differ materially from the expectations expressed in such forward-looking statements. These factors – many of which are beyond our control and the effects of which can be difficult to predict – include: credit, market, liquidity and funding, insurance, operational, regulatory compliance, strategic, reputation, legal and regulatory environment, competitive and systemic risks and other risks discussed in the risk sections of our 2018 Annual Report and the Risk management section of this Q2 2019 Report to Shareholders; including global uncertainty, Canadian housing and household indebtedness, information technology and cyber risk, regulatory changes, digital disruption and innovation, data and third party related risks, climate change, the business and economic conditions in the geographic regions in which we operate, the effects of changes in government fiscal, monetary and other policies, tax risk and transparency, and environmental and social risk.

We caution that the foregoing list of risk factors is not exhaustive and other factors could also adversely affect our results. When relying on our forward-looking statements to make decisions with respect to us, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Material economic assumptions underlying the forward-looking statements contained in this Q2 2019 Report to Shareholders 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 in our 2018 Annual Report, as updated by the Economic, market and regulatory review and outlook section of this Q2 2019 Report to Shareholders. 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 our 2018 Annual Report and the Risk management section of this Q2 2019 Report to Shareholders.

 

Overview and outlook

 

 

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 84,000+ employees who 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 more than 16 million clients in Canada, the U.S. and 34 other countries. Learn more at rbc.com.


 

Royal Bank of Canada        Second Quarter 2019         3

Selected financial and other highlights

 

 

     As at or for the three months ended            As at or for the six months ended  
(Millions of Canadian dollars, except per share, number of and percentage amounts)  

April 30

2019

   

January 31

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Total revenue

  $ 11,499     $ 11,589     $ 10,054       $ 23,088     $ 20,882  

Provision for credit losses (PCL)

    426       514       274         940       608  

Insurance policyholder benefits, claims and acquisition expense (PBCAE)

    1,160       1,225       421         2,385       1,257  

Non-interest expense

    5,916       5,912       5,482         11,828       11,093  

Income before income taxes

    3,997       3,938       3,877               7,935       7,924  

Net income

  $ 3,230     $ 3,172     $ 3,060             $ 6,402     $ 6,072  

Segments – net income

           

Personal & Commercial Banking

  $ 1,549     $ 1,571     $ 1,459       $ 3,120     $ 2,980  

Wealth Management

    585       597       537         1,182       1,134  

Insurance

    154       166       172         320       299  

Investor & Treasury Services

    151       161       212         312       431  

Capital Markets

    776       653       665         1,429       1,413  

Corporate Support

    15       24       15               39       (185

Net income

  $ 3,230     $ 3,172     $ 3,060             $ 6,402     $ 6,072  

Selected information

           

Earnings per share (EPS) – basic

  $ 2.20     $ 2.15     $ 2.06       $ 4.36     $ 4.08  

                                           – diluted

    2.20       2.15       2.06         4.34       4.07  

Return on common equity (ROE) (1) (2)

    17.5%       16.7%       18.1%         17.1%       17.7%  

Average common equity (1)

  $ 74,000     $ 73,550     $ 67,450       $ 73,800     $ 67,150  

Net interest margin (NIM) – on average earning assets (1)

    1.64%       1.62%       1.68%         1.63%       1.66%  

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

    0.29%       0.34%       0.20%         0.32%       0.22%  

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

    0.29%       0.28%       0.22%         0.28%       0.23%  

Gross impaired loans (GIL) as a % of loans and acceptances

    0.49%       0.46%       0.47%         0.49%       0.47%  

Liquidity coverage ratio (LCR) (3)

    127%       128%       122%               127%       122%  

Capital ratios and Leverage ratio

           

Common Equity Tier 1 (CET1) ratio

    11.8%       11.4%       10.9%         11.8%       10.9%  

Tier 1 capital ratio

    12.9%       12.7%       12.3%         12.9%       12.3%  

Total capital ratio

    14.8%       14.5%       14.1%         14.8%       14.1%  

Leverage ratio (4)

    4.3%       4.3%       4.3%               4.3%       4.3%  

Selected balance sheet and other information (5)

           

Total assets

  $   1,378,876     $   1,366,207     $   1,274,778       $   1,378,876     $   1,274,778  

Securities, net of applicable allowance

    240,991       235,832       220,841         240,991       220,841  

Loans, net of allowance for loan losses

    602,392       589,820       551,393         602,392       551,393  

Derivative related assets

    84,812       84,816       94,175         84,812       94,175  

Deposits

    864,101       852,564       822,048         864,101       822,048  

Common equity

    76,139       74,147       69,122         76,139       69,122  

Total capital risk-weighted assets

    510,463       508,512       489,172         510,463       489,172  

Assets under management (AUM)

    733,100       688,000       660,900         733,100       660,900  

Assets under administration (AUA) (6)

    5,655,600       5,363,900       5,666,400               5,655,600       5,666,400  

Common share information

           

Shares outstanding (000s) – average basic

    1,435,091       1,437,074       1,443,084         1,436,099       1,447,504  

                                            – average diluted

    1,441,163       1,443,195       1,449,737         1,442,194       1,454,299  

                                            – end of period (7)

    1,434,879       1,435,073       1,440,986         1,434,879       1,440,986  

Dividends declared per common share

  $ 1.02     $ 0.98     $ 0.94       $ 2.00     $ 1.85  

Dividend yield (8)

    3.9%       4.1%       3.7%         4.0%       3.6%  

Common share price (RY on TSX) (9)

  $ 106.77     $ 100.02     $ 97.64       $ 106.77     $ 97.64  

Market capitalization (TSX) (9)

    153,202       143,536       140,798               153,202       140,798  

Business information (number of)

           

Employees (full-time equivalent) (FTE)

    82,197       82,108       79,308         82,197       79,308  

Bank branches

    1,335       1,334       1,355         1,335       1,355  

Automated teller machines (ATMs)

    4,569       4,568       4,875               4,569       4,875  

Period average US$ equivalent of C$1.00 (10)

  $ 0.751     $ 0.749     $ 0.778       $ 0.750     $ 0.786  

Period-end US$ equivalent of C$1.00

  $ 0.746     $ 0.761     $ 0.779             $ 0.746     $ 0.779  

 

(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)   These measures may not have a standardized meaning under generally accepted accounting principles (GAAP) and may not be comparable to similar measures disclosed by other financial institutions. For further details, refer to the Key performance and non-GAAP measures section.
(3)   LCR is the average for the three months ended for each respective period and is calculated in accordance with Office of the Superintendent of Financial Institutions’ (OSFI) Liquidity Adequacy Requirements (LAR) guideline. For further details, refer to the Liquidity and funding risk section.
(4)   The Leverage ratio is a regulatory measure under the Basel III framework. For further details, refer to the Capital management section.
(5)   Represents period-end spot balances.
(6)   AUA includes $16.2 billion and $8.3 billion (January 31, 2019 – $16.6 billion and $8.5 billion; April 30, 2018 – $17.8 billion and $9.1 billion) of securitized residential mortgages and credit card loans, respectively.
(7)   Effective Q4 2018, Common shares outstanding includes the impact of treasury shares. Comparative amounts have been adjusted to conform with this presentation.
(8)   Defined as dividends per common share divided by the average of the high and low share price in the relevant period.
(9)   Based on TSX closing market price at period-end.
(10)   Average amounts are calculated using month-end spot rates for the period.

 


 

4        Royal Bank of Canada        Second Quarter 2019

Economic, market and regulatory review and outlook – data as at May 22, 2019

 

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

Canada

The Canadian economy is expected to have grown by 0.7%1 in the first calendar quarter of 2019, a relatively modest improvement on the previous calendar quarter’s 0.4%1 increase. Growth continues to be restrained by a slowdown in the oil and gas industry, though the sector is expected to be less of a drag going forward amid higher global oil prices and a reduction in Alberta’s mandatory production curtailments. Growth outside the energy sector picked up in the first calendar quarter, with an improvement in consumer spending and stabilization in the housing sector, both of which were supported by the continuation of a strong labour market. The Bank of Canada (BoC) has left its overnight rate unchanged at 1.75% since October 2018 and April’s policy statement remained silent on potential future rate hikes.

U.S.

Growth in the U.S. increased to 3.2%1 in the first calendar quarter of 2019 from 2.2%1 in the previous calendar quarter. That was despite slower growth in both consumer spending and business investment, as well as a decline in federal spending due to the partial government shutdown earlier this year. Activity in the first calendar quarter was driven by an increase in net trade and inventory investment, neither of which are seen as sustainable sources of growth. Overall growth is expected to moderate in the coming quarters, albeit with a healthier composition including stronger consumer spending and business investment. With unemployment remaining low but the economy showing few signs of inflationary pressure, the Federal Reserve (Fed) has left interest rates steady since December 2018.

Europe

The Euro area’s growth picked up slightly to a rate of 0.4% in the first calendar quarter of 2019 from 0.2% in the previous calendar quarter. Indicators point to divergence between the manufacturing and services sectors, with the latter indicating fairly steady growth in domestic demand while a slowdown in the former reflects a generally weaker global backdrop. The European Central Bank has maintained its stimulative monetary policy stance amid low inflation. In the U.K., Brexit uncertainty continues to weigh on business investment, though the economy grew at a moderate 0.5% pace in the first calendar quarter of 2019. The Bank of England has held its policy rate steady at 0.75% since August 2018 amid ongoing Brexit uncertainty.

Financial markets

With inflation remaining low and central banks showing less inclination to raise interest rates, government bond yields have generally declined since the start of calendar 2019. Expectations of less monetary policy tightening, and in some cases more accommodative fiscal policy, helped drive a recovery in equity markets in the first calendar quarter of 2019. Recent improvement in some global growth indicators has also supported equities, and along with supply constraints, underpinned an increase in global oil prices in the first calendar quarter of 2019. The yield curve briefly inverted in March 2019 as long-term government bond yields declined. However, the move was not sustained and other economic indicators point to limited near-term risk of a recession.

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 any 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 our costs, impact our profitability, and increase the complexity of our operations is included in the Legal and regulatory environment risk section of our 2018 Annual Report, as updated below.

Global Uncertainty

Trade policy remains a risk to the global economic outlook, including Brexit negotiations, and Canadian and U.S. trade tensions with China. The outcome of the Brexit negotiations and its resulting impact on global trade remains uncertain. In March, China imposed a ban on the imports of Canadian canola, and tensions remain elevated between China and the U.S. as they continue to negotiate a trade deal. In April, the International Monetary Fund further lowered its 2019 global growth projections, with the possibility for additional downgrades should these and other downside risks materialize. However, in May 2019, Canada and the U.S. reached an agreement which lifted import duties imposed on steel and aluminum.

Climate Change

Climate change regulations, frameworks, and guidance that apply to banks, insurers and asset managers are rapidly evolving. In March, the BoC joined the Network for Greening the Financial System (NGFS), a group of over 34 central banks and supervisors, who issued recommendations on managing environmental and climate-related risks in April 2019. More recently, the BoC has identified climate change as one of the six vulnerabilities in their 2019 Financial System Review. At this time, the BoC has not released its expectations related to these recommendations; however, as a federally-regulated financial institution, we will be obligated to comply with any resulting requirements and incur any related additional costs.

 

1   Annualized rate


 

Royal Bank of Canada        Second Quarter 2019         5

Privacy

Legislative and regulatory developments are being closely monitored since the General Data Protection Regulation became law in the European Union (EU). The Office of the Privacy Commissioner of Canada (OPC) continues to call for more modern legislation, including the ability to audit businesses and fine companies that do not adhere to privacy laws. The OPC has also revisited its position on consent for certain cross-border transfers of personal information and has issued revised guidance for consultation. These actions demonstrate the ongoing trend toward increased regulatory intervention in the use and safeguarding of personal information. We are reviewing the revised guidance and the potential implications for our various businesses.

United States Regulatory Initiatives

Policymakers continue to consider reforms to various U.S. financial regulations, certain of which may, if implemented, result in a reduction to the complexity of the U.S. regulatory framework and associated compliance costs. In April 2019, the Fed and the Federal Deposit Insurance Corporation released proposals related to resolution plans for bank holding companies, foreign banks and their intermediate holding companies, and insured depository institutions. Other initiatives may introduce new or more stringent requirements, including additional compliance requirements and disclosure obligations. For example, in April 2019 the Fed released proposals related to enhanced prudential standards, regulatory capital, and liquidity standards for foreign banks operating in the U.S., and the SEC has proposed Regulation Best Interest, which is a standard of conduct for brokers and advisors.

U.K. and European Regulatory Reform

Political uncertainty in the U.K. has stalled negotiations with respect to the U.K.’s exit from the EU. In April 2019, all members of the EU agreed to extend the deadline for the U.K.’s departure from the EU, originally set for March 29, 2019, to October 31, 2019. Until the date of its exit or, if there is a transition period, until the period expires, the U.K. will continue to remain an EU Member State subject to all EU legislation. Other forthcoming regulatory initiatives include the EU’s Central Securities Depositary Regulation rules. The regulation is intended to increase discipline in the settlement of securities transactions and is scheduled to take effect in September 2020.

For a discussion on risk factors resulting from these and other regulatory developments which may affect our business and financial results, refer to the Risk management – Top and emerging risks and Legal and regulatory environment risk sections of our 2018 Annual Report and the Capital, liquidity and other regulatory developments section of our Q1 2019 and of this Q2 2019 Report to Shareholders. For further details on our framework and activities to manage risks, refer to the risk and Capital management sections of our 2018 Annual Report and the Risk management and Capital management sections of this Q2 2019 Report to Shareholders.

 

Financial performance

 

 

Overview

 

Q2 2019 vs. Q2 2018

Net income of $3,230 million was up $170 million or 6% from a year ago. Diluted earnings per share (EPS) of $2.20 was up $0.14 or 7% and return on common equity (ROE) of 17.5% was down 60 bps from 18.1% last year. Our Common Equity Tier 1 (CET1) ratio of 11.8% was up 90 bps from a year ago.

Our results were driven by strong earnings growth in Capital Markets, Personal & Commercial Banking, and Wealth Management, partially offset by lower results in Investor & Treasury Services and Insurance.

Capital Markets results were up primarily due to higher revenue in Global Markets, and a lower effective tax rate largely reflecting changes in earnings mix. These factors were partially offset by higher compensation on improved results.

Personal & Commercial Banking earnings increased mainly due to average volume growth of 7% and higher spreads in Canadian Banking, and higher service charges. These factors were partially offset by higher PCL, and an increase in technology related and marketing costs.

Wealth Management results were higher mainly attributable to higher net interest income and higher average fee-based client assets. These factors were partially offset by increased costs in support of business growth and higher PCL.

Investor & Treasury Services earnings decreased primarily due to lower funding and liquidity revenue and lower revenue from our asset services business.

Insurance results were down primarily reflecting lower favourable investment-related experience and increased disability and life retrocession claims costs, partially offset by favourable life retrocession contract renegotiations and favourable actuarial adjustments.

For further details on our business segment results and CET1 ratio, refer to the Business segment results and Capital management sections, respectively.

Q2 2019 vs. Q1 2019

Net income of $3,230 million was up $58 million or 2% from the prior quarter. Diluted EPS of $2.20 was up $0.05 or 2% and ROE of 17.5% was up 80 bps. Our CET1 ratio of 11.8% was up 40 bps.

Our results reflected strong earnings growth in Capital Markets partially offset by lower results in Personal & Commercial Banking, Wealth Management, Insurance, and Investor & Treasury Services.

Capital Markets earnings were up due to improved market conditions and higher client activity. The increase was primarily driven by higher debt origination in most regions, lower PCL, and higher fixed income trading and equity origination largely in North America. These factors were partially offset by lower equity trading primarily in the U.S., higher compensation on improved results and lower foreign exchange trading largely in Canada.

Personal & Commercial Banking results were down reflecting three less days in the quarter, higher PCL and an increase in marketing costs. These factors were partially offset by lower staff related costs and improved spreads in Canadian Banking. The prior quarter also included a write-down of deferred tax assets resulting from a change in the corporate tax rate in Barbados.


 

6        Royal Bank of Canada        Second Quarter 2019

Wealth Management earnings decreased primarily reflecting a favourable accounting adjustment related to Canadian Wealth Management in the prior period, and lower net interest income as volume growth was more than offset by lower spreads and three less days in the quarter. These factors were partially offset by higher transaction volumes.

Insurance results were down mainly due to higher claims costs in International Insurance, partially offset by favourable actuarial adjustments related to the universal life portfolio.

Investor & Treasury Services results decreased primarily due to lower funding and liquidity revenue, including the favourable impact of money market opportunities in the prior quarter, partially offset by the impact of annual regulatory costs incurred in the prior period and lower technology costs.

Q2 2019 vs. Q2 2018 (Six months ended)

Net income of $6,402 million increased $330 million or 5% from a year ago. Six month diluted EPS of $4.34 was up $0.27 or 7% and ROE of 17.1% was down 60 bps.

Our results reflected higher earnings in Personal & Commercial Banking, Wealth Management, Insurance, and Capital Markets, partially offset by lower results in Investor & Treasury Services. Our results also reflect an increase due to foreign exchange translation and the impact in the prior year of the U.S. Tax Reform which resulted in the write-down of net deferred tax assets.

Personal & Commercial Banking earnings increased due to average volume growth of 6% and higher spreads. These factors were partially offset by an increase in PCL, higher technology and staff related costs, and higher marketing costs.

Wealth Management results were up primarily reflecting an increase in net interest income, higher fee-based client assets, and the impact of foreign exchange translation. These factors were partially offset by increased costs in support of business growth, higher PCL, and higher variable compensation on improved results.

Insurance earnings were higher mainly due to favourable life retrocession contract renegotiations, partially offset by lower favourable investment-related experience.

Capital Markets results increased driven by a lower effective tax rate largely reflecting changes in earnings mix, higher revenue in Global Markets and the impact of foreign exchange translation. These factors were partially offset by higher PCL, lower revenue in Corporate and Investment Banking and increased technology and related costs.

Investor & Treasury Services results were down largely due to lower funding and liquidity revenue, lower revenue from our asset services business and higher costs in support of efficiency and technology initiatives.

Corporate Support net income was $39 million, largely due to asset/liability management activities. Net loss was $185 million in the prior year, largely due to the impact of the U.S. Tax Reform of $178 million as noted above, partially offset by asset/liability management activities.

Impact of foreign currency translation

 

     For the three months ended            For the six months ended  

(Millions of Canadian dollars, except per share amounts)

 

Q2 2019 vs.

Q2 2018

   

Q2 2019 vs.

Q1 2019

          

Q2 2019 vs.

Q2 2018

 

Increase (decrease):

       

Total revenue

  $ 92     $ (8     $ 278  

PCL

    1               9  

Non-interest expense

    59       (5       174  

Income taxes

    3       (1       10  

Net income

    29       (2             85  

Impact on EPS

       

Basic

  $     0.02     $      –       $     0.06  

Diluted

    0.02                     0.06  

The relevant average exchange rates that impact our business are shown in the following table:

 

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

   For the three months ended             For the six months ended  
  

April 30

2019

    

January 31

2019

    

April 30

2018

           

April 30

2019

    

April 30

2018

 

U.S. dollar

     0.751        0.749        0.778          0.750        0.786  

British pound

     0.573        0.582        0.562          0.578        0.570  

Euro

     0.667        0.656        0.638                0.661        0.647  

 

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

 


 

Royal Bank of Canada        Second Quarter 2019         7

Total revenue

 

     For the three months ended            For the six months ended  
(Millions of Canadian dollars)  

April 30

2019

   

January 31

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Interest and dividend income

  $ 10,132     $ 10,149     $ 7,865       $ 20,281     $ 15,405  

Interest expense

    5,295       5,265       3,444               10,560       6,539  

Net interest income

  $ 4,837     $ 4,884     $ 4,421       $ 9,721     $ 8,866  

NIM

    1.64%       1.62%       1.68%               1.63%       1.66%  

Insurance premiums, investment and fee income

  $ 1,515     $ 1,579     $ 806       $ 3,094     $ 1,950  

Trading revenue

    250       358       236         608       554  

Investment management and custodial fees

    1,381       1,450       1,318         2,831       2,643  

Mutual fund revenue

    899       873       862         1,772       1,747  

Securities brokerage commissions

    316       342       334         658       689  

Service charges

    466       468       443         934       883  

Underwriting and other advisory fees

    554       345       457         899       998  

Foreign exchange revenue, other than trading

    243       249       277         492       558  

Card service revenue

    266       282       267         548       524  

Credit fees

    288       315       317         603       645  

Net gains on investment securities

    37       46       49         83       88  

Share of profit in joint ventures and associates

    14       15       14         29       39  

Other

    433       383       253               816       698  

Non-interest income

  $ 6,662     $ 6,705     $ 5,633             $ 13,367     $ 12,016  

Total revenue

  $     11,499     $     11,589     $     10,054             $     23,088     $     20,882  

Additional information

           

Total trading revenue

           

Net interest income

  $ 619     $ 601     $ 524       $ 1,220     $ 1,074  

Non-interest income

    250       358       236               608       554  

Total trading revenue

  $ 869     $ 959     $ 760             $ 1,828     $ 1,628  

Q2 2019 vs. Q2 2018

Total revenue increased $1,445 million or 14% from last year, mainly due to an increase in insurance premiums, investment and fee income (Insurance revenue), higher net interest income and other revenue. The impact of foreign exchange translation also increased total revenue by $92 million.

Net interest income increased $416 million or 9%, largely due to volume growth and higher spreads in Canadian Banking and Wealth Management. Higher trading revenue and higher lending revenue in Capital Markets also contributed to the increase. These factors were partially offset by lower funding and liquidity revenue.

NIM was down 4 bps compared to last year, mainly due to changes in average earning asset mix with volume growth primarily in reverse repos, and lower funding and liquidity revenue. These factors were partially offset by higher interest rates resulting in improved spreads on deposits in Canadian Banking and Wealth Management, as well as higher spreads in our trading portfolios in Capital Markets. The impact associated with lower funding and liquidity revenue was more than offset by the related gains on non-trading derivatives in Other revenue.

Insurance revenue increased $709 million or 88%, primarily due to the change in fair value of investments backing our policyholder liabilities and business growth mainly from higher group annuity sales, both of which are largely offset in PBCAE.

Other revenue increased $180 million or 71%, mainly due to the change in the fair value of the hedges related to our U.S. share-based compensation plans, which was largely offset in Non-interest expense. Gains on non-trading derivatives in our funding and liquidity business, which were largely offset in Net interest income also contributed to the increase. These factors were partially offset by lower net gains in our non-trading investment portfolios.

Q2 2019 vs. Q1 2019

Total revenue decreased $90 million or 1% from the prior quarter, due to lower equity trading revenue primarily in the U.S., a decrease in Investment management and custodial fees driven by a favourable accounting adjustment in the prior period in Wealth Management and lower net interest income in Personal & Commercial Banking and Wealth Management, partly driven by three less days in the quarter. Lower Insurance revenue driven by lower group annuity and longevity reinsurance sales, partially offset by the change in the fair value of investments backing our policyholder liabilities, both of which were largely offset in PBCAE, also contributed to the decrease. These factors were partially offset by higher debt origination in most regions and higher fixed income trading and equity origination largely in North America.

Q2 2019 vs. Q2 2018 (Six months ended)

Total revenue increased $2,206 million or 11% from the prior quarter, primarily due to higher Insurance revenue, net interest income, investment management and custodial fees, and other revenue. The impact of foreign exchange translation also increased total revenue by $278 million. These factors were partially offset by lower underwriting and advisory fees.

Net interest income increased $855 million or 10%, largely due to volume growth and higher spreads in Canadian Banking and Wealth Management. Higher trading revenue and higher lending revenue in Capital Markets also contributed to the increase. These factors were partially offset by lower funding and liquidity revenue.

Insurance revenue increased $1,144 million or 59%, mainly reflecting the change in fair value of investments backing our policyholder liabilities and business growth, including higher group annuity sales, both of which were largely offset in PBCAE.


 

8        Royal Bank of Canada        Second Quarter 2019

Investment management and custodial fees increased $188 million or 7%, driven by higher average fee-based clients reflecting market appreciation and net sales in Wealth Management.

Underwriting and other advisory fees decreased $99 million or 10%, due to lower equity and debt origination largely in North America.

Other revenue increased $118 million or 17%, mainly due to gains on non-trading derivatives in our funding and liquidity business, which were largely offset in Net interest income. The change in the fair value of the hedges related to our U.S. share-based compensation plans, which was largely offset in Non-interest expense, also contributed to the increase. These factors were partially offset by lower net gains in our non-trading investment portfolios, a favourable accounting adjustment related to City National Bank (City National) in the prior year, and a gain relating to the reorganization of Interac in the prior year.

Provision for credit losses

Q2 2019 vs. Q2 2018

Total PCL in Q2 2019 of $426 million increased $152 million or 55%.

PCL on loans of $441 million increased $163 million, or 59% from the prior year, mainly due to higher provisions in Personal & Commercial Banking, Wealth Management and Capital Markets. The PCL ratio on loans of 29 bps increased 9 bps.

Q2 2019 vs. Q1 2019

Total PCL decreased $88 million or 17% from the prior quarter.

PCL on loans of $441 million decreased $75 million, or 15% from the prior quarter, mainly due to lower provisions in Capital Markets, partially offset by higher provisions in Personal & Commercial Banking. The PCL ratio on loans improved 5 bps.

Q2 2019 vs. Q2 2018 (Six months ended)

Total PCL increased $332 million or 55% from the prior year.

PCL on loans of $957 million increased $345 million, or 56% from the prior year, mainly due to higher provisions in Capital Markets, Personal & Commercial Banking and Wealth Management. The PCL ratio on loans of 32 bps increased 10 bps.

For further details on PCL, refer to Credit quality performance in the Credit risk section.

Insurance policyholder benefits, claims and acquisition expense (PBCAE)

Q2 2019 vs. Q2 2018

PBCAE increased $739 million from a year ago, mainly reflecting the change in fair value of investments backing our policyholder liabilities and higher group annuity sales, both of which were largely offset in revenue. Lower favourable investment-related experience and higher disability and life retrocession claims costs also contributed to the increase. These factors were partially offset by favourable life retrocession contract renegotiations and favourable actuarial adjustments related to the universal life portfolio.

Q2 2019 vs. Q1 2019

PBCAE decreased $65 million or 5% from the prior quarter, mainly due to higher business growth in the prior period, including group annuity sales which was largely offset in revenue, and favourable actuarial adjustments related to the universal life portfolio. These factors were partially offset by the change in fair value of investments backing our policyholder liabilities, which was also largely offset in revenue, and higher claims costs in International Insurance.

Q2 2019 vs. Q2 2018 (Six months ended)

PBCAE increased $1,128 million or 90% from the prior year, mainly reflecting the change in fair value of investments backing our policyholder liabilities and higher group annuity sales, both of which were largely offset in revenue. Growth in longevity reinsurance and lower favourable investment-related experience also contributed to the increase. These factors were partially offset by favourable life retrocession contract renegotiations.

Non-interest expense

 

      For the three months ended             For the six months ended  
(Millions of Canadian dollars, except percentage amounts)   

April 30

2019

    

January 31

2019

    

April 30

2018

           

April 30

2019

    

April 30

2018

 

Salaries

   $     1,607      $     1,608      $     1,482        $ 3,215      $ 2,948  

Variable compensation

     1,430        1,388        1,338          2,818        2,722  

Benefits and retention compensation

     471        492        465          963        945  

Share-based compensation

     114        155        39                269        211  

Human resources

   $ 3,622      $ 3,643      $ 3,324        $ 7,265      $ 6,826  

Equipment

     445        431        386          876        758  

Occupancy

     405        397        386          802        765  

Communications

     273        240        249          513        473  

Professional fees

     290        305        321          595        602  

Amortization of other intangibles

     299        290        266          589        527  

Other

     582        606        550                1,188        1,142  

Non-interest expense

   $ 5,916      $ 5,912      $ 5,482        $     11,828      $     11,093  

Efficiency ratio (1)

     51.4%        51.0%        54.5%          51.2%        53.1%  

Efficiency ratio adjusted (2)

     53.2%        52.1%        53.6%                52.7%        52.7%  

 

  (1)   Efficiency ratio is calculated as Non-interest expense divided by Total revenue.  
  (2)   Measures have been adjusted by excluding the change in fair value of investments backing our policyholder liabilities. These are non-GAAP measures. For further details, refer to the Key performance and non-GAAP measures section.  


 

Royal Bank of Canada        Second Quarter 2019         9

Q2 2019 vs. Q2 2018

Non-interest expense increased $434 million or 8%, largely due to the change in the fair value of our U.S. share-based compensation plans, which was largely offset in revenue and higher variable compensation on improved results. In addition, increased costs in support of business growth and higher staff-related costs, the impact of foreign exchange translation and an increase in technology and related costs, including digital initiatives, also contributed to the increase.

Our efficiency ratio of 51.4% decreased 310 bps from 54.5% last year. Excluding the change in fair value of investments backing our policyholder liabilities, our efficiency ratio of 53.2% decreased 40 bps from 53.6% last year.

Q2 2019 vs. Q1 2019

Non-interest expense increased $4 million.

Our efficiency ratio of 51.4% increased 40 bps from 51.0% last quarter. Excluding the change in fair value of investments backing our policyholder liabilities, our efficiency ratio of 53.2% increased 110 bps from 52.1% last quarter.

Q2 2019 vs. Q2 2018 (Six months ended)

Non-interest expense increased $735 million or 7%, primarily attributable to increased costs in support of business growth and higher staff-related costs, the impact of foreign exchange translation, and an increase in technology and related costs, including digital initiatives. Higher variable compensation on improved results, and the change in the fair value of our U.S. share-based compensation plans, which was largely offset in revenue, also contributed to the increase.

Our efficiency ratio of 51.2% decreased 190 bps from 53.1%. Excluding the change in fair value of investments backing our policyholder liabilities, our efficiency ratio of 52.7% remained unchanged from last year.

Efficiency ratio excluding the change in fair value of investments backing our policyholder liabilities is a non-GAAP measure. For further details, including a reconciliation, refer to the Key performance and non-GAAP measures section.

Income taxes

 

      For the three months ended             For the six months ended  
(Millions of Canadian dollars, except percentage amounts)   

April 30

2019

    

January 31

2019

    

April 30

2018

           

April 30

2019

    

April 30

2018

 

Income taxes

   $ 767      $ 766      $ 817              $ 1,533      $ 1,852  

Income before income taxes

   $     3,997      $     3,938      $     3,877        $     7,935      $     7,924  

Canadian statutory income tax rate (1)

     26.5%        26.5%        26.5%          26.5%        26.5%  

Lower average tax rate applicable to subsidiaries (2)

     (4.8)%        (5.1)%        (4.3)%          (5.0)%        (3.7)%  

Tax-exempt income from securities

     (1.9)%        (1.8)%        (1.8)%          (1.8)%        (1.7)%  

Tax rate change

     (0.1)%        0.5%        –%          0.2%        1.9%  

Other

     (0.5)%        (0.6)%        0.7%                (0.6)%        0.4%  

Effective income tax rate

     19.2%        19.5%        21.1%                19.3%        23.4%  

 

  (1)   Blended Federal and Provincial statutory income tax rate.  
  (2)   As the reduced tax rates from the U.S. Tax Reform were effective on January 1, 2018, the Lower average tax rate applicable to subsidiaries for the three and six months ended April 30, 2018 reflects the fiscal 2018 blended rate for U.S. subsidiaries.  

Q2 2019 vs. Q2 2018

Income tax expense decreased $50 million or 6% from last year, due to higher income from lower tax rate jurisdictions and higher favourable tax adjustments in the current quarter, partially offset by higher Income before income taxes.

The effective income tax rate of 19.2% decreased 190 bps, mainly due to higher income from lower tax rate jurisdictions and favourable tax adjustments in the current quarter.

Q2 2019 vs. Q1 2019

Income tax expense increased $1 million from last quarter, primarily due to higher Income before income taxes, offset by a write-down of deferred tax assets in the previous quarter resulting from a change in the corporate tax rate in Barbados.

The effective income tax rate of 19.2% decreased 30 bps, mainly due to the write-down of deferred tax assets in the previous quarter as noted above, partially offset by lower favourable tax adjustments in the current quarter.

Q2 2019 vs. Q2 2018 (Six months ended)

Income tax expense decreased $319 million or 17% from last year, and the effective income tax rate of 19.3% decreased 410 bps, primarily due to the impact of the U.S. Tax Reform, which resulted in the write-down of net deferred tax assets in the prior year, an increase in income from lower tax rate jurisdictions and higher favourable tax adjustments in the current year.


 

10        Royal Bank of Canada        Second Quarter 2019

Business segment results

 

 

How we measure and report our business segments

 

The key methodologies and assumptions used in our management reporting framework are periodically reviewed by management to ensure they remain valid. They remain unchanged from October 31, 2018.

For further details on our key methodologies and assumptions used in our management reporting framework, refer to the How we measure and report our business segments section of our 2018 Annual Report.

 

Key performance and non-GAAP measures

 

Performance measures

Return on common equity

We measure and evaluate the performance of our consolidated operations and each business segment using a number of financial metrics, such as net income and ROE. We use ROE, at both the consolidated and business segment levels, as a measure of return on total capital invested in our business. Management views the business segment ROE measure as a useful measure for supporting investment and resource allocation decisions because it adjusts for certain items that may affect comparability between business segments and certain competitors. ROE does not have a standardized meaning under GAAP and may not be comparable to similar measures disclosed by other financial institutions. For further details, refer to the Key performance and non-GAAP measures section of our 2018 Annual Report.

The following table provides a summary of our ROE calculations:

 

     For the three months ended  
   

April 30

2019

         

January 31

2019

         

April 30

2018

 
(Millions of Canadian dollars, except percentage amounts)   Personal &
Commercial
Banking
    Wealth
Management
    Insurance     Investor &
Treasury
Services
    Capital
Markets
    Corporate
Support
    Total            Total            Total  

Net income available to common shareholders

  $ 1,526     $ 573     $ 152     $ 148     $ 756     $ 6     $ 3,161       $ 3,096       $ 2,979  

Total average common equity (1) (2)

    23,000       14,200       1,950       3,500       22,800       8,550       74,000               73,550               67,450  

ROE (3)

    27.2%       16.5%       32.4%       17.4%       13.6%       n.m.       17.5%               16.7%               18.1%  
                     
     For the six months ended              
   

April 30

2019

         

April 30

2018

             
(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

  $ 3,072     $ 1,156     $     316     $ 305     $ 1,386     $ 22     $ 6,257       $ 5,908      

Total average common equity (1) (2)

    23,000       14,150       1,900       3,550       23,000       8,200       73,800               67,150      

ROE (3)

    26.9%       16.5%       33.5%       17.3%       12.2%       n.m.       17.1%               17.7%      

 

(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 enhance the comparability of our financial performance for the three and six months ended April 30, 2019 with the corresponding period in the prior year and the three months ended January 31, 2019, as well as, in the case of economic profit, measure relative contribution to shareholder value. Non-GAAP measures do not have a standardized meaning under GAAP and may not be comparable to similar measures disclosed by other financial institutions.


 

Royal Bank of Canada        Second Quarter 2019         11

The following discussion describes the non-GAAP measures we use in evaluating our operating results.

Economic profit

Economic profit is net income excluding the after-tax effect of amortization of other intangibles less a capital charge for use of attributed capital. It measures the return generated by our businesses in excess of our cost of shareholders’ equity, thus enabling users to identify relative contributions to shareholder value.

The capital charge includes a charge for common equity and preferred shares. For 2019, our cost of common equity remains unchanged at 8.5%.

Economic profit

 

     For the three months ended  
   

April 30

2019

         

January 31

2019

         

April 30

2018

 
(Millions of Canadian dollars)   Personal &
Commercial
Banking
    Wealth
Management
    Insurance     Investor &
Treasury
Services
    Capital
Markets
    Corporate
Support
    Total            Total            Total  

Net income

  $ 1,549     $ 585     $ 154     $ 151     $      776     $ 15     $ 3,230       $ 3,172       $ 3,060  

add: Non-controlling interests

    (3                             (1     (4       (2       (9

    After-tax effect of amortization
    of other intangibles

    2       51             3                   56               54               55  

Adjusted net income (loss)

  $ 1,548     $ 636     $ 154     $ 154     $ 776     $ 14     $ 3,282       $ 3,224       $ 3,106  

less: Capital charge

    497       307       42       76       493       185       1,600               1,649               1,468  

Economic profit (loss)

  $ 1,051     $ 329     $ 112     $ 78     $ 283     $ (171   $ 1,682             $ 1,575             $ 1,638  
                     
     For the six months ended              
   

April 30

2019

         

April 30

2018

             
(Millions of Canadian dollars)   Personal &
Commercial
Banking
    Wealth
Management
    Insurance     Investor &
Treasury
Services
    Capital
Markets
    Corporate
Support
    Total            Total              

Net income

  $ 3,120     $ 1,182     $ 320     $ 312     $   1,429     $ 39     $ 6,402       $ 6,072      

add: Non-controlling interests

    (5                             (1     (6       (20    

    After-tax effect of amortization
    of other intangibles

    5       100             5                   110               109      

Adjusted net income (loss)

  $ 3,120     $ 1,282     $ 320     $ 317     $ 1,429     $ 38     $ 6,506       $ 6,161      

less: Capital charge

    1,013       622       84       157       1,012       361       3,249               2,973      

Economic profit (loss)

  $ 2,107     $ 660     $ 236     $ 160     $ 417     $ (323   $ 3,257             $ 3,188      

Results excluding specified item

 

For the six months ended April 30, 2017, our share of a gain related to the sale by our payment processing joint venture Moneris of its U.S. operations to Vantiv, Inc., which was $212 million (before- and after-tax) and recorded in Canadian Banking.

There were no specified items for the three months ended April 30, 2019, January 31, 2019, and April 30, 2018, or for the six months ended April 30, 2019 and April 30, 2018.

The following table provides calculations of our Canadian Banking results and measures excluding the specified item for the six months ended April 30, 2017 for the purpose of calculating the adjusted operating leverage ratio for the six months ended April 30, 2018, which is a non-GAAP measure:

Canadian Banking

 

                   For the six months ended  
               

April 30

2017

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

Gain related to

the sale by

Moneris (1)

    Adjusted  

Total revenue

                                                                             $     7,382     $     (212   $     7,170  

PCL

            506             506  

Non-interest expense

                                    3,087             3,087  

Net income before income taxes

          $ 3,789     $ (212   $ 3,577  

Net income

                                  $ 2,862     $ (212   $ 2,650  

Other information

             

Non-interest expense

          $ 3,087     $     $ 3,087  

Total revenue

            7,382       (212     7,170  

Efficiency ratio

                                    41.8%               43.1%  

Revenue growth rate

            7.2%         4.1%  

Non-interest expense growth rate

            2.4%         2.4%  

Operating leverage

                                    4.8%               1.7%  

 

(1)   Includes foreign currency translation.


 

12        Royal Bank of Canada        Second Quarter 2019

Efficiency ratio excluding the change in fair value of investments in Insurance

Our efficiency ratio is impacted by the change in fair value of investments backing our policyholder liabilities, which is reported in revenue and largely offset in PBCAE.

The following table provides calculations of our consolidated efficiency ratio excluding the change in fair value of investments backing our policyholder liabilities:

 

     For the three months ended  
   

April 30

2019

 

 

     

January 31

2019

 

 

     

April 30

2018

 

 

      Item excluded                   Item excluded                   Item excluded    
      Change in fair value of             Change in fair value of             Change in fair value of    
(Millions of Canadian dollars,       investments backing             investments backing             investments backing    
except percentage amounts)     As reported       policyholder liabilities       Adjusted               As reported       policyholder liabilities       Adjusted           As reported       policyholder liabilities       Adjusted  

Total revenue

  $     11,499     $     (383   $     11,116       $     11,589     $     (247   $     11,342       $     10,054     $     174     $     10,228  

Non-interest expense

    5,916             5,916               5,912             5,912           5,482             5,482  

Efficiency ratio

    51.4%               53.2%               51.0%               52.1%           54.5%               53.6%  

 

     For the six months ended  
   

April 30

2019

 

 

     

April 30

2018

 

 

      Item excluded             Item excluded    
      Change in fair value of             Change in fair value of    

(Millions of Canadian dollars,

      investments backing             investments backing    

except percentage amounts)

    As reported       policyholder liabilities       Adjusted               As reported       policyholder liabilities       Adjusted  

Total revenue

  $     23,088     $     (630   $     22,458       $     20,882     $     148     $     21,030  

Non-interest expense

    11,828             11,828               11,093             11,093  

Efficiency ratio

    51.2%               52.7%               53.1%               52.7%  

 

Personal & Commercial Banking

 

     As at or for the three months ended            As at or for the six months ended  
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)  

April 30

2019

   

January 31

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Net interest income

  $ 3,060     $ 3,134     $ 2,852       $ 6,194     $ 5,708  

Non-interest income

    1,273       1,284       1,251         2,557       2,560  

Total revenue

    4,333       4,418       4,103         8,751       8,268  

PCL on performing assets

    9       35       18         44       59  

PCL on impaired assets

    363       313       282         676       558  

PCL

    372       348       300         720       617  

Non-interest expense

    1,887       1,915       1,828         3,802       3,629  

Income before income taxes

    2,074       2,155       1,975         4,229       4,022  

Net income

  $ 1,549     $ 1,571     $ 1,459             $ 3,120     $ 2,980  

Revenue by business

           

Canadian Banking

  $ 4,099     $ 4,170     $ 3,871       $ 8,269     $ 7,798  

Caribbean & U.S. Banking

    234       248       232               482       470  

Selected balance sheet and other information

           

ROE

    27.2%       26.6%       27.8%         26.9%       28.2%  

NIM

    2.85%       2.84%       2.79%         2.85%       2.76%  

Efficiency ratio

    43.5%       43.3%       44.6%         43.4%       43.9%  

Operating leverage

    2.4%       (0.2)%       1.0%         1.0%       0.7%  

Effective income tax rate

    25.3%       27.1%       26.1%         26.2%       25.9%  

Average total earning assets, net

  $     440,300     $     437,100     $     419,200       $     438,700     $     417,400  

Average loans and acceptances, net

    441,900       438,100       419,900         440,000       417,900  

Average deposits

    389,000       382,200       357,900         385,500       357,500  

AUA (1)

    283,300       268,500       269,100         283,300       269,100  

Average AUA

    277,900       264,000       268,900         270,800       268,700  

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

    0.34%       0.28%       0.28%         0.31%       0.27%  

Other selected information – Canadian Banking

           

Net income

  $ 1,460     $ 1,544     $ 1,426       $ 3,004     $ 2,906  

NIM

    2.80%       2.79%       2.74%         2.79%       2.71%  

Efficiency ratio

    42.0%       41.6%       42.6%         41.8%       42.0%  

Operating leverage

    1.7%       (0.2)%       0.7%         0.7%       (0.6)%  

Operating leverage adjusted (2)

    n.a.       n.a.       n.a.         n.a.       2.6%  

Effective income tax rate

    26.2%       26.3%       26.1%               26.3%       26.0%  

 

(1)   AUA represents period-end spot balances and includes securitized residential mortgages and credit card loans as at April 30, 2019 of $16.2 billion and $8.3 billion, respectively (January 31, 2019 – $16.6 billion and $8.5 billion; April 30, 2018 – $17.8 billion and $9.1 billion).
(2)   This is a non-GAAP measure. The six months ended April 30, 2018 operating leverage of (0.6)% in Canadian Banking was impacted by our share of the gain related to the sale of the U.S. operations of Moneris of $212 million (before- and after-tax) in Q1 2017, which was a specified item. For further details, including a reconciliation, refer to the Key performance and non-GAAP measures section. The six months ended April 30, 2018 revenue and expense growth rates in Canadian Banking were 5.6% and 6.2%, respectively. Excluding our share of the gain as noted above, the six months ended April 30, 2018 adjusted revenue growth rate was 8.8%.
n.a.   not applicable


 

Royal Bank of Canada        Second Quarter 2019         13

Financial performance

Q2 2019 vs. Q2 2018

Net income increased $90 million or 6% from last year, mainly due to average volume growth of 7% and higher spreads in Canadian Banking, and higher service charges. These factors were partially offset by higher PCL, and an increase in technology related and marketing costs.

Total revenue increased $230 million or 6%.

Canadian Banking revenue increased $228 million or 6% compared to last year, largely reflecting average volume growth of 5% in loans and 9% in deposits and improved spreads, and higher service charges.

Caribbean & U.S. Banking revenue increased $2 million or 1% compared to last year.

Net interest margin was up 6 bps, mainly due to improved spreads on deposits in Canadian Banking, reflecting higher interest rates, partially offset by the impact of competitive pricing pressures.

PCL increased $72 million or 24%, driving an increase of 6 bps in the PCL on impaired loans ratio. For further details, refer to Credit quality performance in the Credit risk section.

Non-interest expense increased $59 million or 3%, primarily attributable to an increase in technology and related costs, including digital initiatives, and higher marketing costs.

Q2 2019 vs. Q1 2019

Net income decreased $22 million or 1% from last quarter, reflecting three less days in the quarter, higher PCL and an increase in marketing costs. These factors were partially offset by lower staff related costs and improved spreads in Canadian Banking. The prior quarter also included a write-down of deferred tax assets resulting from a change in the corporate tax rate in Barbados.

Net interest margin was up 1 bp.

Q2 2019 vs. Q2 2018 (Six months ended)

Net income increased $140 million or 5% from last year, reflecting average volume growth of 6% and higher spreads. These factors were partially offset by an increase in PCL, higher technology and staff related costs, and higher marketing costs.

Total revenue increased $483 million or 6% from last year, mainly driven by average volume growth of 5% in loans and 8% in deposits. Improved spreads reflecting higher interest rates, partially offset by the impact of competitive pricing pressures, also contributed to the increase.

PCL increased $103 million or 17%, resulting in an increase of 4 bps in the PCL on impaired loans ratio. For further details, refer to Credit quality performance in the Credit risk section.

Non-interest expense increased $173 million or 5%, largely reflecting an increase in technology and related costs, including digital initiatives, staff related costs, and marketing costs.


 

14        Royal Bank of Canada        Second Quarter 2019

Wealth Management

 

 

     As at or for the three months ended            As at or for the six months ended  
(Millions of Canadian dollars, except number of, percentage amounts and as otherwise noted)  

April 30

2019

   

January 31

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Net interest income

  $ 731     $ 744     $ 632       $ 1,475     $ 1,244  

Non-interest income

           

Fee-based revenue

    1,663       1,714       1,570         3,377       3,159  

Transaction and other revenue

    585       490       403         1,075       985  

Total revenue

    2,979       2,948       2,605         5,927       5,388  

PCL on performing assets

    13       15       (21       28       (28

PCL on impaired assets

    17       11       1         28       6  

PCL

    30       26       (20       56       (22

Non-interest expense

    2,204       2,164       1,939         4,368       3,950  

Income before income taxes

    745       758       686         1,503       1,460  

Net income

  $ 585     $ 597     $ 537             $ 1,182     $ 1,134  

Revenue by business

           

Canadian Wealth Management

  $ 808     $ 842     $ 742       $ 1,650     $ 1,491  

U.S. Wealth Management (including City National)

    1,539       1,471       1,255         3,010       2,639  

U.S. Wealth Management (including City National) (US$ millions)

    1,155       1,103       977         2,258       2,077  

Global Asset Management

    538       543       516         1,081       1,072  

International Wealth Management

    94       92       92               186       186  

Selected balance sheet and other information

           

ROE

    16.5%       16.4%       15.8%         16.5%       16.5%  

NIM

    3.66%       3.67%       3.47%         3.66%       3.37%  

Pre-tax margin (1)

    25.0%       25.7%       26.3%         25.4%       27.1%  

Number of advisors (2)

    5,176       5,119       4,912         5,176       4,912  

Average total earning assets, net

  $ 81,900     $ 80,500     $ 74,800       $ 81,200     $ 74,500  

Average loans and acceptances, net

    62,200       61,200       54,800         61,700       53,600  

Average deposits

    93,000       94,300       93,000         93,600       92,800  

AUA (3)

        1,050,900         981,400         944,600             1,050,900         944,600  

U.S. Wealth Management (including City National) (3)

    537,200       496,500       458,500         537,200       458,500  

U.S. Wealth Management (including City National) (US$ millions) (3)

    400,900       378,000       357,300         400,900       357,300  

AUM (3)

    726,600       682,000       655,000         726,600       655,000  

Average AUA

    1,027,300       986,800       947,000         1,006,700       942,700  

Average AUM (4)

    712,200       675,100       655,800         693,300       652,000  

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

    0.12%       0.07%       0.01%               0.09%       0.02%  

 

   

For the three

months ended

          For the six
months ended
 
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items

(Millions of Canadian dollars, except percentage amounts)

  Q2 2019 vs.
Q2 2018
    Q2 2019 vs.
Q1 2019
           Q2 2019 vs.
Q2 2018
 

Increase (decrease):

       

Total revenue

  $ 48     $ (3     $ 130  

Non-interest expense

    39       (4       103  

Net income

    6       1               20  

Percentage change in average U.S. dollar equivalent of C$1.00

        (3)%       –%             (5)%  

Percentage change in average British pound equivalent of C$1.00

    2%           (2)%         1%  

Percentage change in average Euro equivalent of C$1.00

    5%       2%               2%  

 

(1)   Pre-tax margin is defined as Income before income taxes divided by Total revenue.
(2)   Represents client-facing advisors across all our Wealth Management businesses.
(3)   Represents period-end spot balances.
(4)   Amounts in the prior year have been revised from those previously presented.

Financial performance

Q2 2019 vs. Q2 2018

Net income increased $48 million or 9%, primarily attributable to higher net interest income and higher average fee-based client assets. These factors were partially offset by increased costs in support of business growth and higher PCL.

Total revenue increased $374 million or 14%.

Canadian Wealth Management revenue increased $66 million or 9%, primarily due to higher average fee-based client assets reflecting net sales and market appreciation.

U.S. Wealth Management (including City National) revenue increased $284 million or 23%. In U.S. dollars, revenue increased $178 million or 18%, primarily due to the change in the fair value of the hedges related to our U.S. share-based compensation plans, which was largely offset in non-interest expense, and an increase in net interest income due to volume growth and higher spreads.

Global Asset Management revenue increased $22 million or 4%, mainly due to higher average fee-based assets under management reflecting market appreciation and net sales.

PCL increased $50 million. PCL on performing assets increased $34 million from $(21) million in the prior year due to higher repayments and maturities in the prior year in U.S. Wealth Management (including City National). Higher provisions on impaired loans in U.S. Wealth Management (including City National) and higher recoveries in the prior year also contributed to the increase. PCL on impaired loans ratio increased 11 bps. For further details, refer to Credit quality performance in the Credit risk section.


 

Royal Bank of Canada        Second Quarter 2019         15

Non-interest expense increased $265 million or 14%, mainly due to the change in the fair value of our U.S. share-based compensation plans, which was largely offset in revenue, and increased costs in support of business growth mainly reflecting higher staff-related costs. Higher variable compensation on improved results and the impact of foreign exchange translation also contributed to the increase.

Q2 2019 vs. Q1 2019

Net income decreased $12 million or 2%, primarily reflecting a favourable accounting adjustment related to Canadian Wealth Management in the prior period, and lower net interest income as volume growth was more than offset by lower spreads and three less days in the quarter. These factors were partially offset by higher transaction volumes.

Q2 2019 vs. Q2 2018 (Six months ended)

Net income increased $48 million or 4% from a year ago, primarily reflecting an increase in net interest income, higher fee-based client assets, and the impact of foreign exchange translation. These factors were partially offset by increased costs in support of business growth, higher PCL, and higher variable compensation on improved results.

Total revenue increased $539 million or 10%, mainly due to higher net interest income driven by volume growth and higher interest rates, the impact of foreign exchange translation, and higher average fee-based client assets reflecting market appreciation and net sales. The change in the fair value of the hedges related to our U.S. share-based compensation plans, which was largely offset in non-interest expense, also contributed to the increase.

PCL increased $78 million. PCL on performing assets increased $56 million from $(28) million due to higher repayments and maturities in the prior year in U.S. Wealth Management (including City National). The current year also reflected unfavourable changes in macroeconomic variables compared to last year. Higher provisions on impaired loans in U.S. Wealth Management (including City National) and higher recoveries in the prior year also contributed to the increase. PCL on impaired loans ratio increased 7 bps. For further details, refer to Credit quality performance in the Credit risk section.

Non-interest expense increased $418 million or 11%, mainly due to increased costs in support of business growth largely reflecting higher staff-related costs, the impact of foreign exchange translation, and higher variable compensation on improved results. The change in the fair value of our U.S. share-based compensation plans, which was largely offset in revenue, and higher regulatory costs also contributed to the increase.

 

Insurance

 

 

     As at or for the three months ended            As at or for the six months ended  
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)  

April 30

2019

   

January 31

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Non-interest income

           

Net earned premiums

  $ 964     $ 1,162     $ 824       $ 2,126     $ 1,763  

Investment income (1)

    515       381       (87       896       79  

Fee income

    36       36       69         72       108  

Total revenue

    1,515       1,579       806         3,094       1,950  

Insurance policyholder benefits and claims (1)

    1,077       1,129       351         2,206       1,119  

Insurance policyholder acquisition expense

    83       96       70         179       138  

Non-interest expense

    150       154       148         304       290  

Income before income taxes

    205       200       237         405       403  

Net income

  $ 154     $ 166     $ 172             $ 320     $ 299  

Revenue by business

           

Canadian Insurance

  $ 1,004     $ 1,039     $ 310       $ 2,043     $ 931  

International Insurance

    511       540       496               1,051       1,019  

Selected balances and other information

           

ROE

    32.4%       34.7%       36.3%         33.5%       32.3%  

Premiums and deposits (2)

  $ 1,106     $ 1,314     $ 981       $ 2,420     $ 2,076  

Fair value changes on investments backing policyholder liabilities (1)

    383       247       (174             630       (148

 

(1)   Investment income can experience volatility arising from fluctuation of assets designated as fair value through profit and loss (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 the Consolidated Statements of Income and are largely offset by changes in the fair value of the actuarial liabilities, the impact of which is reflected in Insurance policyholder benefits, claims and acquisition expense.
(2)   Premiums and deposits include premiums on risk-based insurance and annuity products, and individual and group segregated fund deposits, consistent with insurance industry practices.

Financial performance

Q2 2019 vs. Q2 2018

Net income decreased $18 million or 10% from a year ago, primarily reflecting lower favourable investment-related experience and increased disability and life retrocession claims costs, partially offset by favourable life retrocession contract renegotiations and favourable actuarial adjustments.

Total revenue increased $709 million or 88%.

Canadian Insurance revenue increased $694 million, primarily due to the change in fair value of investments backing our policyholder liabilities and business growth mainly from higher group annuity sales, both of which are largely offset in PBCAE as indicated below.

International Insurance revenue increased $15 million or 3%, mainly due to the change in fair value of investments backing our policyholder liabilities, which is largely offset in PBCAE as indicated below, and business growth in longevity reinsurance.


 

16        Royal Bank of Canada        Second Quarter 2019

PBCAE increased $739 million, mainly reflecting the change in fair value of investments backing our policyholder liabilities and business growth. Lower favourable investment-related experience and higher disability and life retrocession claims costs also contributed to the increase. These factors were partially offset by favourable life retrocession contract renegotiations and favourable actuarial adjustments related to the universal life portfolio.

Non-interest expense increased $2 million or 1%, largely reflecting higher costs related to regulatory initiatives.

Q2 2019 vs. Q1 2019

Net income decreased $12 million or 7%, mainly due to higher claims costs in International Insurance, partially offset by favourable actuarial adjustments related to the universal life portfolio.

Q2 2019 vs. Q2 2018 (Six months ended)

Net income increased $21 million or 7% from a year ago, primarily reflecting favourable life retrocession contract renegotiations, partially offset by lower favourable investment-related experience.

Total revenue increased $1,144 million or 59% compared to the prior year, mainly reflecting the change in fair value of investments backing our policyholder liabilities and business growth, including higher group annuity sales, both of which are largely offset in PBCAE as indicated below.

PBCAE increased $1,128 million or 90%, mainly reflecting the change in fair value of investments backing our policyholder liabilities, business growth, and lower favourable investment-related experience. These factors were partially offset by favourable life retrocession contract renegotiations.

Non-interest expense increased $14 million or 5%, largely reflecting higher costs related to regulatory initiatives and an increase in costs to support sales and client service activities.

 

Investor & Treasury Services

 

 

(Millions of Canadian dollars, except percentage amounts and as otherwise noted)   As at or for the three months ended            As at or for the six months ended  
 

April 30

2019

   

January 31

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Net interest income

  $ (34   $ (31   $ 118       $ (65   $ 246  

Non-interest income

    621       662       553         1,283       1,101  

Total revenue

    587       631       671         1,218       1,347  

Non-interest expense

    388       418       391         806       780  

Net income before income taxes

    199       213       280         412       567  

Net income

  $ 151     $ 161     $ 212             $ 312     $ 431  

Selected balance sheet and other information

           

ROE

    17.4%       17.3%       28.1%         17.3%       27.5%  

Average deposits

  $ 173,900     $ 171,900     $ 163,600       $ 172,900     $ 159,400  

Average client deposits

    58,200       59,200       58,200         58,700       57,500  

Average wholesale funding deposits

    115,700       112,700       105,400         114,200       101,900  

AUA (1)

      4,307,800         4,100,900         4,439,800           4,307,800         4,439,800  

Average AUA

    4,271,000       4,191,300       4,502,800               4,230,500       4,470,500  

 

   

For the three

months ended

          For the six
months ended
 
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items

(Millions of Canadian dollars, except percentage amounts)

  Q2 2019 vs.
Q2 2018
    Q2 2019 vs.
Q1 2019
           Q2 2019 vs.
Q2 2018
 

Increase (decrease):

       

Total revenue

  $ (10   $ (3     $ (8

Non-interest expense

    (8     (2       (8

Net income

    (2     (1              

Percentage change in average U.S. dollar equivalent of C$1.00

    (3)%       –%         (5)%  

Percentage change in average British pound equivalent of C$1.00

    2%       (2)%         1%  

Percentage change in average Euro equivalent of C$1.00

    5%       2%               2%  

 

(1)   Represents period-end spot balances.

Financial performance

Q2 2019 vs. Q2 2018

Net income decreased $61 million or 29%, primarily due to lower funding and liquidity revenue and lower revenue from our asset services business.

Total revenue decreased $84 million or 13%, mainly due to lower funding and liquidity revenue, including gains from the disposition of certain securities in the prior year, lower revenue from our asset services business due to lower client activity, as well as the impact of foreign exchange translation.

Non-interest expense decreased $3 million or 1%, largely driven by the impact of foreign exchange translation, partially offset by higher costs in support of efficiency and technology initiatives.

Q2 2019 vs. Q1 2019

Net income decreased $10 million or 6%, primarily due to lower funding and liquidity revenue, including the favourable impact of money market opportunities in the prior quarter, partially offset by the impact of annual regulatory costs incurred in the prior period and lower technology costs.


 

Royal Bank of Canada        Second Quarter 2019         17

Q2 2019 vs. Q2 2018 (Six months ended)

Net income decreased $119 million or 28%, largely due to lower funding and liquidity revenue, lower revenue from our asset services business and higher costs in support of efficiency and technology initiatives.

Total revenue decreased $129 million or 10%, mainly due to lower funding and liquidity revenue driven by the impact of reduced money market opportunities in the current year and gains from the disposition of certain securities in the prior year. Lower revenue from our asset services business due to challenging market conditions throughout the earlier part of 2019 and lower client activity also contributed to the decrease.

Non-interest expense increased $26 million or 3%, primarily driven by higher costs in support of efficiency and technology initiatives.

 

Capital Markets

 

 

     As at or for the three months ended            As at or for the six months ended  
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)  

April 30

2019

   

January 31

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Net interest income (1)

  $ 1,057     $ 1,006     $ 841       $ 2,063     $ 1,707  

Non-interest income (1)

    1,112       1,092       1,169         2,204       2,478  

Total revenue (1)

    2,169       2,098       2,010         4,267       4,185  

PCL on performing assets

    (23     38       (21       15       (46

PCL on impaired assets

    48       102       14         150       59  

PCL

    25       140       (7       165       13  

Non-interest expense

    1,289       1,230       1,190         2,519       2,404  

Net income before income taxes

    855       728       827         1,583       1,768  

Net income

  $ 776     $ 653     $ 665             $ 1,429     $ 1,413  

Revenue by business

           

Corporate and Investment Banking

  $ 969     $ 927     $ 967       $ 1,896     $ 1,961  

Global Markets

    1,235       1,227       1,092         2,462       2,313  

Other

    (35     (56     (49             (91     (89

Selected balance sheet and other information

           

ROE

    13.6%       10.8%       13.4%         12.2%       14.1%  

Average total assets

  $     648,900     $     643,700     $     563,700       $     646,200     $     567,000  

Average trading securities

    101,200       102,100       98,900         101,700       99,900  

Average loans and acceptances, net

    101,800       98,400       82,800         100,000       82,100  

Average deposits

    79,100       79,000       71,000         79,100       67,900  

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

    0.19%       0.41%       0.07%               0.30%       0.15%  

 

   

For the three

months ended

          For the six
months ended
 
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items

(Millions of Canadian dollars, except percentage amounts)

  Q2 2019 vs.
Q2 2018
    Q2 2019 vs.
Q1 2019
           Q2 2019 vs.
Q2 2018
 

Increase (decrease):

       

Total revenue

  $ 43     $       $ 123  

Non-interest expense

    21       1         59  

Net income

    19       (1             50  

Percentage change in average U.S. dollar equivalent of C$1.00

    (3)%       –%         (5)%  

Percentage change in average British pound equivalent of C$1.00

    2%       (2)%         1%  

Percentage change in average Euro equivalent of C$1.00

    5%       2%               2%  

 

(1)   The taxable equivalent basis (teb) adjustment for the three months ended April 30, 2019 was $120 million (January 31, 2019 – $107 million; April 30, 2018 – $151 million) and for the six months ended April 30, 2019 was $227 million (April 30, 2018 – $243 million). For further discussion, refer to the How we measure and report our business segments section of our 2018 Annual Report.

Financial performance

Q2 2019 vs. Q2 2018

Net income increased $111 million or 17%, primarily due to higher revenue in Global Markets, and a lower effective tax rate largely reflecting changes in earnings mix. These factors were partially offset by higher compensation on improved results.

Total revenue increased $159 million or 8%.

Corporate and Investment Banking revenue remained relatively flat as higher M&A and debt origination in the U.S., the impact of foreign exchange translation and higher lending revenue primarily in the U.S. were largely offset by lower municipal banking activity, lower M&A in Europe and lower loan syndication activity primarily in the U.S.

Global Markets revenue increased $143 million or 13% due to improved market conditions and increased client activity. The increase was primarily driven by higher fixed income trading revenue across all regions, higher debt origination largely in the U.S. and Europe and the impact of foreign exchange translation. Higher equity trading in North America and increased equity origination primarily in the U.S. also contributed to the increase. These factors were partially offset by lower equity trading revenue largely in Europe.

Other revenue increased $14 million largely reflecting lower residual funding costs, partially offset by gains in our legacy U.S. portfolios in the prior year.

PCL increased $32 million, driving an increase of 12 bps in the PCL on impaired loans ratio, primarily due to provisions taken on a few accounts. For further details, refer to Credit quality performance in the Credit risk section.

Non-interest expense increased $99 million or 8%, mainly due to higher compensation on improved results, the impact of foreign exchange translation and higher technology and related costs.


 

18        Royal Bank of Canada        Second Quarter 2019

Q2 2019 vs. Q1 2019

Net income increased $123 million or 19% due to improved market conditions and higher client activity. The increase was primarily driven by higher debt origination in most regions, lower PCL, and higher fixed income trading and equity origination largely in North America. These factors were partially offset by lower equity trading revenue primarily in the U.S., higher compensation on improved results and lower foreign exchange trading largely in Canada.

Q2 2019 vs. Q2 2018 (Six months ended)

Net income increased $16 million or 1%, driven by a lower effective tax rate largely reflecting changes in earnings mix, higher revenue in Global Markets and the impact of foreign exchange translation. These factors were partially offset by higher PCL, lower revenue in Corporate and Investment Banking and increased technology and related costs.

Total revenue increased $82 million or 2%, mainly driven by the impact of foreign exchange translation and higher equity trading revenue primarily in North America. These factors were partially offset by lower equity and debt origination largely in the North America and lower equity trading revenue mainly in Europe.

PCL increased $152 million, largely driven by an increase in provisions on impaired loans taken on one account in the utilities sector and higher provisions on performing loans driven by unfavourable changes in macroeconomic variables compared to the prior year. PCL on impaired loans ratio increased 15 bps. For further details, refer to Credit quality performance in the Credit risk section.

Non-interest expense increased $115 million or 5%, largely reflecting the impact of foreign exchange translation and increased technology and related costs.

 

Corporate Support

 

 

     For the three months ended            For the six months ended  
(Millions of Canadian dollars)  

April 30

2019

   

January 31

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Net interest income (loss) (1)

  $ 23     $ 31     $ (22     $ 54     $ (39

Non-interest income (loss) (1)

    (107     (116     (119       (223     (217

Total revenue (1)

    (84     (85     (141       (169     (256

PCL

    (1           1         (1      

Non-interest expense

    (2     31       (14       29       40  

Net income (loss) before income taxes (1)

    (81     (116     (128       (197     (296

Income taxes (recoveries) (1)

    (96     (140     (143       (236     (111

Net income (loss) (2)

  $ 15     $ 24     $ 15             $ 39     $ (185

 

(1)   Teb adjusted.
(2)   Net income reflects income attributable to both shareholders and Non-Controlling Interests (NCI). Net income attributable to NCI for the three months ended April 30, 2019 was $1 million (January 31, 2019 – $nil; April 30, 2018 – $7 million) and for the six months ended April 30, 2019 was $1 million (April 30, 2018 – $16 million).

Due to the nature of activities and consolidation adjustments reported in this segment, we believe that a comparative period analysis is not relevant. The following identifies material items affecting the reported results in each period.

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 three months ended April 30, 2019 was $120 million, as compared to $107 million in the prior quarter and $151 million last year. The teb amount for the six months ended April 30, 2019 was $227 million, as compared to $243 million in the prior year.

The following identifies the material items, other than the teb impacts noted previously, affecting the reported results in each period.

Q2 2019

Net income was $15 million, largely due to asset/liability management activities, partially offset by net unfavourable tax adjustments.

Q1 2019

Net income was $24 million, largely reflecting net favourable tax adjustments.

Q2 2018

Net income was $15 million, largely due to asset/liability management activities.

Q2 2019 (Six months ended)

Net income was $39 million, largely due to asset/liability management activities.

Q2 2018 (Six months ended)

Net loss was $185 million, largely due to the impact of the U.S. Tax Reform of $178 million, partially offset by asset/liability management activities.

 


 

Royal Bank of Canada        Second Quarter 2019         19

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)

 

     2019            2018            2017  
(Millions of Canadian dollars, except per share and percentage amounts)   Q2     Q1            Q4     Q3     Q2     Q1            Q4     Q3  

Personal & Commercial Banking

  $ 4,333     $ 4,418       $ 4,364     $ 4,284     $ 4,103     $ 4,165       $ 4,019     $ 3,970  

Wealth Management

    2,979       2,948         2,740       2,798       2,605       2,783         2,562       2,547  

Insurance

    1,515       1,579         1,039       1,290       806       1,144         1,612       1,009  

Investor & Treasury Services

    587       631         624       620       671       676         602       594  

Capital Markets (2)

    2,169       2,098         2,056       2,157       2,010       2,175         1,954       2,040  

Corporate Support (2)

    (84     (85             (154     (124     (141     (115             (226     (72

Total revenue

  $  11,499     $  11,589       $  10,669     $  11,025     $  10,054     $  10,828       $  10,523     $  10,088  

PCL (3)

    426       514         353       346       274       334         234       320  

PBCAE

    1,160       1,225         494       925       421       836         1,137       643  

Non-interest expense

    5,916       5,912               5,882       5,858       5,482       5,611               5,611       5,537  

Net income before income taxes

  $ 3,997     $ 3,938       $ 3,940     $ 3,896     $ 3,877     $ 4,047       $ 3,541     $ 3,588  

Income taxes

    767       766               690       787       817       1,035               704       792  

Net income

  $ 3,230     $ 3,172             $ 3,250     $ 3,109     $ 3,060     $ 3,012             $ 2,837     $ 2,796  

EPS – basic

  $ 2.20     $ 2.15       $ 2.21     $ 2.10     $ 2.06     $ 2.02       $ 1.89     $ 1.86  

        – diluted

    2.20       2.15               2.20       2.10       2.06       2.01               1.88       1.85  

Segments – net income (loss)

                   

Personal & Commercial Banking

  $ 1,549     $ 1,571       $ 1,538     $ 1,510     $ 1,459     $ 1,521       $ 1,404     $ 1,399  

Wealth Management

    585       597         553       578       537       597         491       486  

Insurance

    154       166         318       158       172       127         265       161  

Investor & Treasury Services

    151       161         155       155       212       219         156       178  

Capital Markets

    776       653         666       698       665       748         584       611  

Corporate Support

    15       24               20       10       15       (200             (63     (39

Net income

  $ 3,230     $ 3,172             $ 3,250     $ 3,109     $ 3,060     $ 3,012             $ 2,837     $ 2,796  

Effective income tax rate

    19.2%       19.5%         17.5%       20.2%       21.1%       25.6%         19.9%       22.1%  

Period average US$ equivalent of C$1.00

  $ 0.751     $ 0.749             $ 0.767     $ 0.767     $ 0.778     $ 0.794             $ 0.792     $ 0.770  

 

(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 our 2018 Annual Report.
(3)   Effective November 1, 2017, we adopted IFRS 9, Financial Instruments. 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 fair value through other comprehensive income (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).

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 results in lower client activity and may negatively impact the results of our Capital Markets brokerage business and our Wealth Management investment management business.

Trend analysis

Earnings have generally trended upward over the period. However, results in the first quarter of 2019 were impacted by challenging

market conditions throughout the earlier part of the quarter. Quarterly earnings are also affected by the impact of foreign exchange translation.

Personal & Commercial Banking revenue has benefitted from solid volume growth, higher spreads since the latter half of 2017, and higher fee-based revenue.

Wealth Management revenue has generally trended upwards primarily due to growth in average fee-based client assets which benefitted from net sales and market appreciation, and the impact of higher interest rates and volume growth driving higher net interest income since the beginning of the period. The change in the fair value of the hedges related to our U.S. share-based compensation plans, which is largely offset in Non-interest expense, also contributed to fluctuations in revenue over the period.

Insurance revenue fluctuated over the period, primarily due to the impact of changes in the fair value of investments backing our policyholder liabilities. Since 2017, revenues have generally benefitted from the impact of new group annuity sales and restructured international life contracts, which are largely offset in PBCAE. We have also benefitted from business growth in Canadian and International Insurance throughout 2018 and the first half of 2019.

Investor & Treasury Services revenue is impacted by fluctuations in market conditions and client activity. The first half of 2018 trended higher due to generally higher market volatility, growth in client deposits, and increased client activity from our asset services business, combined with an improvement in funding & liquidity performance. Reduced money market opportunities in the current year and the impact of challenging market conditions impacted the first quarter of 2019. The second quarter of 2019 was impacted by lower client activity.


 

20        Royal Bank of Canada        Second Quarter 2019

Capital Markets revenue is influenced, to a large extent, by market conditions and activity in the fixed income and equity trading businesses, with the first quarter results generally stronger than the remaining quarters. The second quarter of 2018 experienced lower equity originations driven by lower market activity, decreased fixed income trading across all regions, and lower equity trading revenue in the U.S. The decline experienced in the fourth quarter of 2018 largely resulted from lower fixed income trading revenue. The first quarter of 2019 experienced higher equity and fixed income trading revenue, which was partially offset by lower debt and equity origination primarily in North America. Debt origination rallied in the second quarter of 2019 in most regions driving growth along with higher fixed income trading and equity origination largely in North America, partially offset by lower equity trading primarily in the U.S. and lower foreign exchange trading largely in Canada.

PCL saw a general improvement in 2017 due to lower provisions and higher recoveries in our Capital Markets and Personal & Commercial Banking portfolios and lower provisions on impaired assets for the majority of 2018. On November 1, 2017, we adopted IFRS 9, which resulted in the introduction of PCL on performing financial assets. PCL on performing assets has fluctuated over the period as it is impacted by macroeconomic conditions and volume growth. The fourth quarter of 2018 was also impacted by the restructuring of portfolios in Barbados. The first half of 2019 was impacted by higher provisions for impaired loans mainly relating to a few accounts in Capital Markets and Personal & Commercial Banking.

PBCAE has fluctuated quarterly as it includes the changes to the fair value of investments backing our policyholder liabilities, the impact of group annuity sales and restructured international life contracts, all of which are largely offset in Revenue. PBCAE has also increased due to business growth, and has been impacted by investment-related experience, and claims volumes over the period. The results are impacted by actuarial adjustments, which generally occur in the fourth quarter of each year.

Non-interest expense has fluctuated over the period and has remained relatively stable since the latter half of 2018. Growth over the period mainly reflects higher costs in support of business growth and our ongoing investments in technology and related costs, including digital initiatives. The increase in 2017 and 2018 mainly reflected higher variable compensation on improved results in Wealth Management and Capital Markets. The third quarter of 2017 was also impacted by higher severance costs. Fiscal 2018 was impacted by higher regulatory costs, and the decrease over the second and fourth quarter of 2018 mainly reflects the change in the fair value of our U.S. share-based compensation plans, which was largely offset in Revenue. The small increase in the first quarter of 2019 also reflected the impact of foreign exchange translation and the change in the fair value of our U.S. share-based compensation plans, which was largely offset in Revenue, partially offset by seasonally lower marketing costs and lower professional fees.

Our effective income tax rate has fluctuated over the period, mostly due to varying levels of income reported in jurisdictions with different tax rates, as well as fluctuating levels of income from tax-advantaged sources and various levels of tax adjustments. The first quarter of 2018 was adversely impacted by the U.S. Tax Reform, which resulted in the write-down of net deferred tax assets, however, this was more than offset during 2018 by the ongoing lower corporate tax rate. The first quarter of 2019 included a write-down of deferred tax assets resulting from a change in the corporate tax rate in Barbados. Our effective income tax rate has generally been impacted over the period by net favourable tax adjustments and changes to the earnings mix.

 

Financial condition

 

 

Condensed balance sheets

 

 

     As at  
(Millions of Canadian dollars)  

April 30

2019

   

October 31

2018

 

Assets

   

Cash and due from banks

  $ 33,041     $ 30,209  

Interest-bearing deposits with banks

    26,718       36,471  

Securities, net of applicable allowance (1)

    240,991       222,866  

Assets purchased under reverse repurchase agreements and securities borrowed

    309,520       294,602  

Loans

   

Retail

    407,222       399,452  

Wholesale

    198,263       180,278  

Allowance for loan losses

    (3,093     (2,912

Other – Derivatives

    84,812       94,039  

          – Other (2)

    81,402       79,729  

Total assets

  $     1,378,876     $     1,334,734  

Liabilities

   

Deposits

  $ 864,101     $ 837,046  

Other – Derivatives

    82,168       90,238  

          – Other (2)

    341,301       318,364  

Subordinated debentures

    9,360       9,131  

Total liabilities

    1,296,930       1,254,779  

Equity attributable to shareholders

    81,845       79,861  

Non-controlling interests

    101       94  

Total equity

    81,946       79,955  

Total liabilities and equity

  $ 1,378,876     $ 1,334,734  

 

(1)   Securities are comprised of Trading and Investment securities.
(2)   Other – Other assets and liabilities include Segregated fund net assets and liabilities, respectively.


 

Royal Bank of Canada        Second Quarter 2019         21

Q2 2019 vs. Q4 2018

Total assets increased $44 billion or 3% from October 31, 2018. Foreign exchange translation increased total assets by $14 billion.

Cash and due from banks was up $3 billion or 9%, mainly due to higher deposits with central banks, reflecting short-term cash management activities.

Interest-bearing deposits with banks decreased $10 billion or 27%, primarily due to lower deposits with central banks, reflecting cash management activities.

Securities, net of applicable allowance, were up $18 billion or 8%, largely due to higher government debt and corporate debt securities, reflecting our business activities. Higher equity trading securities reflecting favourable market conditions and the impact of foreign exchange translation also contributed to the increase.

Assets purchased under reverse repurchase agreements (reverse repos) and securities borrowed increased $15 billion or 5%, largely attributable to client activity and the impact of foreign exchange translation, partially offset by higher financial netting.

Loans were up $26 billion or 4%, primarily due to volume growth, which led to higher wholesale loans and residential mortgages.

Derivative assets were down $9 billion or 10%, primarily attributable to lower fair values on foreign exchange contracts.

Total liabilities increased $42 billion or 3%. Foreign exchange translation increased total liabilities by $14 billion.

Deposits increased $27 billion or 3%, mainly as a result of higher retail and business deposits, driven by increased client activities.

Derivative liabilities were down $8 billion or 9%, primarily attributable to lower fair values on foreign exchange contracts.

Other liabilities increased $23 billion or 7%, mainly attributable to higher obligations related to repurchase agreements largely due to increased client activity, funding requirements and the impact of foreign exchange translation, partially offset by higher financial netting.

Total equity increased $2 billion or 2%, largely reflecting earnings, net of dividends and redemptions of preferred shares.

 

Off-balance sheet arrangements

 

In the normal course of business, we engage in a variety of financial transactions that, for accounting purposes, are not recorded on our Consolidated Balance Sheets. Off-balance sheet transactions are generally undertaken for risk, capital and funding management purposes which benefit us and our clients. These include transactions with structured entities and may also include the issuance of guarantees. These transactions give rise to, among other risks, varying degrees of market, credit, and liquidity and funding risk, which are discussed in the Risk management section of this Q2 2019 Report to Shareholders. Our significant off-balance sheet transactions include those described on pages 47 to 49 of our 2018 Annual Report.


 

22        Royal Bank of Canada        Second Quarter 2019

Risk management

 

 

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. Credit risk may arise directly from the risk of default of a primary obligor, indirectly from a secondary obligor, through off-balance sheet exposures, contingent credit risk and/or transactional risk.

Our Credit Risk Framework (CRF) and supporting credit policies are designed to clearly define roles and responsibilities, acceptable practices, limits and key controls. There have been no material changes to our CRF as described in our 2018 Annual Report.

Credit risk exposure by portfolio, sector and geography

The following table presents our credit risk exposures under the Basel regulatory defined classes and reflects exposures at default (EAD). The classification of our sectors aligns with our view of credit risk by industry.

 

 

     As at  
   

April 30

2019

         

January 31

2019

 
    Credit risk (1)           Counterparty credit risk (2)                    
   

On-balance

sheet amount

    Off-balance sheet amount (3)          

Repo-style

transactions

   

Derivatives

   

Total

exposure

          

Total

exposure

 
(Millions of Canadian dollars)   Undrawn     Other (4)         

Retail

                 

Residential secured (5)

  $ 303,318     $ 62,677     $       $     $     $ 365,995       $ 361,572  

Qualifying revolving (6)

    25,682       70,125                           95,807         95,227  

Other retail

    57,211       14,417       73                           71,701               69,859  

Total retail

  $ 386,211     $ 147,219     $ 73             $     $     $ 533,503             $ 526,658  

Wholesale

                 

Agriculture

  $ 9,005     $ 1,691     $ 40       $     $ 72     $ 10,808       $ 10,625  

Automotive

    10,678       6,551       340               1,253       18,822         18,525  

Banking

    45,599       1,880       542         54,340       19,736       122,097         114,181  

Consumer discretionary

    15,745       8,447       784         2       464       25,442         25,713  

Consumer staples

    5,026       6,844       513               1,022       13,405         13,213  

Oil & gas

    7,198       10,883       1,547               1,969       21,597         20,462  

Financial services

    25,307       21,633       3,243         116,252       18,961       185,396         174,544  

Financing products

    701       1,421       511         128       771       3,532         4,282  

Forest products

    1,490       593       95               51       2,229         2,327  

Governments

    102,858       7,765       1,508         4,460       5,982       122,573         142,500  

Industrial products

    7,459       8,333       585         1       644       17,022         16,192  

Information technology

    5,143       6,485       173         16       3,649       15,466         16,557  

Investments

    16,410       952       403         13       210       17,988         17,494  

Mining & metals

    1,915       4,516       816               197       7,444         6,739  

Public works & infrastructure

    1,895       1,769       463               181       4,308         4,326  

Real estate & related

    59,170       11,495       1,370               666       72,701         70,151  

Other services

    24,718       10,617       888               1,152       37,375         38,656  

Telecommunication & media

    9,404       9,324       151               1,741       20,620         20,134  

Transportation

    6,008       5,875       2,225               1,574       15,682         15,337  

Utilities

    9,006       19,238       4,128               3,069       35,441         35,968  

Other sectors

    2,512       439       1               13       18,685       21,650               19,656  

Total wholesale

  $ 367,247     $ 146,751     $ 20,326             $ 175,225     $ 82,049     $ 791,598             $ 787,582  

Total exposure (7)

  $ 753,458     $ 293,970     $ 20,399             $ 175,225     $ 82,049     $ 1,325,101             $ 1,314,240  

By geography (8)

                 

Canada

  $ 532,143     $ 212,727     $ 9,636       $ 72,993     $ 35,196     $ 862,695       $ 851,118  

U.S.

    135,962       59,127       9,285         46,550       19,210       270,134         272,692  

Europe

    50,627       19,420       1,397         52,302       23,043       146,789         148,477  

Other International

    34,726       2,696       81               3,380       4,600       45,483               41,953  

Total exposure (7)

  $   753,458     $   293,970     $   20,399             $   175,225     $   82,049     $   1,325,101             $   1,314,240  
(1)   EAD for standardized exposures are reported net of allowance for impaired assets and EAD for internal ratings based exposures are reported gross of all allowance for credit losses and partial write-offs as per regulatory definitions.
(2)   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.
(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)   Includes residential mortgages and home equity lines of credit.
(6)   Includes credit cards, unsecured lines of credit and overdraft protection products.
(7)   Excludes securitization, banking book equities and other assets not subject to the standardized or internal ratings based approach.
(8)   Geographic profile is based on the country of residence of the borrower.

Q2 2019 vs. Q1 2019

Total credit risk exposure increased $11 billion or 1% from the prior quarter, primarily due to growth in loans and acceptances, the impact of foreign exchange translation and higher derivatives, partially offset by lower deposits with central banks.

Retail exposure increased $7 billion or 1%, largely driven by growth in our residential secured portfolios.

Wholesale exposure increased $4 billion or 1%, primarily driven by the impact of foreign exchange translation, higher derivatives and growth in loans and acceptances, largely offset by lower deposits with central banks.


 

Royal Bank of Canada        Second Quarter 2019         23

The geographic mix of our credit risk exposure remained consistent to the prior quarter. Our exposure in Canada, the U.S., Europe and Other International was 65%, 21%, 11% and 3%, respectively (January 31, 2019 – 65%, 21%, 11% and 3%, respectively).

 

Net European exposure by country, asset type and client type (1) (2)

 

 

     As at  
   

April 30

2019

         

January 31

2019

 
    Asset type           Client type                          
(Millions of Canadian dollars)   Loans
Outstanding
    Securities (3)     Repo-style
transactions
    Derivatives            Financials     Sovereign     Corporate            Total            Total  

U.K.

  $ 8,952     $ 16,429     $ 397     $ 1,814       $ 15,269     $ 4,084     $ 8,239       $ 27,592       $ 32,787  

Germany

    1,667       7,515       1       350         5,014       2,651       1,868         9,533         7,886  

France

    932       9,267       8       349               1,386       8,229       941               10,556               11,261  

Total U.K., Germany, France

  $ 11,551     $ 33,211     $ 406     $ 2,513             $ 21,669     $ 14,964     $ 11,048             $ 47,681             $ 51,934  

Ireland

  $ 773     $ 63     $ 458     $ 35       $ 624     $ 3     $ 702       $ 1,329       $ 1,174  

Italy

    65       89             17         75       9       87         171         269  

Portugal

          2       9               10       1               11         44  

Spain

    428       203       1       39               215             456               671               872  

Total peripheral

  $ 1,266     $ 357     $ 468     $ 91             $ 924     $ 13     $ 1,245             $ 2,182             $ 2,359  

Luxembourg (4)

  $ 2,030     $ 7,940     $ 65     $ 37       $ 1,513     $ 7,469     $ 1,090       $ 10,072       $ 10,121  

Netherlands (4)

    617       903       52       228         894       1       905         1,800         1,852  

Norway

    199       1,884             25         1,777       95       236         2,108         2,074  

Sweden

    252       3,997       22       13         2,356       1,650       278         4,284         3,872  

Switzerland

    487       4,629       188       200         628       4,406       470         5,504         6,242  

Other

    1,900       1,985       133       330               1,279       1,169       1,900               4,348               3,679  

Total other Europe

  $ 5,485     $ 21,338     $ 460     $ 833             $ 8,447     $ 14,790     $ 4,879             $ 28,116             $ 27,840  

Net exposure to Europe (5)

  $   18,302     $   54,906     $   1,334     $   3,437             $   31,040     $   29,767     $   17,172             $   77,979             $   82,133  

 

(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 $134.9 billion against repo-style transactions (January 31, 2019 – $114.8 billion) and $9.7 billion against derivatives (January 31, 2019 – $10.7 billion).
(3)   Securities include $13.7 billion of trading securities (January 31, 2019 – $13.9 billion), $24.7 billion of deposits (January 31, 2019 – $33.7 billion), and $16.5 billion of securities carried at FVOCI (January 31, 2019 – $13.3 billion).
(4)   Excludes $2.1 billion (January 31, 2019 – $1.8 billion) of exposures to supranational agencies.
(5)   Reflects $1.2 billion of mitigation through credit default swaps, which are largely used to hedge single name exposures and market risk (January 31, 2019 – $1.5 billion).

Q2 2019 vs. Q1 2019

Net credit risk exposure to Europe decreased $4.2 billion from last quarter, largely driven by decreased exposure in the United Kingdom, partially offset by increased exposure in Germany.

Our European corporate loan book is managed on a global basis with underwriting standards reflecting the same approach to the use of our balance sheet as we have applied in both Canada and the U.S. PCL on loans during the quarter was $14 million. The gross impaired loans ratio of this loan book was 16 bps, up 6 bps from last quarter.


 

24        Royal Bank of Canada        Second Quarter 2019

Residential mortgages and home equity lines of credit (insured vs. uninsured)

Residential mortgages and home equity lines of credit are secured by residential properties. The following table presents a breakdown by geographic region.

 

     As at April 30, 2019  
(Millions of Canadian dollars, except
percentage amounts)
  Residential mortgages           Home equity
lines of credit
 
  Insured (1)           Uninsured           Total           Total  

Region (2)

                 

Canada

                 

Atlantic provinces

  $ 7,542       53     $ 6,681       47     $ 14,223       $ 1,876  

Quebec

    12,575       39         19,883       61         32,458         3,622  

Ontario

    36,960       31         83,228       69         120,188         16,796  

Alberta

    20,407       54         17,236       46         37,643         6,526  

Saskatchewan and Manitoba

    8,877       50         8,709       50         17,586         2,442  

B.C. and territories

    14,969       30               34,727       70               49,696               8,375  

Total Canada (3)

  $ 101,330       37     $ 170,464       63     $ 271,794       $ 39,637  

U.S. (4)

                  15,130       100         15,130         2,040  

Other International (4)

    7                     3,205       100               3,212               1,421  

Total International

  $ 7                 $ 18,335       100           $ 18,342             $ 3,461  

Total

  $   101,337       35           $   188,799       65           $   290,136             $   43,098  

 

     As at January 31, 2019  

(Millions of Canadian dollars, except

percentage amounts)

  Residential mortgages           Home equity
lines of credit
 
  Insured (1)           Uninsured           Total           Total  

Region (2)

                 

Canada

                 

Atlantic provinces

  $ 7,575       54     $ 6,579       46     $ 14,154       $ 1,900  

Quebec

    12,777       40         19,387       60         32,164         3,644  

Ontario

    37,802       32         80,570       68         118,372         16,613  

Alberta

    20,490       55         17,010       45         37,500         6,619  

Saskatchewan and Manitoba

    8,950       51         8,593       49         17,543         2,475  

B.C. and territories

    15,274       31               33,946       69               49,220               8,302  

Total Canada (3)

  $ 102,868       38     $ 166,085       62     $ 268,953       $ 39,553  

U.S. (4)

    1               14,212       100         14,213         1,937  

Other International (4)

    7                     3,139       100               3,146               1,443  

Total International

  $ 8                 $ 17,351       100           $ 17,359             $ 3,380  

Total

  $   102,876       36           $   183,436       64           $   286,312             $   42,933  

 

  (1)   Insured residential mortgages are mortgages whereby our exposure to default is mitigated by insurance through the Canada Mortgage and Housing Corporation (CMHC) or other private mortgage default insurers.  
  (2)   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.  
  (3)   Total consolidated residential mortgages in Canada of $272 billion (January 31, 2019 – $269 billion) was largely comprised of $248 billion (January 31, 2019 – $246 billion) of residential mortgages and $7 billion (January 31, 2019 – $7 billion) of mortgages with commercial clients, of which $4 billion (January 31, 2019 – $4 billion) are insured mortgages, both in Canadian Banking, and $17 billion (January 31, 2019 – $16 billion) of residential mortgages in Capital Markets held for securitization purposes.  
  (4)   Home equity lines of credit include term loans collateralized by residential mortgages.  

Home equity lines of credit are uninsured and reported within the personal loan category. As at April 30, 2019, home equity lines of credit in Canadian Banking were $40 billion (January 31, 2019 – $39 billion). Approximately 98% of these home equity lines of credit (January 31, 2019 – 98%) are secured by a first lien on real estate, and 7% (January 31, 2019 – 7%) of the total Homeline clients pay the scheduled interest payment only.

Residential mortgages portfolio by amortization period

The following table provides a summary of the percentage of residential mortgages that fall within the remaining amortization periods based upon current customer payment amounts, which incorporate payments larger than the minimum contractual amount and/or higher frequency of payments.

 

     As at  
   

April 30

2019

         

January 31

2019

 
    

Canada

   

U.S. and other

International

   

Total

          

Canada

   

U.S. and other

International

   

Total

 

Amortization period

             

£ 25 years

    71     41     69       70     39     69

> 25 years £ 30 years

    23       59       25         23       61       25  

> 30 years £ 35 years

    4             4         5             4  

> 35 years

    2             2               2             2  

Total

    100     100     100             100     100     100


 

Royal Bank of Canada        Second Quarter 2019         25

Average loan-to-value (LTV) ratios

The following table provides a summary of our average LTV ratio for newly originated and acquired uninsured residential mortgages and Homeline products by geographic region.

 

     For the three months ended            For the six months ended  
   

April 30

2019

         

January 31

2019

         

April 30

2019

 
    Uninsured            Uninsured            Uninsured  
    

Residential

mortgages (1)

   

Homeline

products (2)

          

Residential

mortgages (1)

   

Homeline

products (2)

          

Residential

mortgages (1)

   

Homeline

products (2)

 

Region (3)

               

Atlantic provinces

    72     75       74     74       73     74

Quebec

    71       73         71       73         71       73  

Ontario

    70       68         70       67         70       68  

Alberta

    72       71         72       71         72       71  

Saskatchewan and Manitoba

    74       74         74       74         74       74  

B.C. and territories

    67       64         66       64         67       64  

U.S.

    73       n.m.         74       n.m.         74       n.m.  

Other International

    71       n.m.               71       n.m.               71       n.m.  

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

    70     68             70     68             70     68

Total Canadian Banking residential mortgages portfolio (6)

    57     50             56     50             57     50

 

  (1)   Residential mortgages exclude residential mortgages within the Homeline products.  
  (2)   Homeline products are comprised of both residential mortgages and home equity lines of credit.  
  (3)   Region is based upon address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick, and B.C. and territories are comprised of British Columbia, Nunavut, Northwest Territories and Yukon.  
  (4)   The average LTV ratio for newly originated and acquired uninsured residential mortgages and Homeline products is calculated on a weighted basis by mortgage amounts at origination.  
  (5)   For newly originated mortgages and Homeline products, LTV is calculated based on the total facility amount for the residential mortgage and Homeline product divided by the value of the related residential property.  
  (6)   Weighted by mortgage balances and adjusted for property values based on the Teranet – National Bank National Composite House Price Index.  
  n.m.   not meaningful  


 

26        Royal Bank of Canada        Second Quarter 2019

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.

Provision for credit losses

 

     For the three months ended            For the six months ended  

(Millions of Canadian dollars, except percentage amounts)

 

April 30

2019

   

January 31

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Personal & Commercial Banking

  $ 385     $ 347     $ 306       $ 732     $ 618  

Wealth Management

    30       26       (20       56       (22

Capital Markets

    27       143       (9       170       16  

Corporate Support and other

    (1           1               (1      

PCL – Loans

  $ 441     $ 516     $ 278       $ 957     $ 612  

PCL – Other financial assets

    (15     (2     (4             (17     (4

Total PCL

  $ 426     $ 514     $ 274             $ 940     $ 608  

PCL on loans is comprised of:

           

Retail

  $ 30     $ 33     $ 26       $ 63     $ 46  

Wholesale

    (24     60       (46             36       (57

PCL on performing loans

  $ 6     $ 93     $ (20           $ 99     $ (11

Retail

  $ 258     $ 269     $ 259       $ 527     $ 504  

Wholesale

    177       154       39               331       119  

PCL on impaired loans

  $ 435     $ 423     $ 298             $ 858     $ 623  

PCL – Loans

  $ 441     $ 516     $ 278             $ 957     $ 612  

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

      0.29%         0.34%         0.20%                 0.32%         0.22%  

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

    0.29%       0.28%       0.22%               0.28%       0.23%  

Additional information by geography (1)

                                               

Canada

           

Residential mortgages

  $ 6     $ 10     $ 7       $ 16     $ 17  

Personal

    116       121       107         237       220  

Credit cards

    122       116       119         238       226  

Small business

    9       5       8               14       15  

Retail

    253       252       241         505       478  

Wholesale

    113       41       21               154       55  

PCL on impaired loans

  $ 366     $ 293     $ 262             $ 659     $ 533  

U.S.

           

Retail

  $ 1     $ 2     $ 1       $ 3     $ 2  

Wholesale

    48       110       1               158       23  

PCL on impaired loans

  $ 49     $ 112     $ 2             $ 161     $ 25  

Other International

           

Retail

  $ 4     $ 15     $ 17       $ 19     $ 24  

Wholesale

    16       3       17               19       41  

PCL on impaired loans

  $ 20     $ 18     $ 34             $ 38     $ 65  

PCL on impaired loans

  $   435     $   423     $   298             $   858     $   623  

 

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

Q2 2019 vs. Q2 2018

Total PCL was $426 million. PCL on loans of $441 million increased $163 million, or 59% from the prior year, due to higher provisions in Personal & Commercial Banking, Wealth Management and Capital Markets. The PCL ratio on loans of 29 bps increased 9 bps, largely from higher impaired loans in a few sectors in both Personal & Commercial Banking and Capital Markets.

PCL on performing loans of $6 million, compared to ($20) million in the prior year, was largely due to higher provisions in Wealth Management, partially offset by lower provisions in Personal & Commercial Banking.

PCL on impaired loans of $435 million was $137 million higher than the prior year, mainly due to higher provisions in Personal & Commercial Banking and Capital Markets.

PCL on loans in Personal & Commercial Banking increased $79 million, largely reflecting an increase in provisions on impaired loans in our commercial portfolios in Canadian Banking, mainly from a couple of accounts, partially offset by lower provisions on performing loans.

PCL on loans in Wealth Management increased $50 million. PCL on performing loans increased $34 million from $(21) million in the prior year due to higher repayments and maturities in the prior year in U.S. Wealth Management (including City National). Higher provisions on impaired loans in U.S. Wealth Management (including City National) and higher recoveries in the prior year also contributed to the increase.

PCL on loans in Capital Markets increased $36 million, primarily driven by an increase in provisions on impaired loans from a few accounts.

Q2 2019 vs. Q1 2019

PCL on loans of $441 million decreased $75 million, or 15% from the prior quarter, mainly due to lower provisions in Capital Markets partially offset by higher provisions in Personal & Commercial Banking. The PCL ratio on loans of 29 bps improved 5 bps.


 

Royal Bank of Canada        Second Quarter 2019         27

PCL on performing loans of $6 million, compared to $93 million in the prior quarter, was largely due to lower provisions in both Capital Markets and Personal & Commercial Banking, mainly driven by favourable changes in macroeconomic variables compared to the prior quarter.

PCL on impaired loans of $435 million increased $12 million from the prior quarter, mainly due to higher provisions in Personal & Commercial Banking, partially offset by lower provisions in Capital Markets.

PCL on loans in Personal & Commercial Banking increased $38 million, largely reflecting an increase in provisions on impaired loans in commercial portfolios in Canadian Banking, mainly from a couple of accounts, partially offset by a decrease in provisions on performing loans in commercial portfolios in Canadian Banking as described above.

PCL on loans in Capital Markets decreased $116 million, largely driven by lower provisions on performing loans as described above and higher provisions on impaired loans in the prior quarter related to one account in the utilities sector.

Q2 2019 vs. Q2 2018 (Six months ended)

Total PCL was $940 million. PCL on loans of $957 million increased $345 million, or 56% from the prior year, mainly due to higher provisions in Capital Markets, Personal & Commercial Banking and Wealth Management. The PCL ratio on loans of 32 bps increased 10 bps.

PCL on performing loans of $99 million, compared to ($11) million in the prior year, reflected higher provisions in Capital Markets and Wealth Management, largely driven by unfavourable changes in macroeconomic variables compared to last year.

PCL on impaired loans of $858 million was $235 million higher than the prior year, mainly due to higher provisions in Personal & Commercial Banking and Capital Markets.

PCL on loans in Personal & Commercial Banking increased $114 million, largely due to an increase in provisions on impaired loans in commercial portfolios in Canadian Banking, mainly from a couple of accounts.

PCL on loans in Wealth Management increased $78 million. PCL on performing loans increased $56 million from $(28) million due to higher repayments and maturities in the prior year in U.S. Wealth Management (including City National). The current year also reflected unfavourable changes in macroeconomic variables compared to last year. Higher provisions on impaired loans in U.S. Wealth Management (including City National) and higher recoveries in the prior year also contributed to the increase.

PCL on loans in Capital Markets increased $154 million, largely driven by an increase in provisions on impaired loans from one account in the utilities sector and higher provisions on performing loans as described above.

Gross impaired loans

 

     As at  

(Millions of Canadian dollars, except percentage amounts)

 

April 30

2019

   

January 31

2019

   

April 30

2018

 

Personal & Commercial Banking

  $   1,786     $   1,653     $   1,755  

Wealth Management

    243       223       228  

Capital Markets

    1,013       906       672  

Corporate Support and other

                 

Total GIL

  $ 3,042     $ 2,782     $ 2,655  

Canada (1)

     

Retail

  $ 763     $ 749     $ 722  

Wholesale

    630       407       527  

GIL

    1,393       1,156       1,249  

U.S. (1)

     

Retail

  $ 31     $ 30     $ 37  

Wholesale

    969       949       497  

GIL

    1,000       979       534  

Other International (1)

     

Retail

  $ 324     $ 331     $ 343  

Wholesale

    325       316       529  

GIL

    649       647       872  

Total GIL

  $ 3,042     $ 2,782     $ 2,655  

Impaired loans, beginning balance

  $ 2,782     $ 2,183     $ 2,527  

Classified as impaired during the period (new impaired) (2)

    1,162       1,133       594  

Net repayments (2)

    (129     (99     (133

Amounts written off

    (501     (377     (346

Other (2), (3)

    (272     (58     13  

Impaired loans, balance at end of period

  $ 3,042     $ 2,782     $ 2,655  

GIL as a % of related loans and acceptances

     

Total GIL as a % of related loans and acceptances

    0.49%       0.46%       0.47%  

Personal & Commercial Banking

    0.40%       0.37%       0.41%  

Canadian Banking

    0.29%       0.26%       0.29%  

Caribbean Banking

    6.23%       6.54%       6.63%  

Wealth Management

    0.38%       0.37%       0.41%  

Capital Markets

    0.99%       0.90%       0.80%  

 

(1)   Geographic information is based on residence of borrower.
(2)   Certain GIL movements for Canadian Banking retail and wholesale portfolios are generally allocated to new impaired, as return to performing status, Net repayments, sold, and exchange and other movements amounts are not reasonably determinable. Certain GIL movements for Caribbean Banking retail and wholesale portfolios are generally allocated to Net repayments and new impaired, as return to performing status, sold, and foreign exchange translation and other movements amounts are not reasonably determinable.
(3)   Includes return to performing status during the period, recoveries of loans and advances previously written off, sold, and foreign exchange translation and other movements.


 

28        Royal Bank of Canada        Second Quarter 2019

Q2 2019 vs. Q2 2018

Total GIL of $3,042 million increased $387 million or 15% from the prior year, and the total GIL ratio of 49 bps increased 2 bps, primarily reflecting higher impaired loans in Capital Markets.

GIL in Personal & Commercial Banking increased $31 million or 2%, mainly due to higher impaired loans in our Canadian Banking portfolios, partially offset by lower impaired loans in our Caribbean Banking portfolios.

GIL in Wealth Management increased $15 million or 7%, mainly reflecting higher impaired loans in U.S. Wealth Management (including City National).

GIL in Capital Markets increased $341 million or 51%, mainly due to one account in the utilities sector.

Q2 2019 vs. Q1 2019

Total GIL increased $260 million or 9% from the prior quarter, and the total GIL ratio of 49 bps increased 3 bps.

GIL in Personal & Commercial Banking increased $133 million or 8%, primarily in our commercial portfolios in Canadian Banking, mainly due to higher impaired loans.

GIL in Wealth Management increased $20 million or 9%, largely reflecting higher impaired loans in U.S. Wealth Management (including City National).

GIL in Capital Markets increased $107 million or 12%, mainly due to higher impaired loans in the oil & gas sector, partially offset by sales.

Allowance for credit losses (ACL)

 

     As at  
(Millions of Canadian dollars)  

April 30

2019

   

January 31

2019

   

April 30

2018

 

Personal & Commercial Banking

  $     2,692     $     2,604     $     2,478  

Wealth Management

    218       202       197  

Capital Markets

    378       464       353  

Corporate Support and other

    2       3       2  

ACL on loans

  $ 3,290     $ 3,273     $ 3,030  

ACL on other financial assets

    56       69       104  

Total ACL

  $ 3,346     $ 3,342     $ 3,134  

ACL on loans is comprised of:

     

Retail

  $ 1,818     $ 1,785     $ 1,678  

Wholesale

    677       693       564  

ACL on performing loans

  $ 2,495     $ 2,478     $ 2,242  

ACL on impaired loans

    795       795       788  

Additional information by geography (1)

                       

Canada

     

Retail

  $ 169     $ 176     $ 152  

Wholesale

    192       111       141  

ACL on impaired loans

  $ 361     $ 287     $ 293  

U.S.

     

Retail

  $     $ 2     $ 2  

Wholesale

    141       226       137  

ACL on impaired loans

  $ 141     $ 228     $ 139  

Other International

     

Retail

  $ 169     $ 169     $ 171  

Wholesale

    124       111       185  

ACL on impaired loans

  $ 293     $ 280     $ 356  

ACL on impaired loans

  $ 795     $ 795     $ 788  

 

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

Q2 2019 vs. Q2 2018

Total ACL of $3,346 million increased $212 million or 7% from the prior year, reflecting an increase of $260 million in ACL on loans, partially offset by a decrease of $48 million in ACL on other financial assets.

ACL on performing loans of $2,495 million increased $253 million from the prior year, reflecting higher ACL in Personal & Commercial Banking, Capital Markets and Wealth Management, mainly driven by volume growth and unfavourable changes in macroeconomic variables compared to the prior year.

ACL on impaired loans of $795 million increased $7 million from the prior year, largely due to higher ACL in Personal & Commercial Banking, mainly offset by lower ACL in Capital Markets and Wealth Management.

ACL on other financial assets decreased $48 million, primarily due to the restructuring of Barbados securities in the fourth quarter of the prior year.


 

Royal Bank of Canada        Second Quarter 2019         29

Q2 2019 vs. Q1 2019

Total ACL of $3,346 million remained relatively flat.

ACL on performing loans of $2,495 million was $17 million higher than the prior quarter, largely reflecting higher ACL on loans in Personal & Commercial Banking and Wealth Management, partially offset by lower ACL in Capital Markets.

ACL on impaired loans of $795 million remained flat compared to the prior quarter, as higher ACL on loans in Personal & Commercial Banking, was offset by lower ACL in Capital Markets.

For further details, refer to Note 5 of our Condensed Financial Statements.

 

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. There have been no material changes to our Market Risk Framework from the framework described in our 2018 Annual Report. We continue to manage the controls and governance procedures that ensure that our market risk exposure is consistent with risk appetite constraints set by the Board of Directors. These controls include limits on probabilistic measures of potential loss in trading positions, such as Value-at-Risk (VaR) and Stressed Value-at-Risk (SVaR).

Market risk controls are also in place to manage structural interest rate risk (SIRR) arising from traditional banking products. Factors contributing to SIRR include the mismatch between future asset and liability repricing dates, relative changes in asset and liability rates, and product features that could affect the expected timing of cash flows, such as options to pre-pay loans or redeem term deposits prior to contractual maturity. To monitor and control SIRR, we assess two primary financial metrics, Net Interest Income (NII) risk and Economic Value of Equity (EVE) risk, under a range of market shocks and scenarios. For further details on our approach to the management of market risk, refer to the Market risk section of our 2018 Annual Report. There has been no material change to the SIRR measurement methodology, controls, or limits from those described in our 2018 Annual Report.

Market risk measures – FVTPL positions

VaR and SVaR

The following table presents our Market risk VaR and Market risk SVaR figures.

 

      April 30, 2019             January 31, 2019             April 30, 2018  
     As at      For the three
months ended
           As at     For the three
months ended
           As at     For the three
months ended
 
(Millions of Canadian dollars)    Average      High      Low            Average            Average  

Equity

   $ 14      $ 15      $ 21      $ 12        $ 20     $ 22        $ 9     $ 15  

Foreign exchange

     4        4        5        3          4       6          5       4  

Commodities

     1        1        2        1          2       3          2       1  

Interest rate (1)

     15        13        17        11          14       16          16       21  

Credit specific (2)

     5        5        6        5          5       5          5       5  

Diversification (3)

     (21      (18      n.m.        n.m.                (15     (18              (17     (18

Market risk VaR

   $ 18      $ 20      $ 27      $ 15              $ 30     $ 34              $ 20     $ 28  

Market risk Stressed VaR

   $     86      $     96      $     111      $     82              $     113     $     123              $     61     $     97  
                         
      April 30, 2019             April 30, 2018               
     As at      For the six
months ended
           As at     For the six
months ended
                    
(Millions of Canadian dollars)    Average      High      Low            Average              

Equity

   $ 14      $ 18      $ 30      $ 12        $ 9     $ 15         

Foreign exchange

     4        5        13        3          5       3         

Commodities

     1        2        4        1          2       2         

Interest rate (1)

     15        15        19        11          16       19         

Credit specific (2)

     5        5        6        5          5       5         

Diversification (3)

     (21      (18      n.m        n.m.                (17     (18       

Market risk VaR

   $ 18      $ 27      $ 45      $ 15              $ 20     $ 26         

Market risk Stressed VaR

   $     86      $     110      $     161      $     79              $     61     $     89         

 

(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 portfolio diversification.
n.m.   not meaningful

Q2 2019 vs. Q2 2018

Average market risk VaR of $20 million decreased $8 million from the prior year due to lower relative inventory in overall fixed income portfolios and lower market volatility in the current period.

Average SVaR of $96 million stayed stable, however the current period experienced lower variability due to reduced market volatility.

Q2 2019 vs. Q1 2019

Average market risk VaR of $20 million decreased $14 million and average SVaR of $96 million decreased $27 million from the prior quarter as equity markets recovered from the volatility experienced in Q1 2019. Furthermore, inventories in overall fixed income portfolios were managed at lower levels in the current quarter.


 

30        Royal Bank of Canada        Second Quarter 2019

Q2 2019 vs. Q2 2018 (Six months ended)

Average market risk VaR of $27 million remained stable as the effects of more pronounced equity market volatility in Q1 2019, relative to Q2 2018, were balanced out by lower average inventory levels in overall fixed income portfolios in Q2 2019.

Average SVaR of $110 million increased $21 million from the prior year, mainly due to growth in Q1 from certain 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 no net trading losses in the three months ended April 30, 2019 and January 31, 2019.

 

LOGO

Market risk measures for other FVTPL positions – Assets and liabilities of RBC Insurance

We offer a range of insurance products to clients and hold investments to meet the future obligations to policyholders. The investments which support actuarial liabilities are predominantly fixed income assets designated as FVTPL. Consequently, changes in the fair values of these assets are recorded in investment income within Total revenue in the Consolidated Statements of Income and are largely offset by changes in the fair value of the actuarial liabilities, the impact of which is reflected in Insurance policyholder benefits, claims and acquisition expense. As at April 30, 2019, we had liabilities with respect to insurance obligations of $11.0 billion, up from $10.5 billion in the prior quarter, and assets of $9.3 billion in support of the liabilities, up from $8.6 billion last quarter.

Market risk measures – Structural Interest Rate 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 for our structural balance sheet, assuming no subsequent hedging. Rate floors are applied within the declining rates scenarios, with floor levels set based on rate changes experienced globally. Interest rate risk measures are based upon interest rate exposures at a specific time and continuously change as a result of business activities and management actions.

 

    

April 30

2019

          

January 31

2019

          

April 30

2018

 
    EVE risk           NII risk (1)                                      
(Millions of Canadian dollars)   Canadian
dollar
impact
    U.S.
dollar
impact 
(2)
    Total            Canadian
dollar
impact
    U.S.
dollar
impact 
(2)
    Total            EVE risk     NII risk (1)            EVE risk     NII risk (1)  

Before-tax impact of:

                         

100bps increase in rates

  $ (1,047   $ (65   $ (1,112     $ 348     $ 121     $ 469       $   (1,019   $    487         $  (1,086   $    555  

100bps decrease in rates

    909       (404     505               (461     (151     (612             549       (617             669       (656

 

(1)   Represents the 12-month NII exposure to an instantaneous and sustained shift in interest rates.
(2)   Represents the impact on the SIRR portfolios held in our City National and U.S. banking operations.

As at April 30, 2019, an immediate and sustained -100 bps shock would have had a negative impact to our NII of $612 million, down from $617 million last quarter. An immediate and sustained +100 bps shock at the end of April 30, 2019 would have had a negative impact to the Bank’s EVE of $1,112 million, up from $1,019 million reported last quarter. The quarter-over-quarter NII sensitivity to the -100bps shock was stable, while the marginal increase in EVE risk is attributed to incremental fixed rate asset growth. During the second quarter of 2019, NII and EVE risks remained well within approved limits.


 

Royal Bank of Canada        Second Quarter 2019         31

Market risk measures for other material non-trading portfolios

Investment securities carried at FVOCI

We held $54.9 billion of investment securities carried at FVOCI as at April 30, 2019 compared to $51.9 billion in the prior quarter. The quarter-over-quarter increase was largely driven by higher corporate debt securities due to business activities. 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. Our portfolio of investment securities carried at FVOCI is interest rate sensitive and would impact OCI by a pre-tax change in value of $7 million as at April 30, 2019 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 $22 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 SIRR measure as at April 30, 2019 was $7.9 billion, up from $6.0 billion in the prior quarter. Our investment securities carried at FVOCI also include equity exposures of $0.5 billion as at April 30, 2019 compared to $0.5 billion last quarter.

Derivatives related to non-trading activity

Derivatives are also used to hedge market risk exposures unrelated to our trading activity. In aggregate, derivative assets not related to trading activity of $2.4 billion as at April 30, 2019 were down from $2.5 billion last quarter, and derivative liabilities of $2.2 billion as at April 30, 2019 were up from $2.1 billion last quarter.

Non-trading derivatives in hedge accounting relationships

The derivative assets and liabilities described above include derivative assets in a designated hedge accounting relationship of $0.9 billion as at April 30, 2019, down from $1.0 billion as at January 31, 2019, and derivative liabilities of $1.8 billion as at April 30, 2019, up from $1.6 billion last quarter. These derivative assets and liabilities are included in our SIRR measure and other internal non-trading market risk measures. We use interest rate swaps to manage our investment securities and SIRR. To the extent these swaps are considered effective, changes in their fair value are recognized in Other comprehensive income. The interest rate risk for the swaps designated as cash flow hedges, measured as the change in the fair value of the derivatives for a one basis point parallel increase in yields, was $7 million as of April 30, 2019, unchanged from $7 million as of January 31, 2019.

Interest rate swaps are also used to hedge changes in the fair value of certain fixed-rate instruments. Changes in fair value of the hedged instruments that are related to interest rate movements and the corresponding interest rate swaps are reflected in the Consolidated Statements of Income.

We also use foreign exchange derivatives to manage our exposure to equity investments in subsidiaries that are denominated in foreign currencies, particularly the U.S. dollar, British pound, and Euro. Changes in the fair value of these hedges and the cumulative translation adjustment related to our structural foreign exchange risk are reported in Other comprehensive income.

Other non-trading derivatives

The derivative assets and liabilities related to non-trading activity also include interest rate swaps and foreign exchange derivatives that are not in designated hedge accounting relationships, which are used to manage other non-trading exposures. Changes in the fair value of these derivatives are reflected in the Consolidated Statements of Income. Derivative assets of $1.5 billion as at April 30, 2019 were unchanged from $1.5 billion as at January 31, 2019, and derivative liabilities of $0.4 billion as at April 30, 2019 were down from $0.5 billion last quarter.

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 average value of the 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 income 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 Risk-weighted Assets (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.


 

32        Royal Bank of Canada        Second Quarter 2019

Linkage of market risk to selected balance sheet items

The following table provides the linkages between selected balance sheet items with positions included in our trading market risk and non-trading market risk disclosures, which illustrates how we manage market risk for our assets and liabilities through different risk measures:

 

     As at April 30, 2019  
          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

  $ 33,041     $     $ 33,041       Interest rate  

Interest-bearing deposits with banks

    26,718       12,865       13,853       Interest rate  

Securities

       

Trading

    138,916       129,593       9,323       Interest rate, credit spread  

Investment, net of applicable allowance

    102,075             102,075       Interest rate, credit spread, equity  

Assets purchased under reverse repurchase agreements and securities borrowed

    309,520       239,657       69,863       Interest rate  

Loans

       

Retail

    407,222       7,770       399,452       Interest rate  

Wholesale

    198,263       9,236       189,027       Interest rate  

Allowance for loan losses

    (3,093           (3,093     Interest rate  

Segregated fund net assets

    1,561             1,561       Interest rate  

Other

       

Derivatives

    84,812       82,402       2,410       Interest rate, foreign exchange  

Other assets

    73,905       2,892       71,013       Interest rate  

Assets not subject to market risk (3)

    5,936                          

Total assets

  $ 1,378,876     $ 484,415     $ 888,525          

Liabilities subject to market risk

       

Deposits

  $ 864,101     $ 93,813     $ 770,288       Interest rate  

Segregated fund liabilities

    1,561             1,561       Interest rate  

Other

       

Obligations related to securities sold short

    34,049       34,049          

Obligations related to assets sold under repurchase agreements and securities loaned

    223,980       218,288       5,692       Interest rate  

Derivatives

    82,168       79,957       2,211       Interest rate, foreign exchange  

Other liabilities

    76,895       8,814       68,081       Interest rate  

Subordinated debentures

    9,360             9,360       Interest rate  

Liabilities not subject to market risk (4)

    4,816                          

Total liabilities

  $   1,296,930     $   434,921     $   857,193          

Total equity

  $ 81,946        

Total liabilities and equity

  $ 1,378,876        

 

(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 and SVaR and stress testing are used as risk controls for traded risk.
(2)   Non-traded risk includes positions used in the management of the SIRR and other non-trading portfolios. Other material non-trading portfolios include positions from RBC Insurance and investment securities, net of applicable allowance, not included in SIRR.
(3)   Assets not subject to market risk include $5,936 million of physical and other assets.
(4)   Liabilities not subject to market risk include $4,816 million of payroll related and other liabilities.


 

Royal Bank of Canada        Second Quarter 2019         33

     As at January 31, 2019
          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

  $ 40,033     $     $ 40,033     Interest rate

Interest-bearing deposits with banks

    38,653       22,859       15,794     Interest rate

Securities

       

Trading

    138,173       129,595       8,578     Interest rate, credit spread

Investment, net of applicable allowance

    97,659             97,659     Interest rate, credit spread, equity

Assets purchased under reverse repurchase agreements and securities borrowed

    297,660       223,953       73,707     Interest rate

Loans

       

Retail

    401,767       7,112       394,655     Interest rate

Wholesale

    191,114       8,778       182,336     Interest rate

Allowance for loan losses

    (3,061           (3,061   Interest rate

Segregated fund net assets

    1,443             1,443     Interest rate

Other

       

Derivatives

    84,816       82,307       2,509     Interest rate, foreign exchange

Other assets

    71,692       2,439       69,253     Interest rate

Assets not subject to market risk (3)

    6,258                      

Total assets

  $ 1,366,207     $ 477,043     $ 882,906      

Liabilities subject to market risk

       

Deposits

  $ 852,564     $ 96,229     $ 756,335     Interest rate

Segregated fund liabilities

    1,443             1,443     Interest rate

Other

       

Obligations related to securities sold short

    33,242       33,242          

Obligations related to assets sold under repurchase agreements and securities loaned

    224,529       218,297       6,232     Interest rate

Derivatives

    81,766       79,647       2,119     Interest rate, foreign exchange

Other liabilities

    78,383       7,887       70,496     Interest rate

Subordinated debentures

    9,255             9,255     Interest rate

Liabilities not subject to market risk (4)

    4,375                      

Total liabilities

  $   1,285,557     $   435,302     $   845,880      

Total equity

  $ 80,650        

Total liabilities and equity

  $ 1,366,207        

 

(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 and SVaR and stress testing are used as risk controls for traded risk.
(2)   Non-traded risk includes positions used in the management of the SIRR and other non-trading portfolios. Other material non-trading portfolios include positions from RBC Insurance and investment securities, net of applicable allowance, not included in SIRR.
(3)   Assets not subject to market risk include $6,258 million of physical and other assets.
(4)   Liabilities not subject to market risk include $4,375 million of 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 as they come due. Liquidity risk arises from mismatches in the timing and value of on-balance sheet and off-balance sheet cash flows.

Our Liquidity Risk Management Framework (LRMF) is designed to ensure that we have sufficient liquidity to satisfy current and prospective commitments in both normal and stressed conditions. There have been no material changes to our LRMF as described in our 2018 Annual Report.

We continue to maintain liquidity and funding that is appropriate for the execution of our strategy. Liquidity risk remains well within our risk appetite.

Liquidity reserve

Our liquidity reserve consists of available unencumbered liquid assets as well as uncommitted and undrawn central bank borrowing facilities that could be accessed under extraordinary circumstances subject to satisfying certain preconditions as set by various Central Banks (e.g., BoC, the Fed, Bank of England, and Bank of France).

To varying degrees, unencumbered liquid assets represent a ready source of funding. Unencumbered assets are the difference between total and encumbered assets from both on- and off-balance sheet sources. Encumbered assets, in turn, are not considered a source of liquidity in measures of liquidity risk.

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.


 

34        Royal Bank of Canada        Second Quarter 2019

     As at April 30, 2019  
(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 due from banks

  $ 33,041     $       $ 33,041     $ 2,758     $ 30,283  

Interest-bearing deposits with banks

    26,718               26,718       335       26,383  

Securities issued or guaranteed by sovereigns, central banks or multilateral development banks (1)

    193,628       291,472         485,100       329,956       155,144  

Other securities

    89,309       129,715         219,024       97,427       121,597  

Undrawn credit lines granted by central banks (2)

    11,217               11,217             11,217  

Other assets eligible as collateral for discount (3)

    102,507               102,507             102,507  

Other liquid assets (4)

    19,466                     19,466       19,072       394  

Total liquid assets

  $   475,886     $   421,187             $   897,073     $   449,548     $   447,525  

 

     As at January 31, 2019  
(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 due from banks

  $ 40,033     $       $ 40,033     $ 2,585     $ 37,448  

Interest-bearing deposits with banks

    38,653               38,653       328       38,325  

Securities issued or guaranteed by sovereigns, central banks or multilateral development banks (1)

    196,493       277,661         474,154       329,626       144,528  

Other securities

    79,484       120,017         199,501       84,522       114,979  

Undrawn credit lines granted by central banks (2)

    10,722               10,722             10,722  

Other assets eligible as collateral for discount (3)

    95,157               95,157             95,157  

Other liquid assets (4)

    18,498                     18,498       18,137       361  

Total liquid assets

  $   479,040     $   397,678             $   876,718     $   435,198     $   441,520  

 

     As at                          
(Millions of Canadian dollars)  

April 30

2019

   

January 31

2019

                         

Royal Bank of Canada

  $ 215,759     $ 201,440          

Foreign branches

    73,112       81,969          

Subsidiaries

    158,654       158,111          

Total unencumbered liquid assets

  $   447,525     $   441,520          

 

(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)   Includes loans that qualify as eligible collateral for the discount window facility available to us at the Federal Reserve Bank of New York (FRBNY). Amounts are face value and would be subject to collateral margin requirements applied by the FRBNY to determine collateral value/borrowing capacity. Access to the discount window borrowing program is conditional on meeting requirements set by the FRBNY and borrowings are typically expected to be infrequent and due to uncommon occurrences requiring temporary accommodation.
(3)   Represents our unencumbered Canadian dollar non-mortgage loan book (at face value) that could, subject to satisfying conditions precedent to borrowing and application of prescribed collateral margin requirements, be pledged to the Bank of Canada (BoC) for advances under its Emergency Lending Assistance (ELA) program. ELA is not considered a source of available liquidity in our normal liquidity risk profile but could in extraordinary circumstances, where normal market liquidity is seriously impaired, allow us and other banks to monetize assets eligible as collateral to meet requirements and mitigate further market liquidity disruption. The balance also includes our unencumbered mortgage loans that qualify as eligible collateral at Federal Home Loan Bank (FHLB).
(4)   Encumbered liquid assets amount represents cash collateral and margin deposit amounts pledged related to over-the-counter (OTC) and exchange-traded derivative transactions.

The liquidity reserve is typically most affected by routine flows of client banking activity where liquid asset portfolios adjust to the change in cash balances, and additionally from capital markets activities where business strategies and client flows may also affect the addition or subtraction of liquid assets in the overall calculation of the liquidity reserve. 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.

Q2 2019 vs. Q1 2019

Total liquid assets increased $20 billion or 2%, primarily due to an increase in securities received as collateral under collateral swap transactions and an increase in Other assets eligible as collateral for discount resulting from volume growth in wholesale loans and residential mortgages eligible to pledge to the ELA and FHLB. These factors were partially offset by a decrease in cash and deposits with central banks reflecting cash management. However, the increase in collateral received was offset with a corresponding increase in collateral pledged under encumbered liquid assets due to collateral swap transactions.


 

Royal Bank of Canada        Second Quarter 2019         35

Asset encumbrance

The table below provides a summary of 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 April 30, 2019, our Unencumbered assets available as collateral comprised 28% of total assets (January 31, 2019 – 29%).

Asset encumbrance

 

     As at  
   

April 30

2019

         

January 31

2019

 
    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 due from banks

  $     $ 2,758       $ 30,283     $       $ 33,041       $     $ 2,585       $ 37,448     $     $ 40,033  

Interest-bearing deposits with banks

          335         26,383               26,718               328         38,325             38,653  

Securities

                           

Trading

    42,029               94,404       2,483         138,916         40,659               94,912       2,602       138,173  

Investment, net of applicable allowance

    15,169               86,843       63         102,075         14,047               83,550       62       97,659  

Assets purchased under reverse repurchase agreements and securities borrowed (4)

    390,172       22,357         42,917       7,334         462,780         379,112       22,633         35,373       9,041       446,159  

Loans

                           

Retail

                           

Mortgage securities

    30,512               37,203               67,715         30,494               37,069             67,563  

Mortgage loans

    41,021               17,284       164,116         222,421         44,961               14,400       159,388       218,749  

Non-mortgage loans

    7,351               62,032       47,703         117,086         9,251               58,701       47,503       115,455  

Wholesale

                  34,994       163,269         198,263                       33,302       157,812       191,114  

Allowance for loan losses

                        (3,093       (3,093                           (3,061     (3,061

Segregated fund net assets

                        1,561         1,561                             1,443       1,443  

Other

                           

Derivatives

                        84,812         84,812                             84,816       84,816  

Others (5)

    19,072                     394       60,375               79,841               18,137                     361       59,452       77,950  

Total assets

  $  545,326     $   25,450             $   432,737     $   528,623             $   1,532,136             $   536,661     $   25,546             $   433,441     $   519,058     $   1,514,706  

 

(1)   Includes assets restricted from use to generate secured funding due to legal or other constraints.
(2)   Includes loans that could be used to collateralize central bank advances. Our unencumbered Canadian dollar non-mortgage loan book (at face value) could, subject to satisfying conditions for borrowing and application of prescribed collateral margin requirements, be pledged to the BoC for advances under its ELA program. It also includes our unencumbered mortgage loans that qualify as eligible collateral at FHLB. We also lodge loans that qualify as eligible collateral for the discount window facility available to us at the FRBNY. ELA and other central bank facilities are not considered sources of available liquidity in our normal liquidity risk profile. However, banks could monetize assets meeting collateral criteria during periods of extraordinary and severe disruption to market-wide liquidity.
(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 since they may not be acceptable at central banks or for other lending programs.
(4)   Includes bank-owned liquid assets and securities received as collateral from off-balance sheet securities financing, derivative transactions, and margin lending. Includes $22.4 billion (January 31, 2019 – $22.6 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 April 30, 2019, relationship-based deposits, which are the primary source of funding for retail loans and mortgages, were $571 billion or 51% of our total funding (January 31, 2019 – $551 billion or 49%). 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 liquidity asset buffers.

On April 18, 2018, the Department of Finance published bail-in regulations under the Canada Deposit Insurance Corporation (CDIC) Act and the Bank Act, which became effective September 23, 2018. 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 CDIC to convert all or a portion of certain shares and liabilities of that bank into common shares. As at April 30, 2019, the notional value of issued and outstanding long-term debt subject to conversion under the Bail-in regime was $8,533 million (January 31, 2019 – $6,115 million).


 

36        Royal Bank of Canada        Second Quarter 2019

For further details on our wholesale funding, refer to the Composition of wholesale funding tables below.

Long-term debt issuance

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

 

    Programs by geography

 

 

Canada   U.S.    Europe/Asia

• Canadian Shelf Program – $25 billion

 

• U.S. Shelf Program – US$40 billion

  

• European Debt Issuance Program – US$40 billion

    

• Global Covered Bond Program – 32 billion

        

• Japanese Issuance Programs – ¥1 trillion

We also raise long-term funding using Canadian Deposit 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.

 

LOGO

 

LOGO

(1)   Based on original term to maturity greater than 1 year

 

(1)   Based on original term to maturity greater than 1 year

 

(2)   Mortgage-backed securities and Canada Mortgage Bonds


 

Royal Bank of Canada        Second Quarter 2019         37

The following table provides our composition of wholesale funding based on remaining term to maturity:

Composition of wholesale funding (1)

 

     As at April 30, 2019  
(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)

  $ 6,925     $ 569     $ 188     $ 60     $ 7,742     $     $     $ 7,742  

Certificates of deposit and commercial paper

    5,906       11,110       16,878       19,719       53,613             134       53,747  

Asset-backed commercial paper (3)

    2,081       4,660       5,056       4,176       15,973                   15,973  

Senior unsecured medium-term notes (4)

    1,375       4,043       2,865       11,113       19,396       26,363       24,165       69,924  

Senior unsecured structured notes (5)

    94       327       446       1,640       2,507       2,382       4,668       9,557  

Mortgage securitization

          514       587       2,317       3,418       2,119       11,928       17,465  

Covered bonds/asset-backed securities (6)

          1,503       3,991       6,353       11,847       11,773       21,402       45,022  

Subordinated liabilities

          1,000       102       2,000       3,102       2,500       3,847       9,449  

Other (7)

    9,796       3,310       1,221       803       15,130       156       9,968       25,254  

Total

  $   26,177     $   27,036     $   31,334     $   48,181     $   132,728     $   45,293     $   76,112     $   254,133  

Of which:

               

– Secured

  $ 10,777     $ 8,353     $ 10,706     $ 12,846     $ 42,682     $ 13,892     $ 33,331     $ 89,905  

– Unsecured

    15,400       18,683       20,628       35,335       90,046       31,401       42,781       164,228  
               
     As at January 31, 2019  
(Millions of Canadian dollars)   Less than 1
month
   

1 to 3

months

    3 to 6
months
    6 to 12
months
   

Less than 1

year sub-total

    1 year
to 2 years
    2 years and
greater
    Total  

Deposits from banks (2)

  $ 4,141     $ 29     $ 709     $     $ 4,879     $     $     $ 4,879  

Certificates of deposit and commercial paper

    5,461       16,769       16,232       15,804       54,266       66       131       54,463  

Asset-backed commercial paper (3)

    2,029       3,160       6,183       4,702       16,074                   16,074  

Senior unsecured medium-term notes (4)

    121       7,400       6,180       4,282       17,983       25,540       31,213       74,736  

Senior unsecured structured notes (5)

    65       275       450       1,759       2,549       1,511       5,514       9,574  

Mortgage securitization

          527       513       1,109       2,149       3,660       11,597       17,406  

Covered bonds/asset-backed securities (6)

    1,313       3,338       1,503       3,932       10,086       12,167       26,836       49,089  

Subordinated liabilities

                1,000       2,095       3,095       2,499       3,798       9,392  

Other (7)

    9,373       2,810       3,189       1,855       17,227       157       9,065       26,449  

Total

  $ 22,503     $ 34,308     $ 35,959     $ 35,538     $   128,308     $   45,600     $   88,154     $   262,062  

Of which:

               

– Secured

  $   11,764     $ 8,945     $   10,169     $   10,794     $ 41,672     $ 15,827     $ 38,433     $ 95,932  

– Unsecured

    10,739         25,363       25,790       24,744       86,636       29,773       49,721       166,130  

 

(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 $8,094 million (January 31, 2019 – $8,240 million), bearer deposit notes (unsecured) of $3,999 million (January 31, 2019 – $4,176 million), other long-term structured deposits (unsecured) of $9,811 million (January 31, 2019 – $8,910 million), and FHLB advances (secured) of $3,350 million (January 31, 2019 – $5,123 million).

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.

There have been no changes to our major credit ratings as disclosed in our 2018 Annual Report.

Credit ratings (1)

 

      As at May 22, 2019  
      Short-term
debt
     Legacy senior
long-term debt 
(2)
    

Senior long-

term debt (3)

     Outlook  

Moody’s

     P-1        Aa2        A2        stable  

Standard & Poor’s

     A-1+        AA-        A        stable  

Fitch Ratings

     F1+        AA        AA        stable  

DBRS

     R-1(high)        AA        AA (low)        positive  

 

  (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.  

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


 

38        Royal Bank of Canada        Second Quarter 2019

and do not represent the cumulative impact of multiple downgrades. The amounts reported change periodically as a result of several factors, including the transfer of trading activity to centrally cleared financial market infrastructures and exchanges, the expiration of transactions with downgrade triggers, the imposition of internal limitations on new agreements to exclude downgrade triggers, as well as normal course mark-to-market of positions with collateralized counterparties moving from a negative to a positive position. There is no outstanding senior debt issued in the market that contains rating triggers that would lead to early prepayment of principal.

Additional contractual obligations for rating downgrades

 

     As at  
   

April 30

2019

         

January 31

2019

 
(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

  $ 211     $ 70     $ 181       $ 179     $ 63     $ 150  

Other contractual funding or margin requirements (1)

    187       179                     185       176        

 

(1)   Includes Guaranteed Investment Certificates (GICs) issued by our municipal markets business out of New York.

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 Basel Committee on Banking Supervision (BCBS) and OSFI regulatory minimum coverage level for LCR is currently 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)

 

      For the three months ended  
   

April 30

2019

         

January 31

2019

 
(Millions of Canadian dollars, except percentage amounts)   Total unweighted
value (average) 
(2)
    Total weighted
value (average)
           Total unweighted
value (average) (2)
    Total weighted
value (average)
 

High-quality liquid assets

         

Total high-quality liquid assets (HQLA)

    n.a.     $ 224,088               n.a.     $ 221,751  

Cash outflows

         

Retail deposits and deposits from small business customers, of which:

  $ 258,262       19,749       $ 257,222       19,754  

Stable deposits (3)

    86,823       2,605         85,262       2,558  

Less stable deposits

    171,439       17,144         171,960       17,196  

Unsecured wholesale funding, of which:

    294,733       137,808         291,119       132,359  

Operational deposits (all counterparties) and deposits in networks of cooperative banks (4)

    125,681       29,919         127,648       30,410  

Non-operational deposits

    142,231       81,068         141,227       79,705  

Unsecured debt

    26,821       26,821         22,244       22,244  

Secured wholesale funding

    n.a.       35,654         n.a.       33,728  

Additional requirements, of which:

    268,282       83,091         269,708       80,563  

Outflows related to derivative exposures and other collateral requirements

    63,802       44,671         64,633       44,379  

Outflows related to loss of funding on debt products

    6,884       6,884         4,532       4,532  

Credit and liquidity facilities

    197,596       31,536         200,543       31,652  

Other contractual funding obligations (5)

    19,547       19,547         19,966       19,966  

Other contingent funding obligations (6)

    431,700       7,714               427,209       7,601  

Total cash outflows

    n.a.     $ 303,563               n.a.     $ 293,971  

Cash inflows

         

Secured lending (e.g., reverse repos)

  $   302,587     $ 59,777       $   279,932     $ 54,853  

Inflows from fully performing exposures

    13,763       9,444         13,697       9,631  

Other cash inflows

    57,747       57,747               56,739       56,739  

Total cash inflows

    n.a.     $   126,968               n.a.     $ 121,223  
           Total adjusted
value
                Total adjusted
value
 

Total HQLA

    $ 224,088                     $   221,751  

Total net cash outflows

            176,595                       172,748  

Liquidity coverage ratio

            127%                       128%  

 

(1)   The LCR is calculated in accordance with OSFI’s Liquidity Adequacy Requirements (LAR) guideline, which, in turn, reflects liquidity-related requirements issued by the BCBS. The LCR for the quarter ended April 30, 2019 is calculated as an average of 61 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 (SMEs), 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%).
n.a.   not applicable

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.


 

Royal Bank of Canada        Second Quarter 2019         39

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 83% 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.

Q2 2019 vs. Q1 2019

The average LCR for the quarter ended April 30, 2019 was 127%, which translates into a surplus of approximately $47 billion, compared to 128% in the prior quarter. The LCR position was relatively consistent with the prior quarter as we continue to manage balance sheet growth and optimize our liquidity position.

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 within the Liquidity and funding risk section of our 2018 Annual Report.

 

     As at April 30, 2019  
(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

  $ 57,442     $ 3     $     $     $     $     $     $     $ 2,314     $ 59,759  

Securities

                   

Trading (1)

    91,020       98             22       13       85       64       8,010       39,604       138,916  

Investment, net of applicable allowance

    1,745       5,373       2,819       2,589       4,104       12,080       29,869       42,989       507       102,075  

Assets purchased under reverse repurchase agreements and securities borrowed

    179,752       74,419       25,129       11,132       8,921       608                   9,559       309,520  

Loans, net of applicable allowance

    23,935       20,676       25,332       25,340       30,879       121,194       218,327       49,019       87,690       602,392  

Other

                   

Customers’ liability under acceptances

    10,415       5,666       11       2       5                         (26     16,073  

Derivatives

    3,857       6,165       3,555       5,185       3,127       9,156       15,699       38,067       1       84,812  

Other financial assets

    25,014       1,287       611       390       75       149       264       1,814       2,226       31,830  

Total financial assets

  $ 393,180     $ 113,687     $ 57,457     $ 44,660     $ 47,124     $ 143,272     $ 264,223     $ 139,899     $ 141,875     $ 1,345,377  

Other non-financial assets

    2,080       1,352       35       1,014       333       1,503       1,482       1,468       24,232       33,499  

Total assets

  $  395,260     $  115,039     $  57,492     $  45,674     $  47,457     $  144,775     $  265,705     $  141,367     $  166,107     $  1,378,876  

Liabilities and equity

                   

Deposits (2)

                   

Unsecured borrowing

  $ 56,402     $ 40,044     $ 43,148     $ 33,069     $ 37,624     $ 37,183     $ 50,801     $ 16,205     $ 451,183     $ 765,659  

Secured borrowing

    2,689       6,277       7,458       4,043       5,420       6,827       21,373       6,432             60,519  

Covered bonds

          1,505       3,048             4,851       12,515       12,265       3,739             37,923  

Other

                   

Acceptances

    10,406       5,666       11       2       5                         9       16,099  

Obligations related to securities sold short

    34,049                                                       34,049  

Obligations related to assets sold under repurchase agreements and securities loaned

    191,135       21,020       3,928       74       49       501                   7,273       223,980  

Derivatives

    3,968       5,859       3,842       4,412       2,476       9,118       15,247       37,242       4       82,168  

Other financial liabilities

    26,724       2,180       1,798       319       433       220       684       7,664       885       40,907  

Subordinated debentures

                102                         321       8,937             9,360  

Total financial liabilities

  $ 325,373     $ 82,551     $ 63,335     $ 41,919     $ 50,858     $ 66,364     $ 100,691     $ 80,219     $ 459,354     $ 1,270,664  

Other non-financial liabilities

    1,117       944       81       3,304       285       713       765       10,600       8,457       26,266  

Equity

                                                    81,946       81,946  

Total liabilities and equity

  $ 326,490     $ 83,495     $ 63,416     $  45,223     $ 51,143     $ 67,077     $ 101,456     $ 90,819     $ 549,757     $  1,378,876  

Off-balance sheet items

                   

Financial guarantees

  $ 528     $ 2,421     $ 1,957     $ 3,023     $ 2,086     $ 1,144     $ 5,898     $ 62     $ 57     $ 17,176  

Lease commitments

    69       136       200       195       192       716       1,561       3,044             6,113  

Commitments to extend credit

    2,460       5,004       7,629       9,382       14,389       37,045       165,072       18,321       2,608       261,910  

Other credit-related commitments

    842       1,170       1,130       1,425       1,539       357       669       121       101,324       108,577  

Other commitments

    98                                                 482       580  

Total off-balance sheet items

  $ 3,997     $ 8,731     $ 10,916     $ 14,025     $ 18,206     $ 39,262     $ 173,200     $ 21,548     $ 104,471     $ 394,356  

 

(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)   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.

 


 

40        Royal Bank of Canada        Second Quarter 2019

     As at January 31, 2019  
(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

  $ 76,344     $ 3     $     $     $     $     $     $     $ 2,339     $ 78,686  

Securities

                   

Trading (1)

    96,872       19       53             21       50       70       7,411       33,677       138,173  

Investment, net of applicable allowance

    1,868       3,935       3,110       2,556       2,530       13,199       29,140       40,827       494       97,659  

Assets purchased under reverse repurchase agreements and securities borrowed

    179,266       64,013       21,311       10,609       13,659       610                   8,192       297,660  

Loans, net of applicable allowance

    20,699       16,596       26,144       23,958       27,730       124,862       215,764       47,888       86,179       589,820  

Other

                   

Customers’ liability under acceptances

    11,152       5,605       17             2       5                   (31     16,750  

Derivatives

    5,056       6,624       4,549       2,586       4,634       9,269       16,174       35,920       4       84,816  

Other financial assets

    23,621       1,139       682       60       197       117       243       1,765       2,148       29,972  

Total financial assets

  $ 414,878     $ 97,934     $ 55,866     $ 39,769     $ 48,773     $ 148,112     $ 261,391     $ 133,811     $ 133,002     $ 1,333,536  

Other non-financial assets

    2,129       1,300       416       493       627       1,142       1,291       1,402       23,871       32,671  

Total assets

  $ 417,007     $ 99,234     $ 56,282     $ 40,262     $ 49,400     $ 149,254     $ 262,682     $ 135,213     $ 156,873     $ 1,366,207  

Liabilities and equity

                   

Deposits (2)

                   

Unsecured borrowing

  $ 51,080     $ 46,688     $ 39,785     $ 36,807     $ 30,939     $ 38,178     $ 53,336     $ 14,950     $ 437,877     $ 749,640  

Secured borrowing

    3,608       6,400       7,080       6,053       2,659       9,648       21,529       5,961             62,938  

Covered bonds

          2,599       1,509       3,004             11,988       17,331       3,555             39,986  

Other

                   

Acceptances

    11,149       5,605       16       2             6                   3       16,781  

Obligations related to securities sold short

    33,242                                                       33,242  

Obligations related to assets sold under repurchase agreements and securities loaned

    183,875       29,749       2,892       159             496                   7,358       224,529  

Derivatives

    5,450       6,902       4,535       3,041       3,811       7,960       14,816       35,244       7       81,766  

Other financial liabilities

    27,942       2,000       2,543       1,435       371       162       588       6,894       810       42,745  

Subordinated debentures

                      102                   317       8,836             9,255  

Total financial liabilities

  $ 316,346     $ 99,943     $ 58,360     $ 50,603     $ 37,780     $ 68,438     $ 107,917     $ 75,440     $ 446,055     $ 1,260,882  

Other non-financial liabilities

    1,156       847       191       902       1,957       643       768       10,043       8,168       24,675  

Equity

                                                    80,650       80,650  

Total liabilities and equity

  $ 317,502     $   100,790     $ 58,551     $ 51,505     $ 39,737     $ 69,081     $ 108,685     $ 85,483     $ 534,873     $   1,366,207  

Off-balance sheet items

                   

Financial guarantees

  $ 291     $ 1,450     $ 2,598     $ 1,933     $ 3,074     $ 1,506     $ 4,764     $ 713     $ 51     $ 16,380  

Lease commitments

    66       131       200       199       191       724       1,558       2,820             5,889  

Commitments to extend credit (3)

    1,372       5,036       8,245       10,037       15,554       35,718       172,094       14,821       2,224       265,101  

Other credit-related commitments

    574       1,047       1,477       1,098       1,425       494       699       114       102,298       109,226  

Other commitments

    23                                                 527       550  

Total off-balance sheet items (3)

  $ 2,326     $ 7,664     $ 12,520     $ 13,267     $ 20,244     $ 38,442     $ 179,115     $ 18,468     $ 105,100     $ 397,146  

 

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

 

Capital management

 

We continue to manage our capital in accordance with our Capital Management Framework as described in our 2018 Annual Report. In addition, we continue to monitor and prepare for new regulatory capital developments, including the BCBS Basel III reforms, in order to ensure timely and accurate compliance with these requirements. For additional details on new regulatory developments that relate to our Capital Management Framework, refer to the Capital, liquidity and other regulatory developments section of this Q2 2019 Report to Shareholders.

OSFI expects Canadian banks to meet the Basel III targets for CET1, Tier 1 and Total capital ratios. Effective January 1, 2014, OSFI allowed Canadian banks to phase in the Basel III Credit Valuation Adjustment (CVA) risk capital charge over a five-year period ending December 31, 2018. As of January 1, 2019, the CVA scalars were fully phased-in for each tier of capital, resulting in all tiers of capital having the same risk-weighted assets value. In fiscal 2018, the CVA scalars were 80%, 83% and 86% for CET1, Tier 1 and Total capital, respectively.

The Financial Stability Board (FSB) has designated us as a Global Systemically Important Bank (G-SIB). This designation requires us to maintain a higher loss absorbency requirement (common equity as a percentage of risk-weighted assets) of 1%. As the Domestic Systemically Important Bank (D-SIB) requirement is equivalent to the G-SIB requirement of 1% of RWA, the G-SIB designation had no further impact to the loss absorbency requirements on our CET1 ratio.


 

Royal Bank of Canada        Second Quarter 2019         41

On April 18, 2018, OSFI released its final guideline on Total Loss Absorbing Capacity (TLAC), which applies to Canadian D-SIBs as part of the Federal Government’s Bail-in Regime. The guideline is consistent with the TLAC standard released on November 9, 2015 by the FSB for institutions designated as G-SIBs, but tailored to the Canadian context. The TLAC requirement is intended to address the sufficiency of a systemically important bank’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 other 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 guideline.

TLAC requirements established two minimum standards, which are required to be met effective November 1, 2021: the risk-based TLAC ratio, which builds on the risk-based capital ratios described in the Capital Adequacy Requirements (CAR) guideline, and the TLAC leverage ratio, which builds on the leverage ratio described in OSFI’s Leverage Requirements guideline. OSFI has provided notification requiring systemically important banks to maintain a minimum TLAC ratio of 23.25%, which includes the revised Domestic Stability Buffer (DSB) as noted below, and a TLAC leverage ratio of 6.75%. We began issuing bail-in eligible debt in the fourth quarter of 2018 and this has contributed to improving our TLAC ratio. We expect our TLAC ratio to improve through normal course refinancing of maturing unsecured term debt.

Effective November 1, 2018, we were required to adopt OSFI’s revisions to the CAR guidelines relating to the securitization framework and the standardized approach for measuring counterparty credit risk.

For further details on regulatory developments, refer to the Capital, liquidity and other regulatory developments section of this Q2 2019 Report to Shareholders.

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 and leverage requirements imposed by OSFI:

 

Basel III

Capital ratios

and leverage

  OSFI regulatory target requirements for large banks under Basel III     RBC
capital and
leverage
ratios as at
April 30,
2019
          Domestic
Stability
Buffer
(3)
    Minimum including
Capital Buffers,
D-SIB/G-SIB
surcharge and
Domestic Stability
Buffer
 
  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%       11.8%         1.75%       > 9.8%  
Tier 1 capital     > 6.0%       2.5%       > 8.5%       1.0%       > 9.5%       12.9%         1.75%       > 11.3%  
Total capital     > 8.0%       2.5%       > 10.5%       1.0%       > 11.5%       14.8%         1.75%       > 13.3%  
Leverage ratio     > 3.0%       n.a.       > 3.0%       n.a.       > 3.0%       4.3%         n.a.       > 3.0%  

 

(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)   In 2018, OSFI required the public disclosure of their Pillar 2 DSB. Effective April 30, 2019, OSFI raised the level for the DSB to 1.75% of RWA from 1.5%.
n.a.   not applicable

The following table provides details on our regulatory capital, RWA, and capital and leverage ratios. Our capital position remains strong and our capital and leverage ratios remain well above OSFI regulatory targets.

 

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

April 30

2019

    

January 31

2019

    

October 31

2018

 

Capital (1)

        

CET1 capital

   $ 60,314      $ 57,963      $ 57,001  

Tier 1 capital

     65,992        64,341        63,279  

Total capital

     75,491        73,758        72,494  

Risk-weighted Assets (RWA) used in calculation of capital ratios (1), (2)

        

CET1 capital RWA

   $ 510,463      $ 508,512      $ 495,528  

Tier 1 capital RWA

     510,463        508,512        495,993  

Total capital RWA

     510,463        508,512        496,459  

Total capital RWA consisting of: (1)

        

Credit risk

   $ 414,523      $ 410,003      $ 401,534  

Market risk

     31,453        34,862        32,209  

Operational risk

     64,487        63,647        62,716  

Total capital RWA

   $   510,463      $   508,512      $   496,459  

Capital ratios and Leverage ratio (1)

        

CET1 ratio

     11.8%        11.4%        11.5%  

Tier 1 capital ratio

     12.9%        12.7%        12.8%  

Total capital ratio

     14.8%        14.5%        14.6%  

Leverage ratio

     4.3%        4.3%        4.4%  

Leverage ratio exposure (billions)

   $ 1,521.2      $ 1,501.8      $ 1,450.8  

 

  (1)   Capital, RWA, and capital ratios are calculated using OSFI’s CAR based on the Basel III framework. The Leverage ratio is calculated using OSFI Leverage Requirements Guideline based on the Basel III framework.
  (2)   In fiscal 2018, amounts included CVA scalars of 80%, 83% and 86%, respectively.


 

42        Royal Bank of Canada        Second Quarter 2019

Q2 2019 vs. Q1 2019

 

LOGO

 

(1)   Represents rounded figures.
(2)   Internal capital generation of $1.7 billion which represents Net income available to shareholders, less common and preferred shares dividends.

Our CET1 ratio was 11.8%, up 40 bps from last quarter, mainly reflecting internal capital generation and lower RWA, driven by lower market risk partially offset by growth in derivatives and lending.

Our Tier 1 capital ratio of 12.9% was up 20 bps, reflecting the factors noted above under the CET1 ratio. These factors were partially offset by the redemption of preferred shares.

Our Total capital ratio of 14.8% was up 30 bps, reflecting the factors noted above under the Tier 1 ratio.

RWA increased $2 billion, mainly driven by the impact of foreign exchange translation and growth in derivatives and lending, partially offset by lower market risk.

Our Leverage ratio of 4.3% was flat from last quarter, as internal capital generation was offset by the redemption of preferred shares and higher leverage exposures, mainly in lending, repo-style transactions, and derivatives, partially offset by lower cash and deposits.

Selected capital management activity

The following table provides our selected capital management activity:

 

     For the three months ended
April 30, 2019
           For the six months ended
April 30, 2019
 
(Millions of Canadian dollars, except number of shares)   Number of
shares (000s)
    Amount            Number of
shares (000s)
    Amount  

Tier 1 capital

         

Common shares activity

         

Issued in connection with share-based compensation plans (1)

    526     $      38         685     $      49  

Purchased for cancellation

    (107     (1       (3,791     (46

Issuance of preferred shares, Series BO (2)

                  14,000       350  

Redemption of preferred shares, Series AD (2)

                  (10,000     (250

Redemption of preferred shares, Series AJ (2)

    (13,579     (339       (13,579     (339

Redemption of preferred shares, Series AK (2)

    (2,421     (61       (2,421     (61

Redemption of preferred shares, Series AL (2)

    (12,000     (300             (12,000     (300

 

  (1)   Amounts include cash received for stock options exercised during the period and includes fair value adjustments to stock options.
  (2)   For further details, refer to Note 9 of our Condensed Financial Statements.

On February 23, 2018, we announced a normal course issuer bid (NCIB) to purchase up to 30 million of our common shares. This NCIB was completed on February 26, 2019, with 9.7 million common shares repurchased and cancelled at a total cost of approximately $947 million.

On February 27, 2019, we announced an NCIB program to purchase up to 20 million of our common shares, commencing on March 1, 2019 and continuing until February 29, 2020, 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 0.1 million, at a cost of approximately $11 million.

For the three months ended April 30, 2019, the total number of common shares repurchased and cancelled under our NCIB programs was approximately 0.1 million. The total cost of the shares repurchased was $11 million.

For the six months ended April 30, 2019, the total number of common shares repurchased and cancelled under our NCIB programs was approximately 3.8 million. The total cost of the shares repurchased was $359 million.

We determine the amount and timing of the 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 at the prevailing market price at the time of acquisition.

On February 24, 2019, we redeemed all 2.4 million Non-Cumulative Floating Rate First Preferred Shares Series AK, all 13.6 million Non-Cumulative 5-Year Rate Reset First Preferred Shares Series AJ, and all 12 million Non-Cumulative 5-Year Rate Reset First Preferred Shares Series AL, at a price of $25 per share.

 


 

Royal Bank of Canada        Second Quarter 2019         43

Selected share data

 

      As at April 30, 2019  
(Millions of Canadian dollars, except number of shares and as otherwise noted)    Number of
shares (000s)
     Amount      Dividends
declared per
share
 

Common shares issued (1)

     1,435,923      $   17,638      $ 1.02  

Treasury shares – common shares

     (1,044      (104         

Common shares outstanding

     1,434,879      $ 17,534           

Stock options and awards

        

Outstanding

     8,906        

Exercisable

     4,195                    

First preferred shares issued

        

Non-cumulative Series W (2)

     12,000      $ 300      $ 0.31  

Non-cumulative Series AA

     12,000        300        0.28  

Non-cumulative Series AC

     8,000        200        0.29  

Non-cumulative Series AE

     10,000        250        0.28  

Non-cumulative Series AF

     8,000        200        0.28  

Non-cumulative Series AG

     10,000        250        0.28  

Non-cumulative Series AZ (3), (4)

     20,000        500        0.25  

Non-cumulative Series BB (3), (4)

     20,000        500        0.24  

Non-cumulative Series BD (3), (4)

     24,000        600        0.23  

Non-cumulative Series BF (3), (4)

     12,000        300        0.23  

Non-cumulative Series BH (4)

     6,000        150        0.31  

Non-cumulative Series BI (4)

     6,000        150        0.31  

Non-cumulative Series BJ (4)

     6,000        150        0.33  

Non-cumulative Series BK (3), (4)

     29,000        725        0.34  

Non-cumulative Series BM (3), (4)

     30,000        750        0.34  

Non-cumulative Series BO (3), (4)

     14,000        350        0.30  

Non-cumulative Series C-2 (5)

     20        31      US$   16.88  

Preferred shares issued

     227,020      $ 5,706     

Treasury shares – preferred shares (6)

     (1                

Preferred shares outstanding

     227,019      $ 5,706           

Dividends

        

Common

      $ 1,466     

Preferred

              65           

 

  (1)   For further details about our capital management activity, refer to Note 9 of our Condensed Financial Statements.  
  (2)   Effective February 24, 2010, we have the right to convert these shares into common shares at our option, subject to certain restrictions.  
  (3)   Dividend rate will reset every five years.  
  (4)   Non-viable contingent capital (NVCC) instruments.  
  (5)   Represents 815,400 depositary shares relating to preferred shares Series C-2. Each depositary share represents one-fortieth interest in a share of Series C-2.  
  (6)   Positive amounts represent a short position in treasury shares.  

As at May 17, 2019, the number of outstanding common shares was 1,435,000,145, net of treasury shares held of 954,202, and the number of stock options and awards was 8,874,869.

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, which are the preferred shares Series AZ, BB, BD, BF, BH, BI, BJ, BK, BM, BO, and subordinated debentures due on July 17, 2024, September 29, 2026, June 4, 2025, January 20, 2026 and January 27, 2026, would be converted into RBC common shares pursuant to an automatic conversion formula with a conversion price based on the greater of: (i) a 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 2,832 million RBC common shares, in aggregate, which would represent a dilution impact of 66.38% based on the number of RBC common shares outstanding as at April 30, 2019.

 

Capital, liquidity, and other regulatory developments

 

Liquidity Adequacy Requirements (LAR) Guidelines

On April 11, 2019, OSFI issued the final LAR guidelines for LCR, Net Cumulative Cash Flow, Net Stable Funding Ratio and liquidity monitoring tools. This concluded a process of review and public consultation on items affecting the liquidity reserves banks are required to hold in order to withstand stress events, how banks can fund their balance sheets and the monitoring of related metrics. We are well positioned to comply with the final rules, and changes are not expected to have a material impact on our ability to maintain compliance with regulatory liquidity requirements and offer our breadth of retail and wholesale financial services. The revised guideline will be effective January 1, 2020.


 

44        Royal Bank of Canada        Second Quarter 2019

Net Stable Funding Ratio Disclosure

On April 11, 2019, OSFI finalized the Net Stable Funding Ratio (NSFR) Disclosure Requirements guideline. These disclosures will complement the NSFR requirements and encourage transparency, comparability, and market discipline in terms of liquidity measures. The new disclosure requirements are effective January 31, 2021.

Large Exposure Limits Guideline

On April 10, 2019, OSFI revised its Large Exposure Limits guideline, which is intended to constrain the maximum loss an institution could face in the event of a sudden failure of a counterparty by limiting exposures to a single counterparty or interconnected group of companies. The guideline enhances existing policies for managing the risks of large exposures and ensures consistent and robust practices across all the systemically important banks in Canada. We will be required to implement the new guideline in the first quarter of 2020. We are currently assessing the impact of the guidelines.

For a discussion on risk factors resulting from these and other regulatory developments which may affect our business and financial results, refer to the Risk management – Top and emerging risks and Legal and regulatory environment risk sections of our 2018 Annual Report and the Economic, market and regulatory review and outlook section of our Q1 2019 and of this Q2 2019 Report to Shareholders. For further details on our framework and activities to manage risks, refer to the risk and Capital management sections of our 2018 Annual Report and the Risk management and Capital management sections of this Q2 2019 Report to Shareholders.

 

Accounting and control matters

 

 

Summary of accounting policies and estimates

 

Our Condensed Financial Statements are presented in compliance with International Accounting Standard (IAS) 34 Interim Financial Reporting. Our significant accounting policies are described in Note 2 of our audited 2018 Annual Consolidated Financial Statements and our Q2 2019 Condensed Financial Statements.

 

Changes in accounting policies and disclosures

 

Changes in accounting policies

During the first quarter of 2019, we adopted IFRS 15 Revenue from Contracts with Customers (IFRS 15). As permitted by the transition provisions of IFRS 15, we elected not to restate comparative period results; accordingly, all comparative period information prior to the first quarter of 2019 is presented in accordance with our previous accounting policies, as described in our 2018 Annual Report. As a result of the adoption of IFRS 15, we adjusted our opening retained earnings as at November 1, 2018 to align the recognition of certain fees with the transfer of the performance obligations. Refer to Note 2 of our Condensed Financial Statements for details of these changes.

Future changes in accounting policies and disclosures

In January 2016, the IASB issued IFRS 16 Leases (IFRS 16), which sets out the principles for the recognition, measurement, presentation and disclosure of leases. The standard removes the current requirement for lessees to classify leases as finance leases or operating leases by introducing a single lessee accounting model that requires the recognition of lease assets and lease liabilities on the balance sheet for most leases. Lessees will also recognize depreciation expense on the lease asset and interest expense on the lease liability in the statement of income. There are no significant changes to lessor accounting aside from enhanced disclosure requirements.

IFRS 16 will be effective for us on November 1, 2019. We plan to adopt IFRS 16 by adjusting our Consolidated Balance Sheet at November 1, 2019, the date of initial application, with no restatement of comparative periods.

Our transition to IFRS 16 includes a centralized enterprise-wide program and governance structure led by Finance to assess our existing lease portfolio and the impact on systems, processes, training, communication and financial reporting. We are upgrading our systems, processes and internal controls. Next steps include completing a preliminary quantification of our lease assets and liabilities, the impact on the CET1 ratio and developing the additional disclosures required by the new standard.

As we prepare for our transition to IFRS 16, we will continue to monitor industry interpretations of the new standard and assess the potential impact to our implementation.

Other future changes in accounting policies and disclosures that are not yet effective for us are described in Note 2 of our audited 2018 Annual Consolidated Financial Statements.


 

Royal Bank of Canada        Second Quarter 2019         45

Controls and procedures

 

Disclosure controls and procedures

As of April 30, 2019, 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 April 30, 2019.

Internal control over financial reporting

No changes were made in our internal control over financial reporting during the quarter ended April 30, 2019 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 11 and 26 of our audited 2018 Annual Consolidated Financial Statements.

 


 

46        Royal Bank of Canada        Second Quarter 2019

EDTF recommendations index

 

We aim to present transparent, high-quality risk disclosures by providing disclosures in our 2018 Annual Report, Q2 2019 Report to Shareholders (RTS), Supplementary Financial Information package (SFI), and Pillar 3 Report, in accordance with recommendations from the Financial Stability Board’s (FSB) Enhanced Disclosure Task Force (EDTF). Information within the SFI and Pillar 3 Report is not and should not be considered incorporated by reference into our Q2 2019 Report to Shareholders.

The following index summarizes our disclosure by EDTF recommendation:

 

             Location of disclosure
Type of Risk   Recommendation   Disclosure   

RTS

page

  Annual
Report page
   SFI
page
General   1  

Table of contents for EDTF risk disclosure

   46   112    1
  2  

Define risk terminology and measures

     50, 52-55

213-214

  
  3  

Top and emerging risks

     50-51   
  4  

New regulatory ratios

   40-41   91-93   
Risk governance, risk management and business model   5  

Risk management organization

     50, 52-55   
  6  

Risk culture

     52-55   
  7  

Risk in the context of our business activities

     98   
  8  

Stress testing

       53-54, 67   

Capital adequacy and

risk-weighted assets (RWA)

  9  

Minimum Basel III capital ratios and Domestic systemically important bank surcharge

   41   91-93   
  10  

Composition of capital and reconciliation of the accounting balance sheet to the regulatory balance sheet

        20-23
  11  

Flow statement of the movements in regulatory capital

        24
  12  

Capital strategic planning

     90-93   
  13  

RWA by business segments

        26
  14  

Analysis of capital requirement, and related measurement model information

     56-59    25,*
  15  

RWA credit risk and related risk measurements

        *
  16  

Movement of risk-weighted assets by risk type

        26
  17  

Basel back-testing

       53, 56-57    40
Liquidity   18  

Quantitative and qualitative analysis of our liquidity reserve

   33-34   73-75,

79-80

  
Funding   19  

Encumbered and unencumbered assets by balance sheet category, and contractual obligations for rating downgrades

   35,
37-38
  75,78   
  20  

Maturity analysis of consolidated total assets, liabilities and off-balance sheet commitments analyzed by remaining contractual maturity at the balance sheet date

   39-40   80-81   
  21  

Sources of funding and funding strategy

   35-37   75-77   
Market risk   22  

Relationship between the market risk measures for trading and non-trading portfolios and the balance sheet

   32-33   71-72   
  23  

Decomposition of market risk factors

   29-31   67-70   
  24  

Market risk validation and back-testing

     67   
  25  

Primary risk management techniques beyond reported risk measures and parameters

       67-70   
Credit risk   26  

Bank’s credit risk profile

   22-29   56-66,

159-165

   29-40,*
   

Quantitative summary of aggregate credit risk exposures that reconciles to the balance sheet

   64-68
  106-111
   *
  27  

Policies for identifying impaired loans

     57-59,

101-102,

123-126,

128-129

  
  28  

Reconciliation of the opening and closing balances of impaired loans and impairment allowances during the year

        31, 36
  29  

Quantification of gross notional exposure for OTC derivatives or exchange-traded derivatives

     60    42
  30  

Credit risk mitigation, including collateral held for all sources of credit risk

       59    39
Other   31  

Other risk types

     83-90   
  32  

Publicly known risk events

       86-87,

202-203

  

 

*   These disclosure requirements are satisfied or partially satisfied by disclosures provided in our Pillar 3 Report as at April 30, 2019 and October 31, 2018.


 

Royal Bank of Canada        Second Quarter 2019         47

Interim Condensed Consolidated Financial Statements (unaudited)

 

 

Interim Condensed Consolidated Balance Sheets (unaudited)

 

 

     As at  
(Millions of Canadian dollars)  

April 30

2019

   

October 31

2018

 

Assets

   

Cash and due from banks

  $ 33,041     $ 30,209  

Interest-bearing deposits with banks

    26,718       36,471  

Securities

   

Trading

    138,916       128,258  

Investment, net of applicable allowance (Note 4)

    102,075       94,608  
      240,991       222,866  

Assets purchased under reverse repurchase agreements and securities borrowed

    309,520       294,602  

Loans (Note 5)

   

Retail

    407,222       399,452  

Wholesale

    198,263       180,278  
    605,485       579,730  

Allowance for loan losses (Note 5)

    (3,093     (2,912
      602,392       576,818  

Segregated fund net assets

    1,561       1,368  

Other

   

Customers’ liability under acceptances

    16,073       15,641  

Derivatives

    84,812       94,039  

Premises and equipment

    3,014       2,832  

Goodwill

    11,289       11,137  

Other intangibles

    4,758       4,687  

Other assets

    44,707       44,064  
      164,653       172,400  

Total assets

  $   1,378,876     $   1,334,734  

Liabilities and equity

   

Deposits (Note 6)

   

Personal

  $ 286,495     $ 270,154  

Business and government

    544,667       534,371  

Bank

    32,939       32,521  
      864,101       837,046  

Segregated fund net liabilities

    1,561       1,368  

Other

   

Acceptances

    16,099       15,662  

Obligations related to securities sold short

    34,049       32,247  

Obligations related to assets sold under repurchase agreements and securities loaned

    223,980       206,814  

Derivatives

    82,168       90,238  

Insurance claims and policy benefit liabilities

    11,006       10,000  

Other liabilities

    54,606       52,273  
      421,908       407,234  

Subordinated debentures

    9,360       9,131  

Total liabilities

    1,296,930       1,254,779  

Equity attributable to shareholders

   

Preferred shares (Note 9)

    5,706       6,309  

Common shares (Note 9)

    17,534       17,617  

Retained earnings

    53,640       51,112  

Other components of equity

    4,965       4,823  
    81,845       79,861  

Non-controlling interests

    101       94  

Total equity

    81,946       79,955  

Total liabilities and equity

  $   1,378,876     $   1,334,734  

The accompanying notes are an integral part of these Interim Condensed Consolidated Financial Statements.


 

48        Royal Bank of Canada        Second Quarter 2019

Interim Condensed Consolidated Statements of Income (unaudited)

 

 

     For the three months ended            For the six months ended  
    April 30     April 30           April 30     April 30  
(Millions of Canadian dollars, except per share amounts)   2019     2018            2019     2018  

Interest and dividend income (Note 3)

                                                                                             

Loans

  $ 6,123     $ 5,059       $ 12,283     $ 10,032  

Securities

    1,702       1,396         3,398       2,750  

Assets purchased under reverse repurchase agreements and securities borrowed

    2,191       1,285         4,339       2,393  

Deposits and other

    116       125               261       230  
      10,132       7,865               20,281       15,405  

Interest expense (Note 3)

         

Deposits and other

    3,203       2,220         6,428       4,207  

Other liabilities

    1,999       1,148         3,947       2,182  

Subordinated debentures

    93       76               185       150  
      5,295       3,444               10,560       6,539  

Net interest income

    4,837       4,421               9,721       8,866  

Non-interest income

         

Insurance premiums, investment and fee income

    1,515       806         3,094       1,950  

Trading revenue

    250       236         608       554  

Investment management and custodial fees

    1,381       1,318         2,831       2,643  

Mutual fund revenue

    899       862         1,772       1,747  

Securities brokerage commissions

    316       334         658       689  

Service charges

    466       443         934       883  

Underwriting and other advisory fees

    554       457         899       998  

Foreign exchange revenue, other than trading

    243       277         492       558  

Card service revenue

    266       267         548       524  

Credit fees

    288       317         603       645  

Net gains on investment securities

    37       49         83       88  

Share of profit in joint ventures and associates

    14       14         29       39  

Other

    433       253               816       698  
      6,662       5,633               13,367       12,016  

Total revenue

    11,499       10,054               23,088       20,882  

Provision for credit losses (Notes 4 and 5)

    426       274               940       608  

Insurance policyholder benefits, claims and acquisition expense

    1,160       421               2,385       1,257  

Non-interest expense

         

Human resources (Note 7)

    3,622       3,324         7,265       6,826  

Equipment

    445       386         876       758  

Occupancy

    405       386         802       765  

Communications

    273       249         513       473  

Professional fees

    290       321         595       602  

Amortization of other intangibles

    299       266         589       527  

Other

    582       550               1,188       1,142  
      5,916       5,482               11,828       11,093  

Income before income taxes

    3,997       3,877         7,935       7,924  

Income taxes

    767       817               1,533       1,852  

Net income

  $ 3,230     $ 3,060             $ 6,402     $ 6,072  

Net income attributable to:

         

Shareholders

  $ 3,226     $ 3,051       $ 6,396     $ 6,052  

Non-controlling interests

    4       9               6       20  
    $ 3,230     $ 3,060             $ 6,402     $ 6,072  

Basic earnings per share (in dollars) (Note 10)

  $ 2.20     $ 2.06       $ 4.36     $ 4.08  

Diluted earnings per share (in dollars) (Note 10)

    2.20       2.06         4.34       4.07  

Dividends per common share (in dollars)

    1.02       0.94               2.00       1.85  

The accompanying notes are an integral part of these Interim Condensed Consolidated Financial Statements.


 

Royal Bank of Canada        Second Quarter 2019         49

Interim Condensed Consolidated Statements of Comprehensive Income (unaudited)

 

 

     For the three months ended            For the six months ended  
(Millions of Canadian dollars)  

April 30

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Net income

  $      3,230     $      3,060             $      6,402     $      6,072  

Other comprehensive income (loss), net of taxes

         

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

    140       (14       139       (38

Provision for credit losses recognized in income

    (9     9         (10     24  

Reclassification of net losses (gains) on debt securities and loans at fair value through other comprehensive income to income

    (31     (35             (60     (63
      100       (40             69       (77

Foreign currency translation adjustments

         

Unrealized foreign currency translation gains (losses)

    1,096       1,978         1,131       (28

Net foreign currency translation gains (losses) from hedging activities

    (398     (710       (464     (52

Reclassification of losses (gains) on foreign currency translation to income

                  2        

Reclassification of losses (gains) on net investment hedging activities to income

                        2        
      698       1,268               671       (80

Net change in cash flow hedges

         

Net gains (losses) on derivatives designated as cash flow hedges

    (182     (217       (498     207  

Reclassification of losses (gains) on derivatives designated as cash flow hedges to income

    (25     144               (99     (9
      (207     (73             (597     198  

Items that will not be reclassified subsequently to income:

         

Remeasurements of employee benefit plans (Note 7)

    (92     84         (486     133  

Net fair value change due to credit risk on financial liabilities designated as at fair value through profit or loss

    (189     144         (26     126  

Net gains (losses) on equity securities designated at fair value through other comprehensive income

    30       1               37       (1
      (251     229               (475     258  

Total other comprehensive income (loss), net of taxes

    340       1,384               (332     299  

Total comprehensive income (loss)

  $ 3,570     $ 4,444             $ 6,070     $ 6,371  

Total comprehensive income attributable to:

         

Shareholders

  $ 3,566     $ 4,432       $ 6,063     $ 6,351  

Non-controlling interests

    4       12               7       20  
    $ 3,570     $ 4,444             $ 6,070     $ 6,371  

The income tax effect on the Interim Condensed Consolidated Statements of Comprehensive Income is shown in the table below.

 

     For the three months ended            For the six months ended  
(Millions of Canadian dollars)  

April 30

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Income taxes on other comprehensive income

         

Net unrealized gains (losses) on debt securities and loans at fair value through other comprehensive income

  $           48     $ (40     $           44     $ 2  

Provision for credit losses recognized in income

                        (4

Reclassification of net losses (gains) on debt securities and loans at fair value through other comprehensive income to income

    (15     (15       (32     (30

Unrealized foreign currency translation gains (losses)

    1       5         2        

Net foreign currency translation gains (losses) from hedging activities

    (136     (239       (160     (20

Reclassification of losses (gains) on net investment hedging activities to income

                  1        

Net gains (losses) on derivatives designated as cash flow hedges

    (66     (78       (179     105  

Reclassification of losses (gains) on derivatives designated as cash flow hedges to income

    (9     52         (36     (34

Remeasurements of employee benefit plans

    (45     30         (170     50  

Net fair value change due to credit risk on financial liabilities designated as at fair value through profit or loss

    (69     53         (10     46  

Net gains (losses) on equity securities designated at fair value through other comprehensive income

    (6     (3             (7     (4

Total income tax expenses (recoveries)

  $ (297   $        (235           $ (547   $         111  

The accompanying notes are an integral part of these Interim Condensed Consolidated Financial Statements.


 

50        Royal Bank of Canada        Second Quarter 2019

Interim Condensed Consolidated Statements of Changes in Equity (unaudited)

 

 

     For the three months ended April 30, 2019  
                                  Other components of equity                    
(Millions of Canadian dollars)  

Preferred

shares

   

Common

shares

   

Treasury

shares –

preferred

   

Treasury

shares –

common

   

Retained

earnings

   

Available-

for-sale

securities

   

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

  $   6,406     $   17,601     $     $ (36   $   52,208       $    (43   $ 4,119     $    298     $ 4,374     $ 80,553     $ 97     $ 80,650  

Changes in equity

                         

Issues of share capital

          38                                                   38             38  

Common shares purchased for cancellation

          (1                 (10                               (11           (11

Redemption of preferred shares

    (700                                                       (700           (700

Sales of treasury shares

                43       1,272                                       1,315             1,315  

Purchases of treasury shares

                  (43       (1,340                                     (1,383           (1,383

Share-based compensation awards

                            (8                               (8           (8

Dividends on common shares

                            (1,466                               (1,466           (1,466

Dividends on preferred shares and other

                            (65                               (65           (65

Other

                            6                                 6             6  

Net income

                            3,226                                 3,226       4       3,230  

Total other comprehensive income (loss), net of taxes

                            (251             100       698       (207     591       340             340  

Balance at end of period

  $ 5,706     $ 17,638     $     $ (104   $ 53,640             $ 57     $    4,817     $ 91     $    4,965     $   81,845     $   101     $   81,946  
                         
     For the three months ended April 30, 2018  
          Other components of equity                    
(Millions of Canadian dollars)  

Preferred

shares

   

Common

shares

   

Treasury

shares –

preferred

   

Treasury

shares –

common

   

Retained

earnings

   

Available-

for-sale

securities

   

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

  $   6,306     $   17,647     $     $ (7   $ 45,764       $   124     $ 2,200     $    702     $ 3,026     $ 72,736     $ 588     $ 73,324  

Changes in equity

                         

Issues of share capital

          15                                                   15             15  

Common shares purchased for cancellation

          (28                 (196                               (224           (224

Redemption of preferred shares

                                                                         

Sales of treasury shares

                64       1,344                                       1,408             1,408  

Purchases of treasury shares

                  (67       (1,432                                     (1,499           (1,499

Share-based compensation awards

                            (1                               (1           (1

Dividends on common shares

                            (1,356                               (1,356           (1,356

Dividends on preferred shares and other

                            (71                               (71     (1     (72

Other

                            (15                               (15     1       (14

Net income

                            3,051                                 3,051       9       3,060  

Total other comprehensive income (loss), net of taxes

                            229               (40     1,265       (73     1,152       1,381       3       1,384  

Balance at end of period

  $ 6,306     $ 17,634     $ (3)     $ (95   $   47,405             $ 84     $    3,465     $ 629     $    4,178     $   75,425     $   600     $   76,025  


 

Royal Bank of Canada        Second Quarter 2019         51

     For the six months ended April 30, 2019  
                                  Other components of equity                    
(Millions of Canadian dollars)   Preferred
shares
    Common
shares
   

Treasury

shares –
preferred

    Treasury
shares –
common
    Retained
earnings
   

Available-

for-sale

securities

    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

  $   6,306     $   17,635     $ 3     $ (18   $   51,112       $ (12   $ 4,147     $   688     $   4,823     $   79,861     $ 94     $ 79,955  

Transition adjustment (Note 2)

                            (70                                     (70           (70

Adjusted balance at beginning of period

  $ 6,306     $ 17,635     $ 3     $ (18   $ 51,042       $ (12   $ 4,147     $ 688     $ 4,823     $ 79,791     $ 94     $ 79,885  

Changes in equity

                         

Issues of share capital

    350       49                                                   399             399  

Common shares purchased for cancellation

          (46                 (313                               (359           (359

Redemption of preferred shares

    (950                                                       (950           (950

Sales of treasury shares

                  125         2,801                                       2,926             2,926  

Purchases of treasury shares

                (128     (2,887                                     (3,015           (3,015

Share-based compensation awards

                            (6                               (6           (6

Dividends on common shares

                            (2,873                               (2,873           (2,873

Dividends on preferred shares and other

                            (139                               (139           (139

Other

                            8                                 8             8  

Net income

                            6,396                                 6,396       6       6,402  

Total other comprehensive income (loss), net of taxes

                            (475             69       670       (597     142       (333     1       (332

Balance at end of period

  $ 5,706     $ 17,638     $     $ (104   $ 53,640             $      57     $   4,817     $ 91     $ 4,965     $ 81,845     $   101     $   81,946  
                         
     For the six months ended April 30, 2018  
          Other components of equity                    
(Millions of Canadian dollars)   Preferred
shares
    Common
shares
    Treasury
shares –
preferred
    Treasury
shares –
common
    Retained
earnings
   

Available-

for-sale

securities

    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

  $   6,413     $   17,730     $     $ (27   $   45,359     $    378       $   3,545     $   431     $   4,354     $   73,829     $   599     $   74,428  

Transition adjustment

                            (558     (378        299                   (79     (637           (637

Adjusted balance at beginning of period

  $ 6,413     $ 17,730     $     $ (27   $ 44,801     $     $ 299     $ 3,545     $ 431     $ 4,275     $ 73,192     $ 599     $ 73,791  

Changes in equity

                         

Issues of share capital

          45                                                   45             45  

Common shares purchased for cancellation

          (141                 (1,006                               (1,147           (1,147

Redemption of preferred shares

    (107                       2                                 (105           (105

Sales of treasury shares

                  133         2,769                                       2,902             2,902  

Purchases of treasury shares

                (136     (2,837                                     (2,973           (2,973

Share-based compensation awards

                            (4                               (4           (4

Dividends on common shares

                            (2,675                               (2,675           (2,675

Dividends on preferred shares and other

                            (143                               (143     (19     (162

Other

                            120         (138                 (138     (18           (18

Net income

                            6,052                                 6,052       20       6,072  

Total other comprehensive income (loss), net of taxes

                            258               (77     (80     198       41       299             299  

Balance at end of period

  $ 6,306     $ 17,634     $ (3   $ (95   $ 47,405             $ 84     $ 3,465     $ 629     $ 4,178     $ 75,425     $ 600     $ 76,025  

The accompanying notes are an integral part of these Interim Condensed Consolidated Financial Statements.


 

52        Royal Bank of Canada        Second Quarter 2019

Interim Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

     For the three months ended            For the six months ended  
(Millions of Canadian dollars)  

April 30

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Cash flows from operating activities

         

Net income

  $ 3,230     $ 3,060       $ 6,402     $ 6,072  

Adjustments for non-cash items and others

         

Provision for credit losses

    426       274         940       608  

Depreciation

    157       141         307       276  

Deferred income taxes

    (124     42         (286     313  

Amortization and impairment of other intangibles

    300       266         593       527  

Net changes in investments in joint ventures and associates

    (13     (13       (28     (35

Losses (Gains) on investment securities

    (47     (51       (96     (94

Adjustments for net changes in operating assets and liabilities

         

Insurance claims and policy benefit liabilities

    494       (214       1,006       (19

Net change in accrued interest receivable and payable

    28       76         114       (56

Current income taxes

    (376     (541       (535     (2,511

Derivative assets

    4       11,337         9,227       848  

Derivative liabilities

    402       (13,329       (8,070     (1,237

Trading securities

    (743     (1,807       (10,658     (613

Loans, net of securitizations

    (12,604     (14,695       (25,755     (18,274

Assets purchased under reverse repurchase agreements and securities borrowed

    (11,860     (1,419       (14,918     (40,208

Deposits, net of securitizations

    11,537       23,337         27,055       33,751  

Obligations related to assets sold under repurchase agreements and securities loaned

    (549     (12,401       17,166       27,834  

Obligations related to securities sold short

    807       2,643         1,802       3,039  

Brokers and dealers receivable and payable

    162       (778       (316     (944

Other

    (2,405     (2,469             (3,897     (1,244

Net cash from (used in) operating activities

    (11,174     (6,541             53       8,033  

Cash flows from investing activities

         

Change in interest-bearing deposits with banks

    11,935       290         9,753       (4,317

Proceeds from sale of investment securities

    5,571       5,280         8,856       10,497  

Proceeds from maturity of investment securities

    7,279       11,753         22,298       18,885  

Purchases of investment securities

    (16,218     (11,310       (36,886     (24,652

Net acquisitions of premises and equipment and other intangibles

    (575     (517             (1,136     (874

Net cash from (used in) investing activities

    7,992       5,496               2,885       (461

Cash flows from financing activities

         

Issue of common shares, net of issuance costs

    30       9         39       32  

Common shares purchased for cancellation

    (11     (224       (359     (1,147

Issue of preferred shares, net of issuance costs

                  350        

Redemption of preferred shares

    (700             (950     (105

Sales of treasury shares

    1,315       1,408         2,926       2,902  

Purchases of treasury shares

    (1,383     (1,499       (3,015     (2,973

Dividends paid

    (1,481     (1,391       (2,964     (2,787

Dividends/distributions paid to non-controlling interests

          (1             (19

Change in short-term borrowings of subsidiaries

    (1,774     899               3,086       898  

Net cash from (used in) financing activities

    (4,004     (799             (887     (3,199

Effect of exchange rate changes on cash and due from banks

    194       121               781       (15

Net change in cash and due from banks

    (6,992     (1,723       2,832       4,358  

Cash and due from banks at beginning of period (1)

    40,033       34,488               30,209       28,407  

Cash and due from banks at end of period (1)

  $ 33,041     $ 32,765             $ 33,041     $ 32,765  

Cash flows from operating activities include:

         

Amount of interest paid

  $ 5,047     $ 3,005       $ 9,795     $ 6,006  

Amount of interest received

    9,817       7,434         19,477         14,689  

Amount of dividends received

    488       429         981       839  

Amount of income taxes paid

    958       1,050               1,749       4,168  

 

(1)   We are required to maintain balances with central banks and other regulatory authorities. The total balances were $2.3 billion as at April 30, 2019 (January 31, 2019 – $2.3 billion; October 31, 2018 – $2.4 billion; April 30, 2018 – $2.6 billion; January 31, 2018 – $2.5 billion; October 31, 2017 – $2.3 billion).

The accompanying notes are an integral part of these Interim Condensed Consolidated Financial Statements.


 

Royal Bank of Canada        Second Quarter 2019         53

Note 1    General information

 

Our unaudited Interim Condensed Consolidated Financial Statements (Condensed Financial Statements) are presented in compliance with International Accounting Standard (IAS) 34 Interim Financial Reporting. The Condensed Financial Statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with our audited 2018 Annual Consolidated Financial Statements and the accompanying notes included on pages 113 to 211 in our 2018 Annual Report. Tabular information is stated in millions of Canadian dollars, except per share amounts and percentages. On May 22, 2019, the Board of Directors authorized the Condensed Financial Statements for issue.

 

Note 2    Summary of significant accounting policies, estimates and judgments

 

Except as indicated below, the Condensed Financial Statements have been prepared using the same accounting policies and methods used in preparation of our audited 2018 Annual Consolidated Financial Statements. Our significant accounting policies and future changes in accounting policies and disclosures that are not yet effective for us are described in Note 2 of our audited 2018 Annual Consolidated Financial Statements.

Changes in accounting policies

During the first quarter, we adopted IFRS 15 Revenue from Contracts with Customers (IFRS 15). As permitted by the transition provisions of IFRS 15, we elected not to restate comparative period results; accordingly, all comparative period information is presented in accordance with our previous accounting policies, as described in our 2018 Annual Report. As a result of the adoption of IFRS 15, we reduced our opening retained earnings by $70 million, on an after tax basis as at November 1, 2018 (the date of initial application), to align the recognition of certain fees with the transfer of the performance obligations.

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 customers.

Investment management and custodial fees and Mutual fund revenue are generally calculated as a percentage of daily or period-end net asset values based on the terms of the contract with customers and are received monthly, quarterly, semi-annually 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 derived from the daily net asset value (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 customer 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 twelve 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 customer and have discretion in establishing the price for the commissions and fees earned, which may require judgment.


 

54        Royal Bank of Canada        Second Quarter 2019

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. Refer to Note 2 and Note 3 of our audited 2018 Annual Consolidated Financial Statements for a description of the valuation techniques and inputs used in the fair value measurement of our financial instruments. There have been no significant changes to our determination of fair value during the quarter.

 

     As at April 30, 2019  
    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

  $     $ 12,861     $     $             $ 13,857             $ 13,857     $ 26,718     $ 26,718  

Securities

                   

Trading

        130,612       8,304                                   138,916       138,916  

Investment, net of applicable allowance

                    54,397           537               47,141               47,131       102,075       102,065  
      130,612       8,304       54,397       537               47,141               47,131       240,991       240,981  

Assets purchased under reverse repurchase agreements and securities borrowed

    239,657                                 69,863               69,865       309,520       309,522  

Loans, net of applicable allowance

                   

Retail

    135       195       96               404,748         405,181       405,174       405,607  

Wholesale

    7,271       1,746       477                     187,724               186,967       197,218       196,461  
      7,406       1,941       573                     592,472               592,148       602,392       602,068  

Other

                   

Derivatives

    84,812                                         84,812       84,812  

Other assets (1)

    1,458                                 46,445               46,445       47,903       47,903  

Financial liabilities

                   

Deposits

                   

Personal

  $ 152     $ 15,880           $   270,463       $   270,325     $   286,495     $   286,357  

Business and government (2)

    (18         109,592             435,093         435,936       544,667       545,510  

Bank (3)

          4,601                               28,338               28,379       32,939       32,980  
      134       130,073                               733,894               734,640       864,101       864,847  

Other

                   

Obligations related to securities sold short

    34,049                                 34,049       34,049  

Obligations related to assets sold under repurchase agreements and securities loaned

          218,288             5,692         5,693       223,980       223,981  

Derivatives

    82,168                                 82,168       82,168  

Other liabilities (4)

    (1,159     33             58,132         58,103       57,006       56,977  

Subordinated debentures

                                        9,360               9,524       9,360       9,524  


 

Royal Bank of Canada        Second Quarter 2019         55

     As at October 31, 2018  
    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

  $     $ 20,274     $     $             $ 16,197             $ 16,197     $ 36,471     $ 36,471  

Securities

                   

Trading

      121,031       7,227                                     128,258       128,258  

Investment, net of applicable allowance

                  48,093       406               46,109               45,367       94,608       93,866  
      121,031       7,227       48,093       406               46,109               45,367       222,866       222,124  

Assets purchased under reverse repurchase agreements and securities borrowed

    219,108                                 75,494               75,490       294,602       294,598  

Loans, net of applicable allowance

                   

Retail

    69       190       94               397,102         394,051       397,455       394,404  

Wholesale

    7,129       1,540       458                     170,236               168,087       179,363       177,214  
      7,198       1,730       552                     567,338               562,138       576,818       571,618  

Other

                   

Derivatives

    94,039                                         94,039       94,039  

Other assets (1)

    1,373                                 46,205               46,205       47,578       47,578  

Financial liabilities

                   

Deposits

                   

Personal

  $ 150     $ 14,602           $ 255,402       $ 255,115     $ 270,154     $ 269,867  

Business and government (2)

    (11     103,446             430,936         431,158       534,371       534,593  

Bank (3)

          7,072                               25,449               25,462       32,521       32,534  
      139       125,120                               711,787               711,735       837,046       836,994  

Other

                   

Obligations related to securities sold short

    32,247                                 32,247       32,247  

Obligations related to assets sold under repurchase agreements and securities loaned

          201,839             4,975         4,976       206,814       206,815  

Derivatives

    90,238                                 90,238       90,238  

Other liabilities (4)

    (1,434     18             54,917         54,880       53,501       53,464  

Subordinated debentures

                                        9,131               9,319       9,131       9,319  

 

(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.


 

56        Royal Bank of Canada        Second Quarter 2019

Note 3    Fair value of financial instruments (continued)

 

 

Fair value of assets and liabilities measured at fair value on a recurring basis and classified using the fair value hierarchy

 

 

    

As at  

 

 
    April 30, 2019           October 31, 2018  
    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

  $     $ 12,861     $     $       $ 12,861             $     $ 20,274     $     $       $ 20,274  

Securities

                     

Trading

                     

Issued or guaranteed

                     

Canadian government debt (1)

                     

Federal

    12,161       5,219               17,380         8,342       6,231               14,573  

Provincial and municipal

          11,291               11,291               11,350               11,350  

U.S. state, municipal and agencies debt (1)

    962       35,523       67         36,552         2,068       31,030       66         33,164  

Other OECD government debt (2)

    4,285       5,018               9,303         1,151       9,018               10,169  

Mortgage-backed securities (1)

          967               967               1,001               1,001  

Asset-backed securities

                     

Non-CDO securities (3)

          963       4         967               1,023       110         1,133  

Corporate debt and other debt

          22,831       21         22,852         2       22,303       21         22,326  

Equities

    36,383       2,114       1,107               39,604               30,847       2,547       1,148               34,542  
      53,791       83,926       1,199               138,916               42,410       84,503       1,345               128,258  

Investment

                     

Issued or guaranteed

                     

Canadian government debt (1)

                     

Federal

          451               451               238               238  

Provincial and municipal

          2,138               2,138               1,554               1,554  

U.S. state, municipal and agencies debt (1)

          16,241               16,241               18,136               18,136  

Other OECD government debt

          4,192               4,192               1,470               1,470  

Mortgage-backed securities (1)

          2,540       28         2,568               2,174               2,174  

Asset-backed securities

                     

CDO

          7,062               7,062               6,239               6,239  

Non-CDO securities

          884               884               863               863  

Corporate debt and other debt

          20,715       146         20,861               17,227       192         17,419  

Equities

    42       175       296         513         42       103       237         382  

Loan substitute securities

          24                     24                     24                     24  
      42       54,422       470               54,934               42       48,028       429               48,499  

Assets purchased under reverse repurchase agreements and securities borrowed

          239,657               239,657                 219,108               219,108  

Loans

          9,161       759         9,920               8,929       551         9,480  

Other

                     

Derivatives

                     

Interest rate contracts

          36,222       239         36,461         1       33,862       222         34,085  

Foreign exchange contracts

          32,343       45         32,388               43,253       53         43,306  

Credit derivatives

          187               187               38               38  

Other contracts

    2,724       14,007       57         16,788         5,868       11,654       296         17,818  

Valuation adjustments

          (643     3               (640                   (631     6               (625

Total gross derivatives

    2,724       82,116       344         85,184         5,869       88,176       577         94,622  

Netting adjustments

                            (372     (372                                     (583     (583

Total derivatives

            84,812                 94,039  

Other assets

    1,208       184       66               1,458               1,020       288       65               1,373  
    $  57,765     $  482,327     $  2,838     $ (372   $  542,558             $  49,341     $  469,306     $  2,967     $ (583   $  521,031  

Financial Liabilities

                     

Deposits

                     

Personal

  $     $ 15,840     $ 192     $       $ 16,032       $     $ 14,362     $ 390     $       $ 14,752  

Business and government

          109,574               109,574               103,440       (5       103,435  

Bank

          4,601               4,601               7,072               7,072  

Other

                     

Obligations related to securities sold short

    18,107       15,942               34,049         17,732       14,515               32,247  

Obligations related to assets sold under repurchase agreements and securities loaned

          218,288               218,288               201,839               201,839  

Derivatives

                     

Interest rate contracts

          30,297       824         31,121               29,620       726         30,346  

Foreign exchange contracts

          33,291       28         33,319               41,836       32         41,868  

Credit derivatives

          281               281               94               94  

Other contracts

    2,561       15,020       247         17,828         4,369       13,730       380         18,479  

Valuation adjustments

          (6     (3             (9                   29       5               34  

Total gross derivatives

    2,561       78,883       1,096         82,540         4,369       85,309       1,143         90,821  

Netting adjustments

                            (372     (372                                     (583     (583

Total derivatives

            82,168                 90,238  

Other liabilities

    187       (1,369     56               (1,126             170       (1,654     68               (1,416
    $ 20,855     $ 441,759     $ 1,344     $  (372   $ 463,586             $ 22,271     $ 424,883     $ 1,596     $  (583   $ 448,167  

 

(1)   As at April 30, 2019, residential and commercial mortgage-backed securities (MBS) included in all fair value levels of trading securities were $22,962 million and $nil (October 31, 2018 – $16,776 million and $nil), respectively, and in all fair value levels of Investment securities were $6,117 million and $1,673 million (October 31, 2018 – $4,713 million and $1,348 million), respectively.
(2)   OECD stands for Organisation for Economic Co-operation and Development.
(3)   CDO stands for collateralized debt obligations.


 

Royal Bank of Canada        Second Quarter 2019         57

Fair value measurements using significant unobservable inputs (Level 3 Instruments)

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.

During the three months ended April 30, 2019, there were no significant changes made to the valuation techniques and ranges and weighted averages of unobservable inputs used in the determination of fair value of Level 3 financial instruments. As at April 30, 2019, the impacts of adjusting one or more of the unobservable inputs by reasonably possible alternative assumptions did not change significantly from the impacts disclosed in our 2018 Annual Consolidated Financial Statements.

Changes in fair value measurement for instruments measured on a recurring basis and categorized in Level 3

 

     For the three months ended April 30, 2019  
(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

                 

Issued or guaranteed

                 

U.S. state, municipal and agencies debt

  $ 65     $     $ 2     $     $     $     $     $ 67     $  

Asset-backed securities

                 

Non-CDO securities

    9                         (5                 4       1  

Corporate debt and other debt

    22                         (1                 21        

Equities

    1,076       (29     16       70       (35     9             1,107       (12
      1,172       (29     18       70       (41     9             1,199       (11

Investment

                 

Mortgage-backed securities

    27             1                               28       n.a.  

Corporate debt and other debt

    135             11                               146       n.a.  

Equities

    247             10             39                   296       n.a.  

Loan substitute securities

                                                    n.a.  
      409             22             39                   470       n.a.  

Loans

    826       12       1       48       (2     53       (179     759       5  

Other

                 

Net derivative balances (3)

                 

Interest rate contracts

    (550     (27           (193     184       1             (585     (31

Foreign exchange contracts

    12       1       3       (1                 2       17       1  

Other contracts

    (102     35       (3     (6     13       (22     (105     (190     14  

Valuation adjustments

    13                         (7                 6        

Other assets

    61       10       1             (6                 66       10  
    $   1,841     $       2     $   42     $     (82   $   180     $ 41     $   (282   $   1,742     $   (12

Liabilities

                 

Deposits

                 

Personal

  $ (91   $ (4   $     $ (24   $ 6     $ (107   $ 28     $ (192   $ (7

Business and government

                                                     

Other

                 

Other liabilities

    (52     (5     (2     1       2                   (56     (4
    $ (143   $ (9   $ (2   $ (23   $ 8     $   (107   $ 28     $ (248   $ (11


 

58        Royal Bank of Canada        Second Quarter 2019

Note 3    Fair value of financial instruments (continued)

 

 

     For the three months ended April 30, 2018  
(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

                 

Issued or guaranteed

                 

U.S. state, municipal and agencies debt

  $ 187     $ 12     $ 8     $     $ (141   $     $     $ 66     $ 4  

Asset-backed securities

                 

Non-CDO securities

    196       14       5             (100                 115       14  

Corporate debt and other debt

    29       (1                             (5     23        

Equities

    975       (32     36       54       (33                 1,000       (18
      1,387       (7     49       54       (274           (5     1,204        

Investment

                 

Mortgage-backed securities

                                                    n.a.  

Corporate debt and other debt

    28             1                   4             33       n.a.  

Equities

    246             1             (1                 246       n.a.  

Loan substitute securities

    3             1                               4       n.a.  
      277             3             (1     4             283       n.a.  

Loans

    521       3             164       (1                 687       3  

Other

                 

Net derivative balances (3)

                 

Interest rate contracts

    (512     (11           23                   (5     (505     (11

Foreign exchange contracts

    33       (2     2       (1     (1     4       (1     34       (3

Other contracts

    (157     (5     (5     (18     (11     21       63       (112     (28

Valuation adjustments

    (11                       (11                 (22      

Other assets

    0       0       0       0       0       0       0       0       0  
    $   1,538     $     (22   $     49     $     222     $     (299   $ 29     $ 52     $     1,569     $     (39

Liabilities

                 

Deposits

                 

Personal

  $ (554   $ (14   $ (6   $ (18   $ 4     $     (108   $     442     $ (254   $ (5)  

Business and government

                                                     

Other

                 

Other liabilities

    (28           (1           5                   (24      
    $ (582   $ (14   $ (7   $ (18   $ 9     $ (108   $ 442     $ (278   $ (5


 

Royal Bank of Canada        Second Quarter 2019         59

     For the six months ended April 30, 2019  
(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

                 

Issued or guaranteed

                 

U.S. state, municipal and agencies debt

  $ 66     $ (1   $ 2     $     $     $     $     $ 67     $  

Asset-backed securities

                 

Non-CDO securities

    110       15                   (121                 4       2  

Corporate debt and other debt

    21       1                   (1                 21        

Equities

    1,148       (47     16       150       (178     18             1,107       (17
      1,345       (32     18       150       (300     18             1,199       (15

Investment

                 

Mortgage-backed securities

                1       27                         28       n.a.  

Corporate debt and other debt

    192       (3     13             (56                 146       n.a.  

Equities

    237             20             39                   296       n.a.  

Loan substitute securities

                                                    n.a.  
      429       (3     34       27       (17                 470       n.a.  

Loans

    551       29       2       312       (4     53       (184     759       21  

Other

                 

Net derivative balances (3)

                 

Interest rate contracts

    (504     (95           (193     224       3       (20     (585     (37

Foreign exchange contracts

    21       (6     9       1             (1     (7     17        

Other contracts

    (84     80       (3     (15     (10     (39     (119     (190     74  

Valuation adjustments

    1                         5                   6        

Other assets

    65       10       1             (10                 66       10  
    $   1,824     $     (17   $       61     $    282     $   (112   $ 34     $ (330   $   1,742     $ 53  

Liabilities

                 

Deposits

                 

Personal

  $ (390   $ (34   $ (1   $ (33   $ 11     $ (125   $ 380     $ (192   $ (5

Business and government

    5                                     (5            

Other

                 

Other liabilities

    (68     (5     (2     1       18                   (56     (3
    $ (453   $ (39   $ (3   $ (32   $ 29     $   (125   $    375     $ (248   $       (8


 

60        Royal Bank of Canada        Second Quarter 2019

Note 3    Fair value of financial instruments (continued)

 

 

     For the six months ended April 30, 2018  
(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

                 

Issued or guaranteed

                 

U.S. state, municipal and agencies debt

  $ 508     $ 16     $ (5   $     $ (453   $     $     $ 66     $ (1

Asset-backed securities

                 

Non-CDO securities

    196       26       (1           (106                 115       11  

Corporate debt and other debt

    30       (2                             (5     23       (1

Equities

    923       (100     15       233       (73     4       (2     1,000       (41
      1,657       (60     9       233       (632     4       (7     1,204       (32

Investment

                 

Mortgage-backed securities

                                                    n.a.  

Corporate debt and other debt

    29       (5     5                   4             33       n.a.  

Equities

    217             27             2                   246       n.a.  

Loan substitute securities

    3             1                               4       n.a.  
      249       (5     33             2       4             283       n.a.  

Loans

    477       2       (1     214       (5                 687       2  

Other

                 

Net derivative balances (3)

                 

Interest rate contracts

    (455     34             50       1             (135     (505     34  

Foreign exchange contracts

    21       4       3       (1     3       5       (1     34       3  

Other contracts

    (181     48       1       (16     (45     (13     94       (112     72  

Valuation adjustments

    (16                       (6                 (22      

Other assets

                                                     
    $   1,752     $        23     $         45     $    480     $   (682   $     $ (49   $   1,569     $          79  

Liabilities

                 

Deposits

                 

Personal

  $ (465   $ (45   $ (2   $ (167   $ 26     $ (160   $ 559     $ (254   $ (14

Business and government

                                                     

Other

                 

Other liabilities

    (24     (1           (5     6                   (24      
    $ (489   $ (46   $ (2   $ (172   $ 32     $   (160   $    559     $ (278   $ (14

 

(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 $18 million for the three months ended April 30, 2019 (April 30, 2018 – losses of $2 million) and gains of $29 million for the six months ended April 30, 2019 (April 30, 2018 – gains of $30 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 April 30, 2019 included derivative assets of $344 million (April 30, 2018 – $661 million) and derivative liabilities of $1,096 million (April 30, 2018 – $1,266 million).
n.a.   not applicable

Transfers between fair value hierarchy levels for instruments carried at fair value on a recurring basis

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 three months ended April 30, 2019, transfers out of Level 1 to Level 2 included Other contracts, consisting of derivative related assets and derivative related liabilities of $1,996 million and $621 million, respectively.

During the three months ended April 30, 2019 there were no significant transfers out of Level 2 to Level 1.

Transfers between Level 2 and Level 3 are primarily due to either a change in the market observability for an input, or a change in an unobservable input’s significance to a financial instrument’s fair value.

During the three months ended April 30, 2019, significant transfers out of Level 2 to Level 3 include:

   

$107 million in Personal deposits, due to a change in the market observability of inputs.

During the three months ended April 30, 2019, significant transfers out of Level 3 to Level 2 include:

   

$179 million in Loans, due to changes in significance of the unobservable inputs.

   

$93 million of OTC equity options in Other contracts, comprised of $163 million of derivative related assets and $70 million of derivative related liabilities, due to changes in the market observability of inputs.


 

Royal Bank of Canada        Second Quarter 2019         61

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 three months ended            For the six months ended  
(Millions of Canadian dollars)  

April 30

2019

   

April 30

2018 (1)

          

April 30

2019

   

April 30

2018 (1)

 

Interest and dividend income (2), (3)

         

Financial instruments measured at fair value through profit or loss

  $ 2,900     $ 1,847       $ 5,787     $ 3,508  

Financial instruments measured at fair value through other comprehensive income

    288       172         560       324  

Financial instruments measured at amortized cost

    6,944       5,846               13,934       11,573  
      10,132       7,865               20,281       15,405  

Interest expense (2)

         

Financial instruments measured at fair value through profit or loss

  $ 2,479     $ 1,456       $ 4,997     $ 2,734  

Financial instruments measured at amortized cost

    2,816       1,988               5,563       3,805  
      5,295       3,444               10,560       6,539  

Net interest income

  $       4,837     $     4,421             $       9,721     $       8,866  

 

(1)   Amounts have been revised from those previously presented.
(2)   Excludes the following amounts related to our insurance operations and included in Insurance premiums, investment and fee income in the Interim Consolidated Statements of Income. For the three months ended April 30, 2019, Interest income of $114 million (April 30, 2018 – $113 million), and Interest expense of $1 million (April 30, 2018 – $2 million). For the six months ended April 30, 2019, Interest Income of $243 million (April 30, 2018 – $238 million), and Interest expense of $2 million (April 30, 2018 – $3 million).
(3)   Includes dividend income for the three months ended April 30, 2019 of $456 million (April 30, 2018 – $393 million) and for the six months ended April 30, 2019 of $893 million (April 30, 2018 – $760 million).

 

Note 4    Securities

 

Unrealized gains and losses on securities at FVOCI (1) (2)

 

     As at  
    April 30, 2019           October 31, 2018  
(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  

Issued or guaranteed

                 

Canadian government debt

                 

Federal (3)

  $ 450     $ 2     $ (1   $ 451       $ 244     $     $ (6   $ 238  

Provincial and municipal

    2,116       26       (4     2,138         1,578       2       (26     1,554  

U.S. state, municipal and agencies debt (3)

    16,119       203       (81     16,241         18,000       285       (149     18,136  

Other OECD government debt

    4,190       3       (1     4,192         1,469       2       (1     1,470  

Mortgage-backed securities (3)

    2,578       2       (12     2,568         2,176       1       (3     2,174  

Asset-backed securities

                 

CDO

    7,100       1       (39     7,062         6,248       1       (10     6,239  

Non-CDO securities

    880       6       (2     884         856       9       (2     863  

Corporate debt and other debt

    20,809       61       (9     20,861         17,439       22       (42     17,419  

Equities

    294       221       (2     513         197       186       (1     382  

Loan substitute securities

    25             (1     24               25             (1     24  
    $   54,561     $   525     $   (152   $   54,934             $   48,232     $   508     $   (241   $   48,499  

 

(1)   Excludes $47,141 million of held-to-collect securities as at April 30, 2019 that are carried at amortized cost, net of allowance for credit losses (October 31, 2018 – $46,109 million).
(2)   Gross unrealized gains and losses includes $1 million of allowance for credit losses on debt securities at FVOCI as at April 30, 2019 (October 31, 2018 – $11 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 $1,681 million, $1 million, $9 million and $1,673 million, respectively as at April 30, 2019 (October 31, 2018 – $1,442 million, $nil, $6 million and $1,436 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:

   

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.


 

62        Royal Bank of Canada        Second Quarter 2019

Note 4    Securities (continued)

 

 

Allowance for credit losses – securities at FVOCI (1)

 

     For the three months ended  
    April 30, 2019           April 30, 2018  
    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

  $ 6     $       $ 3     $ 9       $ 37     $ 5       $     $ 42  

Provision for credit losses

                     

Transfers to Stage 1

                                                     

Transfers to Stage 2

                                                     

Purchases

    1                     1         48                     48  

Sales and maturities

                                (46                   (46

Changes in risk, parameters and exposures

    (2             (7     (9       (1     (1             (2

Exchange rate and other

                                            2       1                     3  

Balance at end of period

  $       5     $       –             $       (4   $         1             $       40     $         5             $       –     $       45  

 

     For the six months ended  
    April 30, 2019           April 30, 2018  
    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

  $ 4     $ 7       $     $ 11       $ 3     $ 22       $     $ 25  

Provision for credit losses

                     

Transfers to Stage 1

                                                     

Transfers to Stage 2

                                                     

Purchases

    3                     3         82                     82  

Sales and maturities

    (1     (7             (8       (46     (17             (63

Changes in risk, parameters and exposures

    (1             (4     (5       (1     1                

Exchange rate and other

                                            2       (1                   1  

Balance at end of period

  $       5     $       –             $       (4   $         1             $       40     $         5             $       –     $       45  

 

(1)   Expected credit losses on debt securities at FVOCI are not separately recognized on the balance sheet 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.

Allowance for credit losses – securities at amortized cost

 

     For the three months ended  
    April 30, 2019           April 30, 2018  
    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

  $ 6     $ 30       $     $ 36       $ 4     $ 35       $     $ 39  

Provision for credit losses

                     

Transfers to Stage 1

                                                     

Transfers to Stage 2

                                                     

Purchases

    3                     3         2                     2  

Sales and maturities

                                (1     (1             (2

Changes in risk, parameters and exposures

    (2     (8             (10       (1     (5             (6

Exchange rate and other

          1                     1                     2                     2  

Balance at end of period

  $       7     $     23             $       –     $       30             $         4     $       31             $       –     $       35  

 

     For the six months ended  
    April 30, 2019           April 30, 2018  
    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

  $ 6     $ 32       $     $ 38       $ 9     $ 45       $     $ 54  

Provision for credit losses

                     

Transfers to Stage 1

                                3       (3              

Transfers to Stage 2

                                (7     7                

Purchases

    4                     4         3                     3  

Sales and maturities

                                (2     (10             (12

Changes in risk, parameters and exposures

    (3     (10             (13       (2     (7             (9

Exchange rate and other

          1                     1                     (1                   (1

Balance at end of period

  $       7     $     23             $       –     $       30             $         4     $       31             $       –     $       35  


 

Royal Bank of Canada        Second Quarter 2019         63

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 as at the reporting date as outlined in the internal ratings maps in the Credit risk section of our 2018 Annual Report.

 

     As at  
    April 30, 2019           October 31, 2018  
    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

  $ 53,783     $ 3       $     $ 53,786       $ 46,956     $ 479       $     $ 47,435  

Non-investment grade

    471       1               472         500       33               533  

Impaired

                        139       139                                   125       125  
  $ 54,254     $ 4       $ 139     $ 54,397       $ 47,456     $ 512       $ 125     $ 48,093  

Items not subject to impairment (2)

                                    537                                               406  
                                    $ 54,934                                             $ 48,499  

Securities at amortized cost

                     

Investment grade

  $ 45,780     $ 78       $     $ 45,858       $ 44,958     $ 119       $     $ 45,077  

Non-investment grade

    676       637               1,313         367       703               1,070  

Impaired

                                                                       
  $ 46,456     $ 715       $     $ 47,171       $ 45,325     $ 822       $     $ 46,147  

Allowance for credit losses

    7       23                     30               6       32                     38  

Amortized cost

  $   46,449     $   692             $     $   47,141             $   45,319     $   790             $     $   46,109  

 

(1)   Includes $139 million of purchased credit impaired securities (October 31, 2018 – $125 million).
(2)   Investment securities at FVOCI not subject to impairment represent equity securities designated as FVOCI.


 

64        Royal Bank of Canada        Second Quarter 2019

Note 5    Loans and allowance for credit losses

 

Allowance for credit losses

 

     For the three months ended  
    April 30, 2019           April 30, 2018  
(Millions of Canadian dollars)   Balance at
beginning
of period
    Provision
for credit
losses
    Net
write-offs
    Exchange
rate and
other
(1)
    Balance at
end of
period
           Balance at
beginning
of period
    Provision
for credit
losses
    Net
write-offs
    Exchange
rate and
other (1)
    Balance at
end of
period
 

Retail

                     

Residential mortgages

  $ 409     $ (2   $ (16   $ 4     $ 395       $ 363     $ 19     $ (10   $ 9     $ 381  

Personal

    892       148       (117     (1     922         861       122       (107           876  

Credit cards

    780       135       (125           790         680       136       (123     1       694  

Small business

    51       7       (8     (1     49         50       8       (5     (1     52  

Wholesale

    1,110       158       (155     (5     1,108         1,025       (5     (18     10       1,012  

Customers’ liability under acceptances

    31       (5                 26               16       (2           1       15  
    $   3,273     $ 441     $ (421   $ (3   $   3,290             $   2,995     $ 278     $ (263   $ 20     $   3,030  

Presented as:

                     

Allowance for loan losses

  $ 3,061           $ 3,093       $ 2,776           $ 2,808  

Other liabilities – Provisions

    180             171         202             206  

Customers’ liability under acceptances

    31             26         16             15  

Other components of equity

    1                                             1                               1  

 

     For the six months ended  
    April 30, 2019           April 30, 2018  
(Millions of Canadian dollars)   Balance at
beginning
of period
    Provision
for credit
losses
    Net
write-offs
    Exchange
rate and
other
(1)
    Balance at
end of
period
           Balance at
beginning
of period
    Provision
for credit
losses
    Net
write-offs
    Exchange
rate and
other (1)
    Balance at
end of
period
 

Retail

                     

Residential mortgages

  $ 382     $ 31     $ (20   $ 2     $ 395       $ 378     $ 32     $ (23   $ (6   $ 381  

Personal

    895       271       (230     (14     922         826       267       (209     (8     876  

Credit cards

    760       275       (245           790         693       234       (233           694  

Small business

    51       13       (13     (2     49         49       17       (12     (2     52  

Wholesale

    979       362       (216     (17     1,108         1,010       67       (36     (29     1,012  

Customers’ liability under acceptances

    21       5                   26               20       (5                 15  
    $   3,088     $ 957     $ (724   $ (31   $   3,290             $   2,976     $ 612     $ (513   $ (45   $   3,030  

Presented as:

                     

Allowance for loan losses

  $ 2,912           $ 3,093       $ 2,749           $ 2,808  

Other liabilities – Provisions

    154             171         207             206  

Customers’ liability under acceptances

    21             26         20             15  

Other components of equity

    1                                                                           1  

 

(1)   Includes interest income on impaired loans of $24 million for the three months ended April 30, 2019 (April 30, 2018 – $20 million) and $45 million for the six months ended April 30, 2019 (April 30, 2018 – $37 million).

The following tables reconcile the opening and closing allowance for loans and commitments, by stage, for each major product category.

Reconciling items include the following:

   

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.


 

Royal Bank of Canada        Second Quarter 2019         65

Allowance for credit losses – Retail and wholesale loans

 

     For the three months ended  
    April 30, 2019           April 30, 2018  
    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

  $ 138     $ 79       $ 192     $ 409       $ 130     $ 67       $ 166     $ 363  

Provision for credit losses

                     

Transfers to Stage 1

    35       (28       (7             17       (17              

Transfers to Stage 2

    (2     3         (1             (6     7         (1      

Transfers to Stage 3

          (10       10               (1     (5       6        

Originations

    10                     10         17                     17  

Maturities

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

Changes in risk, parameters and exposures

    (39     19         12       (8       (10     9         8       7  

Write-offs

                  (17     (17                     (11     (11

Recoveries

                  1       1                       1       1  

Exchange rate and other

    1       1               2       4               5       3               1       9  

Balance at end of period

  $ 140     $ 63             $ 192     $ 395             $ 149     $ 62             $ 170     $ 381  

Personal

                     

Balance at beginning of period

  $ 235     $ 519       $ 138     $ 892       $ 275     $ 459       $ 127     $ 861  

Provision for credit losses

                     

Transfers to Stage 1

    142       (136       (6             218       (218              

Transfers to Stage 2

    (23     24         (1             (50     50                

Transfers to Stage 3

    (1     (40       41               (1     (35       36        

Originations

    23       1               24         25       1               26  

Maturities

    (5     (27             (32       (7     (30             (37

Changes in risk, parameters and exposures

    (134     214         76       156         (207     261         79       133  

Write-offs

                  (148     (148                     (137     (137

Recoveries

                  31       31                       30       30  

Exchange rate and other

    1                     (2     (1                                        

Balance at end of period

  $ 238     $ 555             $ 129     $ 922             $ 253     $ 488             $ 135     $ 876  

Credit cards

                     

Balance at beginning of period

  $ 168     $ 612       $     $ 780       $ 212     $ 468       $     $ 680  

Provision for credit losses

                     

Transfers to Stage 1

    118       (118                     216       (216              

Transfers to Stage 2

    (20     20                       (41     41                

Transfers to Stage 3

    (1     (83       84               (1     (55       56        

Originations

    1                     1         3                     3  

Maturities

    (1     (5             (6       (3     (13             (16

Changes in risk, parameters and exposures

    (98     197         41       140         (189     271         67       149  

Write-offs

                  (158     (158                     (155     (155

Recoveries

                  33       33                       32       32  

Exchange rate and other

    (1     1                                   2       (1                   1  

Balance at end of period

  $ 166     $ 624             $     $ 790             $ 199     $ 495             $     $ 694  

Small business

                     

Balance at beginning of period

  $ 16     $ 18       $ 17     $ 51       $ 17     $ 15       $ 18     $ 50  

Provision for credit losses

                     

Transfers to Stage 1

    6       (6                     7       (7              

Transfers to Stage 2

    (1     1                       (1     1                

Transfers to Stage 3

          (2       2                     (3       3        

Originations

    2                     2         2                     2  

Maturities

    (1     (2             (3       (1     (2             (3

Changes in risk, parameters and exposures

    (7     8         7       8         (8     12         5       9  

Write-offs

                  (10     (10                     (7     (7

Recoveries

                  2       2                       2       2  

Exchange rate and other

                        (1     (1             (1     1               (1     (1

Balance at end of period

  $ 15     $ 17             $ 17     $ 49             $ 15     $ 17             $ 20     $ 52  

Wholesale

                     

Balance at beginning of period

  $ 301     $ 361       $ 448     $ 1,110       $ 249     $ 334       $ 442     $ 1,025  

Provision for credit losses

                     

Transfers to Stage 1

    54       (45       (9             67       (67              

Transfers to Stage 2

    (8     8                       (11     14         (3      

Transfers to Stage 3

    (2     (17       19               (1     (13       14        

Originations

    59       17               76         59       9               68  

Maturities

    (46     (36             (82       (37     (56             (93

Changes in risk, parameters and exposures

    (68     65         167       164         (76     68         28       20  

Write-offs

                  (168     (168                     (36     (36

Recoveries

                  13       13                       18       18  

Exchange rate and other

    3       5               (13     (5             4       6                     10  

Balance at end of period

  $     293     $     358             $     457     $   1,108             $     254     $     295             $     463     $   1,012  


 

66        Royal Bank of Canada        Second Quarter 2019

Note 5    Loans and allowance for credit losses (continued)

 

 

 

     For the six months ended  
    April 30, 2019           April 30, 2018  
    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

  $ 142     $ 64       $ 176     $ 382       $ 140     $ 65       $ 173     $ 378  

Provision for credit losses

                     

Transfers to Stage 1

    43       (36       (7             39       (39              

Transfers to Stage 2

    (5     7         (2             (11     12         (1      

Transfers to Stage 3

    (1     (18       19               (1     (8       9        

Originations

    23                     23         33                     33  

Maturities

    (6     (3             (9       (6     (5             (11

Changes in risk, parameters and exposures

    (57     49         25       17         (46     36         20       10  

Write-offs

                  (22     (22                     (25     (25

Recoveries

                  2       2                       2       2  

Exchange rate and other

    1                     1       2               1       1               (8     (6

Balance at end of period

  $ 140     $ 63             $ 192     $ 395             $ 149     $ 62             $ 170     $ 381  

Personal

                     

Balance at beginning of period

  $ 242     $ 512       $ 141     $ 895       $ 278     $ 427       $ 121     $ 826  

Provision for credit losses

                     

Transfers to Stage 1

    274       (268       (6             422       (422              

Transfers to Stage 2

    (46     47         (1             (92     92                

Transfers to Stage 3

    (1     (84       85               (1     (78       79        

Originations

    46       1               47         51       3               54  

Maturities

    (12     (57             (69       (16     (65             (81

Changes in risk, parameters and exposures

    (266     404         155       293         (387     532         149       294  

Write-offs

                  (292     (292                     (266     (266

Recoveries

                  62       62                       57       57  

Exchange rate and other

    1                     (15     (14             (2     (1             (5     (8

Balance at end of period

  $ 238     $ 555             $ 129     $ 922             $ 253     $ 488             $ 135     $ 876  

Credit cards

                     

Balance at beginning of period

  $ 161     $ 599       $     $ 760       $ 251     $ 442       $     $ 693  

Provision for credit losses

                     

Transfers to Stage 1

    228       (228                     444       (444              

Transfers to Stage 2

    (39     39                       (81     81                

Transfers to Stage 3

    (1     (163       164               (1     (92       93        

Originations

    2                     2         6       1               7  

Maturities

    (2     (11             (13       (7     (43             (50

Changes in risk, parameters and exposures

    (182     387         81       286         (413     550         140       277  

Write-offs

                  (311     (311                     (297     (297

Recoveries

                  66       66                       64       64  

Exchange rate and other

    (1     1                                                              

Balance at end of period

  $ 166     $ 624             $     $ 790             $ 199     $ 495             $     $ 694  

Small business

                     

Balance at beginning of period

  $ 17     $ 16       $ 18     $ 51       $ 15     $ 15       $ 19     $ 49  

Provision for credit losses

                     

Transfers to Stage 1

    11       (11                     15       (15              

Transfers to Stage 2

    (2     2                       (3     3                

Transfers to Stage 3

          (5       5                     (6       6        

Originations

    5                     5         5                     5  

Maturities

    (2     (4             (6       (2     (4             (6

Changes in risk, parameters and exposures

    (14     19         9       14         (15     24         9       18  

Write-offs

                  (17     (17                     (16     (16

Recoveries

                  4       4                       4       4  

Exchange rate and other

                        (2     (2                                 (2     (2

Balance at end of period

  $ 15     $ 17             $ 17     $ 49             $ 15     $ 17             $ 20     $ 52  

Wholesale

                     

Balance at beginning of period

  $ 274     $ 340       $ 365     $ 979       $ 251     $ 352       $ 407     $ 1,010  

Provision for credit losses

                     

Transfers to Stage 1

    78       (69       (9             125       (125              

Transfers to Stage 2

    (17     19         (2             (46     49         (3      

Transfers to Stage 3

    (3     (33       36               (1     (19       20        

Originations

    127       27               154         111       17               128  

Maturities

    (89     (79             (168       (78     (108             (186

Changes in risk, parameters and exposures

    (79     149         306       376         (108     131         102       125  

Write-offs

                  (236     (236                     (63     (63

Recoveries

                  20       20                       27       27  

Exchange rate and other

    2       4               (23     (17                   (2             (27     (29

Balance at end of period

  $ 293     $ 358             $ 457     $ 1,108             $ 254     $ 295             $ 463     $ 1,012  


 

Royal Bank of Canada        Second Quarter 2019         67

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 as at the reporting date as outlined in the internal ratings maps for Wholesale and Retail facilities in the Credit risk section of our 2018 Annual Report.

 

     As at  
    April 30, 2019           October 31, 2018  
(Millions of Canadian dollars)   Stage 1     Stage 2     Stage 3     Total            Stage 1     Stage 2     Stage 3     Total  

Retail

                 

Loans outstanding – Residential mortgages

                 

Low risk

  $ 226,803     $ 5,351     $     $ 232,154       $ 222,026     $ 3,688     $     $ 225,714  

Medium risk

    13,174       1,289             14,463         13,681       1,369             15,050  

High risk

    2,647       2,749             5,396         2,577       2,897             5,474  

Not rated (1)

    36,469       570             37,039         34,670       578             35,248  

Impaired

                754       754                           726       726  
      279,093       9,959       754       289,806               272,954       8,532       726       282,212  

Items not subject to impairment (2)

                            330                                       259  

Total

                            290,136                                       282,471  

Loans outstanding – Personal

                 

Low risk

  $ 71,220     $ 1,638     $     $ 72,858       $ 71,763     $ 1,256     $     $ 73,019  

Medium risk

    6,055       2,057             8,112         6,124       1,925             8,049  

High risk

    929       1,701             2,630         998       1,672             2,670  

Not rated (1)

    8,271       84             8,355         8,595       64             8,659  

Impaired

                316       316                             303       303  

Total

    86,475       5,480       316       92,271               87,480       4,917       303       92,700  

Loans outstanding – Credit cards

                 

Low risk

  $ 13,285     $ 104     $     $ 13,389       $ 13,185     $ 100     $     $ 13,285  

Medium risk

    2,223       1,707             3,930         2,234       1,632             3,866  

High risk

    136       1,404             1,540         139       1,331             1,470  

Not rated (1)

    850       31             881               764       30             794  

Total

    16,494       3,246             19,740               16,322       3,093             19,415  

Loans outstanding – Small business

                 

Low risk

  $ 2,178     $ 31     $     $ 2,209       $ 2,004     $ 46     $     $ 2,050  

Medium risk

    2,255       108             2,363         2,230       102             2,332  

High risk

    108       192             300         95       178             273  

Not rated (1)

    154       1             155         166       1             167  

Impaired

                48       48                           44       44  

Total

    4,695       332       48       5,075               4,495       327       44       4,866  

Undrawn loan commitments – Retail

                 

Low risk

  $   191,408     $ 1,711     $     $   193,119       $ 182,426     $ 1,270     $     $ 183,696  

Medium risk

    9,600       242             9,842         10,794       239             11,033  

High risk

    2,161       212             2,373         3,740       166             3,906  

Not rated (1)

    2,571       61             2,632               2,584       35             2,619  

Total

    205,740       2,226             207,966               199,544       1,710             201,254  

Wholesale – Loans outstanding

                 

Investment grade

  $ 54,393     $ 81     $     $ 54,474       $ 46,869     $ 324     $     $ 47,193  

Non-investment grade

      114,584         11,279             125,863         106,027         10,190             116,217  

Not rated (1)

    6,637       379             7,016         6,692       411             7,103  

Impaired

                1,892       1,892                           1,096       1,096  
      175,614       11,739       1,892       189,245               159,588       10,925         1,096       171,609  

Items not subject to impairment (2)

                            9,017                                       8,669  

Total

                            198,262                                       180,278  

Undrawn loan commitments – Wholesale

                 

Investment grade

  $   216,669     $     $     $ 216,669       $ 222,970     $ 93     $     $ 223,063  

Non-investment grade

    90,864       7,926             98,790         88,828       7,069             95,897  

Not rated (1)

    5,080                   5,080               4,291                   4,291  

Total

    312,613       7,926               320,539                 316,089         7,162         –         323,251  

 

(1)   In certain cases where an internal risk rating is not assigned, we use other approved credit risk assessment or rating methodologies, policies and tools to manage our credit risk.
(2)   Items not subject to impairment are loans held at FVTPL.


 

68        Royal Bank of Canada        Second Quarter 2019

Note 5    Loans and allowance for credit losses (continued)

 

 

Loans past due but not impaired (1)

 

     As at  
    April 30, 2019           October 31, 2018  
(Millions of Canadian dollars)   1 to 29 days     30 to 89 days     90 days
and greater
    Total            1 to 29 days     30 to 89 days     90 days
and greater
    Total  

Retail

  $ 2,779     $ 1,333     $ 190     $ 4,302       $     2,995     $     1,402     $     179     $     4,576  

Wholesale

    1,408       334             1,742               1,246       468             1,714  
    $ 4,187     $ 1,667     $ 190     $ 6,044             $ 4,241     $ 1,870     $ 179     $ 6,290  

 

(1)   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    Deposits

 

 

     As at  
    April 30, 2019           October 31, 2018  
(Millions of Canadian dollars)   Demand (1)     Notice (2)     Term (3)     Total            Demand (1)     Notice (2)     Term (3)     Total  

Personal

  $ 139,399     $ 49,870     $ 97,226     $ 286,495       $ 135,101     $ 48,873     $ 86,180     $ 270,154  

Business and government

    243,387       10,567       290,713       544,667         238,617       8,606       287,148       534,371  

Bank

    7,754       206       24,979       32,939               8,750       299       23,472       32,521  
    $     390,540     $     60,643     $     412,918     $     864,101             $     382,468     $     57,778     $     396,800     $     837,046  

Non-interest-bearing (4)

                 

Canada

  $ 91,496     $ 5,555     $     $ 97,051       $ 88,119     $ 5,086     $     $ 93,205  

United States

    32,318                   32,318         34,098                   34,098  

Europe (5)

    710                   710         564                   564  

Other International

    5,667       5             5,672         5,495       5             5,500  

Interest-bearing (4)

                 

Canada

    219,759       15,342       316,446       551,547         213,747       15,112       292,641       521,500  

United States

    2,537       35,525       53,294       91,356         2,478       33,099       67,211       102,788  

Europe (5)

    32,587       1,016       29,860       63,463         32,930       1,412       26,598       60,940  

Other International

    5,466       3,200       13,318       21,984               5,037       3,064       10,350       18,451  
    $ 390,540     $ 60,643     $ 412,918     $ 864,101             $ 382,468     $ 57,778     $ 396,800     $ 837,046  

 

(1)   Demand deposits are deposits for which we do not have the right to require notice of withdrawal, which includes 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 April 30, 2019, deposits denominated in U.S. dollars, British pounds, Euro and other foreign currencies were $314 billion, $21 billion, $43 billion and $33 billion, respectively (October 31, 2018 – $309 billion, $20 billion, $38 billion and $32 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)  

April 30

2019

   

October 31

2018

 

Within 1 year:

   

less than 3 months

  $ 106,917     $ 89,553  

3 to 6 months

    53,654       59,109  

6 to 12 months

    85,007       80,773  

1 to 2 years

    56,525       51,798  

2 to 3 years

    42,174       45,550  

3 to 4 years

    18,007       21,127  

4 to 5 years

    24,258       23,863  

Over 5 years

    26,376       25,027  
    $     412,918     $ 396,800  

Aggregate amount of term deposits in denominations of one hundred thousand dollars or more (1)

  $ 375,000     $     362,000  

 

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


 

Royal Bank of Canada        Second Quarter 2019         69

Note 7    Employee benefits – Pension and other post-employment benefits

 

We offer a number of defined benefit and defined contribution plans which provide pension and post-employment benefits to eligible employees. The following tables present the composition of our pension and other post-employment benefit expense and the effects of remeasurements recorded in other comprehensive income.

Pension and other post-employment benefit expense

 

     For the three months ended  
    Pension plans           Other post-employment benefit plans  
(Millions of Canadian dollars)  

April 30

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Current service costs

  $ 74     $ 90       $ 9     $ 9  

Net interest expense (income)

    (5     2         17       18  

Remeasurements of other long term benefits

                  4       (1

Administrative expense

    4       3                      

Defined benefit pension expense

  $ 73     $ 95       $ 30     $ 26  

Defined contribution pension expense

    50       43                      
    $     123     $     138             $     30     $     26  

 

     For the six months ended  
    Pension plans           Other post-employment benefit plans  
(Millions of Canadian dollars)  

April 30

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Current service costs

  $ 148     $ 179       $ 19     $ 19  

Net interest expense (income)

    (10     4         33       34  

Remeasurements of other long term benefits

                  6       (1

Administrative expense

    8       7                      

Defined benefit pension expense

  $ 146     $ 190       $ 58     $ 52  

Defined contribution pension expense

    111       95                      
    $     257     $     285             $     58     $     52  

Pension and other post-employment benefit remeasurements (1)

 

     For the three months ended  
    Defined benefit pension plans           Other post-employment benefit plans  
(Millions of Canadian dollars)  

April 30

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Actuarial (gains) losses:

         

Changes in financial assumptions

  $     653     $     (211     $     60     $     (22

Experience adjustments

                  (2     (4

Return on plan assets (excluding interest based on discount rate)

    (574     123                      
    $ 79     $ (88           $ 58     $ (26

 

     For the six months ended  
    Defined benefit pension plans           Other post-employment benefit plans  
(Millions of Canadian dollars)  

April 30

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Actuarial (gains) losses:

         

Changes in financial assumptions

  $     1,260     $     (193     $     117     $     (22

Experience adjustments

                  (3     (6

Return on plan assets (excluding interest based on discount rate)

    (718     38                      
    $ 542     $ (155           $ 114     $ (28

 

(1)   Market based assumptions, including Changes in financial assumptions and Return on plan assets, are reviewed on a quarterly basis. All other assumptions are updated during our annual review of plan assumptions.

 

Note 8    Income taxes

 

Tax examinations and assessments

During the second quarter, we received proposal letters (the Proposals) from the Canada Revenue Agency (CRA), in respect of the 2014 taxation year, which suggests that Royal Bank of Canada owes additional taxes of approximately $295 million as the tax deductibility of certain dividends was denied on the basis that they were part of a “dividend rental arrangement”. This amount represents the maximum additional tax owing for that year. The Proposals are consistent with the previously received proposal letters and reassessments, which were described in Note 22 of our 2018 Annual Consolidated Financial Statements.

During the first quarter, we received reassessments that are consistent with the previously received proposal letters from the CRA in respect of the 2013 and 2012 taxation years.

In all cases, we are confident that our tax filing position was appropriate and intend to defend ourselves vigorously.


 

70        Royal Bank of Canada        Second Quarter 2019

Note 9     Significant capital and funding transactions

 

Preferred shares

On November 2, 2018, we issued 14 million Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BO at a price of $25 per share, for total gross proceeds of $350 million. For the initial five year period to the earliest redemption date of February 24, 2024, the Series BO Preferred Shares pay quarterly cash dividends, if declared, at a rate of 4.8% per annum. 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 a premium of 2.38%. Holders have the option to convert their shares into Non-Cumulative Floating Rate First Preferred Shares, Series BP, subject to certain conditions, on the earliest redemption date and every fifth year thereafter at a rate equal to the 3-month Government of Canada Treasury Bill yield plus 2.38%. Subject to the consent of OSFI and the requirements of the Bank Act (Canada), we may redeem the Series BO Preferred Shares in whole or in part at a price per share of $25 on the earliest redemption date and every fifth year thereafter. The Series BO Preferred Shares include NVCC provisions which are necessary for the shares to qualify as Tier 1 regulatory capital.

On November 24, 2018, we redeemed all 10 million Non-Cumulative First Preferred Shares Series AD at a price of $25 per share.

On February 24, 2019, we redeemed all 2.4 million Non-Cumulative First Preferred Shares Series AK, all 13.6 million Non-Cumulative 5 year Rate Reset First Preferred Shares Series AJ, and all 12 million Non-Cumulative 5-year Rate Reset First Preferred Shares Series AL, at a price of $25 per share.

Common shares issued (1)

 

     For the three months ended  
    April 30, 2019           April 30, 2018  
(Millions of Canadian dollars, except number of shares)  

Number of

shares

(thousands)

    Amount           

Number of

shares

(thousands)

    Amount  

Issued in connection with share-based compensation plans (2)

    526     $     38         201     $      15  

Purchased for cancellation (3)

    (107     (1             (2,257     (28
      419     $ 37               (2,056   $ (13
         
     For the six months ended  
    April 30, 2019           April 30, 2018  
(Millions of Canadian dollars, except number of shares)  

Number of

shares

(thousands)

    Amount           

Number of

shares

(thousands)

    Amount  

Issued in connection with share-based compensation plans (2)

    685     $      49         665     $ 45  

Purchased for cancellation (3)

    (3,791     (46             (11,554     (141
      (3,106   $ 3               (10,889   $     (96

 

(1)   The requirements of our dividend reinvestment plan (DRIP) are satisfied through either open market share purchases or shares issued from treasury. During the three and six months ended April 30, 2019 and April 30, 2018, our DRIP’s requirements were satisfied through open market share purchases.
(2)   Amounts include cash received for stock options exercised during the period and the fair value adjustment to stock options.
(3)   During the three months ended April 30, 2019, we purchased for cancellation common shares at a total fair value of $11 million (average cost of $101.41 per share), with a book value of $1 million (book value of $12.27 per share). During the six months ended April 30, 2019, we purchased for cancellation common shares at a total fair value of $359 million (average cost of $94.60 per share), with a book value of $46 million (book value of $12.26 per share). During the three months ended April 30, 2018, we purchased for cancellation common shares at a total fair value of $224 million (average cost of $99.30 per share), with a book value of $28 million (book value of $12.22 per share). During the six months ended April 30, 2018, we purchased for cancellation common shares at a total fair value of $1,147 million (average cost of $99.29 per share), with a book value of $141 million (book value of $12.22 per share).


 

Royal Bank of Canada        Second Quarter 2019         71

Note 10    Earnings per share

 

 

     For the three months ended            For the six months ended  
(Millions of Canadian dollars, except share and per share amounts)  

April 30

2019

   

April 30

2018

          

April 30

2019

   

April 30

2018

 

Basic earnings per share

         

Net income

  $ 3,230     $ 3,060       $ 6,402     $ 6,072  

Preferred share dividends

    (65     (72       (139     (144

Net income attributable to non-controlling interest

    (4     (9             (6     (20

Net income available to common shareholders

    3,161       2,979               6,257       5,908  

Weighted average number of common shares (in thousands)

    1,435,091       1,443,084         1,436,099       1,447,504  

Basic earnings per share (in dollars)

  $ 2.20     $ 2.06             $ 4.36     $ 4.08  

Diluted earnings per share

         

Net income available to common shareholders

  $ 3,161     $ 2,979       $ 6,257     $ 5,908  

Dilutive impact of exchangeable shares

    3       3               7       7  

Net income available to common shareholders including dilutive impact of exchangeable shares

    3,164       2,982               6,264       5,915  

Weighted average number of common shares (in thousands)

    1,435,091       1,443,084         1,436,099       1,447,504  

Stock options (1)

    2,224       2,716         2,125       2,894  

Issuable under other share-based compensation plans

    740       754         739       753  

Exchangeable shares (2)

    3,108       3,183               3,231       3,148  

Average number of diluted common shares (in thousands)

      1,441,163         1,449,737           1,442,194         1,454,299  

Diluted earnings per share (in dollars)

  $ 2.20     $ 2.06             $ 4.34     $ 4.07  

 

(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 three months ended April 30, 2019, no outstanding options were excluded from the calculation of diluted earnings per share. For the three months ended April 30, 2018, an average of 738,258 outstanding options with an average exercise price of $102.33 were excluded from the calculation of diluted earnings per share. For the six months ended April 30, 2019, an average of 761,317 outstanding options with an average price of $102.33 were excluded from the calculation of diluted earnings per share. For the six months ended April 30, 2018, an average of 575,107 outstanding options with an average exercise price of $102.33 were excluded from the calculation of diluted earnings per share.
(2)   Includes exchangeable preferred shares.

 

Note 11    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. As a result, 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. 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 accruals could be material to our results of operations in any particular period.

Our significant legal proceedings and regulatory matters are those disclosed in our audited 2018 Annual Consolidated Financial Statements as updated below:

LIBOR regulatory investigations and litigation

In January 2019, a number of financial institutions, including Royal Bank of Canada and RBC Capital Markets LLC, were named in a purported class action in New York alleging violations of the U.S. antitrust laws and common law principles of unjust enrichment in the setting of London interbank offered rate (LIBOR) after the Intercontinental Exchange took over administration of the benchmark interest rate from the British Bankers’ Association in 2014. 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.

Interchange fees litigation

The trial in the Watson proceeding has been rescheduled from October 14, 2019 to October 19, 2020.


 

72        Royal Bank of Canada        Second Quarter 2019

Note 12    Results by business segment

 

 

     For the three months ended April 30, 2019  
(Millions of Canadian dollars)   Personal &
Commercial
Banking
    Wealth
Management
    Insurance     Investor &
Treasury
Services
    Capital
Markets
(1)
    Corporate
Support 
(1)
    Total  

Net interest income (2)

  $ 3,060     $ 731     $     $ (34   $ 1,057     $ 23     $ 4,837  

Non-interest income

    1,273           2,248           1,515             621           1,112       (107         6,662  

Total revenue

    4,333       2,979       1,515       587       2,169       (84     11,499  

Provision for credit losses

    372       30                   25       (1     426  

Insurance policyholder benefits, claims and acquisition expense

                1,160                         1,160  

Non-interest expense

    1,887       2,204       150       388       1,289       (2     5,916  

Net income (loss) before income taxes

    2,074       745       205       199       855       (81     3,997  

Income taxes (recoveries)

    525       160       51       48       79       (96     767  

Net income

  $     1,549     $ 585     $ 154     $ 151     $ 776     $       15     $ 3,230  

Non-interest expense includes:

             

Depreciation and amortization

  $ 157     $ 152     $ 12     $ 35     $ 100     $     $ 456  

 

     For the three months ended April 30, 2018  
(Millions of Canadian dollars)   Personal &
Commercial
Banking
    Wealth
Management
    Insurance     Investor &
Treasury
Services
    Capital
Markets (1)
    Corporate
Support (1)
    Total  

Net interest income (2)

  $ 2,852     $ 632     $     $ 118     $ 841     $ (22   $ 4,421  

Non-interest income

        1,251           1,973              806              553           1,169       (119         5,633  

Total revenue

    4,103       2,605       806       671       2,010       (141     10,054  

Provision for credit losses

    300       (20                 (7     1       274  

Insurance policyholder benefits, claims and acquisition expense

                421                         421  

Non-interest expense

    1,828       1,939       148       391       1,190       (14     5,482  

Net income (loss) before income taxes

    1,975       686       237       280       827       (128     3,877  

Income taxes (recoveries)

    516       149       65       68       162       (143     817  

Net income

  $ 1,459     $ 537     $ 172     $ 212     $ 665     $       15     $ 3,060  

Non-interest expense includes:

             

Depreciation and amortization

  $ 145     $ 133     $ 9     $ 30     $ 90     $     $ 407  

 

(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.


 

Royal Bank of Canada        Second Quarter 2019         73

     For the six months ended April 30, 2019  
(Millions of Canadian dollars)   Personal &
Commercial
Banking
    Wealth
Management
    Insurance     Investor &
Treasury
Services
    Capital
Markets
(1)
    Corporate
Support 
(1)
    Total  

Net interest income (2)

  $ 6,194     $ 1,475     $     $ (65   $ 2,063     $ 54     $ 9,721  

Non-interest income

        2,557           4,452           3,094           1,283           2,204       (223       13,367  

Total revenue

    8,751       5,927       3,094       1,218       4,267       (169     23,088  

Provision for credit losses

    720       56                   165       (1     940  

Insurance policyholder benefits, claims and acquisition expense

                2,385                         2,385  

Non-interest expense

    3,802       4,368       304       806       2,519             29       11,828  

Net income (loss) before income taxes

    4,229       1,503       405       412       1,583       (197     7,935  

Income taxes (recoveries)

    1,109       321       85       100       154       (236     1,533  

Net income

  $ 3,120     $ 1,182     $ 320     $ 312     $ 1,429     $ 39     $ 6,402  

Non-interest expense includes:

             

Depreciation and amortization

  $ 310     $ 299     $ 23     $ 69     $ 195     $     $ 896  

 

     For the six months ended April 30, 2018  
(Millions of Canadian dollars)   Personal &
Commercial
Banking
    Wealth
Management
    Insurance     Investor &
Treasury
Services
    Capital
Markets (1)
    Corporate
Support (1)
    Total  

Net interest income (2)

  $ 5,708     $ 1,244     $     $ 246     $ 1,707     $ (39   $ 8,866  

Non-interest income

        2,560           4,144           1,950           1,101           2,478       (217       12,016  

Total revenue

    8,268       5,388       1,950       1,347       4,185       (256     20,882  

Provision for credit losses

    617       (22                 13             608  

Insurance policyholder benefits, claims and acquisition expense

                1,257                         1,257  

Non-interest expense

    3,629       3,950       290       780       2,404             40       11,093  

Net income (loss) before income taxes

    4,022       1,460       403       567       1,768       (296     7,924  

Income taxes (recoveries)

    1,042       326       104       136       355       (111     1,852  

Net income

  $ 2,980     $ 1,134     $ 299     $ 431     $ 1,413     $ (185   $ 6,072  

Non-interest expense includes:

             

Depreciation and amortization

  $ 285     $ 263     $ 18     $ 60     $ 177     $     $ 803  

 

(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.

Total assets and total liabilities by business segment

 

      As at April 30, 2019  
(Millions of Canadian dollars)    Personal &
Commercial
Banking
     Wealth
Management
     Insurance      Investor &
Treasury
Services
     Capital
Markets
     Corporate
Support
     Total  

Total assets

   $ 463,861      $ 99,175      $ 17,703      $ 135,817      $ 617,468      $ 44,852      $ 1,378,876  

Total liabilities

   $ 463,882      $ 99,350      $ 17,711      $ 135,741      $ 617,261      $ (37,015    $ 1,296,930  
                                                  
      As at October 31, 2018  
(Millions of Canadian dollars)    Personal &
Commercial
Banking
     Wealth
Management
     Insurance      Investor &
Treasury
Services
     Capital
Markets
     Corporate
Support
     Total  

Total assets

   $ 453,879      $ 93,063      $ 16,210      $ 136,030      $ 590,950      $ 44,602      $ 1,334,734  

Total liabilities

   $ 453,878      $ 93,162      $ 16,289      $ 135,944      $ 590,582      $ (35,076    $ 1,254,779  


 

74        Royal Bank of Canada        Second Quarter 2019

Note 13    Capital management

 

Regulatory capital and capital ratios

OSFI formally establishes risk-based capital and leverage targets for deposit-taking institutions in Canada. During the second quarter of 2019, we complied with all capital and leverage requirements, including the domestic stability buffer, imposed by OSFI.

 

      As at  
(Millions of Canadian dollars, except Capital ratios and leverage ratios)   

April 30

2019

    

October 31

2018

 

Capital (1)

     

CET1 capital

   $ 60,314      $ 57,001  

Tier 1 capital

     65,992        63,279  

Total capital

     75,491        72,494  

Risk-weighted Assets (RWA) used in calculation of capital ratios (1) (2)

     

CET1 capital RWA

   $ 510,463      $ 495,528  

Tier 1 capital RWA

     510,463        495,993  

Total capital RWA

     510,463        496,459  

Total capital RWA consisting of: (1)

     

Credit risk

   $ 414,523      $ 401,534  

Market risk

     31,453        32,209  

Operational risk

     64,487        62,716  

Total Capital RWA

   $     510,463      $     496,459  

Capital ratios and Leverage ratios (1)

     

CET1 ratio

     11.8%        11.5%  

Tier 1 capital ratio

     12.9%        12.8%  

Total capital ratio

     14.8%        14.6%  

Leverage ratio

     4.3%        4.4%  

Leverage ratio exposure (billions)

   $ 1,521.2      $ 1,450.8  

 

(1)   Capital, RWA, and capital ratios are calculated using OSFI Capital Adequacy Requirements based on the Basel III framework. The leverage ratio is calculated using OSFI Leverage Requirements Guideline based on the Basel III framework.
(2)   In fiscal 2018, amounts included CVA scalars of 80%, 83% and 86%, respectively.


 

Royal Bank of Canada        Second Quarter 2019         75

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

   

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)

   

Direct deposit service

Shareholders in Canada and the U.S. may have their RBC 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 20 million common shares during the period spanning from March 1, 2019 to February 29, 2020, when the bid expires, or such earlier date as we may complete the purchases pursuant to our Notice of Intention filed with the Toronto Stock Exchange.

   

We determine the amount and

timing of the purchases under the NCIB, subject to prior consultation with the Office of the Superintendent of Financial Institutions Canada.

 

A copy of our Notice of Intention to file a NCIB may be obtained, without charge, by contacting our Corporate Secretary at our Toronto mailing address.

 

2019 Quarterly earnings release dates

First quarter            February 22

Second quarter      May 23

Third quarter          August 21

Fourth quarter        December 4

U.S.A.

 

Co-Transfer Agent (U.K.):

Computershare Investor Services PLC

Securities Services – Registrars

P.O. Box 82, The Pavilions,

Bridgwater Road,

Bristol BS99 6ZZ

U.K.

 

Stock exchange listings

(Symbol: RY)

 

Common shares are listed on:

Canada – Toronto Stock

Exchange (TSX)

U.S. – New York Stock Exchange

(NYSE)

Switzerland – Swiss Exchange

(SIX)

 

All preferred shares are listed on the TSX with the exception of the series C-2. The related depository shares of the series C-2 preferred shares are listed on the NYSE.

   

email: service@computershare.com

 

For other shareholder inquiries,

please contact:

Shareholder Relations

Royal Bank of Canada

200 Bay Street

South Tower

Toronto, Ontario M5J 2J5

Canada

Tel: 416-955-7806

 

Financial analysts, portfolio

managers, institutional

investors

For financial information inquiries, please contact: Investor Relations

Royal Bank of Canada

155 Wellington Street West

Toronto, Ontario M5V 3K7

Canada

Tel: 416-955-7802

 

or visit our website at

rbc.com/investorrelations

       
      Dividend dates for 2019
     

Subject to approval by the Board of Directors

         

Record

dates

 

Payment

dates

      Common and preferred shares series W, AA, AC, AE, AF, AG, AZ, BB, BD, BF, BH, BI, BJ, BK, BM and BO  

January 24

April 25

July 25

October 24

 

February 22

May 24

August 23

November 22

     

Preferred shares series C-2

(US$)

 

January 28

April 26

July 26

October 28

 

February 7

May 7

August 7

November 7

     

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 and RBC INSURANCE 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.