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falseFY0001000275IFRSNYWe are required to maintain balances due to regulatory requirements or contractual restrictions from central banks, other regulatory authorities, and other counterparties. The total balances were $3 billion as at October 31, 2023 (October 31, 2022 – $2 billion; October 31, 2021 – $2 billion).Total assets of unconsolidated structured entities represent the maximum assets that may have to be purchased by the conduits under purchase commitments outstanding. Of the purchase commitments outstanding, the conduits have purchased financial assets totalling $37 billion as at October 31, 2023 (October 31, 2022 – $32 billion). The maximum exposure to loss resulting from our interests in these entities consists mostly of investments, loans, fair value of derivatives, liquidity and credit enhancement facilities. The maximum exposure to loss of the multi-seller conduits is higher than the on-balance sheet assets primarily because of the notional amounts of the backstop liquidity and credit enhancement facilities. Refer to Note 24 for further details. Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.55% above the 3-month CDOR. Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.76% above the 3-month CDOR. Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.98% above the 3-month CDOR. Includes $(9) million that was reclassified from other comprehensive income to retained earnings.For pension plans with funding deficits, the benefit obligations and fair value of plan assets as at October 31, 2023 were $300 million and $106 million, respectively (October 31, 2022 – $323 million and $117 million, respectively)The notes include NVCC provisions, necessary for the notes to qualify as Tier 2 regulatory capital under Basel III. NVCC provisions require the conversion of the instrument into a variable number of common shares in the event that OSFI deems the Bank non-viable or a federal or provincial government in Canada publicly announces that the Bank has accepted or agreed to accept a capital injection. In such an event, each note is convertible into common shares pursuant to an automatic conversion formula with a multiplier of 1.5 and a conversion price based on the greater of: (i) a floor price of $5.00 and (ii) the current market price of our common shares based on the volume weighted average trading price of our common shares on the Toronto Stock Exchange. The number of shares issued is determined by dividing the par value of the note (including accrued and unpaid interest on such note) by the conversion price and then times the multiplier. Interest at a rate of 0.40% above the 30-day Bankers’ Acceptance rate. Interest at a rate of 0.25% above the U.S. dollar 3-month London Interbank Mean Rate (LIMEAN) under a synthetic methodology. In the event of a reduction of the annual dividend we declare on our common shares, the interest payable on the debentures is reduced pro rata to the dividend reduction and the interest reduction is payable with the proceeds from the sale of newly issued common shares. On June 8, 2023, all $110 million of outstanding 9.30% subordinated debentures matured. The principal plus accrued interest were paid to noteholders on the maturity date. On November 1, 2022, we redeemed all TT$300 million of outstanding 4.75% subordinated debentures due on November 1, 2027 for 100% of their principal amount plus interest accrued to, but excluding, the redemption date. Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.61% above the 3-month CDOR. Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.31% above the 3-month CDOR. Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 2.12% above the Daily Compounded CORRA. 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
40-F
[Check one]
☐      REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
☒      ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended October 31, 2023    Commission File Number
001-13928
ROYAL BANK OF CANADA
(Exact name of Registrant as specified in its charter)
 
Canada   6029   Not Applicable
(Province or other jurisdiction of
incorporation or organization)
 
(Primary Standard Industrial
Classification Code Number)
 
(I.R.S. Employer Identification
Number (if applicable))
200 Bay Street
Royal Bank Plaza
Toronto, Ontario
Canada M5J 2J5
Attention: Karen E. McCarthy
Senior Vice President, Associate General Counsel & Secretary
(416) 974-6715
(Address and telephone number of Registrant’s principal executive offices)
Royal Bank of Canada
200 Vesey Street
New York, NY 10281
Attention: John Penn
Assistant General Counsel & Managing Director, RBC US Bank & Capital Markets Regulatory Law and General Counsel, RBC Capital Markets, LLC
(212) 858-7116
(Name, address (including zip code) and telephone number (including area code)
of agent for service in the United States)
copies of all correspondence should be sent to:
 
Joe Cumming
Royal Bank of Canada
200 Bay Street
Toronto, Ontario
Canada M5J 2J5
Tel: (437)
779-7209
  
Donald R. Crawshaw
Sullivan & Cromwell LLP
125 Broad Street
New York, New York
USA 10004-2498
Tel: (212) 558-4000

Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
Title of each class
  
Trading Symbol(s)
  
Name of each exchange on which registered
     
Common Shares
  
RY
  
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act.
 
    
Not Applicable
    
     (Title of Class)     
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
 
    
Not Applicable
    
     (Title of Class)     
For annual reports, indicate by check mark the information filed with this Form:
☒    Annual information form        ☒    Audited annual financial statements
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the
annual report.
 
Common Shares
 
 
1,402,372,572        
 
First Preferred Shares*
 
Series AZ
 
 
20,000,000        
 
Series BB
 
 
20,000,000        
 
Series BD
 
 
24,000,000        
 
Series BF
 
 
12,000,000        
 
Series BH
 
 
6,000,000        
 
Series BI
 
 
6,000,000        
 
Series BO
 
 
14,000,000        
 
Series BQ
 
 
1,750,000**    
 
Series BR
 
 
1,250,000**    
 
Series BS
 
 
1,000,000**    
 
Series BT
 
 
750,000***  
 
Series C-2
 
 
15,385****
 
Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes
  ☒                                                                                            No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Yes
  ☒                                                                                            No  ☐
*The First Preferred Shares Series AZ, BB, BD, BF, BH, BI, BO, BQ, BR, BS and BT contain
non-viability
contingent capital provisions.
**In connection with the issuance of Limited Recourse Capital Notes (LRCN) Series 1, on July 28, 2020, the Registrant issued CAD $1,750 million of First Preferred Shares Series BQ (Series BQ) at a price of CAD $1,000 per Series BQ. In connection with the issuance of LRCN Series 2, on November 2, 2020, the Registrant issued CAD $1,250 million of First Preferred Shares Series BR (Series BR) at a price of CAD $1,000 per Series BR. In connection with the issuance of LRCN Series 3, on June 8, 2021, the Registrant issued CAD $1,000 million of First Preferred Shares Series BS (Series BS) at a price of CAD $1,000 per Series BS. The Series BQ, Series BR and Series BS were issued to a consolidated trust to be held as trust assets in connection with the LRCN structure.
***The First Preferred Shares Series BT were issued on November 5, 2021 to certain institutional investors.
****On November 7, 2023, we redeemed all of our issued and outstanding First Preferred Shares Series
C-2
(Series
C-2).
The Bank’s Depositary Shares representing interests in the Series
C-2
were listed on the New York Stock Exchange prior to the redemption.
 
2

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule
12b-2
of the Exchange Act.
Emerging growth company  ☐
 
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.   
 
†   The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
  
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
  
    ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements.
  
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §
240.10D-1(b).
  
 
3

CONTROLS AND PROCEDURES
Information about disclosure controls and procedures and internal control over financial reporting can be found under “Controls and procedures” on page 122 of our Management’s Discussion and Analysis set forth in Exhibit 2, and under “Management’s Report on Internal Control over Financial Reporting” which can be found on page 134 of our Financial Review set forth in Exhibit 2, which sections are incorporated by reference.
AUDIT COMMITTEE FINANCIAL EXPERTS
The Registrant’s board of directors has determined that it has three audit committee financial experts serving on its audit committee. Cynthia Devine, Frank Vettese and Barry Perry have been determined to be such audit committee financial experts and are independent, as that term is defined by the New York Stock Exchange’s listing standards applicable to the Registrant. The U.S. Securities and Exchange Commission (the “SEC”) has indicated that the designation of Cynthia Devine, Frank Vettese and Barry Perry as audit committee financial experts does not make any of them an “expert” for any purpose, impose any duties, obligations or liability on Cynthia Devine, Frank Vettese and Barry Perry that are greater than those imposed on members of the audit committee and board of directors who do not carry this designation or affect the duties, obligations or liability of any other member of the audit committee.
CODE OF ETHICS
The Registrant has adopted a code of ethics (the “Code of Conduct”) that applies to all employees, contract workers and members of the board of directors, including its principal executive officer, principal financial officer and principal accounting officer. In 2023, the Registrant adopted a revised Code of Conduct. Key amendments made to the Code of Conduct included enhancements to the data loss prevention content to make it more prominent, additional reference to the prohibition on the use of
off-channel
communications and use of interactive methods such as a diagram and case studies to better illustrate how principles are applied in
day-to-day
activities. The full text of the Code of Conduct is set forth in Exhibit 4 and is also available on our website at rbc.com.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information about principal accountant fees and services and a brief description of our
pre-approval
policies and procedures can be found under “Audit Committee” beginning on page 24 of our Annual Information Form set forth in Exhibit 1, which section is incorporated by reference. A copy of our
pre-approval
policies and procedures can be found in Appendix D of our Annual Information Form, which section is incorporated by reference.
OFF-BALANCE
SHEET ARRANGEMENTS
Information about
off-balance
sheet arrangements can be found under
“Off-balance
sheet arrangements” beginning on page 60 of our Management’s Discussion and Analysis set forth in Exhibit 2, which section is incorporated by reference.
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Disclosure of contractual obligations can be found under “Transactional/positional risk drivers – Liquidity and funding risk” beginning on page 86 of our Management’s Discussion and Analysis set forth in Exhibit 2, which section is incorporated by reference.
 
4

Table of Contents
IDENTIFICATION OF THE AUDIT COMMITTEE
The Registrant has a separately-designated standing audit committee. Information about the audit committee can be found under “Audit Committee” beginning on page 24 of our Annual Information Form set forth in Exhibit 1, which section is incorporated by reference.
UNDERTAKING
The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities in relation to which the obligation to file an annual report on Form
40-F
arises; or transactions in said securities.
SUMMARY OF SIGNIFICANT DIFFERENCES FROM NYSE CORPORATE GOVERNANCE RULES
A summary of significant ways corporate governance practices followed by the Registrant differ from corporate governance practices required to be followed by U.S. Domestic Companies under the New York Stock Exchange’s listing standards (disclosure required by section 303A.11 of the NYSE Listed Company Manual) is available on the Registrant’s corporate governance website at rbc.com/governance.
DISCLOSURE
PURSUANT
TO
SECTION
13(r)
OF
THE
SECURITIES
EXCHANGE
ACT
OF
1934
In accordance with section 13(r) of the U.S. Securities Exchange Act of 1934, we are required to disclose certain Iran-related activities. We maintain a robust economic sanctions compliance program which monitors compliance with economic sanctions requirements in the jurisdictions in which we operate and we believe we have been in compliance with relevant economic sanctions legislation throughout fiscal 2023.
We currently maintain certain
non-U.S.
dollar denominated accounts for the Embassy of the Islamic Republic of Iran in Canada (the “Iranian Embassy”). Any funds in these accounts are frozen by Ontario court order in connection with civil litigation, which is being monitored.
In fiscal 2023 these accounts generated CAD $3,336 in gross revenue and less than CAD $3,000 in net income.
*Information contained in or otherwise accessible through the websites mentioned in this report does not form part of this report. All references to websites are inactive textual references and for your information only.
 
5

Table of Contents
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form
40-F
and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized.
 
ROYAL BANK OF CANADA
By:  
/s/ David McKay
Name:   David McKay
Title:   President and Chief Executive Officer
Date:   November 30, 2023
 
6

Table of Contents
INDEX TO EXHIBITS
 
Exhibit
  
Exhibit No.
Royal Bank of Canada Annual Information Form dated November 29, 2023
     1
Financial Review
     2
•  Management’s Discussion and Analysis
  
•  Caution Regarding Forward-Looking Statements
  
•  Management’s Responsibility for Financial Reporting
  
•  Management’s Report on Internal Control over Financial Reporting
  
•  Report of Independent Registered Public Accounting Firm
  
•  Consolidated Financial Statements
  
Consent of Independent Registered Public Accounting Firm
     3
Code of Conduct
     4
Return on Equity and Assets Ratios
     5
Rule
13a-14(a)/15d-14(a)
Certifications
   31
•  Certification of the Registrant’s Chief Executive Officer
•  Certification of the Registrant’s Chief Financial Officer
  
Section 1350 Certifications
   32
•  Certification of the Registrant’s Chief Executive Officer
•  Certification of the Registrant’s Chief Financial Officer
  
Royal Bank of Canada Policy for the Recovery of Erroneously Awarded Incentive-based Compensation from Executive Officers
   97
Interactive Data File (formatted as Inline XBRL)
   101
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
   104
 
7

Table of Contents
EX-1 2 d519293dex1.htm EX-1 ANNUAL INFORMATION FORM EX-1 Annual Information Form

Exhibit 1

 

LOGO

 

ROYAL BANK OF CANADA

ANNUAL

INFORMATION

FORM

 

November 29, 2023


CAUTION REGARDING FORWARD-LOOKING STATEMENTS

From time to time, we make written or oral forward-looking statements within the meaning of certain securities laws, including the “safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. We may make forward-looking statements in this 2023 Annual Information Form and in the documents incorporated by reference herein, in other filings with Canadian regulators or the United States (U.S.) Securities and Exchange Commission (SEC), in reports to shareholders, and in other communications. In addition, our representatives may communicate forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements in this document and in the documents incorporated by reference herein include, but are not limited to, statements relating to our financial performance objectives, vision and strategic goals, the economic, market, and regulatory review and outlook for Canadian, U.S., U.K., European and global economies, the regulatory environment in which we operate, the implementation of IFRS 17 Insurance Contracts, the expected closing of the transaction involving HSBC Bank Canada, including plans for the combination of our operations with HSBC Bank Canada and the financial, operational and capital impacts of the transaction, the expected closing of the transaction involving the U.K. branch of RBC Investor Services Trust and the RBC Investor Services business in Jersey, the expected impact of the Federal Deposit Insurance Corporation’s special assessment, the Strategic priorities and Outlook sections for each of our business segments, as discussed in our 2023 Annual Report for the fiscal year ended October 31, 2023 (the 2023 Annual Report), the risk environment including our credit risk, market risk, liquidity and funding risk as set out in our 2023 Management’s Discussion and Analysis for the fiscal year ended October 31, 2023 (the 2023 Management’s Discussion and Analysis) as well as the effectiveness of our risk monitoring, our climate- and sustainability-related beliefs, targets and goals (including our net-zero and sustainable finance commitments) and related legal and regulatory developments as set out in our 2023 Management’s Discussion and Analysis, and includes statements made by our President and Chief Executive Officer and other members of management. The forward-looking statements contained in this Annual Information Form and in the documents incorporated by reference represent the views of management and are presented for the purpose of assisting the holders of our securities and financial analysts in understanding our financial position and results of operations as at and for the periods ended on the dates presented, as well as our financial performance objectives, vision, strategic goals and priorities and anticipated financial performance, and may not be appropriate for other purposes. Forward-looking statements are typically identified by words such as “believe”, “expect”, “suggest”, “seek”, “foresee”, “forecast”, “schedule”, “anticipate”, “intend”, “estimate”, “goal”, “commit”, “target”, “objective”, “plan”, “outlook”, “timeline” and “project” and similar expressions of future or conditional verbs such as “will”, “may”, “might”, “should”, “could”, “can” or “would” or negative or grammatical variations thereof.

By their very nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties, both general and specific in nature, which give rise to the possibility that our predictions, forecasts, projections, expectations or conclusions will not prove to be accurate, that our assumptions may not be correct, that our financial performance, environmental & social or other objectives, vision and strategic goals will not be achieved, and that our actual results may differ materially from such predictions, forecasts, projections, expectations or conclusions.

We caution readers not to place undue reliance on our forward-looking statements as a number of risk factors could cause our actual results to differ materially from the expectations expressed in such forward-looking statements. These factors – many of which are beyond our control and the effects of which can be difficult to predict – include, but are not limited to: credit, market, liquidity and funding, insurance, operational, regulatory compliance (which could lead to us being subject to various legal and regulatory proceedings, the potential outcome of which could include regulatory restrictions, penalties and fines), strategic, reputation, legal and regulatory environment, competitive, model, systemic risks and other risks discussed in the risk sections of our 2023 Annual Report, including business and economic conditions in the geographic regions in which we operate, Canadian housing and household indebtedness, information technology, cyber and third-party risks, geopolitical uncertainty, environmental and social risk (including climate change), digital disruption and innovation, privacy and data related risks, regulatory changes, culture and conduct risks, the effects of changes in government fiscal, monetary and other policies, tax risk and transparency, and our ability to anticipate and successfully manage risks arising from all of the foregoing factors. Additional factors that could cause actual results to differ materially from the expectations in such forward-looking statements can be found in the risk sections of our 2023 Annual Report, as may be updated by subsequent quarterly reports.

We caution that the foregoing list of risk factors is not exhaustive and other factors could also adversely affect our results. When relying on our forward-looking statements to make decisions with respect to us, investors and others should carefully consider the foregoing factors and other uncertainties and potential events, as well as the inherent uncertainty of forward-looking statements. Material economic assumptions underlying the forward-looking statements contained in this 2023 Annual Information Form 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 2023 Annual Report, as such sections may be updated by subsequent quarterly reports. Except as required by law, we do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by us or on our behalf.

Additional information about these and other factors can be found in the risk sections of our 2023 Management’s Discussion and Analysis contained in our 2023 Annual Report, as may be updated by subsequent quarterly reports.


TABLE OF CONTENTS

 

                MD&A
Incorporated by
Reference
 

CORPORATE STRUCTURE

   1  

Name, Address and Incorporation

   1  

Intercorporate Relationships

   1  

GENERAL DEVELOPMENT OF THE BUSINESS

   1  

Three Year History

   1     23-26, 185*  

DESCRIPTION OF THE BUSINESS

   3  

General Summary

   3     23-26, 32-57  

Seasonality

   3     58-59  

Competition

   3     32-57  

Government Regulation and Supervision – Canada

   4  

Government Regulation and Supervision – United States

   6  

Risk Factors

   10     63-109  

Environmental and Social Policies

   10     107-109  

DESCRIPTION OF CAPITAL STRUCTURE

   10  

General Description

   10     109-118, 214-216*  

Prior Sales

   13     109-118, 213-216*  

Constraints

   13  

Ratings

   14     93  

MARKET FOR SECURITIES

   16  

Trading Price and Volume

   16  

DIVIDENDS

   18     115-116, 214-216*  

SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER

   18  

DIRECTORS AND EXECUTIVE OFFICERS

   19  

Directors

   19  

Committees of the Board

   20  

Executive Officers

   20  

Ownership of Securities

   22  

Cease Trade Orders, Bankruptcies, Penalties or Sanctions

   22  

Conflicts of Interest

   23  

LEGAL PROCEEDINGS AND REGULATORY ACTIONS

   23     223-224*  

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

   23  

TRANSFER AGENT AND REGISTRAR

   24  

EXPERTS

   24  

AUDIT COMMITTEE

   24  

Audit Committee Mandate

   24  

Composition of Audit Committee

   24  

Relevant Education and Experience of Audit Committee Members

   24  

Pre-Approval Policies and Procedures

   25  

Independent Registered Public Accounting Firm Fees

   26  

ADDITIONAL INFORMATION

   27  

TRADEMARKS

   27  

APPENDIX A – PRINCIPAL SUBSIDIARIES

   28  

APPENDIX B – EXPLANATION OF RATINGS AND OUTLOOK

   29  

APPENDIX C – AUDIT COMMITTEE MANDATE

   32  

APPENDIX D – PRE-APPROVAL POLICIES AND PROCEDURES

   38  

*Notes 6, 19, 20 and 25 to the 2023 Annual Consolidated Financial Statements for the fiscal year ended October 31, 2023 (the 2023 Annual Consolidated Financial Statements) for Royal Bank of Canada are incorporated by reference herein.

INFORMATION IS AT OCTOBER 31, 2023, UNLESS OTHERWISE NOTED.


CORPORATE STRUCTURE

Name, Address and Incorporation1

Royal Bank of Canada is a Schedule I bank under the Bank Act (Canada), which constitutes its charter. The Bank was created as Merchants Bank in 1864 and was incorporated under the “Act to Incorporate the Merchants’ Bank of Halifax” assented to June 22, 1869. The Bank changed its name to The Royal Bank of Canada in 1901 and to Royal Bank of Canada in 1990.

The Bank’s corporate headquarters are located at Royal Bank Plaza, 200 Bay Street, Toronto, Ontario, Canada and its head office is located at 1 Place Ville-Marie, Montreal, Quebec, Canada.

Intercorporate Relationships

Information about intercorporate relationships with principal subsidiaries, including place of incorporation and percentage of securities owned by the Bank, is provided in Appendix A.

 

GENERAL DEVELOPMENT OF THE BUSINESS

Three Year History

Our business strategies and actions are guided by our vision, “To be among the world’s most trusted and successful financial institutions.” Our three strategic goals are:

 

   

In Canada, to be the undisputed leader in financial services;

   

In the U.S., to be the preferred partner to institutional, corporate, commercial and high net worth clients and their businesses; and

   

In select global financial centres, to be a leading financial services partner valued for our expertise.

In 2021, the Canadian economy showed growth and RBC reported net income of $16.1 billion, up 40% from the prior year. These results reflected higher earnings in Personal & Commercial Banking, Capital Markets, Wealth Management and Insurance, partially offset by lower earnings in Investor & Treasury Services, as well as releases of provisions on performing loans primarily driven by improvements in our macroeconomic and credit quality outlook.

In 2022, Canadian output growth was supported by recovery from the COVID-19 pandemic in the travel and hospitality sectors and increased activity in the oil and gas and mining sectors reflecting higher global commodity prices. In the U.S., while inflation rates began to decrease as global supply chain disruptions eased, and the price of gasoline declined from higher levels in the spring, price growth remained very high and broad-based. Bond yields increased substantially from the second calendar quarter of 2022 as central banks responded to high inflation.

In 2022, RBC reported net income of $15.8 billion, down 2% from 2021, reflecting lower results in Capital Markets and Insurance, partially offset by higher earnings in Personal & Commercial Banking, Wealth Management and Investor & Treasury Services. 2022 also reflected lower releases of provisions on performing loans.

 

1 When we say “we”, “us”, “our”, or “RBC”, we mean Royal Bank of Canada and its subsidiaries, as applicable. References to “the Bank” mean Royal Bank of Canada without its subsidiaries.


In 2023, GDP growth slowed across most advanced economies as headwinds from higher interest rates continued to have a lagged impact. Global inflation pressures showed signs of easing. However, underlying price pressures are not expected to fully ease until there is a more pronounced slowdown in domestic demand and the economy. In Canada, output in early calendar 2023 was supported by strength in consumer spending and an unexpectedly strong rebound in housing market activity in the spring. Canadian gross domestic product declined slightly in the second quarter of 2023 as consumer spending slowed. The U.S. economy remained resilient with strong consumer spending despite rising interest rates, and employment has continued to increase. The Euro area economy is losing momentum as inflation is still high but has begun to slow. Bond yields increased substantially in 2023 as markets demand higher term premiums and expect central banks to hold policy interest rates higher for longer. Interest rates have increased to levels that most central banks view as sufficient to slow economic growth and reduce inflationary pressure over time, and are expected to remain significantly higher than pre-pandemic levels.

Effective the first quarter of 2023, we simplified our reporting structure by eliminating the Investor & Treasury Services segment and moving our Investor Services business to our Wealth Management segment and our Treasury Services and Transaction Banking businesses to our Capital Markets segment. Effective the fourth quarter of 2023, we moved the Investor Services lending business from our Wealth Management segment to our Capital Markets segment.

In 2023, RBC reported net income of $14.9 billion, down 6% from last year, reflecting lower earnings in Wealth Management, Personal & Commercial Banking and Insurance, which were partially offset by higher results in Capital Markets, and the impact of the Canada recovery dividend and other tax related adjustments in the current year. 2023 also reflects higher provisions on credit losses, reflecting higher provisions on impaired loans and provisions taken on performing loans as compared to releases of provisions on performing loans last year.

We continue to monitor and prepare for regulatory developments and changes in a manner that seeks to ensure compliance with new requirements, while mitigating adverse business or financial impacts. Such impacts could result from new or amended laws or regulations and the expectations of those who enforce them. A high level summary of the key regulatory changes that have the potential to increase or decrease our costs and the complexity of our operations is included in the Legal and regulatory environment risk section of our 2023 Annual Report. For a discussion on risk factors resulting from these and other developments which may affect our business and financial results, refer to the risk sections of our 2023 Annual Report. For further details on our framework and activities to manage risks, refer to the risk and Capital management sections of our 2023 Annual Report.

Our acquisitions and dispositions that have influenced the general development of our business over the past three years are summarized in the following table:

 

Business Segment    Acquisition/Disposition
   Key Characteristics

Wealth Management

   Acquisition of Brewin Dolphin Holdings PLC (2022)    Creates a premier wealth manager in the U.K., Channel Islands and Ireland
   Partial disposition of RBC Investor Services operations (2023)    Divests the European asset servicing activities of RBC Investor Services and its associated Malaysian centre of excellence to CACEIS, the asset servicing banking group of Crédit Agricole S.A. and Banco Santander, S.A.

On November 29, 2022, we entered into an agreement to acquire 100% of the common shares of HSBC Bank Canada for an all-cash purchase price of $13.5 billion. We will also purchase all of the existing preferred shares and subordinated debt of HSBC Canada held directly or indirectly by HSBC Holdings plc at par value. The agreement includes an additional amount that accrues from August 30, 2023 to the closing date, which is calculated based on the all-cash purchase price for the common shares of HSBC Canada and the Canadian Overnight Repo Rate Average. The transaction is expected to close in the first calendar quarter of 2024 and is subject to the satisfaction of customary closing conditions, including regulatory approvals.

 

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Additional information can also be found under “Overview and outlook” beginning on page 23 and under “Key corporate events” beginning on page 25 of our 2023 Management’s Discussion and Analysis and in Note 6 “Significant acquisitions and disposition” on page 185 of our 2023 Annual Consolidated Financial Statements, which sections and note are incorporated by reference herein.

 

DESCRIPTION OF THE BUSINESS

General Summary

Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading performance. Our success comes from the 94,000+ employees who leverage their imaginations and insights to bring our vision, values and strategy to life so we can help our clients thrive and communities prosper. As Canada’s biggest bank and one of the largest in the world, based on market capitalization, we have a diversified business model with a focus on innovation and providing exceptional experiences to our more than 17 million clients in Canada, the U.S. and 27 other countries.

Our business segments are Personal & Commercial Banking, Wealth Management, Insurance and Capital Markets. Our business segments are supported by Corporate Support.

Additional information about our business and each segment (including segment results) can be found under “Overview and outlook” beginning on page 23 and under “Business segment results” beginning on page 32 of our 2023 Management’s Discussion and Analysis, which sections are incorporated by reference herein.

Seasonality

Information about seasonality is provided under “Quarterly results and trend analysis” beginning on page 58 of our 2023 Management’s Discussion and Analysis, which section is incorporated by reference herein.

Competition

Personal & Commercial Banking competes with other Schedule 1 banks, independent trust companies, foreign banks, credit unions, caisses populaires, auto financing companies, as well as emerging entrants to the financial services industry, in Canada; other banks, emerging digital banks, trust companies and investment management companies serving retail and corporate clients, as well as public institutions, in the Caribbean; and other Canadian banking institutions that have U.S. operations, in the U.S.

Our Canadian Wealth Management business competes with domestic banks and trust companies, investment counselling firms, bank-owned full-service brokerages and boutique brokerages, mutual fund companies and global private banks. In Canada, bank-owned wealth managers continue to be the major players. Our U.S. Wealth Management business (including City National Bank (CNB)) operates in a fragmented and highly competitive industry and competitors include other broker-dealers, commercial banks and other financial institutions that service high net worth and ultra-high net worth individuals, entrepreneurs and their businesses. Our Global Asset Management business faces competition in Canada from banks, insurance companies and asset management organizations; in the U.S. from independent asset management firms, as well as those that are part of national and international banks and insurance companies; and internationally from asset managers that are owned by international banks, as well as national and regional asset managers in the geographies where we serve clients. Competitors to our International Wealth Management business include global wealth managers, traditional private banks and domestic wealth managers. Competitors to our Investor Services business include domestic and international custodians with Canadian and U.K. operations.

 

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In our Canadian Insurance business, many of our competitors specialize in either life and health, wealth or in property and casualty products. In our International Insurance business we compete in the global reinsurance market which is competitive as there are many participants. Market share is largely held by a small number of reinsurers, with RBC Insurance continuing to selectively pursue niche opportunities.

Our Capital Markets business is a market leader in Canada and competes with large global investment banks in the U.S. Outside North America, we have a targeted presence in the U.K. & Europe, Australia, Asia & other markets aligned with our global expertise.

Additional information about our competition can be found under “Business segment results” beginning on page 32 of our 2023 Management’s Discussion and Analysis, which section is incorporated by reference herein.

Government Regulation and Supervision – Canada

The Bank is a “Schedule I” bank under the Bank Act (Canada) (Bank Act), and, as such, is a federally regulated financial institution. It has Canadian insurance and trust and loan company subsidiaries that are also federally regulated financial institutions (FRFI Subsidiaries and, together with the Bank, FRFIs) governed by (respectively) the Insurance Companies Act (Canada) and the Trust and Loan Companies Act (Canada). The activities of the FRFI Subsidiaries are also regulated under provincial and territorial laws in respect of their activities in the provinces and territories. In certain provinces, some of the Bank’s capital markets and wealth management activities are regulated under provincial securities laws (which are administered and enforced by securities regulatory authorities).

The Office of the Superintendent of Financial Institutions (OSFI), an independent agency of the Government of Canada, reports to the Minister of Finance (the Minister) for the supervision of the FRFIs. OSFI is required, at least once a year, to examine the affairs and business of each FRFI for the purpose of determining whether the FRFI is complying with the provisions of its governing statute and it is in sound financial condition, and report to the Minister. The FRFIs are also required to make periodic filings and reports to OSFI.

The FRFIs are also subject to regulation under the Financial Consumer Agency of Canada Act (FCAC Act).2 The Financial Consumer Agency of Canada (Agency), among other things, enforces consumer-related provisions of the federal statutes which govern these financial institutions. The Commissioner of the Agency must report to the Minister on all matters connected with the administration of the FCAC Act and consumer provisions of other federal statutes, including the Bank Act, Trust and Loan Companies Act and Insurance Companies Act. The FRFIs are also subject to provincial and territorial laws of general application.

The Bank and the following subsidiaries are member institutions of the Canada Deposit Insurance Corporation (CDIC): Royal Trust Corporation of Canada, The Royal Trust Company, Royal Bank Mortgage Corporation and RBC Investor Services Trust. CDIC insures certain deposits held at its member institutions. Under the Bank Act, the Bank is prohibited from engaging in or carrying on any business other than the business of banking, except as permitted under that statute. The business of banking includes providing any financial services; acting as a financial agent; providing investment counselling services and portfolio management services; issuing payment, credit or charge cards; and operating payment, credit or charge card plans.

 

2 For the Bank’s trust subsidiaries, only their retail deposit taking activities are subject to regulation under the FCAC Act.

 

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The Bank has broad powers to invest in securities, but is limited in making “substantial investments” in or in controlling certain types of entities. A “substantial investment” will arise through direct or indirect beneficial ownership of voting shares carrying more than 10 per cent of the voting rights attached to all outstanding voting shares of a corporation, shares representing more than 25 per cent of the shareholders’ equity in a corporation or interests representing more than 25 per cent of the ownership interests in any unincorporated entity. The Bank can make controlling, and in certain circumstances, non-controlling substantial investments in certain entities in accordance with the investment provisions under the Bank Act. Some substantial investments may be made only with the prior approval of the Minister or the Superintendent of Financial Institutions (the Superintendent).

Each FRFI is also required to maintain, in relation to its operations, adequate capital and liquidity, and OSFI may direct financial institutions to increase capital and/or to provide additional liquidity.

Bail-in Regime

Canada has a bank recapitalization regime (the Bail-in Regime) for domestic systemically important banks, including the Bank. Under the Canada Deposit Insurance Corporation Act, in circumstances where the Bank has ceased, or is about to cease, to be viable, the Governor in Council may, upon recommendation of the Minister that they are of the opinion that it is in the public interest to do so, by order:

 

   

vest in CDIC the shares and subordinated debt of the Bank specified in the order (a vesting order);

 

   

appoint CDIC as receiver in respect of the Bank (a receivership order);

 

   

if a receivership order has been made, direct the Minister to incorporate a federal institution designated in the order as a bridge institution wholly-owned by CDIC and specifying the date and time as of which the Bank’s deposit liabilities are assumed (a bridge bank order); or

 

   

if a vesting order or receivership order has been made, direct CDIC to carry out a conversion, by converting or causing the Bank to convert, in whole or in part – by means of a transaction or series of transactions and in one or more steps – the shares and liabilities of the Bank that are subject to the Bail-in Regime into common shares of the Bank or any of its affiliates (a conversion order).

Upon the making of a conversion order, prescribed shares and liabilities under the Bail-in Regime that are subject to that conversion order will, to the extent converted, be converted into common shares of the Bank or any of its affiliates, as determined by CDIC. Subject to certain exceptions, senior debt issued on or after September 23, 2018, with an initial or amended term to maturity (including explicit or embedded options) greater than 400 days, that is unsecured or partially secured and that has been assigned a CUSIP or ISIN or similar identification number is subject to a bail-in conversion. For a description of Canadian bank resolution powers and the consequent risk factors attaching to certain liabilities of the Bank reference is made to rbc.com/investor-relations/_assets-custom/pdf/bail-in-overview.pdf.

The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the PCMLTA) is applicable to all of our businesses in Canada. The PCMLTA implements specific measures designed to detect and deter money laundering and the financing of terrorist activities. Further, the PCMLTA sets out obligations related to deterring and detecting money laundering and terrorist financing from a global perspective, in order to minimize the possibility that RBC could become a party to these activities. RBC has enterprise-wide anti-money laundering policies and procedures which assist in reducing the risk of facilitating money laundering and terrorist financing activities.

Broker-Dealer/Investment Management Subsidiaries

The activities of certain of the Bank’s subsidiaries, such as RBC Dominion Securities Inc. (RBC DS), RBC Direct Investing Inc. (RBC DI), Royal Mutual Funds Inc. (RMFI), RBC Global Asset Management Inc., Phillips, Hager & North Investment Funds Ltd. (PH&N IF), RBC Phillips, Hager & North Investment Counsel Inc. and RBC InvestEase Inc., which act as securities dealers (including investment dealers, mutual fund dealers and exempt market dealers), advisors (portfolio manager) or investment fund managers are regulated in Canada under provincial and territorial securities laws (which are administered and enforced by the applicable securities regulatory authorities) and, for investment dealers and mutual fund dealers, by the rules of the applicable self-regulatory organization (the New Self-Regulatory Organization of Canada (New SRO) formed by the amalgamation of the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada (MFDA) effective January 1, 2023 and renamed the Canadian Investment Regulatory Organization (CIRO) on June 1, 2023). Each of RBC DS, RBC DI, RMFI and PH&N IF are members of the Canadian Investor Protection Fund. The Canadian Investor Protection Fund protects customers’ accounts against certain losses of customer property held by an insolvent CIRO member within specified limits.

 

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Insurance

The activities of the Bank’s regulated Canadian insurance subsidiaries, RBC Life Insurance Company (RBC Life) and RBC Insurance Company of Canada (RICC), are federally governed by the Insurance Companies Act and by provincial legislation in each province and territory in which they carry on business. In addition, the Bank Act sets out a framework for insurance activities that the Bank may or may not carry out. The Bank may administer, promote and provide advice in relation to certain authorized types of insurance and may conduct any aspect of the business of insurance, other than the underwriting of insurance, outside of Canada and in respect of risks outside Canada. However, in Canada, the Bank may not act as agent for any person in the placing of insurance. The Bank can promote an insurance company, agent or broker or non-authorized types of insurance (e.g. life and home and automobile insurance) to certain prescribed groups where the promotion takes place outside of physical bank branches. Additionally, and subject to applicable restrictions under the Bank Act, RBC Wealth Management Financial Services Inc., a wholly owned indirect subsidiary of the Bank, is licensed under applicable provincial and territorial laws to sell insurance products, including individual and group life and living benefits insurance along with money products such as annuities and segregated funds, for both related and independent insurance companies in Canada.

RBC Life is a member of Assuris, which is a not-for-profit organization that protects Canadian life insurance policyholders against loss of benefits due to the financial failure of a member company. RICC is a member of the Property and Casualty Insurance Compensation Corporation, which is the corporation protecting Canadian property and casualty policyholders against loss of benefits due to the financial failure of a member company.

RBC Insurance Agency Ltd. and RBC Commercial Insurance Agency Inc., wholly owned indirect Bank subsidiaries, are licensed insurance agencies that distribute insurance products underwritten by non-RBC entities. These products include home and auto insurance and commercial insurance that are underwritten by an unaffiliated insurance company.

Government Regulation and Supervision – United States

Banking

In the U.S., the Bank is characterized as a foreign banking organization (FBO). Generally, the operations of an FBO and its U.S. subsidiaries and offices are subject to the same comprehensive regulatory regime that governs the operations of U.S. domestic banking organizations. The Bank’s U.S. businesses are subject to supervision and oversight by various U.S. authorities, including federal and state regulators, as well as self-regulatory organizations. An FBO must meet several conditions in order to maintain “well managed” status for U.S. bank regulatory purposes: (i) the FBO must have received a composite regulatory rating of “satisfactory” or better for its U.S. branch, agency and commercial lending company operations following its last regulatory examination, (ii) the FBO’s home country supervisor must consent to it expanding its activities in the U.S. to include activities permissible for a financial holding company (FHC), (iii) the FBO’s management must meet standards comparable to those required for a U.S. bank subsidiary of an FHC and (iv) each U.S. depository institution subsidiary of the FBO and/or bank holding company (BHC) must be deemed to be “well managed”, which is based on regulatory examination ratings.

 

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Under the International Banking Act of 1978, as amended (IBA) and the Bank Holding Company Act of 1956, as amended (BHCA), all of the Bank’s U.S. banking operations are subject to supervision and regulation by the Board of Governors of the Federal Reserve System (Federal Reserve). Under the IBA, the BHCA, and related regulations of the Federal Reserve, the Bank generally may not open a branch, agency or representative office in the U.S., nor acquire five per cent or more of the voting stock of any U.S. bank or BHC, without notice to or prior approval of the Federal Reserve. The Federal Reserve is the U.S. “umbrella regulator” responsible for supervision and oversight of the Bank’s consolidated U.S. activities. The Federal Reserve consults with and obtains information from other prudential and functional U.S. regulators that exercise supervisory authority over the Bank’s various U.S. operations. Reports of financial condition and other information relevant to the Bank’s U.S. businesses are regularly filed with the Federal Reserve.

In 2000, the Bank became a U.S. FHC, as authorized by the Federal Reserve. Pursuant to the Gramm-Leach-Bliley Act of 1999, as amended, an FHC may engage in, or acquire companies engaged in, a broader range of financial and related activities than are permitted to banking organizations that do not maintain FHC status. To qualify as an FHC, the Bank, as an FBO and BHC, must meet certain capital requirements and must be deemed to be “well managed” for U.S. bank regulatory purposes. In addition, any U.S. depository institution subsidiaries of the FBO or BHC must also meet certain capital requirements and be deemed to be “well managed” and must have at least a “satisfactory” rating under the Community Reinvestment Act of 1977, as amended. An FBO must meet several conditions in order to maintain “well managed” status for U.S. bank regulatory purposes: (i) the FBO must have received a composite regulatory rating of “satisfactory” or better for its U.S. branch, agency and commercial lending company operations following its last regulatory examination, (ii) the FBO’s home country supervisor must consent to it expanding its activities in the U.S. to include activities permissible for a financial holding company (FHC), (iii) the FBO’s management must meet standards comparable to those required for a U.S. bank subsidiary of an FHC and (iv) each U.S. depository institution subsidiary of the FBO and/or bank holding company (BHC) must be deemed to be “well managed”, which is based on regulatory examination ratings.

The Federal Reserve, however, has the authority to limit an FHC’s ability to conduct activities that would otherwise be permissible if the FHC or any of its U.S. depositary institution subsidiaries does not satisfactorily meet certain capital requirements or is not deemed to be “well managed”. In such cases, the Federal Reserve may impose corrective capital and/or managerial requirements, as well as additional limitations or conditions. If the deficiencies persist, the FHC may be required to divest its U.S. depository institution subsidiaries or to cease engaging in activities other than the business of banking and certain closely related activities. If any insured depository institution subsidiary of an FHC fails to maintain at least a “satisfactory” rating under the Community Reinvestment Act of 1977, as amended, the FHC would be subject to restrictions on certain new activities and acquisitions.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was enacted. The statute effected significant changes to U.S. financial regulations and required rulemaking by the U.S. financial regulators, with material cross-border implications. Section 165 of the Dodd-Frank Act required the Federal Reserve to establish Enhanced Prudential Standards for Foreign Banking Organizations (Regulation YY). Amongst other regulatory requirements, Regulation YY required the Bank to establish an intermediate holding company (IHC) organized under U.S. law. The IHC is required to hold, directly or indirectly, the Bank’s entire ownership interest in its U.S. insured depository institution subsidiaries and other U.S. subsidiaries (excluding so called section 2(h)(2) companies and branch subsidiaries acquired by debt previously contracted). The Bank has established a two-tier BHC structure in the U.S., consisting of RBC US Group Holdings LLC (RIHC), its top-tier BHC, as the Bank’s IHC and the parent of RBC USA Holdco Corporation, the parent of most of the Bank’s U.S. subsidiaries. Both RIHC and RBC USA Holdco Corporation are BHCs and FHCs. The Bank fulfills its Regulation YY regulatory requirements through RIHC, which include capital adequacy, capital planning and stress testing, risk management and governance, liquidity and liquidity stress testing, financial regulatory reporting and other requirements that are similar to, or the same as, those applicable to U.S. domestic BHCs that are similarly categorized under the rules that tailor enhanced prudential standards for FBOs and large U.S. banking organizations. In addition, the Bank is registered as a “Swap Dealer” with the U.S. Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) and as a “Security-Based Swap Dealer” with the SEC.

 

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The USA PATRIOT Act of 2001, as amended, which amended the Bank Secrecy Act of 1970, as amended (the Act), requires U.S. banks and certain other financial institutions with U.S. operations to maintain appropriate policies, procedures and controls reasonably designed to comply with the Act, including, as applicable, anti-money laundering compliance programs, suspicious activity and currency transaction reporting and other obligations including due diligence on customers to prevent, detect and report individuals and entities involved in money laundering and the financing of terrorism. In January 2021, the Anti-Money Laundering Act of 2020 (AMLA), which also amended the Act, was enacted. The AMLA is intended to comprehensively reform and modernize U.S. anti-money laundering laws. In September 2022, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule implementing the beneficial ownership information (BOI) reporting requirements under the Corporate Transparency Act, which was part of the AMLA. The BOI rule, which goes into effect January 1, 2024, implements sweeping beneficial owner disclosure requirements applicable to all U.S. companies and foreign companies doing business in the U.S., subject to certain exceptions. The BOI rule is the first of three related rulemakings. The remaining rulemakings will address (i) access to the BOI collected under a registry being developed by FinCEN; and (ii) required revisions to FinCEN’s Customer Due Diligence rule. Several other provisions of the AMLA require additional rulemakings, reports and other measures.

The Bank maintains two branches in New York that are licensed and supervised as full federal branches with fiduciary licenses by the Office of the Comptroller of the Currency (OCC), the U.S. supervisor of national banks. In general, the Bank’s branches may exercise the same rights and privileges, and are subject to the same restrictions, as would apply to a U.S. national bank at the same location(s). The Bank’s branches may accept wholesale deposits, but may not take U.S. domestic retail deposits outside of an available exemption. Deposits in the Bank’s branches are not insured by the Federal Deposit Insurance Corporation (FDIC). The Bank also maintains a limited federal branch in Jersey City, New Jersey which may exercise the same rights and privileges as the Bank’s New York federal branches except that it generally can only take deposits from non-U.S. sources.

The OCC examines and supervises the Bank’s U.S. branch office/agency’s activities and operations. In addition, the Bank’s U.S. branches are required to maintain a capital equivalency deposit in their state(s) of residence, which deposits are pledged to the OCC. Furthermore, the Bank’s U.S. branch offices are subject to supervisory guidance based on the examiners’ assessment of risk management, operational controls, compliance and asset quality.

The Bank also maintains a state-licensed agency in Texas and state-licensed representative offices in California, Delaware and Texas. In general, the activities conducted at the Bank’s agency include a broad range of banking powers, including lending and maintaining credit balances, but agencies are limited in their ability to accept deposits from citizens or residents of the U.S. Further limitations may be placed on such agencies’ activities based on state laws. The activities conducted at the representative offices are limited to representational and administrative functions; such representative offices do not have authority to make credit decisions and may not solicit or contract for any deposit or deposit-like liability. The representative offices are examined and assessed by both the Federal Reserve and state regulators and are required to adhere to any applicable state regulations.

Banking activities are also conducted at CNB and RBC Bank (Georgia), National Association (RBC Bank), both of which are national banking associations chartered by the OCC. CNB and RBC Bank are members of the Federal Reserve. The OCC serves as the primary federal prudential regulator of CNB and RBC Bank. As U.S. banks, CNB and RBC Bank are allowed to take retail deposits, and they offer retail and commercial banking services, including deposit and credit services, such as consumer lending products (including credit card and mortgage loans), and business and commercial loans. CNB and RBC Bank are subject to capital requirements, dividend restrictions, limitations on investments and subsidiaries, limitations on transactions with affiliates (including the Bank and its branches), deposit reserve requirements and other requirements administered by the OCC and the Federal Reserve. Deposits at CNB and RBC Bank are FDIC-insured to the extent applicable. CNB and RBC Bank are also required to comply with applicable consumer protection laws and regulations such as those promulgated by the Consumer Financial Protection Bureau, an independent agency created under the Dodd-Frank Act. As an OCC chartered U.S. national bank, CNB also has fiduciary powers and offers trust and investment management services.

 

8


CNB also conducts trust and investment management activities through CNB’s wholly-owned subsidiary, RBC Trust Company (Delaware) Limited (RBC Trust). RBC Trust is a Delaware trust company chartered and supervised by the Delaware State Banking Commission and, as a BHC subsidiary, is subject to oversight by the Federal Reserve. RBC Trust is subject to dividend restrictions, limitations on investments and other applicable state banking law requirements.

Broker-Dealer Activities and Broker-Dealer Subsidiaries

The securities brokerage, trading and investment banking activities are conducted by and through the following U.S.-registered broker-dealer subsidiaries:

 

   

RBC Capital Markets, LLC (RBC CM LLC),

   

RBC CMA LLC,

   

City National Securities, Inc.,

   

CNR Securities, LLC (formerly RIM Securities LLC) and

   

Symphonic Securities LLC.

The SEC, state securities regulators, the Financial Industry Regulatory Authority and other self-regulatory organizations regulate these broker-dealer subsidiaries. Certain activities of RBC CM LLC and RBC CMA LLC are also subject to regulation by the CFTC and the NFA. Pursuant to the Dodd-Frank Act, RBC CM LLC is registered as a “Swaps Firm” with the NFA. Certain activities of RBC CM LLC are subject to regulation by the Municipal Securities Rulemaking Board.

Investment Management and Other Fiduciary Activities

The Bank’s New York branches have fiduciary powers, under which these branches conduct investment management and custody activities for certain customers. In addition, other affiliates are involved in the business of investment management. In many cases, these activities require that the affiliates be registered with the SEC as investment advisers under the U.S. Investment Advisers Act of 1940, as amended (Advisers Act). The Advisers Act and related rules regulate the registration and activities of investment advisers. Although the regulatory regime for investment advisers is similar in some ways to that for broker-dealers, the standard of conduct is higher due to the advisers’ status as fiduciaries.

The following entities are the Bank’s subsidiaries that are registered as “investment advisers” with the SEC:

 

   

RBC CM LLC,

   

RBC Global Asset Management (U.S.) Inc. (GAM),

   

RBC Global Asset Management (UK) Limited (GAM UK),

   

RBC Private Counsel (USA) Inc.,

   

City National Rochdale, LLC (CNR),

   

City National Securities, Inc. and

   

Symphonic Financial Advisors LLC.

GAM and CNR also each sponsor and act as the adviser to U.S. mutual funds. The U.S. Investment Company Act of 1940, as amended, and related rules regulate the registration and operation of mutual funds and certain activities of the funds’ advisers and other affiliates and certain of the funds’ other service providers. Certain activities of GAM UK and GAM are also subject to regulation by the CFTC and the NFA.

ERISA and the Internal Revenue Code

The U.S. Employee Retirement Income Security Act of 1974, as amended (ERISA), and its related rules regulate, among other things, the activities of the financial services industry with respect to pension plan clients. Similarly, the U.S. Internal Revenue Code and the regulations implemented thereunder impose requirements with respect to such clients and also individual retirement accounts (IRAs). Brokers, dealers and investment advisers to pension plans and IRAs must conduct their business in compliance with both ERISA and applicable tax regulations.

 

9


Risk Factors

A discussion of risks affecting us and our businesses appears under the headings “Risk management”, “Transactional/positional risk drivers”, “Operational/regulatory compliance risk drivers”, “Strategic risk drivers”, “Macroeconomic risk drivers” and “Overview of other risks” from pages 63-109 of our 2023 Management’s Discussion and Analysis, which discussions are incorporated by reference herein.

Environmental and Social Policies

Each year the Bank publishes its Environmental, Social and Governance (ESG) Performance Report outlining how the Bank is addressing ESG issues. This report is part of a suite of ESG reporting, including the Bank’s annual Climate Report which highlights how the Bank is managing climate-related risks and opportunities. These reports and other related information are available on the Bank’s website at rbc.com/community-social-impact/reporting-performance/index.html. Additional information about our environmental and social risk policies, including information about factors that could materially adversely affect our ability to achieve our climate and sustainable-finance-related commitments, goals and targets, can be found under “Overview of other risks – Environmental and social risk” beginning on page 107 of our 2023 Management’s Discussion and Analysis, which section is incorporated by reference herein.

 

DESCRIPTION OF CAPITAL STRUCTURE

General Description

The Bank’s authorized share capital consists of an unlimited number of common shares without nominal or par value and an unlimited number of first preferred shares and second preferred shares without nominal or par value, issuable in series; provided that the maximum aggregate consideration for all first preferred shares outstanding at any time may not exceed $30 billion, and for all second preferred shares that may be issued may not exceed $5 billion.

The Bank may also issue an unlimited amount of Limited Resource Capital Notes (LRCNs), which are compound instruments with both equity and liability features. The following summary of share capital and LRCNs is qualified in its entirety by the Bank’s by-laws and the actual terms and conditions of such shares and LRCNs.

Common Shares

The holders of the Bank’s common shares are entitled to vote at all meetings of shareholders, except meetings at which only holders of a specified class, other than common shares, or series of shares are entitled to vote. The holders of common shares are entitled to receive dividends as and when declared by the board of directors, subject to the preference of the preferred shares. After payment to the holders of the preferred shares of the amount or amounts to which they may be entitled, and after payment of all outstanding debts, the holders of the common shares will be entitled to receive any remaining property upon liquidation, dissolution or winding-up.

 

10


Preferred Shares

First preferred shares may be issued, from time to time, in one or more series with such rights, privileges, restrictions and conditions as the board of directors may determine, subject to the Bank Act and to the Bank’s by-laws. The first preferred shares are entitled to preference over any second preferred shares (discussed below) and common shares and over any other shares ranking junior to the first preferred shares with respect to the payment of dividends and in the distribution of property in the event of liquidation, dissolution or winding-up.

As at November 29, 2023, Non-Cumulative First Preferred Shares Series AZ, BB, BD, BF, BH, BI, BO, BQ, BR, BS and BT are outstanding. The Non-Cumulative First Preferred Shares Series AZ, BB, BD, BF, BH, BI and BO are listed on the Toronto Stock Exchange. The Non-Cumulative First Preferred Shares Series BQ, BR, BS and BT are not listed on an exchange. On November 7, 2023, we redeemed all of our issued and outstanding Non-Cumulative First Preferred Shares Series C-2 (the Series C-2 Preferred Shares). The Bank’s Depositary Shares representing interests in the Series C-2 Preferred Shares were listed on the New York Stock Exchange.

Effective January 1, 2013, in accordance with capital adequacy requirements adopted by OSFI, non-common capital instruments issued after January 1, 2013, including first preferred shares, must include terms providing for the full and permanent conversion of such securities into common shares upon the occurrence of certain trigger events relating to financial viability (the Non-Viability Contingent Capital requirements) in order to qualify as regulatory capital. As of January 1, 2013, all outstanding capital instruments that do not meet the Non-Viability Contingent Capital requirements are considered non-qualifying capital instruments and are to be phased out beginning January 1, 2013 at the rate of 10 per cent each year for 10 years. The Non-Cumulative First Preferred Shares Series AZ, BB, BD, BF, BH, BI, BO, BQ, BR, BS and BT contain non-viability contingent capital provisions necessary to qualify as Tier 1 regulatory capital under Basel III and are therefore convertible into common shares upon the occurrence of a non-viability contingent capital trigger event.

We are prohibited by the Bank Act from declaring or paying any dividends on our preferred or common shares when we are, or would be placed as a result of the declaration, in contravention of the capital adequacy and liquidity regulations or any regulatory directives issued under the Bank Act. We may not pay dividends on our common shares or redeem, purchase or otherwise retire common shares or preferred shares at any time without the approval of the holders of outstanding first preferred shares unless all dividends to which first preferred shareholders are then entitled have been declared and paid or set apart for payment.

The Non-Cumulative First Preferred Shares Series BT were issued on November 5, 2021 to certain institutional investors.

The Non-Cumulative First Preferred Shares Series BQ, BR and BS (the LRCN Preferred Shares) were respectively issued on July 28, 2020, November 2, 2020 and June 8, 2021 in connection with the Bank’s concurrent issuances of LRCNs. The LRCN Preferred Shares are held by Computershare Trust Company of Canada as trustee (the Trustee) for Leo LRCN Limited Recourse Trust™ (the Limited Recourse Trust). In certain circumstances, including non-payment of interest on, principal of or redemption price for the LRCNs when due, or the occurrence of an event of default or a non-viability contingent capital trigger event, the Trustee of the Limited Recourse Trust will deliver to holders of LRCNs their proportionate share of the Limited Recourse Trust’s assets, which will consist of the LRCN Preferred Shares except in limited circumstances, in full satisfaction of the Bank’s obligations under the LRCNs.

For so long as the LRCN Preferred Shares are held by the Trustee on behalf of the Limited Recourse Trust, such shares will not be entitled to receive dividends.

On November 2, 2015, in connection with the merger of CNB with and into RBC USA Holdco Corporation, the Bank issued Non-Cumulative First Preferred Shares Series C-1 and C-2 in exchange for two series of outstanding CNB preferred stock. Neither series remains outstanding as of November 29, 2023.

 

11


In the event the Bank failed to pay, declare or set aside for payment, dividends on any of the Series C-2 Preferred Shares or any other series of preferred shares of the Bank for six quarterly dividend periods, or their equivalent, whether or not consecutive, the number of directors of the board of directors would have been increased by two at the Bank’s first annual meeting of shareholders held thereafter. The holders of the Series C-2 Preferred Shares had the right, together with holders of any shares that, by their terms, expressly provided that they rank pari passu with the Series C-2 Preferred Shares (together, the Series C-2 Parity Shares) and that have similar voting rights, if any, to elect, as a class together, such additional two members to the Bank’s board of directors for a term of one year. Upon the payment, or the declaration and setting aside for payment, in full, of all the cumulative dividends payable for all past dividend periods and continuous noncumulative dividends for at least one year on all outstanding preferred shares of the Bank, the terms of such two directors would have terminated, the number of directors of the Bank’s board of directors would have been reduced by two and the voting rights of the holders of the Series C-2 Preferred Shares and the Series C-2 Parity Shares would have ceased (subject to the revesting of such voting rights in the event of each and every additional failure in the payment of dividends for six quarterly dividend periods).

Second preferred shares may be issued, from time to time, in one or more series with such rights, privileges, restrictions and conditions as the board of directors may determine, subject to the Bank Act and to the Bank’s by-laws. There are no second preferred shares currently outstanding. Second preferred shares would rank junior to the first preferred shares. Second preferred shares would be entitled to preference over the common shares and over any other shares ranking junior to the second preferred shares with respect to the payment of dividends and in the distribution of property in the event of our liquidation, dissolution or winding-up.

Except as outlined above with respect to the Series C-2 Preferred Shares and the Series C-2 Parity Shares, holders of the first and second preferred shares are not entitled to any voting rights as a class except as provided under the Bank Act or the Bank’s by-laws. Under the Bank Act, the Bank may not create any other class of shares ranking equal with or superior to a particular class of preferred shares, increase the authorized number of, or amend the rights, privileges, restrictions or conditions attaching to such class of preferred shares, without the approval of the holders of that class of preferred shares.

Any approval to be given by the holders of the first and second preferred shares may be given in writing by the holders of not less than all of the outstanding preferred shares of each class or by a resolution carried by the affirmative vote of not less than 662⁄3 per cent of the votes cast at a meeting of holders of each class of preferred shares at which a quorum is represented. A quorum at any meeting of holders of each class of preferred shares is 51 per cent of the shares entitled to vote at such meeting, except that at an adjourned meeting there is no quorum requirement.

Limited Recourse Capital Notes

LRCNs are the Bank’s direct unsecured obligations constituting subordinated indebtedness for the purpose of the Bank Act and are intended to qualify as our additional Tier 1 capital within the meaning of the regulatory capital adequacy requirements to which we are subject. The LRCNs are not deposits insured under the Canada Deposit Insurance Corporation Act or any other deposit insurance regime designed to ensure the payment of all or a portion of a deposit upon the insolvency of a deposit taking institution.

In the event of a non-payment by the Bank of the principal amount of, interest on or redemption price for the LRCNs when due, the sole remedy of holders of LRCNs shall be the delivery of the LRCN Preferred Shares held by the Trustee for the Limited Recourse Trust.

If the Bank becomes insolvent or is wound-up, the LRCNs will rank (i) subordinate in right of payment to the prior payment in full of all outstanding deposit liabilities of the Bank including certain subordinated indebtedness (within the meaning of the Bank Act); and (ii) in right of payment equally with and not prior to the Bank’s indebtedness which by its terms ranks equally in right of payment with, or is subordinate to, the LRCNs (other than the Bank’s indebtedness which by its terms ranks subordinate to the LRCNs) and will be subordinate in right of payment to the claims of our depositors and other unsubordinated creditors, provided that in any such case and in case of the Bank’s non-payment of the principal amount of, interest on or redemption price for the LRCNs when due, the sole remedy of the holders of the LRCNs shall be the delivery of the LRCN Preferred Shares held by the Trustee for the Limited Recourse Trust.

 

12


Holders of LRCNs are not entitled to any voting rights, other than in certain limited circumstances.

Additional information about the Bank’s share capital can be found under “Capital management” beginning on page 109 of our 2023 Management’s Discussion and Analysis and in Note 20 “Equity” beginning on page 214 of our 2023 Annual Consolidated Financial Statements, which section and note are incorporated by reference herein.

Prior Sales

From time to time, the Bank issues principal at risk notes, securities for which the amount payable at maturity is determined by reference to the price, value or level of an underlying interest such as a stock index, an exchange traded fund or a notional portfolio of equities or other securities. In addition, the Bank periodically issues subordinated debt, preferred shares and other equity instruments which are not listed or quoted on a marketplace.

For information about the Bank’s issuances of subordinated debentures, Limited Recourse Capital Notes and other equity instruments since October 31, 2022, see the “Capital management” section beginning on page 109 of our 2023 Management’s Discussion and Analysis, Note 19 “Subordinated debentures” on page 213 and Note 20 “Equity” beginning on page 214 of our 2023 Annual Consolidated Financial Statements, which section and notes are incorporated by reference herein.

Constraints

The Bank Act contains restrictions on the issue, transfer, acquisition, beneficial ownership and voting of shares of a chartered bank. The following is a summary of several key restrictions.

Subject to certain exceptions contained in the Bank Act, no person may be a major shareholder of a bank having equity of $12 billion or more (which includes the Bank). A person is a major shareholder if:

 

  (a)

the aggregate of the shares of any class of voting shares of the Bank beneficially owned by that person, by entities controlled by that person and by any person associated or acting jointly or in concert with that person is more than 20 per cent of the outstanding shares of that class of voting shares, or

  (b)

the aggregate of shares of any class of non-voting shares of the Bank beneficially owned by that person, by entities controlled by that person and by any person associated or acting jointly or in concert with that person is more than 30 per cent of the outstanding share of that class of non-voting shares.

Additionally, no person may have a significant interest in any class of shares of a bank (including the Bank) unless the person first receives the approval of the Minister. For purposes of the Bank Act, a person has a significant interest in a class of shares of a bank where the aggregate of any shares of the class beneficially owned by that person, by entities controlled by that person and by any person associated or acting jointly or in concert with that person exceeds 10 per cent of all of the outstanding shares of that class of shares of such bank.

The Bank Act also prohibits a bank from purchasing or redeeming any of its shares or paying any dividends if there are reasonable grounds for believing the bank is, or the payment would cause the bank to be, in contravention of the Bank Act requirement to maintain, in relation to its operations, adequate capital and appropriate forms of liquidity and to comply with any regulations or directions of the Superintendent in relation thereto. Under the Bank Act, the Bank cannot redeem or purchase any shares for cancellation unless the prior consent of the Superintendent has been obtained.

 

13


Subject to certain exceptions, the Bank Act also prohibits the registration of a transfer or issue of any shares of a Canadian bank to any government or government agency of Canada or any province of Canada, or to any government of any foreign country, or any political subdivision, or agency of any foreign country.

Ratings

Our ability to access unsecured funding markets and to engage in certain collateralized business activities on a cost-effective basis is primarily dependent upon maintaining competitive credit ratings. Credit ratings and outlooks provided by rating agencies reflect their views and methodologies. Our credit ratings are largely determined by the rating agencies’ assessment of the quality of our earnings, the adequacy of our capital and the effectiveness of our risk management programs. 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 can be no assurance that our credit ratings and rating outlooks will not be lowered or that rating agencies will not issue adverse commentaries about us, potentially resulting in adverse consequences for our funding capacity or access to capital markets.

A lowering of our credit ratings may also affect our ability, and the cost, to enter into normal course derivative or hedging transactions and may require us to post additional collateral under certain contracts. However, we estimate, based on periodic reviews of ratings triggers embedded in our existing businesses and of our funding capacity sensitivity, that a minor downgrade would not materially influence our liability composition, funding access, collateral usage and associated costs.

 

14


As at November 29, 2023, RBC had the following ratings from the rating agencies listed below:

 

      RATING CLASS*        RATING    RANK**

Moody’s Investors Service

   Legacy Senior Long-term Debt1   

Aa1

   2 of 21
   Senior Long-term Debt2   

A1

   5 of 21
   Short-term Debt   

P-1

   1 of 4
   Subordinated Debt   

A3

   7 of 21
   NVCC Subordinated Debt   

A3 (hyb)

   7 of 21
   Preferred Shares   

Baa2 (hyb)

   9 of 21
   NVCC Preferred Shares   

Baa2 (hyb)

   9 of 21
   NVCC Limited Recourse Capital Notes   

Baa2 (hyb)

   9 of 21
     Outlook – Stable          

Standard & Poor’s

   Legacy Senior Long-term Debt1   

AA-

   4 of 22
   Senior Long-term Debt2   

A

   6 of 22
   Short-term Debt   

A-1+

   1 of 7
   Subordinated Debt   

A

   6 of 22
   NVCC Subordinated Debt   

A-

   7 of 22
   Preferred Shares   

BBB+

   8 of 22
   NVCC Preferred Shares   

BBB

   9 of 22
   NVCC Limited Recourse Capital Notes   

BBB

   9 of 22
     Outlook – Stable          

Fitch Ratings

   Legacy Senior Long-term Debt1   

AA

   3 of 23
   Senior Long-term Debt2   

AA-

   4 of 23
   Short-term Debt   

F1+

   1 of 8
   Subordinated Debt   

A

   6 of 23
   NVCC Subordinated Debt   

A

   6 of 23
   Preferred Shares   

BBB+

   8 of 23
   NVCC Preferred Shares   

BBB+

   8 of 23
   NVCC Limited Recourse Capital Notes   

BBB+

   8 of 23
     Outlook – Stable          

DBRS

   Legacy Senior Long-term Debt1   

AA (high)

   2 of 23
   Senior Long-term Debt2   

AA

   3 of 23
   Short-term Debt   

R-1 (high)

   1 of 10
   Subordinated Debt   

AA (low)

   4 of 23
   NVCC Subordinated Debt   

A

   6 of 23
   Preferred Shares   

Pfd-1 (low)

   3 of 16
   NVCC Preferred Shares   

Pfd-2 (high)

   4 of 16
   NVCC Limited Recourse Capital Notes   

A (low)

   7 of 23
     Outlook – Stable          

 

 

Our rating classes may differ from the rating category nomenclatures used by the rating agencies.

  ** 

Relative rank of each rating within the organization’s overall classification system.

 

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.

 

Includes senior long-term debt issued on or after September 23, 2018, which is subject to conversion under the Bail-in Regime.

A definition of the categories of each rating as at November 29, 2023 has been obtained from the respective rating agency’s website and is outlined in Appendix B, and a more detailed explanation may be obtained from the applicable rating agency.

On June 20, 2023, Fitch Ratings affirmed our ratings with a stable outlook.

On May 12, 2023, DBRS affirmed our ratings with a stable outlook.

On May 25, 2023, Standard & Poor’s affirmed our ratings with a stable outlook.

On November 6, 2023, Moody’s affirmed our ratings with a stable outlook.

Credit ratings, including stability or provisional ratings (collectively, 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 may not reflect the potential impact of all risks on the value of securities. In addition, real or anticipated changes in the rating assigned to a security will generally affect the market value of that security. 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. Each Rating listed in the table above should be evaluated independently of any other Rating applicable to our debt and preferred shares. As is customary, RBC pays rating agencies to assign Ratings for the parent company as well as our subsidiaries, and for certain other services.

 

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Additional information about Ratings is provided under “Transactional/positional risk drivers – Liquidity and funding risk – Credit ratings” on page 93 of our 2023 Management’s Discussion and Analysis, which section is incorporated by reference herein.

 

MARKET FOR SECURITIES

Trading Price and Volume

The Bank’s common shares are listed on the Toronto Stock Exchange (TSX) in Canada and the New York Stock Exchange (NYSE) in the U.S. The Bank’s Non-Cumulative First Preferred Shares Series AZ, BB, BD, BF, BH, BI and BO are listed on the TSX.

The following table sets out the price range and trading volumes of the common shares on the TSX and the US Composite for the periods indicated. Prices are based on the reported amounts from TSX InfoSuite and NYSE Connect.

 

     Common Shares (TSX)     Common Shares (NYSE)  
Month         High ($)           Low ($)         Volume (Millions)         High (US$)           Low (US$)     Volume  

November 2022

    135.69       124.65       71.11       101.43       90.33             13,388,872  

December 2022    

    135.45       126.35       54.03       100.96       92.36       23,036,085  

January 2023

    136.30       127.36       126.69       102.43       93.31       20,009,132  

February 2023

    140.18       135.14       78.69       104.69       98.95       12,323,592  

March 2023

    137.78       125.32       77.29       101.23       90.99       21,585,639  

April 2023

    135.40       129.36       120.16       100.56       96.00       18,729,095  

May 2023

    135.35       120.10       83.13       100.01       88.03       17,764,875  

June 2023

    126.88       120.97       53.17       96.11       89.30       12,222,637  

July 2023

    132.70       124.78       120.44       100.83       93.66       22,836,318  

August 2023

    130.50       119.64       72.48       98.49       88.14       21,061,344  

September 2023        

    124.23       117.11       52.68       92.08       86.65       17,090,385  

October 2023

    119.01       107.92       118.03       87.26       77.90       34,151,919  

 

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The following tables provide the price range and trading volumes of the first preferred shares on the TSX for the periods indicated. Prices are based on the reported amounts from TSX InfoSuite.

 

     Series AZ     Series BB     Series BD  
Month       High ($)         Low ($)         Volume         High ($)         Low ($)         Volume         High ($)         Low ($)         Volume  

November 2022

    18.73       17.07       252,552       19.00       17.30       201,695       19.20       18.20       573,191  

December 2022    

    18.01       17.00       404,915       18.00       17.05       276,990       19.49       18.50       380,356  

January 2023

    19.30       17.29       208,798       19.60       17.25       251,018       20.66       18.50       266,485  

February 2023

    18.54       17.06       288,316       18.65       18.11       193,555       20.43       19.19       188,670  

March 2023

    18.16       16.56       363,886       18.30       16.60       246,083       19.48       17.35       272,041  

April 2023

    18.13       17.13       226,039       18.29       17.05       209,412       19.11       17.89       358,975  

May 2023

    17.77       16.44       211,976       17.48       16.46       178,978       18.34       17.01       437,149  

June 2023

    17.74       16.61       242,424       17.80       16.70       512,902       18.79       17.50       384,998  

July 2023

    18.31       17.245       328,509       18.28       17.15       227,238       19.30       18.21       244,913  

August 2023

    18.00       17.00       575,143       17.85       16.93       479,184       19.18       17.29           224,806  

September 2023        

    18.29       17.03       342,576       18.10       16.90       233,797       18.10       17.23       432,288  

October 2023

    18.70       17.53       305,171       18.17       17.11       244,364       18.29       16.83       259,669  

 

     Series BF     Series BH     Series BI  
Month       High ($)         Low ($)         Volume         High ($)         Low ($)         Volume         High ($)         Low ($)         Volume  

November 2022

    19.10       17.55       163,676       21.95       20.12       118,525       22.00       20.30       96,724  

December 2022    

    18.99       17.78       269,199       22.60       20.72       44,635       22.05       21.01       53,594  

January 2023

    19.79       17.96       62,446       23.61       21.35       35,298       23.79       21.20       52,349  

February 2023

    19.38       18.33       170,873       23.28       21.61       39,947       23.33       21.86       17,088  

March 2023

    18.49       16.71       460,214       22.80       22.00       33,393       23.00       22.02       23,327  

April 2023

    18.35       17.45       93,822       22.67       21.50       29,698       22.78       21.47       86,887  

May 2023

    17.55       16.56       92,777       21.83       20.70       47,007       21.76       21.10       77,789  

June 2023

    17.70       16.82       74,212       21.86       20.82       25,673       22.14       20.84       25,610  

July 2023

    19.29       17.23       75,702       21.91       21.05       46,282       21.96       21.18             22,825  

August 2023

    18.46       16.85       150,588       21.99       20.44       40,105       22.01       20.34       43,315  

September 2023        

    17.26       16.44       178,538       21.33       20.64       11,949       21.33       20.76       72,358  

October 2023

    16.90       15.65       258,678       21.15       19.35       47,305       21.35       19.57       48,938  

 

     Series BO  
Month       High ($)         Low ($)         Volume  
November 2022     21.51       20.20       143,372  
December 2022         21.10       19.55       305,217  
January 2023     22.00       19.80       114,758  
February 2023     21.05       20.28       111,243  
March 2023     20.91       19.25       192,153  
April 2023     20.68       19.84       140,872  
May 2023     20.10       19.21       112,798  
June 2023     20.25       19.60       100,281  
July 2023     20.88       19.65       260,287  
August 2023     20.37       19.73       127,264  
September 2023             21.33       19.75       177,896  
October 2023     21.06       20.10       268,522  

 

17


The following table provides the price range and trading volumes of the Depositary Shares on the NYSE for the period indicated. Prices are based on the reported amounts from NYSE Connect.

 

     Series C-23  
Month   High (US$)     Low (US$)     Volume  
November 2022     25.70       25.10       32,102  
December 2022     26.69       25.44       30,789  
January 2023     26.74       26.03       13,521  
February 2023     26.05       25.26       44,654  
March 2023     26.27       25.01       27,429  
April 2023     25.92       25.50       16,540  
May 2023     25.50       25.12       27,346  
June 2023     25.49       25.16       21,616  
July 2023     25.89       25.31       39,807  
August 2023     25.41       25.25       46,210  
September 2023             25.42       25.15       42,573  
October 2023     25.41       25.05       30,254  

 

DIVIDENDS

The Bank has had an uninterrupted history of paying dividends on its common shares and on each of its outstanding series of first preferred shares. Information about the Bank’s dividends paid or payable per share on the common shares and each outstanding series of first preferred shares in each of the two most recently completed years appears under the heading “Selected capital management activity” in the “Capital management” section beginning on page 115 of our 2023 Management’s Discussion and Analysis, which section is incorporated by reference herein. Information about restrictions on the payment of dividends appears under the heading “Restrictions on the payment of dividends” in Note 20 “Equity” on page 214 of our 2023 Annual Consolidated Financial Statements, which note is incorporated by reference herein.

The declaration amount and payment of future dividends will be subject to the discretion of the Bank’s board of directors, and will be dependent upon the Bank’s results of operations, financial condition, cash requirements and future regulatory restrictions on the payment of dividends and other factors deemed relevant by the board of directors.

Information about our dividends and our dividend payout ratio (common share dividends as a percentage of net income less preferred share dividends) is provided under the heading “Selected capital management activity” in the “Capital management” section beginning on page 115 of our 2023 Management’s Discussion and Analysis and in Note 20 “Equity” beginning on page 214 of our 2023 Annual Consolidated Financial Statements, which section and note are incorporated by reference herein.

 

SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER

In connection with each issuance of LRCNs, the Bank also concurrently issues first preferred shares. These LRCN Preferred Shares are held in the Limited Recourse Trust. Pursuant to the Amended and Restated Declaration of Trust for the Limited Recourse Trust and the share provisions for the LRCN Preferred Shares, the Trustee of the Limited Recourse Trust will only deliver the LRCN Preferred Shares to holders of LRCNs under certain prescribed circumstances further described herein under “Description of Capital Structure – Limited Recourse Capital Notes”.

 

3 On November 7, 2023, we redeemed all of our issued and outstanding First Preferred Shares Series C-2 (Series C-2). The Bank’s Depositary Shares representing interests in the Series C-2 were listed on NYSE prior to the redemption.

 

18


Securities Subject to Contractual Restriction on Transfer as at November 29, 2023

 

Designation of

Class

  

Number of Securities that are Subject to a

Contractual Restriction on Transfer

   Percentage of Class
First Preferred Shares       

1,750,000 Non-Cumulative First Preferred Shares Series BQ

 

1,250,000 Non-Cumulative First Preferred Shares Series BR

 

1,000,000 Non-Cumulative First Preferred Shares Series BS

   3.75%

 

DIRECTORS AND EXECUTIVE OFFICERS

Directors

The following are the Bank’s directors as at November 29, 2023:

 

Name and Year Elected   

Province/State and

Country of Residence

   Occupation
Mirko Bibic (2022)    Ontario, CAN    President and Chief Executive Officer, BCE Inc. and Bell Canada
Andrew A. Chisholm (2016)    Ontario, CAN    Corporate Director
Jacynthe Côté (2014)    Quebec, CAN    Chair of the Board, Royal Bank of Canada
Toos N. Daruvala (2015)    New York, U.S.    Corporate Director
Cynthia Devine (2020)    Ontario, CAN    Interim President and Chief Executive Officer, Maple Leaf Sports and Entertainment
Roberta L. Jamieson (2021)    Ontario, CAN    Corporate Director
David I. McKay (2014)    Ontario, CAN    President and Chief Executive Officer, Royal Bank of Canada
Barry Perry (2023)    Newfoundland and Labrador, CAN    Corporate Director
Maryann Turcke (2020)    Ontario, CAN    Corporate Director
Thierry Vandal (2015)    New York, U.S.    President, Axium Infrastructure US Inc.
Bridget A. van Kralingen (2011)    Florida, U.S.    Corporate Director
Frank Vettese (2019)    Ontario, CAN    Co-Founder, SummitNorth Advisory Corp.
Jeffery Yabuki (2017)    Wisconsin, U.S.    Chairman, Sportradar AG and Chairman, Motive Partners GP, LLC

 

19


Directors are elected annually and hold office until the next annual meeting of shareholders. Since November 1, 2018, the directors have held the principal occupations described above, except for the following:

Mr. Mirko Bibic served in a variety of leadership positions since joining BCE Inc. in 2004, including Chief Operating Officer from 2018 through 2020.

Mr. Toos N. Daruvala was Co-Chief Executive Officer, MIO Partners, Inc. from November 2016 through March 2021.

Ms. Roberta L. Jamieson was President and Chief Executive Officer of Indspire (a Canadian Indigenous charity that invests in the education of First Nations, Inuit and Métis people) from November 2004 through December 2020.

Mr. Barry Perry was President and Chief Executive Officer of Fortis Inc. from 2015 through 2020.

Ms. Maryann Turcke was Senior Advisor, Brookfield Infrastructure Partners L.P. from September 2020 through September 2022, Senior Advisor, National Football League from September 2020 through 2021 and Chief Operating Officer, National Football League from April 2017 through September 2020.

Ms. Bridget van Kralingen served in a variety of leadership positions since joining IBM Corporation in 2004 until her retirement as Senior Vice-President of Special Projects in December 2021. She has also served as Senior Vice-President of Global Markets, Senior Vice-President of Global Industries, Platform and Blockchain, Senior Vice-President of IBM Global Business Services and General Manager of IBM North America.

Mr. Frank Vettese served in a variety of leadership positions since joining Deloitte Canada in 2002, most recently as Managing Partner and Chief Executive from 2012 through June 2019.

Mr. Jeffery Yabuki was Executive Chairman, Fiserv, Inc. from June through December 2020 and Chief Executive Officer, Fiserv, Inc. from 2005 through June 2020.

Committees of the Board

Audit Committee: F. Vettese (Chair), T.N Daruvala, C. Devine, B. Perry, M. Turcke and B.A. van Kralingen.

Risk Committee: A.A. Chisholm (Chair), M. Bibic, R.L. Jamieson, T. Vandal and J. Yabuki.

Governance Committee: M. Turcke (Chair), M. Bibic, A.A. Chisholm, C. Devine and R.L. Jamieson.

Human Resources Committee: T. Vandal (Chair), T.N. Daruvala, B. Perry, B.A. van Kralingen, F. Vettese and J. Yabuki.

Executive Officers

The following are the Bank’s executive officers as at November 29, 2023:

 

     
Name    Province/State and Country
of Residence
   Title
     
Nadine Ahn    Ontario, CAN    Chief Financial Officer
     
Maria Douvas    New York, U.S.    Chief Legal Officer
     
Douglas Guzman    Ontario, CAN    Group Head, RBC Wealth Management & RBC Insurance

 

20


     
Name    Province/State and Country
of Residence
   Title
     
Graeme Hepworth    Ontario, CAN    Chief Risk Officer
     
Christoph Knoess    New York, U.S.    Chief Administrative & Strategy Officer
     
David I. McKay    Ontario, CAN    President & Chief Executive Officer
     
Neil McLaughlin    Ontario, CAN    Group Head, Personal & Commercial Banking
     
Derek Neldner    Ontario, CAN    CEO and Group Head, RBC Capital Markets
     
Kelly Pereira    Ontario, CAN    Chief Human Resources Officer
     
Bruce Ross    Ontario, CAN    Group Head, Technology and Operations

Since November 1, 2018, the executive officers have held the positions described below:

Ms. Nadine Ahn was appointed to Group Executive in her role as Chief Financial Officer effective November 1, 2021. Prior to her current role, Ms. Ahn was Senior Vice President, Wholesale Finance & Investor Relations since March 2019 and Senior Vice President, CFO Wholesale Finance since June 2016 and Vice President & Controller, Global Head of Financial Control, Capital Markets Finance since 2014.

Ms. Maria Douvas was appointed to the Group Executive in her role as Chief Legal Officer effective September 17, 2021. Prior to her current role, Ms. Douvas was Executive Vice President and General Counsel since February 2021, Senior Vice President, U.S. General Counsel and Global Head of Litigation since September 2018 and Vice President and Global Head of Litigation and Employment Law since April 2016.

Mr. Douglas Guzman was appointed to Group Executive in his role as Group Head, RBC Wealth Management & Insurance effective November 1, 2015 and assumed leadership of RBC Investor & Treasury Services effective November 1, 2019. Effective November 1, 2022, RBC eliminated the Investor & Treasury Services segment by moving Treasury Services to Capital Markets and Investor Services to Wealth Management, which Mr. Guzman continues to lead. Prior to his current role, Mr. Guzman was Managing Director and Head Global Investment Banking, Capital Markets since 2006.

Mr. Graeme Hepworth was appointed to Group Executive in his role as Chief Risk Officer of Royal Bank of Canada effective April 9, 2018. Prior to his current role, Mr. Hepworth was Executive Vice President, Group Risk Management, Retail and Commercial Risk since 2017, Senior Vice President, Group Risk Management, Personal & Commercial Banking since 2015.

Mr. Christoph Knoess was appointed to the Group Executive in his role as Chief Administrative Officer effective December 2, 2019. Prior to joining RBC, Mr. Knoess was a Partner in Digital, Technology and Organizational Agility in Banking at McKinsey & Company since 2017 and prior to that he was a Partner and Global Head of the Digital, Technology and Analytics Practice at Oliver Wyman since 2008.

Mr. David I. McKay was appointed President of Royal Bank of Canada effective in February 2014 and Chief Executive Officer effective in August 2014. Mr. McKay was appointed to Group Executive in his role as Group Head, Canadian Banking in April 2008 and was appointed Group Head, Personal & Commercial Banking effective October 31, 2012.

Mr. Neil McLaughlin was appointed to Group Executive in his role as Group Head, Personal & Commercial Banking effective May 2017. In September 2021, Mr. McLaughlin also assumed responsibility for RBC Ventures. Prior to his current role, Mr. McLaughlin was Executive Vice President, Business Financial Services, Personal & Commercial Banking since October 2014.

 

21


Mr. Derek Neldner was appointed to the Group Executive in his role as Group Head and CEO, Capital Markets effective November 1, 2019. Prior to his current role, Mr. Neldner was Global Head of Investment Banking since June 2018, and Head, Canadian and Asia Pacific Banking since June 2014. In addition to his leadership role with RBC Capital Markets, Derek is also Board Chair and Chief Executive Officer of RBC US Group Holdings LLC, an intermediate holding company (IHC) organized under U.S. law.

Ms. Kelly Pereira was appointed to Group Executive in her role as Chief Human Resources Officer effective June 1, 2022. Prior to her current role, Ms. Pereira was Senior Vice President, Talent Strategy and Solutions since June 2020, and Senior Vice President Leadership Development and Reimagine HR since July 2017.

Mr. Bruce Ross was appointed to Group Executive in his role as Group Head, Technology and Operations effective in January 2014. Prior to joining RBC, Mr. Ross was with IBM, holding a series of progressively more senior positions.

Ownership of Securities

To our knowledge, as at October 31, 2023, the directors and executive officers, as a group, beneficially own or exercise control or direction over less than one per cent (1%) of our common and preferred shares. None of our directors or executive officers holds shares of our subsidiaries except where required for qualification as a director of a subsidiary.

Cease Trade Orders, Bankruptcies, Penalties or Sanctions

To the best of our knowledge, no director or executive officer,

 

(a)

is, as at November 29, 2023 or has been, within the 10 years before, a director, chief executive officer or chief financial officer of any company (including our company), that while that person was acting in that capacity,

 

  (i)

was the subject of a cease trade or similar order or an order that denied the relevant company access to any exemption under Canadian securities legislation,4 for a period of more than 30 consecutive days, or

 

  (ii)

was subject to an event that resulted, after the director or executive officer ceased to be a director, chief executive officer or chief financial officer, in the company being the subject of a cease trade or similar order or an order that denied the relevant company access to any exemption under Canadian securities legislation,4 for a period of more than 30 consecutive days, or

 

(b)

is, as at November 29, 2023 or has been, within the 10 years before, a director or executive officer of any company (including our company), that while that person was acting in that capacity or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets, or

 

(c)

has, within the 10 years before November 29, 2023, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director or executive officer,

Except for the following:

 

   

Ms. Turcke is a director of Diamond Sports Group, LLC, which filed for Chapter 11 protection in the U.S. Bankruptcy Court for the Southern District of Texas on March 14, 2023.

 

4 National Instrument 14-101 restricts the meaning of “securities legislation” to Canadian provincial and territorial legislation and “securities regulatory authority” to Canadian provincial and territorial securities regulatory authorities.

 

22


To the best of our knowledge, none of our directors or executive officers have been subject to (a) any penalties or sanctions imposed by a court relating to Canadian securities legislation5 or by a Canadian securities regulatory authority5 or has entered into a settlement agreement with a Canadian securities regulatory authority,5 or (b) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.

Conflicts of Interest

To the best of our knowledge, no director or executive officer has an existing or potential material conflict of interest with us or any of our subsidiaries.

 

LEGAL PROCEEDINGS AND REGULATORY ACTIONS

In the ordinary course of our business, we are routinely involved in or parties to various ongoing, pending and threatened legal actions and proceedings.

A description of certain legal proceedings to which we are a party appears in Note 25 “Legal and regulatory matters” beginning on page 223 of our 2023 Annual Consolidated Financial Statements, which note is incorporated by reference herein.

Since October 31, 2022, (a) there have been no penalties or sanctions imposed against us by a court relating to Canadian securities legislation5 or by a Canadian securities regulatory authority5 which are individually or in the aggregate material to the Bank, (b) there have been no other penalties or sanctions imposed by a court or regulatory body against us that would likely be considered important to a reasonable investor in making an investment decision, and (c) we have not entered into any settlement agreements with a court relating to Canadian securities legislation5 or with a Canadian securities regulatory authority5, except that Royal Bank of Canada entered into no-contest settlement agreements with the Ontario Securities Commission (OSC) and Authorité des Marchés Financiers (AMF) in October 2023, in relation to the failure to properly record the costs associated with internally developed software projects from 2008 through 2020. RBC does not admit or deny the allegations. The settlement included a voluntary payment of CAD $4 million to the OSC and AMF. This settlement was not material to RBC.

 

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

To the best of our knowledge, there were no directors or executive officers or any associate or affiliate of a director or executive officer with a material interest in any transaction within the three most recently completed financial years or during the current financial year that has materially affected us or is reasonably expected to materially affect us.

 

 

5 National Instrument 14-101 restricts the meaning of “securities legislation” to Canadian provincial and territorial legislation and “securities regulatory authority” to Canadian provincial and territorial securities regulatory authorities.

 

23


TRANSFER AGENT AND REGISTRAR

For Canada, Computershare Trust Company of Canada is the transfer agent and registrar for our common shares and our preferred shares. Their principal offices are in the cities of: Montreal, QC, Toronto, ON, Calgary, AB and Vancouver, BC. In the U.S., Computershare Trust Company, N.A. is the co-transfer agent located in Canton, Massachusetts and Jersey City, New Jersey. In the U.K., Computershare Services PLC is the co-transfer agent located in Bristol, England.

 

EXPERTS

PricewaterhouseCoopers LLP (PwC), Chartered Professional Accountants, Licensed Public Accountants, audited our Annual Consolidated Financial Statements, which comprise the consolidated balance sheets as of October 31, 2023 and October 31, 2022 and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the years then ended, including the related notes and the effectiveness of our internal control over financial reporting as of October 31, 2023. PwC has advised that they are independent with respect to the Bank within the meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of Ontario and the rules and regulations adopted by the SEC and the Public Company Accounting Oversight Board (United States).

 

AUDIT COMMITTEE

Audit Committee Mandate

The mandate of the Audit Committee is attached as Appendix C to this Annual Information Form.

Composition of Audit Committee

The Audit Committee consists of Frank Vettese (Chair), Toos N. Daruvala, Cynthia Devine, Barry Perry, Maryann Turcke and Bridget A. van Kralingen. The board has determined that each member of the Audit Committee is independent under our Director Independence Policy, which incorporates the independence standards under applicable Canadian and U.S. laws and regulations and none receives, directly or indirectly, any compensation from us other than ordinary course compensation for service as a member of the board of directors and its committees or of a board of directors of one or more of our subsidiaries. All members of the Audit Committee are financially literate within the meaning of National Instrument 52-110 – Audit Committees and of the Corporate Governance Standards of the NYSE. In considering the criteria for determining financial literacy, the board of directors looks at the ability of a director to read and understand a balance sheet, an income statement and a cash flow statement of a financial institution. The board has determined that each of Frank Vettese, Cynthia Devine and Barry Perry qualifies as an “audit committee financial expert” as defined by the SEC.

Relevant Education and Experience of Audit Committee Members

In addition to each member’s general business experience, the education and experience of each Audit Committee member that is relevant to the performance of their responsibilities as an Audit Committee member is as follows:

 

24


Frank Vettese, B.B.A., FCA, earned his Bachelor of Business Administration from the Schulich School of Business and is a Chartered Accountant and a fellow of the Canadian Institute of Chartered Accountants. Mr. Vettese was Managing Partner and Chief Executive of Deloitte Canada from 2012 to June 2019. Mr. Vettese has been a member of the Audit Committee since July 2019.

Toos N. Daruvala earned his MBA from the University of Michigan and his Bachelor of Technology degree in electrical engineering from the Indian Institute of Technology. Mr. Daruvala was Co-Chief Executive Officer of MIO Partners, Inc. from 2015 to 2021, and held various senior positions at McKinsey & Company from 1983 to 2015, including Senior Partner, Risk Practice and Director, Banking and Securities Practice. He concluded his 33 year career at McKinsey & Company by serving as Senior Advisor and Director Emeritus in 2016. Mr. Daruvala has been a member of the Audit Committee since April 2022.

Cynthia Devine, FCPA, FCA, HBA, earned her Honors Business Administration degree from Western University. Ms. Devine became a Fellow of the Institute of Chartered Accountants of Ontario in 2011. Ms. Devine is the interim President and Chief Executive Officer of Maple Leaf Sports & Entertainment. She was the Chief Financial Officer from 2017 to 2022. From 2003 to 2014, Ms. Devine served as Chief Financial Officer of Tim Hortons Inc., and from 2015 to 2017 served as Executive Vice President, Chief Financial Officer and Corporate Secretary of RioCan Real Estate Investment Trust. Ms. Devine serves as a director for Empire Company Limited/Sobeys Inc. Ms. Devine has been a member of the Audit Committee since July 2020.

Barry Perry earned his Bachelor of Commerce degree (Honours) from Memorial University of Newfoundland and is a Chartered Professional Accountant. Mr. Perry was President and Chief Executive Officer of Fortis Inc. from 2015 to 2020 and served as Executive Vice President of Finance and Chief Financial Officer from 2004 to 2014. Mr. Perry is a member of the boards of Capital Power Corporation and Canada Pension Plan Investment Board. Mr. Perry has been a member of the Audit Committee since August 2023.

Maryann Turcke, B.S., M.S., M.B.A, earned her Bachelor of Science in Civil Engineering degree from Queen’s University, her Master of Science in Engineering degree from the University of Toronto and her Master of Business Administration from Queen’s University. Ms. Turcke was Chief Operating Officer of the National Football League from 2018 to 2020, President, NFL Network, Digital Media, IT and Films from 2017 to 2018 and President of Bell Media from 2014 to 2017. Ms. Turcke is Senior Advisor of Brookfield Infrastructure Partners. Ms. Turcke has been a member of the Audit Committee since January 2020.

Bridget A. van Kralingen, M.C., B.C., earned her Bachelor of Commerce from the University of the Witwatersrand, South Africa, her Master of Commerce in Industrial and Organisational Psychology from the University of South Africa, and her honours degree in commerce from the University of Johannesburg. Ms. van Kralingen is Senior Vice-President, Special Projects of IBM Corporation. Ms. van Kralingen held various senior positions at IBM Corporation from 2004 to 2021, including Senior Vice-President, Global Markets and Senior Vice-President, Global Business Services. Ms. van Kralingen was Managing Partner at Deloitte Consulting, US from 2001 to 2004. Ms. van Kralingen is a member of the boards of the New York Historical Society and the Partnership for New York City. Ms.  van Kralingen has been a member of the Audit Committee since August 2021.

Pre-Approval Policies and Procedures

The Audit Committee has adopted a policy that requires pre-approval by the Audit Committee of audit services and other services within permissible categories of non-audit services. The policy prohibits us from engaging the Bank’s independent auditor for “prohibited” categories of non-audit services. A copy of our Pre-Approval Policies and Procedures can be found in Appendix D.

 

25


Independent Registered Public Accounting Firm Fees

Following a tender process, PwC was appointed our independent auditor by the Board of Directors on January 29, 2016, which appointment was approved by the Bank’s shareholders at the Annual and Special Meeting of Common Shareholders held on April 6, 2016. Fees relating to the years ended October 31, 2023 and October 31, 2022 to PwC and its affiliates, including the nature of each category of fees, are detailed below.

 

      

Year ended October 31, 2023

($Millions)

 

 

    

Year ended October 31, 2022

($Millions)

 

 

     

Bank and  

Subsidiaries  

    

Mutual  

Funds(1)  

     Total       

Bank and  

Subsidiaries  

    

Mutual  

Funds(1)  

     Total    

Audit fees

     43.3          2.5          45.8          41.6          3.3          44.9    

Audit-related fees

     10.4          -          10.4          9.9          -          9.9    

Tax fees

     0.1          0.3          0.4          0.1          0.3          0.4    

All other fees

     0.8          0.6          1.4          0.5          0.5          1.0    

Total fees

     54.6          3.4          58.0          52.1          4.1          56.2    

(1) The Mutual Funds category includes fees paid for professional services provided by PwC for certain mutual funds managed by subsidiaries of the Bank. In addition to other administrative costs, the subsidiaries are responsible for the auditors’ fees for professional services rendered in connection with the annual audit, statutory and regulatory filings and other services for the Mutual Funds in return for a fixed administration fee.

Audit Fees

Audit fees were paid for professional services rendered by the Bank’s independent auditor for the integrated audit of the 2023 Annual Consolidated Financial Statements of the Bank, including its audit of the effectiveness of our internal control over financial reporting, and any financial statement audits of our subsidiaries. In addition, audit fees were paid for services that generally only the Bank’s independent auditor reasonably can provide, which includes services provided in connection with statutory and regulatory filings, including those related to prospectuses and other offering documents.

Audit-Related Fees

Audit-related fees were paid for assurance and related services that are reasonably related to the performance of the audit or review of our 2023 Annual Consolidated Financial Statements and are not reported under the audit fees item above. These services consisted of:

 

   

employee benefit plan audits;

   

due diligence related to mergers and acquisitions;

   

consultations and audits in connection with acquisitions, including evaluating the accounting treatment for proposed transactions;

   

attest services not required by statute or regulation;

   

reporting on the effectiveness of internal controls as required by contract or for business reasons;

   

the audits of various trusts and limited partnerships; and

   

consultations regarding financial and reporting standards.

Tax Fees

Tax fees were paid for tax compliance services including preparation of tax returns for certain mutual funds managed by subsidiaries of the Bank and a subscription for services to provide specific tax data and information to complete routine tax schedules and calculations for clients.

 

26


All Other Fees

These services consist of translation of financial statements and related continuous disclosure and other public documents containing financial information for us and certain of our subsidiaries, regulatory compliance services, as well as accounting and other research software subscriptions and publications.

 

ADDITIONAL INFORMATION

Additional information, including directors’ and officers’ remuneration and indebtedness, principal holders of our securities and securities authorized for issuance under equity compensation plans, where applicable, is contained in the Bank’s Management Proxy Circular for the most recent annual meeting of shareholders. Additional financial information is provided in our 2023 Annual Consolidated Financial Statements and 2023 Management’s Discussion and Analysis which are included in our 2023 Annual Report.

Copies of this Annual Information Form, our 2023 Annual Report and Management Proxy Circular in respect of the most recent annual meeting of shareholders may be obtained from Investor Relations at 200 Bay Street, South Tower, Toronto, Ontario, M5J 2J5.

This Annual Information Form, the 2023 Annual Consolidated Financial Statements and 2023 Management’s Discussion and Analysis, as well as additional information about us may be found on our website at rbc.com, on SEDAR+, the Canadian Securities Administrators’ website, at sedarplus.ca, and on the EDGAR section of the SEC’s website at sec.gov.

Information contained in or otherwise accessible through the websites mentioned in this Annual Information Form does not form a part of this Annual Information Form. All references in this Annual Information Form to websites are inactive textual references and are for your information only.

 

TRADEMARKS

Trademarks used in this Annual Information Form include the RBC LION & GLOBE Design, ROYAL BANK OF CANADA, RBC, RBC Insurance, RBC Investor Services and Leo LRCN Limited Recourse Trust 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 Annual Information Form, which are not the property of Royal Bank of Canada, are owned by their respective holders.

 

27


APPENDIX A – PRINCIPAL SUBSIDIARIES

 

(Millions of Canadian dollars)        As at October 31, 2023  

 

 
Principal subsidiaries (1)   Principal
office address (2)
   Carrying value of voting
shares owned by the
Bank (3)
 

 

 

Royal Bank Holding Inc.

  Toronto, Ontario, Canada    $ 85,823  

RBC Direct Investing Inc.

  Toronto, Ontario, Canada   

RBC Insurance Holdings Inc.

  Mississauga, Ontario, Canada   

RBC Life Insurance Company

  Mississauga, Ontario, Canada   

Investment Holdings (Cayman) Limited

  George Town, Grand Cayman, Cayman Islands   

RBC (Barbados) Funding Ltd.

  St. James, Barbados   

Capital Funding Alberta Limited

  Calgary, Alberta, Canada   

RBC Global Asset Management Inc.

  Toronto, Ontario, Canada   

RBC Investor Services Trust

  Toronto, Ontario, Canada   

RBC (Barbados) Trading Bank Corporation

  St. James, Barbados   

 

 

RBC US Group Holdings LLC (2)

  Toronto, Ontario, Canada      32,278  

RBC USA Holdco Corporation (2)

  New York, New York, U.S.   

RBC Capital Markets, LLC (2)

  New York, New York, U.S.   

City National Bank (2)

  Los Angeles, California, U.S.   

 

 

RBC Dominion Securities Limited

  Toronto, Ontario, Canada      15,290  

RBC Dominion Securities Inc.

  Toronto, Ontario, Canada   

 

 

Royal Bank Mortgage Corporation

  Toronto, Ontario, Canada      6,277  

 

 

RBC Europe Limited

  London, England      2,977  

 

 

The Royal Trust Company

  Montreal, Quebec, Canada      1,367  

 

 

Royal Trust Corporation of Canada

  Toronto, Ontario, Canada      553  

 

 

(1) The Bank directly or indirectly controls each subsidiary.

(2) Each subsidiary is incorporated or organized under the laws of the state, province or country in which the principal office is situated, except for RBC US Group Holdings LLC and RBC USA Holdco Corporation which are incorporated under the laws of the State of Delaware, U.S., RBC Capital Markets, LLC, which is organized under the laws of the State of Minnesota, U.S., and City National Bank which is a national bank, chartered under the laws of the United States of America.

(3) The carrying value of voting shares is stated as the Bank’s equity in such investments.

 

28


APPENDIX B – EXPLANATION OF RATINGS AND OUTLOOK

 

Institution           Rating    Outlook
Moody’s       

●   Obligations rated ‘Aa’ are judged to be of high quality and are subject to very low credit risk.

●   Obligations rated ‘A’ are judged to be upper medium-grade and are subject to low credit risk.

●   Obligations rated ‘Baa’ are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.

●   Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.

●   Additionally, a “(hyb)” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.

●   Ratings of ‘P-1’ reflect a superior ability to repay short-term obligations.

 

   A Moody’s rating outlook is an opinion regarding the likely rating direction over the medium term.
Standard & Poor’s       

●   An obligation rated ‘AA’ differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.

●   An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitments on the obligation is still strong.

●   An obligation rated ‘BBB’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the obligation.

●   Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the rating categories.

●   A short-term obligation rated ‘A-1’ is rated in the highest category by S&P Global Ratings. The obligor’s capacity to meet its financial commitments on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitments on these obligations is extremely strong. A short term obligation rated ‘A-1+’ has extremely strong capacity to meet its financial commitments.

   An S&P Global Ratings outlook assesses the potential direction of a long-term credit rating over the intermediate term, which is generally up to two years for investment grade and generally up to one year for speculative grade.

 

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Institution           Rating    Outlook
Fitch       

●   ‘AA’ (Very High Credit Quality) ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

●   ‘A’ (High Credit Quality) ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.

●   ‘BBB’ (Good Credit Quality) ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.

●   The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories.

●   ‘F1’ (Highest Short-Term Credit Quality) ratings indicate the strongest intrinsic capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.

 

   Outlooks indicate the direction a rating is likely to move over a one- to two-year period. They reflect financial or other trends that have not yet reached or been sustained the level that would cause a rating action, but which may do so if such trends continue.
   
DBRS       

●   An obligation rated ‘AA’ is of superior credit quality. The capacity for the payment of financial obligations is considered high. Credit quality differs from AAA only to a small degree. Unlikely to be significantly vulnerable to future events.

●   An obligation rated ‘A’ is of good credit quality. The capacity for the payment of financial obligations is substantial, but of lesser credit quality than AA. May be vulnerable to future events, but qualifying negative factors are considered manageable.

●   All rating categories from AA to CCC contain the subcategories (high) and (low). The absence of either a (high) or (low) designation indicates the credit rating is in the middle of the category.

●   R-1 ratings indicate the highest credit quality. The capacity for the payment of short-term financial obligations as they fall due is exceptionally high. Unlikely to be adversely affected by future events. The R-1 and R-2 rating categories are further denoted by the subcategories “(high)”, “(middle)”, and “(low)”.

●   Preferred shares rated Pfd-1 are generally of superior credit quality and are supported by entities with strong earnings and balance sheet characteristics. Pfd-1 ratings generally correspond with issuers with a AAA or AA category reference point.

●   Preferred shares rated Pfd-2 are generally of good credit quality. Protection of dividends and principal is still substantial, but earnings, the balance sheet and coverage ratios are not as strong as Pfd-1 rated companies. Generally, Pfd-2 ratings correspond with issuers with an A category or higher reference point.

●   Each rating category of the preferred shares may be denoted by the subcategories “high” and “low”. The absence of either a “high” or “low” designation indicates the rating is in the middle of the category.

   Rating Trends provide guidance in respect of DBRS Morningstar’s opinion regarding the outlook for a rating. Rating Trends have three categories: “Positive”, “Stable” or “Negative”. The Rating Trend indicates the direction in which DBRS Morningstar considers the rating may move if present circumstances continue, or in certain cases as it relates to the Corporate Finance sector, unless challenges are addressed by the issuer.

 

30


WHAT THE RATINGS ADDRESS:

Short-term and Long-term Senior Debt

Short-term and long-term senior debt credit ratings are the current opinion of the rating agency on creditworthiness of an obligor with respect to fixed-income obligations whose original maturity is of a short and medium to long-term nature, respectively. They address the possibility that a financial obligation will not be honoured as promised and reflect both the likelihood of default and any financial loss suffered in the event of default.

Subordinated Debt

Subordinated debt credit ratings are the current opinion of the rating agency on creditworthiness of an obligor with respect to a specific financial obligation and a specific class of financial obligation for a specific financial program. Ratings take into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated.

Preferred Shares

Preferred shares ratings address the issuer’s capacity and willingness to pay dividends and principal, in case of limited life, on a timely basis. They address the likelihood of timely payment of dividends, notwithstanding the legal ability to pass on or defer a dividend payment.

Rating Outlook

Rating Outlook assesses the potential direction of a credit rating over the intermediate to longer term. In determining a Rating Outlook consideration is given to any changes in the economic and fundamental business conditions. An Outlook is not necessarily a precursor of a rating change.

 

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APPENDIX C – AUDIT COMMITTEE MANDATE

ROYAL BANK OF CANADA

(the Bank)

November 29, 2023

AUDIT COMMITTEE MANDATE

 

 

 

A.

PURPOSE AND DUTIES OF THE COMMITTEE

 

  1.

General Purpose

The Committee is responsible for assisting the Bank’s board of directors (the Board) in its oversight of (i) the integrity of the Bank’s financial statements; (ii) the qualifications, performance and independence of the external auditors; (iii) the performance of the Bank’s internal audit function; (iv) internal controls; and (v) compliance with legal and regulatory requirements.

 

  2.

Financial Statements and other Documents

The Committee will regularly review and discuss the following:

 

  a)

prior to review and approval by the Board, the Bank’s annual statement which includes its annual consolidated financial statements, its quarterly financial statements, and related management’s discussion and analysis;

 

  b)

earnings releases on interim and annual results, the annual information form, the annual report and other financial information, earnings guidance and presentations provided to analysts, rating agencies and the public;

 

  c)

such other periodic disclosure documents as requested by regulators or that may be required by law;

 

  d)

investments and transactions brought to the Committee’s attention that could adversely affect the Bank’s well-being;

 

  e)

prospectuses relating to the issuance of securities of the Bank;

 

  f)

representations provided by management to the auditors, where appropriate;

 

  g)

reports on any litigation matters which could significantly affect the Bank;

 

  h)

tax matters that are material to the financial statements;

 

  i)

reports from the Chief Compliance Officer (the CCO) on regulatory compliance matters, and from the Chief Anti-Money Laundering Officer (the CAMLO) on anti-money laundering matters; and

 

  j)

other reports as required to be communicated by the auditors by the Canadian Public Accountability Board, the Office of the Superintendent of Financial Institutions, and the U.S. Public Company Accounting Oversight Board.

 

32


Moreover, the Committee will ensure that adequate procedures are in place for the review of the Bank’s public disclosure of financial information derived from the Bank’s financial statements, and will periodically assess the adequacy of these procedures.

 

  3.

External Auditor

Subject to the shareholders’ powers conferred by the Bank Act, the Committee will recommend the appointment (or revocation thereof) of any registered public accounting firm (including the external auditor) engaged to prepare or issue an audit report or to perform other audit, review or attest services. The Committee will fix the remuneration and oversee the work of these accounting firms, including the resolution of disagreements with management regarding financial reporting. Such accounting firms will report directly to the Committee.

Moreover, as part of its oversight of the external auditor the Committee will:

 

  a)

meet with the external auditor to review and discuss the annual audit plan, the results of the audit, the auditor’s report with respect to the annual statement, and all other reports, returns and transactions as required by applicable laws;

 

  b)

approve all audit engagement fees and terms, as well as the terms of any permitted non-audit services to be provided by the external auditor to the Bank, with such approvals to be given specifically or pursuant to preapproval policies and procedures adopted by the Committee in accordance with applicable laws;

 

  c)

review any concerns that may be brought forward by the external auditor, including any difficulties they may encounter in conducting their audit, as well as management’s response to such concerns;

 

  d)

review material correspondence between the external auditor and management relating to audit findings;

 

  e)

taking into account the opinions of management and the Bank’s internal auditor, annually assess the external auditor’s qualifications and performance, including relevant experience, geographical reach, professional scepticism, quality of services and communications, and independence and objectivity;

 

  f)

review formal written statements delineating all relationships between the external auditor and the Bank that may impact its independence and objectivity;

 

  g)

annually assess the risk of the external auditor withdrawing from the audit;

 

  h)

discuss with the external auditor and with management the annual audited financial statements and quarterly financial statements, as well as related management’s discussion and analysis;

 

  i)

review hiring policies concerning partners, employees and former partners and employees of the present and former external auditors;

 

  j)

review and evaluate the qualifications, performance and independence of the external auditor’s lead partner and discuss the timing and process for implementing the rotation of the lead audit partner, the concurring audit partners and any other active audit engagement team partner;

 

33


  k)

on a periodic basis, perform a comprehensive review of the performance of the External Auditor over multiple years to assess the audit firm, its independence and application of professional skepticism; and

 

  l)

at least annually, obtain and review a report by the external auditor describing: (i) the external auditor’s internal quality-control procedures; (ii) the external auditor’s internal procedures to ensure independence; and (iii) any material issues raised by the most recent internal quality-control review or peer review of the external auditors, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the external auditor, and any steps taken to deal with any such issues.

 

  4.

Oversight of Independent Control Functions

The Committee will oversee the finance, compliance, anti-money laundering and internal audit functions, having regard to their independence from the businesses whose activities they review. The Committee will review and approve the appointment or removal of each of the Chief Financial Officer (the CFO), the CCO, the CAMLO, and the Chief Audit Executive (the CAE), as well as their respective mandates and the mandates or charters of their respective functions. The Committee will approve each of the functions’ organizational structures, budgets and resources. Every year the Committee will assess the performance of each of the CFO, CCO, CAMLO and CAE and the effectiveness their respective functions. It will also periodically review independent assessments of each of these functions. Moreover, it will annually review and approve the internal audit function’s overall risk methodology.

 

  5.

Internal Control

The Committee will assist in the oversight of internal control by engaging in the following activities:

 

  a)

requiring management to implement and maintain appropriate systems of internal control, including internal controls over financial reporting and for the prevention and detection of fraud and error;

 

  b)

evaluating and approving systems of internal control and meeting regularly with the CAE and with management to assess the adequacy and effectiveness of these systems;

 

  c)

receiving reasonable assurances on a regular basis from management that the organization is in control;

 

  d)

reviewing reports from the Chief Executive Officer (the CEO) and the CFO regarding any significant deficiency or material weakness in the design or operation of internal controls over financial reporting and the detection of fraud involving management or other employees who have a significant role in the Bank’s internal control over financial reporting;

 

  e)

reviewing and approving the Bank’s disclosure policy and reviewing reports on the effectiveness of the Bank’s disclosure controls and procedures;

 

  f)

reviewing the process relating to the CEO and CFO’s certifications on the design and effectiveness of the Bank’s disclosure controls and procedures and internal control over financial reporting, and the integrity of the Bank’s quarterly and annual financial statements.

 

34


  6.

Internal Auditor

The Committee will regularly meet with the CAE to review and approve the annual internal audit plan and review internal audit activities. The Committee will review and discuss with the CAE issues reported to management by the internal audit function and management’s responses and/or corrective actions. The Committee will also evaluate the status of identified control weaknesses, as well as the adequacy and degree of compliance with the Bank’s systems of internal control. Other issues that the Committee may review with the CAE include audit scope, information access, resource limitations or any other difficulties encountered by the internal audit function.

 

  7.

Capital Management

The Committee will review capital transactions and may designate and authorize the issue of (i) First Preferred Shares and (ii) securities qualifying as additional Tier 1 capital under capital adequacy guidelines issued by the Superintendent of Financial Institutions. The Committee may also review and approve securities disclosure documents in connection with issues of the Bank’s subordinated indebtedness as provided in the relevant resolution of the Board.

The Committee will review the adequacy and effectiveness of internal controls related to capital management. It will also discuss with the external auditors any matters arising from the audit that may have an impact on regulatory or capital disclosures included in the Bank’s annual statement.

 

  8.

Committee Reports

The Committee is responsible for preparing any report from the Committee that may be included in the Bank’s annual proxy statement.

 

  9.

Other

 

  a)

The Committee will discuss major issues regarding accounting principles and financial statement presentations, including significant changes in the Bank’s selection or application of accounting principles and analyses prepared by management or the external auditors regarding financial reporting issues and judgments made in connection with the preparation of the financial statements;

 

  b)

The Committee will establish procedures for managing complaints received by the Bank regarding accounting, internal accounting controls or auditing matters, as well as procedures for the confidential and anonymous submission by employees of concerns regarding accounting, internal accounting controls or auditing matters. The Committee will receive reports from the Vice-President, Client Complaints Appeal Office at each Committee meeting and will meet with the Vice-President, Client Complaints Appeal Office annually in relation to these procedures;

 

  c)

The Committee will review and discuss any reports concerning material violations submitted to it by the Bank’s legal counsel pursuant to applicable law and policy;

 

  d)

The Committee will discuss the major financial risk exposures of the Bank and the steps management has taken to monitor and control such exposures;

 

  e)

Subject to the laws applicable to the subsidiary, the Committee may perform for and on behalf of a subsidiary the functions of an audit committee of the subsidiary.

 

35


B.

COMMITTEE COMPOSITION AND PROCEDURES

 

  1.

Composition of Committee

The Committee will be composed of five or more directors. No Committee member may be an officer or employee of the Bank or of an affiliate of the Bank. Each Committee member will be (i) unaffiliated, as determined in accordance with the regulations made under the Bank Act, and (ii) independent, as determined by director independence standards adopted by the Board. Committee membership will reflect a balance of experience and expertise required to fulfill the Committee’s mandate.

All Committee members will be financially literate or become financially literate within a reasonable period after appointment to the Committee. At least one member will have accounting or financial management expertise. No member may serve on the audit committees of more than two other public companies, unless the Board determines such simultaneous service would not impair the member’s ability to serve effectively on the Committee.

 

  2.

Appointment of Committee Members

The Board will appoint or reappoint the Committee members at the annual organizational meeting of the directors. In the normal course members will serve a minimum of three years. Each member will remain a member until a successor is appointed, unless the member resigns, is removed or ceases to be a director. The Board may fill a vacancy that occurs in the Committee at any time.

 

  3.

Committee Chair and Secretary

The Board will appoint or reappoint a Committee Chair from among the members of the Committee. If the Board fails to do so, the Committee members will make the appointment or re-appointment. In the normal course the Committee Chair will serve a minimum of three years. The Committee Chair will not be a former employee of the Bank or of an affiliate. The Secretary of the Committee need not be a director.

 

  4.

Time and Place of Meetings

Meetings may be called by any Committee member, the external auditors, the CFO, the Board Chair, the CEO or the Chief Audit Executive. The Committee members will determine the time and place of and the procedure at meetings, provided that the Committee meets at least quarterly. The Committee members may participate in meetings in person or by telephone, electronic or other communications facilities. The Committee may request any officer or employee of the Bank or the Bank’s outside counsel or external auditors to attend a meeting of the Committee or to meet with any members of, or consultants to, the Committee.

 

  5.

Quorum

A quorum for meetings will be three members.

 

  6.

Notice of Meetings

Notice of the time and place of each meeting will be generally given in writing or by telephone, or by electronic or other communications facilities, to each Committee member and to the external auditors at least 24 hours prior to the time fixed for such meeting; however, The Committee may designate a sub-committee to review any matter within the Committee’s mandate.

 

36


  a)

a member may in any manner waive notice of a meeting and attendance of a member at a meeting is a waiver of notice of the meeting, except where a member attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called;

 

  b)

a resolution in writing signed by all the members entitled to vote on that resolution at a Committee meeting, other than a resolution of the Committee carrying out its duties under subsection 194(3) of the Bank Act, will be as valid as if it had been passed at a meeting of the Committee; and

 

  c)

capital transactions may be reviewed and/or authorized at a meeting of which at least one hour prior notice is given.

 

  7.

Delegation

 

  8.

Reporting to the Board

The Committee will report to the Board following each meeting with respect to its activities and recommendations. It will also report to the Board on the annual statement and returns that must be approved by the directors under the Bank Act.

 

  9.

Access to Management and External Advisors

In fulfilling its responsibilities, the Committee will have unrestricted access to management and employees of the Bank. The Committee will select, retain, oversee, terminate and approve the fees of any external advisor that the Committee deems necessary, including any legal or accounting advisor, to assist it in fulfilling its responsibilities. The Bank will provide appropriate funding, as determined by the Committee, for any such engagement.

The Committee may also investigate any matter with full access to all books, records, facilities, management and employees of the Bank.

 

  10.

Private Meetings

At least quarterly the Committee will meet with no members of management present and have separate private meetings with the external auditors, and each of the CAE, the CFO, the CCO, the CAMLO and the Chief Legal Officer, to discuss any matters that the Committee or these parties believe should be discussed.

 

  11.

Minutes

Minutes of meetings of the Committee will be maintained by the Secretary and subsequently presented to the Committee and to the Board, if required by the Board.

 

  12.

Evaluation of Effectiveness and Review of Mandate

The Committee will annually review and assess the adequacy of its mandate and evaluate its effectiveness in fulfilling its mandate.

 

37


APPENDIX D – PRE-APPROVAL POLICIES AND PROCEDURES

Policies and Procedures

for the Monitoring, and Pre-Approval of Services

to be Performed by Public Accounting Firms

and the Review of the External Auditors

(effective January 25, 2023)

Mandate

 

1.

The mandate of the Audit Committee established by the Board of Directors (“Board”) confers on the Audit Committee the authority and responsibility (among other things) to:

 

   

Pre-approve all audit and any legally permissible non-audit services to be provided by the external auditors and all audit, review and attest services provided by any other public accounting firm, with such approval to be given either specifically or pursuant to pre-approval policies and procedures adopted by the Audit Committee; and

 

   

To complete an annual and five year comprehensive reviews of the external auditor’s performance and to recommend to the Board the selection and termination of the external auditor subject to shareholder approval.

Purpose

 

2.

These Policies and Procedures are intended to:

 

  a)

specify the methods by which the Audit Committee may pre-approve the provision of audit, review and attest services by any public accounting firm to the Bank and its subsidiaries;

 

  b)

specify the methods by which the Audit Committee may pre-approve the provision of non-audit services to the Bank and its subsidiaries by the Bank’s external auditors and their affiliates (the “auditors”) that do not impair the independence of the auditors under applicable laws and professional standards, including the rules of the Chartered Professional Accountants Canada, the Public Company Accounting Oversight Board (“PCAOB”), the Canadian Securities Administrators and the U.S. Securities and Exchange Commission;

 

  c)

set forth procedures designed to ensure that any services to be provided by the auditors and that any audit, review or attestation services to be performed by any other public accounting firm have been properly authorized and pre-approved under the authority of the Audit Committee, and that the Audit Committee is promptly informed of each service;

 

  d)

ensure that the Audit Committee’s responsibilities are not delegated to management in violation of applicable law;

 

  e)

specify the policies relating to the annual and comprehensive evaluation of the external auditor and selection of the external auditor by the Audit Committee for recommendation to the Board.

Required Approval of Audit and Non-Audit Services

 

3.

The Audit Committee shall pre-approve all engagements of the auditors by:

 

  a)

the Bank; or

  b)

any subsidiary.

 

4.

The Audit Committee shall pre-approve all engagements of any public accounting firm to provide audit, review or attest services to:

 

  a)

the Bank; or

  b)

any subsidiary.

 

38


5.

The Audit Committee shall evidence its pre-approval by resolution of the Audit Committee or through the exercise of delegated authority in accordance with these Policies and Procedures.

 

6.

“Subsidiary” has the meaning set forth in Rule 210.1-02(x) of the U.S. Securities and Exchange Commission’s Regulation S-X.

 

7.

For the purpose of these Policies and Procedures and any pre-approval:

 

  a)

“Audit services” include services that are a necessary part of the audit process and any activity that is a necessary procedure used by the accountant in reaching opinions on the financial statements and on internal control over financial reporting as is required under applicable auditing standards (“AAS”), including technical reviews to reach an audit judgment on complex accounting issues;

 

  b)

The term “audit services” is broader than those services strictly required to perform an audit pursuant to AAS and include such services as:

  i)

the issuance of comfort letters and consents in connection with offerings of securities;

  ii)

the performance of domestic and foreign statutory audits;

  iii)

attest services required by statute or regulation; and

  iv)

assistance with and review of documents filed with the Office of the Superintendent of Financial Institutions, Canadian Securities Administrators, the Securities and Exchange Commission, the Board of Governors of the Federal Reserve Board and other regulators having jurisdiction over the activities of the Bank and its subsidiaries, and responding to comments from such regulators;

 

  c)

“Audit-related” services are assurance and related services traditionally performed by the Bank’s independent auditor and that are reasonably related to the performance of the audit or review of financial statements and not categorized under “audit fees” for disclosure purposes.

“Audit-related services” include:

  i)

employee benefit plan audits;

  ii)

due diligence related to mergers and acquisitions,

  iii)

consultations and audits in connection with acquisitions, including evaluating the accounting treatment for proposed transactions;

  iv)

reporting on the effectiveness of internal controls as required by contract or for business reasons;

  v)

the audits of various trusts and limited partnerships;

  vi)

attest services not required by statute or regulation; and

  vii)

consultations regarding financial accounting and reporting standards.

Non-financial operational audits are not “audit-related” services.

 

  d)

“Review services” are services applied to unaudited financial statements and consist of the inquiry and analytical procedures that provide the accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to financial statements for them to be in conformity with International Financial Reporting Standards or, if applicable, any other comprehensive basis of accounting.

 

  e)

“Attest” services are engagements where the accountant issues an examination, a review, or an agreed-upon procedures report on a subject matter, or an assertion about the subject matter that is the responsibility of another party. Examples of the subject matter of an “attest” engagement include: examinations (i.e., audits) of financial forecasts and projections; reviews of pro-forma financial information; reporting on a company’s internal control over financial reporting; and examinations of compliance with contractual arrangements or laws and regulations.

 

39


  f)

A “subsidiary” of a specified person is an affiliate controlled by such person directly, or indirectly through one or more intermediaries.

External Auditor Selection and Appointment

 

8.

The Audit Committee shall monitor, review and assess the quality of the external auditor on an annual basis. The annual assessment will include:

 

  a)

quality and thoroughness of the audit approach and methodology;

  b)

level of professional skepticism, and critical judgments applied by the audit team;

  c)

independence of the external audit firm and the engagement partner;

  d)

skills and knowledge of the audit team;

  e)

level of understanding of our businesses and the financial services industry;

  f)

sufficiency of resources and ability to complete the audit in a timely manner;

  g)

partner rotation;

  h)

value for money;

  i)

quality of communications;

  j)

risk of likelihood of withdrawal from the audit;

  k)

input from senior management of RBC;

  l)

input from RBC Internal Audit;

  m)

a self-assessment prepared by the auditor; and

  n)

audit quality metrics and other matters as determined by the Audit Committee or the Board of Directors.

 

9.

At least every five years the Audit Committee will conduct a comprehensive assessment of the external auditor. The assessment will include:

 

  a)

considerations included within the annual assessment;

  b)

performance since the last comprehensive review, or appointment of the external auditor;

  c)

quality and continuity of the engagement team;

  d)

tenure of the auditor;

  e)

incidence of independence threats and effectiveness of applied safeguards;

  f)

track record of the auditor applying professional skepticism; and

  g)

responsiveness to changes in the Bank’s businesses (i.e. significant acquisitions or changes to systems) and calls for improvement from regulators, inspectors, Audit Committee or management.

 

10.

The Audit Committee will take the following into account in deciding whether to recommend the tendering of the external audit engagement of the Bank:

 

  a)

the results of the annual and comprehensive assessments (refer to factors described in sections 8 and 9);

  b)

the impact of regulatory and legislative requirements, including mandatory tendering and rotation requirements on the Bank and its subsidiaries; and

  c)

other factors deemed relevant by the Audit Committee or the Board.

Delegation

 

11.

The Audit Committee may from time to time delegate to one or more of its members who are “independent” (within the meanings of applicable law and the rules or policies of a securities commission having jurisdiction, and the New York Stock Exchange) the power to pre-approve from time to time:

 

  a)

audit, audit-related, review or attest services to be provided by any public accounting firm (including the auditors) that have not been otherwise approved by the Audit Committee;

  b)

permissible non-audit services to be provided by the auditors that have not otherwise been approved by the Audit Committee, and

  c)

changes in the scope of pre-approved engagements and the maximum estimated fees for engagements that have been pre-approved by the Audit Committee.

 

40


12.

The member(s) exercising such delegated authority must report at the next regularly scheduled meeting of the Audit Committee any services that were pre-approved under this delegated authority since the date of the last regularly scheduled meeting.

 

13.

The member(s) exercising delegated authority may evidence his or her approval by signing an instrument in writing that describes the engagement with reasonable specificity, or by signing an engagement letter containing such a description.

 

14.

In addition, member(s) exercising delegated authority may pre-approve an engagement orally, if any such oral approval is promptly confirmed in writing. Such written confirmation may be given by fax or e-mail and must describe the engagement with reasonable specificity.

 

15.

The Audit Committee may pre-approve a limited ($500,000) management fee addendum budget on an annual basis relating to fees that may arise subsequent to submission of fees for approval at the next scheduled meeting of the Audit Committee for engagements that must either commence or are required to be completed in advance of the next scheduled meeting of the Audit Committee. Any engagement subject to this budget will be limited to those with little or no risk of independence breaches, and will be reported to the Audit Committee at the next scheduled meeting. The limitation on the scope of services only extend to: (i) addendums to existing statutory audit engagements, (ii) new audit and audit-related engagements; and (iii) audit-related services related to Service Organization Control 1 reports and include a limitation on fee increases to one-half or less of the original pre-approved fee, capped at a maximum of $100,000 per engagement.

Responsibilities of External Auditors

 

16.

To support the independence process, the external auditors shall:

 

  a)

confirm in engagement letters that performance of the work will not impair independence;

  b)

satisfy the Audit Committee that they have in place comprehensive internal policies and processes to ensure adherence, world-wide, to independence requirements, including robust monitoring and communications;

  c)

provide communication and confirmation to the Audit Committee on independence on a regular basis, and at least annually;

  d)

provide for Audit Committee approval, in connection with each annual audit engagement, a scope of services outlining the full and limited scope areas of the consolidated bank audit, and overview of all statutory audits and regulatory/client driven engagements to be performed and to perform a review of the detailed description of audit-related services outlined by management;

  e)

utilize the tracking numbers assigned by management to all pre-approved services in all fee billings and correspondence, provide detailed annual fee reporting and review management’s detailed quarterly fee reporting.

  f)

communicate to the Audit Committee all matters required to be communicated by the Canadian Public Accountability Board and U.S. Public Company Accounting Oversight Board.

  g)

maintain certification by the Canadian Public Accountability Board and registration with the U.S. Public Company Accounting Oversight Board; and

  h)

review their partner rotation plan and advise the Audit Committee on an annual basis.

Engagements

 

17.

The Audit Committee will not, as a general rule, pre-approve a service more than one year prior to the time at which it is anticipated that the firm of accountants will be engaged to provide the service.

 

18.

Engagements will not be considered to be revolving in nature and may not operate from year-to-year without re-approval.

 

41


19.

All audit, audit-related, and non-audit services to be provided by the auditor, and all audit, audit-related, review or attest services to be provided by any public accounting firm, shall be provided pursuant to an engagement letter that shall:

 

  a)

be in writing and signed by the auditors or public accounting firm;

  b)

specify the particular services to be provided;

  c)

specify the period in which the services will be performed;

  d)

specify the maximum total fees to be paid; and

  e)

in the case of engagements of the auditors, include a confirmation by the auditors that the services are not within a category of services the provision of which would impair their independence under applicable law and Canadian and U.S. generally accepted auditing standards.

 

20.

Management shall, before signing and delivering an engagement letter on behalf of the Bank or a subsidiary and before authorizing the commencement of an engagement:

 

  a)

obtain an engagement letter in accordance with these Policies and Procedures;

  b)

confirm that the services are described in the engagement letter accurately and with reasonable specificity;

  c)

obtain confirmation from the auditors that they have conducted an analysis that supports their conclusion that performance of the services will not impair their independence;

  d)

with respect to engagements for the provision of services other than audit and audit-related services, obtain confirmation from legal counsel of the Bank that performance of the services will not impair independence; and

  e)

verify that the performance of the services has specifically been approved by the Audit Committee or a member in accordance with authority delegated by the Audit Committee.

All engagement letters entered into pursuant to these Policies and Procedures shall be made available to the Audit Committee upon request.

Tax Services

 

21.

The Audit Committee, and any member in the exercise of delegated power, shall consider the provision of tax services by the auditors on an engagement-by-engagement basis.

 

22.

The Audit Committee shall not pre-approve, and any member of the Audit Committee may not exercise delegated power to engage the auditors to provide, tax services to the Bank or a subsidiary:

 

  a)

to represent the Bank or a subsidiary before a tax or other court;

  b)

if the provision of the services would be prohibited, as prescribed by paragraph 26 of these Policies and Procedures; or

  c)

related to marketing, planning or opinion in favour of the tax treatment of (1) a transaction offered under conditions of confidentiality and for which a fee has been or will be paid by the Bank; or (2) a transaction that was initially recommended directly or indirectly, by the accountant and a significant purpose of which is tax avoidance, unless the proposed tax treatment is at least more likely than not to be allowable under applicable tax laws.

 

23.

The Audit Committee shall not pre-approve, and any member of the Audit Committee may not exercise delegated power to engage the auditors to provide, tax services to a person in a financial oversight role at the Bank, or an immediate family member of such a person, except as would be permitted by the PCAOB rules.

Other Non-Audit Services

 

24.

The Audit Committee, and any member in the exercise of delegated power, shall consider the provision of other non-audit services (non-audit services other than audit-related services and tax services, and including non-audit services relating to internal control and business recovery services) by the auditors on an engagement-by-engagement basis. Any approval of non-audit services relating to internal control must be preceded by a discussion with the auditors of the potential effects of the services on independence as required by the rules of the PCAOB.

 

42


Value-Added Services

 

25.

The Audit Committee recognizes and approves of the fact that the auditors from time to time provide, without charge or commitment, value added services to the Bank and its subsidiaries that do not involve an engagement of the auditors. Such value added services may include surveys, educational sessions, workshops, roundtable meetings with peers, benchmarking studies, and monitoring of contest draws as an independent observer. The Audit Committee receives and reviews periodic reports from management and the auditors providing representative examples of such services as part of its monitoring of the Bank’s overall relationship with the auditors.

Prohibited Services

 

26.

The Audit Committee shall not pre-approve, and any member may not exercise delegated power to engage the auditors to provide, any services, including tax services or business recovery services, that (i) provide for a contingency or commission fee arrangement; or (ii) involve the auditors performing any of the non-audit services set forth in paragraph (c)(4) of Rule 210.2-01 of the U.S. Securities and Exchange Commission’s Regulation S-X, which include:

 

  a.

providing bookkeeping or other services related to the accounting records or financial statements of the Bank or any of its subsidiaries,

  b.

providing financial information systems design and implementation to the Bank or any of its subsidiaries,

  c.

providing appraisal or valuation services, fairness opinions, or contribution-in-kind reports to the Bank or any of its subsidiaries,

  d.

providing actuarial services to the Bank or any of its subsidiaries,

  e.

providing internal audit outsourcing services to the Bank or any of its subsidiaries,

  f.

functioning in the role of management for the Bank or any of its subsidiaries,

  g.

providing human resources services to the Bank or any of its subsidiaries,

  h.

providing broker-dealer, investment adviser, or investment banking services to the Bank or any of its subsidiaries,

  i.

providing legal services to the Bank or any of its subsidiaries,

  j.

providing services that fall within the category of “expert” services that are prohibited by applicable law to the Bank or any of its subsidiaries,

  k.

auditing their own work in relation to the Bank or any of its subsidiaries,

  l.

serving in an advocacy role for the Bank or any of its subsidiaries, or

  m.

providing services to the Bank or any of its subsidiaries that would otherwise compromise their independence under applicable regulatory guidance.

For the purposes of the Prohibited Services listed in Section 26, a “subsidiary” includes any entity for which the Bank uses the equity method of accounting and where it is material to the Bank. Therefore, the Audit Committee is not permitted to pre-approve the provision of the prohibited services listed above by the auditors to these entities.

Timely Reporting to the Audit Committee

 

27.

Management shall provide a quarterly written report to the Audit Committee of services performed and related fees, and if necessary, proposals for approval of any increase in fees or new engagements at the scheduled meetings of the Audit Committee held following the end of each fiscal quarter end, or more frequently if required.

 

43


No Delegation to Management

 

28.

Nothing in these Policies and Procedures shall be interpreted as a delegation to management of the Audit Committee’s responsibilities in violation of applicable law.

Effective Date

 

29.

These updated Policies and Procedures are effective as of and from January 25, 2023.

Disclosure

 

30.

The Bank shall disclose these Policies and Procedures in its periodic filings, as required by applicable law.

Review

 

31.

The Audit Committee shall review and reassess the adequacy of these Policies and Procedures on a triennial basis.

 

44

Table of Contents
Deposits – Business and government; Deposits – Personal;0.01000.01000.00500.01000.01000.0050P3YP5Y000.01000.01000.00500.01000.01000.0050P1YP1Y0Securities – Investment, net of applicable allowance; Loans – Retail; Loans – WholesaleDeposits – Business and government; Subordinated debentures; Deposits – BankSecurities – Investment, net of applicable allowance; Loans – Retail; Loans – WholesaleDeposits – Business and government; Subordinated debentures; Deposits – Bank
Exhibit 2
Management’s Discussion and Analysis
 
Management’s Discussion and Analysis (MD&A) is provided to enable a reader to assess our results of operations and financial condition for the fiscal year ended October 31, 2023, compared to the preceding fiscal year. This MD&A should be read in conjunction with our 2023 Annual Consolidated Financial Statements and related notes and is dated November 29, 2023. All amounts are in Canadian dollars, unless otherwise specified, and are based on financial statements presented in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), unless otherwise noted.
 
Additional information about us, including our 2023
Annual Information Form, is available free of charge on our website at rbc.com/investorrelations, on the Canadian Securities Administrators’ website, SEDAR+, at sedarplus.ca and on the EDGAR section of the United States (U.S.) Securities and Exchange Commission’s (SEC) website at sec.gov.
 
Information contained in or otherwise accessible through the websites mentioned herein does not form part of this report. All references in this report to websites are inactive textual references and are for your information only.
 
 
 
Table of contents
 
 
 
22
 
 
 
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122
 
 
 
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Caution regarding forward-looking statements
From time to time, we make written or oral forward-looking statements within the meaning of certain securities laws, including the “safe harbour” provisions of the
United States Private Securities Litigation Reform Act of 1995
and any applicable Canadian securities legislation. We may make forward-looking statements in this 2023 Annual Report, in other filings with Canadian regulators or the SEC, in other reports to shareholders, and in other communications. In addition, our representatives may communicate forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements in this document include, but are not limited to, statements relating to our financial performance objectives, vision and strategic goals, the economic, market, and regulatory review and outlook for Canadian, U.S., U.K., European and global economies, the regulatory environment in which we operate, the implementation of IFRS 17 Insurance Contracts, the expected closing of the transaction involving HSBC Bank Canada, including plans for the combination of our operations with HSBC Bank Canada and the financial, operational and capital impacts of the transaction, the expected closing of the transaction involving the U.K. branch of RBC Investor Services Trust and the RBC Investor Services business in Jersey, the expected impact of the Federal Deposit Insurance Corporation’s special assessment, the Strategic priorities and Outlook sections for each of our business segments, the risk environment including our credit risk, market risk, liquidity and funding risk as well as the effectiveness of our risk monitoring, our climate- and sustainability-related beliefs, targets and goals (including our
net-zero
and sustainable finance commitments) and related legal and regulatory developments, and includes statements made by our President and Chief Executive Officer and other members of management. The forward-looking statements contained in this document represent the views of management and are presented for the purpose of assisting the holders of our securities and financial analysts in understanding our financial position and results of operations as at and for the periods ended on the dates presented, as well as our financial performance objectives, vision, strategic goals and priorities and anticipated financial performance, and may not be appropriate for other purposes.
Forward-looking
statements are typically identified by words such as “believe”, “expect”, “suggest”, “seek”, “foresee”, “forecast”, “schedule”, “anticipate”, “intend”, “estimate”, “goal”, “commit”, “target”, “objective”, “plan”, “outlook”, “timeline” and “project” and similar expressions of future or conditional verbs such as “will”, “may”, “might”, “should”, “could”, “can” or “would” or negative or grammatical variations thereof.
By their very nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties, both general and specific in nature, which give rise to the possibility that our predictions, forecasts, projections, expectations or conclusions will not prove to be accurate, that our assumptions may not be correct, that our financial performance, environmental & social or other objectives, vision and strategic goals will not be achieved, and that our actual results may differ materially from such predictions, forecasts, projections, expectations or conclusions.
We caution readers not to place undue reliance on our forward-looking statements as a number of risk factors could cause our actual results to differ materially from the expectations expressed in such forward-looking statements. These factors – many of which are beyond our control and the effects of which can be difficult to predict – include, but are not limited to: credit, market, liquidity and funding, insurance, operational, regulatory compliance (which could lead to us being subject to various legal and regulatory proceedings, the potential outcome of which could include regulatory restrictions, penalties and fines), strategic, reputation, legal and regulatory environment, competitive, model, systemic risks and other risks discussed in the risk sections of our 2023 Annual Report, including business and economic conditions in the geographic regions in which we operate, Canadian housing and household indebtedness, information technology, cyber and third-party risks, geopolitical uncertainty, environmental and social risk (including climate change), digital disruption and innovation, privacy and data related risks, regulatory changes, culture and conduct risks, the effects of changes in government fiscal, monetary and other policies, tax risk and transparency, and our ability to anticipate and successfully manage risks arising from all of the foregoing factors. Additional factors that could cause actual results to differ materially from the expectations in such forward-looking statements can be found in the risk sections of our 2023 Annual Report, as may be updated by subsequent quarterly reports.
We caution that the foregoing list of risk factors is not exhaustive and other factors could also adversely affect our results. When relying on our
forward-looking
statements to make decisions with respect to us, investors and others should carefully consider the foregoing factors and other uncertainties and potential events, as well as the inherent uncertainty of forward-looking statements. Material economic assumptions underlying the forward-looking statements contained in this 2023 Annual Report are set out in the Economic, market and regulatory review and outlook section and for each business segment under the Strategic priorities and Outlook headings, as such sections may be updated by subsequent quarterly reports. Except as required by law, we do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by us or on our behalf.
Additional information about these and other factors can be found in the risk sections of this 2023 Annual Report, as may be updated by subsequent quarterly reports.
 
22            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Overview and outlook
 
 
Selected financial and other highlights                
 
Table 1  
(Millions of Canadian dollars, except per share, number of and percentage amounts)
 
2023
    2022    
2023 vs. 2022
Increase (decrease)
 
Total revenue
 
$
56,129
 
  $ 48,985    
$
7,144
 
 
 
14.6%
 
Provision for credit losses (PCL)
 
 
2,468
 
    484    
 
1,984
 
 
 
n.m.
 
Insurance policyholder benefits, claims and acquisition expense (PBCAE)
 
 
4,022
 
    1,783    
 
2,239
 
 
 
n.m.
 
Non-interest
expense
 
 
31,173
 
    26,609    
 
4,564
 
 
 
17.2%
 
Income before income taxes
 
 
18,466
 
    20,109    
 
(1,643
 
 
(8.2)%
 
Net income
 
$
14,866
 
  $ 15,807    
$
(941
 
 
(6.0)%
 
Net income – adjusted
(1)
 
 
16,083
 
    15,998    
 
85
 
 
 
0.5%
 
Segments – net income
       
Personal & Commercial Banking
 
$
8,266
 
  $ 8,370    
$
(104
 
 
(1.2)%
 
Wealth Management
(2)
 
 
2,427
 
    3,210    
 
(783
 
 
(24.4)%
 
Insurance
 
 
803
 
    857    
 
(54
 
 
(6.3)%
 
Capital Markets
(2)
 
 
4,139
 
    3,368    
 
771
 
 
 
22.9%
 
Corporate Support
 
 
(769
    2    
 
(771
 
 
n.m.
 
Net income
 
$
14,866
 
  $ 15,807    
$
(941
 
 
(6.0)%
 
Selected information
       
Earnings per share (EPS) – basic
 
$
10.51
 
  $ 11.08    
$
(0.57
 
 
(5.1)%
 
                                          – diluted
 
 
10.50
 
    11.06    
 
(0.56
 
 
(5.1)%
 
Earnings per share (EPS) – basic adjusted
(1)
 
 
11.39
 
    11.21    
 
0.18
 
 
 
1.6%
 
                                          – diluted adjusted
(1)
 
 
11.38
 
    11.19    
 
0.19
 
 
 
1.7%
 
Return on common equity (ROE)
(3), (4)
 
 
14.2%
 
    16.4%    
 
n.m.
 
 
 
(220) bps
 
Return on common equity (ROE) adjusted
(1)
 
 
15.4%
 
    16.6%    
 
n.m.
 
 
 
(120) bps
 
Average common equity
(3)
 
$
102,800
 
  $ 94,700    
$
8,100
 
 
 
8.6%
 
Net interest margin (NIM) – on average earning assets, net
(4)
 
 
1.50%
 
    1.48%    
 
n.m.
 
 
 
2 bps
 
PCL on loans as a % of average net loans and acceptances
 
 
0.29%
 
    0.06%    
 
n.m.
 
 
 
23 bps
 
PCL on performing loans as a % of average net loans and acceptances
 
 
0.08%
 
    (0.04)%    
 
n.m.
 
 
 
12 bps
 
PCL on impaired loans as a % of average net loans and acceptances
 
 
0.21%
 
    0.10%    
 
n.m.
 
 
 
11 bps
 
Gross impaired loans (GIL) as a % of loans and acceptances
 
 
0.42%
 
    0.26%    
 
n.m.
 
 
 
16 bps
 
Liquidity coverage ratio (LCR)
(4), (5)
 
 
131%
 
    125%    
 
n.m.
 
 
 
600 bps
 
Net stable funding ratio (NSFR)
(4), (5)
 
 
113%
 
    112%    
 
n.m.
 
 
 
100 bps
 
Capital, Leverage and Total loss absorbing capacity (TLAC) ratios
(4), (6)
       
Common Equity Tier 1 (CET1) ratio
 
 
14.5%
 
    12.6%    
 
n.m.
 
 
 
190 bps
 
Tier 1 capital ratio
 
 
15.7%
 
    13.8%    
 
n.m.
 
 
 
190 bps
 
Total capital ratio
 
 
17.6%
 
    15.4%    
 
n.m.
 
 
 
220 bps
 
Leverage ratio
 
 
4.3%
 
    4.4%    
 
n.m.
 
 
 
(10) bps
 
TLAC ratio
 
 
31.0%
 
    26.4%    
 
n.m.
 
 
 
460 bps
 
TLAC leverage ratio
 
 
8.5%
 
    8.5%    
 
n.m.
 
 
 
– bps
 
Selected balance sheet and other information
(7)
       
Total assets
 
$
2,004,992
 
  $ 1,917,219    
$
87,773
 
 
 
4.6%
 
Securities, net of applicable allowance
 
 
409,730
 
    318,223    
 
91,507
 
 
 
28.8%
 
Loans, net of allowance for loan losses
 
 
852,773
 
    819,965    
 
32,808
 
 
 
4.0%
 
Derivative related assets
 
 
142,450
 
    154,439    
 
(11,989
 
 
(7.8)%
 
Deposits
 
 
1,231,687
 
    1,208,814    
 
22,873
 
 
 
1.9%
 
Common equity
 
 
110,347
 
    100,746    
 
9,601
 
 
 
9.5%
 
Total risk-weighted assets (RWA)
(4), (6)
 
 
596,223
 
    609,879    
 
(13,656
 
 
(2.2)%
 
Assets under management (AUM)
(4)
 
 
1,067,500
 
    999,700    
 
67,800
 
 
 
6.8%
 
Assets under administration (AUA)
(4), (8), (9)
 
 
4,338,000
 
    5,653,600    
 
(1,315,600
 
 
(23.3)%
 
Common share information
       
Shares outstanding (000s) – average basic
 
 
1,391,020
 
    1,403,654    
 
(12,634
 
 
(0.9)%
 
                                           – average diluted
 
 
1,392,529
 
    1,406,034    
 
(13,505
 
 
(1.0)%
 
                                           – end of period
 
 
1,400,511
 
    1,382,911    
 
17,600
 
 
 
1.3%
 
Dividends declared per common share
 
$
5.34
 
  $ 4.96    
$
0.38
 
 
 
7.7%
 
Dividend yield
(4)
 
 
4.3%
 
    3.7%    
 
n.m.
 
 
 
60 bps
 
Dividend payout ratio
(4)
 
 
51%
 
    45%    
 
n.m.
 
 
 
600 bps
 
Common share price (RY on TSX)
(10)
 
$
110.76
 
  $ 126.05    
$
(15.29
 
 
(12.1)%
 
Market capitalization (TSX)
(10)
 
 
155,121
 
    174,316    
 
(19,195
 
 
(11.0)%
 
Business information
(number of)
       
Employees (full-time equivalent) (FTE)
 
 
91,398
 
    91,427    
 
(29
 
 
(0.0)%
 
Bank branches
 
 
1,247
 
    1,271    
 
(24
 
 
(1.9)%
 
Automated teller machines (ATMs)
 
 
4,341
 
    4,368    
 
(27
 
 
(0.6)%
 
Period average US$ equivalent of C$1.00
(11)
 
$
0.741
 
  $ 0.774    
$
(0.033
 
 
(4.3)%
 
Period-end
US$ equivalent of C$1.00
 
$
0.721
 
  $ 0.734    
$
(0.013
 
 
(1.8)%
 
 
(1)
This is a
non-GAAP
measure. For further details, including a reconciliation, refer to the Key performance and
non-GAAP
measures section. Amounts have been revised from those previously presented to conform to our basis of presentation for this
non-GAAP
measure.
(2)
Amounts have been revised from those previously presented to conform to our new basis of segment presentation. For further details, refer to the About Royal Bank of Canada section.
(3)
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period. This includes average common equity used in the calculation of ROE. For further details, refer to the Key performance and
non-GAAP
measures section.
(4)
See Glossary for composition of this measure.
(5)
The LCR and NSFR are calculated in accordance with the Office of the Superintendent of Financial Institutions’ (OSFI) Liquidity Adequacy Requirements (LAR) guideline. LCR is the average for the three months ended for each respective period. For further details, refer to the Liquidity and funding risk section.
(6)
Capital ratios and RWA are calculated using OSFI’s Capital Adequacy Requirements (CAR) guideline, the Leverage ratio is calculated using OSFI’s Leverage Requirements (LR) guideline, and both the TLAC and TLAC leverage ratios are calculated using OSFI’s TLAC guideline. The results for the year ended October 31, 2023 reflect our adoption of the revised CAR and LR guidelines that came into effect in Q2 2023 as part of OSFI’s implementation of the Basel III reforms. For further details, refer to the Capital management section.
(7)
Represents
year-end
spot balances.
(8)
AUA includes $13 billion and $7 billion (2022 – $15 billion and $6 billion) of securitized residential mortgages and credit card loans, respectively.
(9)
Comparative amounts have been revised from those previously presented.
(10)
Based on TSX closing market price at
period-end.
(11)
Average amounts are calculated using
month-end
spot rates for the period.
n.m.
not meaningful
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            23

About Royal Bank of Canada
Royal Bank of Canada is a global financial institution with a purpose-driven,
principles-led
approach to delivering leading performance. Our success comes from the 94,000+ employees who leverage their imaginations and insights to bring our vision, values and strategy to life so we can help our clients thrive and communities prosper. As Canada’s biggest bank and one of the largest in the world, based on market capitalization, we have a diversified business model with a focus on innovation and providing exceptional experiences to our more than 17 million clients in Canada, the U.S. and 27 other countries. Learn more at rbc.com.
Effective the first quarter of 2023, we simplified our reporting structure by eliminating the Investor & Treasury Services segment and moving its former businesses to existing segments. We moved our Investor Services business to our Wealth Management segment, and our Treasury Services and Transaction Banking businesses to our Capital Markets segment. Effective the fourth quarter of 2023, we moved the Investor Services lending business from our Wealth Management segment to our Capital Markets segment. From a reporting perspective, there were no changes to our Personal & Commercial Banking and Insurance segments. Comparative results in this MD&A have been revised to conform to our new basis of segment presentation.
Our business segments are described below.
 
Personal &
Commercial Banking
   Provides a broad suite of financial products and services to both individual and business clients in Canada, the Caribbean and the U.S. Our commitment to building and maintaining deep and meaningful relationships with our clients is underscored by the delivery of exceptional client experiences, the breadth of our product suite, our depth of expertise, and the features of our digital solutions.
      
Wealth
Management
   Serves affluent, high net worth (HNW) and ultra-high net worth (UHNW) clients from our offices in key financial centres mainly in Canada, the U.S., the United Kingdom (U.K.), Europe and Asia. We offer a comprehensive suite of wealth, investment, trust, banking, credit and other advice-based solutions. We also provide asset management products to institutional and individual clients through our distribution channels and third-party distributors. We provide financial institutions, asset managers and asset owners with asset services and investor services.
      
Insurance
   Offers a comprehensive suite of advice and solutions for individual and business clients including life, health, wealth, property & casualty, travel, group benefits, annuities, and reinsurance.
      
Capital Markets
   Provides expertise in advisory & origination, sales & trading, lending & financing and transaction banking to corporations, institutional clients, asset managers, private equity firms and governments globally. We serve clients from 60 offices in 16 countries across North America, the U.K. & Europe, Australia, Asia and other regions.
 
Vision
and strategic goals
Our business strategies and actions are guided by our vision,
“To be among the world’s most trusted and successful financial institutions.”
Our three strategic goals are:
 
In Canada, to be the undisputed leader in financial services;
 
In the U.S., to be the preferred partner to institutional, corporate, commercial and HNW clients and their businesses; and
 
In select global financial centres, to be a leading financial services partner valued for our expertise.
For our progress in 2023 against our business strategies and strategic goals, refer to the Business segment results section.
 
Economic, market and regulatory review and outlook – data as at November 29, 2023
The predictions and forecasts in this section are based on information and assumptions from sources we consider reliable. If this information or these assumptions are not accurate, actual economic outcomes may differ materially from the outlook presented in this section.
Economic and market review and outlook
GDP growth is slowing across most advanced economies as headwinds from higher interest rates continue to have a lagged impact. Unemployment rates remain low across most economies. However, they have begun to marginally increase in Canada and the United Kingdom (U.K.). The U.S. economy has remained resilient with strong GDP growth and a low unemployment rate. However, credit conditions continue to tighten, the number of job openings are signaling a decline in hiring demand and the excess of household savings accumulated during the pandemic has shrunk. U.S. GDP growth is expected to slow late in calendar 2023 with mild recessions expected in the first half of calendar 2024. Canadian GDP is expected to decline over the second half of calendar 2023 and grow slowly in early calendar 2024. Inflation is still high but has been slowing in most advanced economies. Interest rates have increased to levels that most central banks view as sufficient to slow economic growth and reduce inflationary pressures over time. We expect central banks will not increase policy interest rates further and expect a shift to reductions in interest rates from the Federal Reserve (Fed) and Bank of Canada (BoC) in the next calendar year. However, interest rates are expected to remain significantly higher than pre-pandemic levels.
 
24            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Canada
Canadian GDP is expected to increase 1.0% in calendar 2023 following a 3.4% increase in calendar 2022. Output in early calendar 2023 was supported by strength in consumer spending and an unexpectedly strong rebound in housing market activity in the spring. However, GDP declined slightly in the second calendar quarter of 2023 as consumer spending slowed. An additional 50 basis points of interest rate increases from the BoC over June and July 2023 helped to slow housing markets over the summer. Per-capita GDP growth and consumer spending have been substantially softer, controlling for historically strong population growth. Labour market conditions have also more recently shown signs of weakening. The unemployment rate has increased by 0.7% since April and the number of job openings has continued to decline. Inflation growth rates have moderated from peak levels in calendar 2022 but remain above the top end of the BoC’s 1% to 3% inflation target range. GDP is expected to continue to decline marginally over the second half of calendar 2023 before shifting back to a positive growth rate in calendar 2024. The unemployment rate is expected to rise above 6% in the first half of calendar 2024. The BoC has increased the overnight rate by 475 basis points since March 2022, and as interest rate increases continue to slow consumer spending, we do not anticipate additional increases. However, we do not expect a shift to interest rate decreases until the second half of calendar 2024.
U.S.
U.S. GDP is expected to increase 2.4% in calendar 2023 following a 1.9% increase in calendar 2022. U.S. GDP growth has been exceptionally resilient in calendar 2023. Consumer spending has remained strong despite rising interest rates and employment has continued to increase at a solid pace. However, the unemployment rate increased to 3.9% in October, wage growth is showing signs of deceleration, and the number of job openings has declined. The Fed has increased the federal funds rate by 525 basis points since March 2022 and views the current level of interest rates as restrictive enough to slow GDP growth and inflationary pressures over time. We expect the Fed will hold the target range steady before shifting to interest rate decreases beginning in the second calendar quarter of 2024. We expect U.S. GDP growth softening in the fourth calendar quarter of 2023 followed by a marginal decline in the first half of calendar 2024.
Europe
Euro area GDP is expected to rise by 0.4% in calendar 2023 following a 3.4% increase in calendar 2022. The Euro area economy is losing momentum. GDP declined 0.1% in the third calendar quarter of 2023 and we expect another 0.1% decline in the fourth calendar quarter of 2023. Labour markets remain exceptionally firm but are expected to soften alongside weaker GDP growth. Euro area inflation is still high but has begun to slow. The European Central Bank (ECB) is expected to hold the deposit rate steady through calendar 2024 after a 25 basis point increase to 4% in September 2023. U.K. GDP is projected to rise by 0.4% in calendar 2023 after a 4.3% increase in calendar 2022. In the U.K., GDP held steady in the third calendar quarter of 2023 as the impact of the Bank of England’s (BOE) 515 basis points of cumulative rate increases since December 2021 begin to slow consumer spending. Headline inflation remains elevated; however it is showing signs of moderating. The BOE is expected to hold the Bank Rate at 5.25% through to the end of calendar 2024.
Financial markets
Bond yields have increased substantially in calendar 2023 as markets demand higher term premiums and expect central banks to hold policy interest rates higher for longer. The spread between longer and shorter duration bond yields, which is a commonly used recession indicator, increased since the second calendar quarter of 2023 but remains well below zero, as markets continue to expect deterioration in economic growth. Equity markets have rebounded after declining earlier in the fall and are still above levels at the end of calendar 2022. Global inflation pressures have shown signs of easing. However, underlying price pressures are not expected to fully ease until there is a more pronounced slowdown in domestic demand and the economy.
Regulatory environment
We continue to monitor and prepare for regulatory developments and changes in a manner that seeks to ensure compliance with new requirements, while mitigating adverse business or financial impacts. Such impacts could result from new or amended laws or regulations and the expectations of those who enforce them. A high level summary of the key regulatory changes that have the potential to increase or decrease our costs and the complexity of our operations is included in the Legal and regulatory environment risk section of this 2023 Annual Report.
For a discussion on risk factors resulting from these and other developments which may affect our business and financial results, refer to the risk sections of this 2023 Annual Report. For further details on our framework and activities to manage risks, refer to the risk and Capital management sections of this 2023 Annual Report.
 
Key corporate events
HSBC Bank Canada
On November 29, 2022, we entered into an agreement to acquire 100% of the common shares of HSBC Bank Canada (HSBC Canada) for an
all-cash
purchase price of $13.5 billion. HSBC Canada is a premier Canadian personal and commercial bank focused on globally connected clients. We will also purchase all of the existing preferred shares and subordinated debt of HSBC Canada held directly or indirectly by HSBC Holdings plc at par value.
The agreement includes a locked box mechanism under which HSBC Canada’s earnings from June 30, 2022 to the closing date accrue to RBC and will be reflected in the acquired net assets on closing. Relatedly, we will pay an additional amount that accrues from August 30, 2023 to the closing date, which is calculated based on the all-cash purchase price for the common shares of HSBC Canada and the Canadian Overnight Repo Rate Average.
The transaction is expected to close in the first calendar quarter of 2024 and is subject to the satisfaction of customary closing conditions, including regulatory approvals. For further details, refer to Note 6 of our 2023 Annual Consolidated Financial Statements.
RBC Investor Services
On July 3, 2023, we completed the previously announced sale of the European asset servicing activities of RBC Investor Services
®
and its associated Malaysian centre of excellence (the partial sale of RBC Investor Services operations) to CACEIS, the asset
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            25

servicing banking group of Crédit Agricole S.A. and Banco Santander, S.A. As a result of the transaction, we recorded a
pre-tax
gain on disposal of $69 million in
Non-Interest
income within the Wealth Management segment ($77 million
after-tax).
The completion of the sale of the business of the U.K. branch of RBC Investor Services Trust and the RBC Investor Services business in Jersey remains subject to customary closing conditions, including regulatory approvals. For further details, refer to Note 6 of our 2023 Annual Consolidated Financial Statements.
 
Defining and measuring success through total shareholder returns
Our focus is to maximize total shareholder returns (TSR) through the achievement of top half performance compared to our global peer group over the medium-term
(3-5
years), which we believe reflects a longer-term view of strong and consistent financial performance.
Maximizing TSR is aligned with our three strategic goals discussed earlier and we believe represents the most appropriate measure of shareholder value creation. TSR is a concept used to compare the performance of our common shares over a period of time, reflecting share price appreciation and dividends paid to common shareholders. The absolute size of TSR will vary depending on market conditions, and the bank’s position reflects the market’s perception of our overall performance relative to our peers over a period of time.
Financial performance objectives are used to measure our performance against our medium-term TSR objectives and are used as goals as we execute against our strategic priorities. We review and revise these financial performance objectives as economic, market and regulatory environments change.
The following table provides a summary of our
3-year
and
5-year
performance against our medium-term financial performance objectives:
 
Financial performance compared to our medium-term objectives
 
Table 2  
Medium-term objectives
(1)
         
3-year 
(2)
    
5-year
 
(2)
 
Diluted EPS growth of 7% +
    
 
10%
 
  
 
5%
 
ROE of 16% +
    
 
16.4%
 
  
 
16.0%
 
Strong capital ratio (CET1)
(3)
    
 
13.6%
 
  
 
13.1%
 
Dividend payout ratio 40% – 50%
 
 
 
 
  
 
45%
 
  
 
47%
 
 
(1)   A medium-term
(3-5
year) objective is considered to be achieved when the performance goal is met in either a
3-
or
5-year
period. These objectives assume a normal business environment and our ability to achieve them in a period may be adversely affected by the macroeconomic backdrop.
(2)   Diluted EPS growth is calculated using a Compound Annual Growth Rate (CAGR). ROE, CET1 and dividend payout ratio are calculated using an average.
(3)   The CET1 ratio is calculated using OSFI’s CAR guideline. For further details on the CET1 ratio, refer to the Capital management section.
Our
3-year
and
5-year
medium-term financial performance objectives will remain unchanged in fiscal 2024.
We compare our TSR to that of a global peer group approved by our Board of Directors (the Board). The global peer group consists of the following 9 financial institutions:
 
Canadian financial institutions:
Bank of Montreal, Canadian Imperial Bank of Commerce, Manulife Financial Corporation, National Bank of Canada, The Bank of Nova Scotia, and Toronto-Dominion Bank.
 
U.S. banks:
JPMorgan Chase & Co. and Wells Fargo & Company.
 
International banks:
Westpac Banking Corporation.
 
Medium-term objectives –
3-
and
5-year
TSR vs. peer group average
 
Table 3  
    
3-year TSR 
(1)
    
5-year TSR 
(1)
 
Royal Bank of Canada
    10%        7%  
 
    Bottom half        Top half  
Peer group average (excluding RBC)
    14%        5%  
 
(1)   The
3-
and
5-year
annualized TSR are calculated based on our common share price appreciation as per the TSX closing market price plus reinvested dividends for the period October 31, 2020 to October 31, 2023 and October 31, 2018 to October 31, 2023.
 
Common share and dividend information
 
Table 4  
For the year ended October 31
 
2023
    2022     2021     2020     2019  
Common share price (RY on TSX) – close, end of period
 
$
110.76
 
  $   126.05       $  128.82     $   93.16     $   106.24  
Dividends paid per share
 
 
5.34
 
    4.96       4.32       4.26       4.00  
Increase (decrease) in share price
 
 
  (12.1)%
 
    (2.2)%       38.3%       (12.3)%       10.8%  
Total shareholder return
 
 
(8.3)%
 
    1.6%       43.8%       (8.4)%       15.2%  
 
Financial performance
 
Overview
2023 vs. 2022
Net income of $14,866 million was down $941 million or 6% from last year. Diluted EPS of $10.50 was down $0.56 and ROE of 14.2% was down 220 bps. Our CET1 ratio was 14.5%, up 190 bps from last year.
Adjusted net income of $16,083 million was up $85 million or 1%. Adjusted diluted EPS of $11.38 was up $0.19 and adjusted ROE of 15.4% was down 120 bps.
 
26            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Our earnings were down from last year, primarily driven by the impact of the CRD and other tax related adjustments in the current year, which is reported in Corporate Support. Our results also reflect lower earnings in Wealth Management, Personal & Commercial Banking and Insurance. This was partially offset by higher results in Capital Markets. Results in the current year reflect higher PCL, mainly driven by higher provisions on impaired loans and provisions taken on performing loans as compared to releases of provisions on performing loans last year.
For further details on our business segment results and CET1 ratio, refer to the Business segment results and Capital management sections, respectively.
Adjusted results
Adjusted results exclude specified items, consisting of impairment losses on our interest in an associated company, certain deferred tax adjustments, the CRD and other tax related adjustments and HSBC Canada transaction and integration costs (net of tax), as well as the
after-tax
impact of amortization of acquisition-related intangibles. Adjusted results are
non-GAAP
measures. For further details, including a reconciliation, refer to the Key performance and
non-GAAP
measures section.
 
Impact of foreign currency translation
The following table reflects the estimated impact of foreign currency translation on key income statement items:
 
 
 
 
Table 5
 
(Millions of Canadian dollars, except per share amounts)
 
2023 vs. 2022
 
Increase (decrease):
 
Total revenue
 
$
936
 
PCL
 
 
29
 
Non-interest
expense
 
 
607
 
Income taxes
 
 
9
 
Net income
 
 
291
 
Impact on EPS
 
Basic
 
$
0.21
 
Diluted
 
 
0.21
 
The relevant average exchange rates that impact our business are shown in the following table:
 
 
 
Table 6  
(Average foreign currency equivalent of C$1.00) (1)
 
        2023
            2022  
U.S. dollar
 
 
0.741
 
    0.774  
British pound
 
 
0.599
 
    0.618  
Euro
 
 
0.689
 
    0.727  
 
  (1)   Average amounts are calculated using
month-end
spot rates for the period.
 
 
Total revenue
 
 
 
Table 7  
(Millions of Canadian dollars, except percentage amounts)
 
        2023
    2022  
Interest and dividend income
 
$
86,991
 
  $ 40,771  
Interest expense
 
 
61,862
 
    18,054  
Net interest income
 
$
25,129
 
  $ 22,717  
NIM
 
 
1.50%
    1.48%
Insurance premiums, investment and fee income
 
$
5,675
 
  $ 3,510  
Trading revenue
 
 
2,392
 
    926  
Investment management and custodial fees
 
 
8,344
 
    7,610  
Mutual fund revenue
 
 
4,063
 
    4,289  
Securities brokerage commissions
 
 
1,463
 
    1,481  
Service charges
 
 
2,099
 
    1,976  
Underwriting and other advisory fees
 
 
2,005
 
    2,058  
Foreign exchange revenue, other than trading
 
 
1,292
 
    1,038  
Card service revenue
 
 
1,240
 
    1,203  
Credit fees
 
 
1,489
 
    1,512  
Net gains on investment securities
 
 
193
 
    43  
Income (loss) from joint ventures and associates
 
 
(219
    110  
Other
 
 
964
 
    512  
Non-interest
income
 
$
31,000
 
  $ 26,268  
Total revenue
 
$
56,129
 
  $ 48,985  
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            27

2023 vs. 2022
Total revenue increased $7,144 million or 15% from last year, mainly due to higher net interest income, Insurance premiums, investment and fee income (insurance revenue), and trading revenue. Higher investment management and custodial fees, other revenue and foreign exchange revenue, other than trading also contributed to the increase. These factors were partially offset by income (loss) from joint ventures and associates and lower mutual fund revenue. The impact of foreign exchange translation increased revenue by $936 million.
Net interest income increased $2,412 million or 11%, largely due to higher spreads in Canadian Banking and Wealth Management and average volume growth in Canadian Banking. These factors were partially offset by lower revenue from
non-trading
derivatives, which was offset in Other revenue, and lower fixed income trading revenue, both in Capital Markets.
NIM was up 2 bps, mainly due to the impact of the higher interest rate environment in Canadian Banking and Wealth Management, partially offset by an unfavourable shift in deposit mix within Canadian Banking and higher funding costs in Capital Markets.
Insurance revenue increased $2,165 million or 62%, primarily reflecting the change in fair value of investments backing policyholder liabilities, higher group annuity sales, and business growth across most products, all of which are largely offset in PBCAE.
Investment management and custodial fees increased $734 million or 10%, mainly reflecting the inclusion of RBC Brewin Dolphin.
Trading revenue increased $1,466 million, mainly due to higher fixed income trading revenue across all regions. The prior year also included the impact of loan underwriting markdowns.
Foreign exchange revenue, other than trading increased $254 million or 24%, primarily driven by foreign currency translation gains associated with certain foreign currency denominated funding, which was offset by the impact of economic hedges in Other revenue.
Mutual fund revenue decreased $226 million or 5%, largely due to lower average fee-based client assets, largely driven by unfavourable market conditions in Wealth Management, and lower average mutual fund balances driving lower distribution fees in Canadian Banking.
Income (loss) from joint ventures and associates decreased $329 million, mainly attributable to impairment losses on our interest in an associated company in Wealth Management.
Other revenue increased $452 million or 88%, mainly attributable to gains from our non-trading portfolios, which were offset in Net interest income, and changes in the fair value of the hedges related to our U.S. share-based compensation plans, which was largely offset in Non-interest expense. Higher revenue from sweep deposits and a favourable impact from tax-related items also contributed to the increase. These factors were partially offset by the impact of economic hedges.
Additional trading information
 
 
 
Table 8  
(Millions of Canadian dollars)
 
2023
    2022  
Net interest income
(1)
 
$
1,510
 
  $ 2,024  
Non-interest
income
 
 
2,392
 
    926  
Total trading revenue
 
$
3,902
 
  $ 2,950  
Total trading revenue by product
               
Interest rate and credit
 
$
2,528
 
  $ 1,147  
Equities
 
 
604
 
    951  
Foreign exchange and commodities
 
 
770
 
    852  
Total trading revenue
 
$
    3,902
 
  $     2,950  
 
  (1)   Reflects net interest income arising from trading-related positions, including assets and liabilities that are classified or designated at fair value through profit or loss (FVTPL).  
2023 vs. 2022
Total trading revenue of $3,902 million, which is comprised of trading-related revenue recorded in Net interest income and
Non-interest
income, increased $952 million or 32% from last year, mainly due to higher fixed income trading revenue across all regions. The prior year also included the impact of loan underwriting markdowns.
 
28            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Provision for credit losses
(1)
 
 
 
Table 9  
    For the year ended  
(Millions of Canadian dollars, except percentage amounts)
 
October 31
2023
   
October 31
2022
 
Personal & Commercial Banking
 
$
370
 
  $ (281
Wealth Management
(2)
 
 
153
 
    20  
Capital Markets
(2)
 
 
137
 
    (20
Corporate Support and other
(3)
 
 
 
     
PCL on performing loans
 
 
660
 
    (281
Personal & Commercial Banking
 
$
1,225
 
  $ 755  
Wealth Management
(2)
 
 
175
 
    13  
Capital Markets
(2)
 
 
436
 
    9  
Corporate Support and other
 
 
 
    1  
PCL on impaired loans
(3)
 
 
1,836
 
    778  
PCL – Loans
 
 
2,496
 
    497  
PCL – Other
(4)
 
 
(28
    (13
Total PCL
 
$
2,468
 
  $ 484  
PCL on loans is comprised of:
               
Retail
 
$
295
 
  $ (31
Wholesale
 
 
365
 
    (250
PCL on performing loans
 
 
660
 
    (281
Retail
 
 
1,051
 
    648  
Wholesale
 
 
785
 
    130  
PCL on impaired loans
 
 
1,836
 
    778  
PCL – Loans
 
$
2,496
 
  $ 497  
PCL on loans as a % of average net loans and acceptances
 
 
0.29%
 
    0.06%  
PCL on impaired loans as a % of average net loans and acceptances
 
 
0.21%
 
    0.10%  
 
  (1)   Information on loans represents loans, acceptance and commitments.  
  (2)   Amounts have been revised from those previously presented to conform to our new basis of segment presentation. For further details, refer to the About Royal Bank of Canada section.  
  (3)   Includes PCL recorded in Corporate Support and Insurance.  
  (4)   PCL – Other includes amounts related to debt securities measured at fair value through other comprehensive income (FVOCI) and amortized cost, accounts receivable, and financial and purchased guarantees.  
2023 vs. 2022
Total PCL increased $1,984 million from last year, primarily reflecting higher provisions in Personal & Commercial Banking and Capital Markets. The PCL on loans ratio increased 23 bps.
PCL on performing loans was $660 million compared to $(281) million last year, mainly reflecting provisions taken in the current year in Personal & Commercial Banking attributable to unfavourable changes in credit quality and portfolio growth. Higher provisions in Capital Markets driven by unfavourable changes to our macroeconomic forecast and credit quality outlook also contributed to the increase.
PCL on impaired loans increased $1,058 million, primarily due to higher provisions in our Canadian Banking portfolios and Capital Markets across most sectors.
 
Insurance policyholder benefits, claims and acquisition expense (PBCAE)
2023 vs. 2022
PBCAE of $4,022 million increased $2,239 million from last year, primarily reflecting the change in fair value of investments backing policyholder liabilities, higher group annuity sales and business growth across most products, all of which are largely offset in revenue. These factors were partially offset by improved claims experience.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            29

Non-interest
expense
 
 
 
Table 10  
(Millions of Canadian dollars, except percentage amounts)
 
2023
    2022  
Salaries
 
$
8,597
 
  $ 7,251  
Variable compensation
 
 
7,607
 
    7,127  
Benefits and retention compensation
 
 
2,139
 
    2,015  
Share-based compensation
 
 
628
 
    135  
Human resources
 
 
18,971
 
    16,528  
Equipment
 
 
2,381
 
    2,099  
Occupancy
 
 
1,634
 
    1,554  
Communications
 
 
1,271
 
    1,082  
Professional fees
 
 
2,223
 
    1,511  
Amortization of other intangibles
 
 
1,487
 
    1,369  
Other
 
 
3,206
 
    2,466  
Non-interest
expense
 
$
  31,173
 
  $   26,609  
Efficiency ratio
(1)
 
 
55.5%
 
    54.3%  
Adjusted efficiency ratio
(2), (3)
 
 
58.2%
 
    55.8%  
 
  (1)   Efficiency ratio is calculated as
Non-interest
expense divided by Total revenue.
 
  (2)   This is a
non-GAAP
ratio. For further details, refer to the Key performance and
non-GAAP
measures section.
 
  (3)   Effective Q2 2023, we revised the composition of this
non-GAAP
ratio. Comparative adjusted amounts have been revised to conform with this presentation.
 
2023 vs. 2022
Non-interest
expense increased $4,564 million or 17% from last year, mainly due to higher staff costs, the inclusion of RBC Brewin Dolphin and related costs, the impact of foreign exchange translation and higher professional fees. The change in the fair value of our U.S. share-based compensation plans, which was largely offset in Other revenue, as well as transaction and integration costs relating to the planned acquisition of HSBC Canada also contributed to the increase.
Our efficiency ratio of 55.5% increased 120 bps from last year. Our adjusted efficiency ratio of 58.2% increased 240 bps from 55.8% last year.
Adjusted efficiency ratio is a
non-GAAP
ratio. For further details, including a reconciliation, refer to the Key performance and
non-GAAP
measures section.
 
Income and other taxes
 
 
 
Table 11  
(Millions of Canadian dollars, except percentage amounts)
 
2023
    2022  
Income taxes
 
$
3,600
 
  $ 4,302  
Other taxes
   
Value added and sales taxes
 
 
597
 
    508  
Payroll taxes
 
 
990
 
    871  
Capital taxes
 
 
55
 
    90  
Property taxes
 
 
144
 
    129  
Insurance premium taxes
 
 
35
 
    31  
Business taxes
 
 
82
 
    72  
 
 
 
1,903
 
    1,701  
Total income and other taxes
 
$
5,503
 
  $ 6,003  
Income before income taxes
 
$
  18,466
 
  $   20,109  
Effective income tax rate
 
 
19.5%
 
    21.4%
Effective total tax rate
(1)
 
 
27.0%
 
    27.5%
Adjusted results
(2)
   
Adjusted income taxes
 
$
3,346
 
  $ 4,367  
Adjusted income before income taxes
 
 
19,429
 
    20,365  
Adjusted effective income tax rate
 
 
17.2%
 
    21.4%  
 
  (1)   Total income and other taxes as a percentage of income before income taxes and other taxes.  
  (2)   These are non-GAAP measures. For further details, including a reconciliation, refer to the Key performance and non-GAAP measures section.  
2023 vs. 2022
Income tax expense decreased $702 million or 16% from last year, primarily due to the impact of changes in earnings mix, certain deferred tax adjustments and lower income before income taxes. These factors were partially offset by the impact of the CRD and other tax related adjustments and the 1.5% increase in the Canadian corporate tax rate in the current year. Adjusted income tax expense decreased $1,021 million or 23%.

30            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

The effective income tax rate of 19.5% decreased 190 bps, primarily due to the impact of changes in earnings mix and certain deferred tax adjustments. These factors were partially offset by the impact of the CRD and other tax related adjustments noted above and the 1.5% increase in the Canadian corporate tax rate in the current year. Adjusted effective income tax rate of 17.2% decreased 420 bps.
Other taxes increased $202 million or 12% from last year, primarily due to higher payroll taxes driven by higher staff-related costs and higher value added and sales taxes commensurate with increased purchase activity.
For further details on specified items, including a reconciliation, refer to the Key performance and non-GAAP measures section.
 
Client assets
Assets under administration
AUA are assets administered by us which are beneficially owned by our clients. We provide services that are administrative in nature, including safekeeping, collecting investment income, settling purchase and sale transactions, and record keeping. Underlying investment strategies within AUA are determined by our clients and generally do not impact the administrative fees that we receive. Administrative fees can be impacted by factors such as asset valuation level changes from market movements, types of services administered, transaction volumes, geography and client relationship pricing based on volumes or multiple services.
Our Wealth Management business is the primary business segment that has AUA with approximately 92% of total AUA, mainly in the Investor Services line of business with approximately 57% of AUA, as at October 31, 2023. The Personal & Commercial Banking business has approximately 8% of total AUA.
2023 vs. 2022
AUA decreased $1,316 billion or 23% from last year, mainly due to the partial sale of RBC Investor Services operations, partially offset by the favourable impact of market appreciation.
The following table summarizes AUA by geography and asset class:
 
AUA by geographic mix and asset class
 
Table 12  
(Millions of Canadian dollars)
 
2023
    2022  
Canada
(1)
               
Money market
 
$
34,900
 
  $ 43,200  
Fixed income
 
 
705,800
 
    735,800  
Equity
 
 
770,500
 
    734,000  
Multi-asset and other
 
 
1,045,800
 
    1,006,300  
Total Canada
 
 
2,557,000
 
    2,519,300  
U.S.
(1)
               
Money market
 
 
31,600
 
    40,700  
Fixed income
 
 
131,600
 
    116,000  
Equity
 
 
271,600
 
    246,300  
Multi-asset and other
 
 
326,500
 
    304,300  
Total U.S.
 
 
761,300
 
    707,300  
Other International
(1)
               
Money market
 
 
19,100
 
    38,200  
Fixed income
(2)
 
 
130,000
 
    255,200  
Equity
 
 
404,100
 
    636,600  
Multi-asset and other
(2)
 
 
466,500
 
    1,497,000  
Total International
(2)
 
 
1,019,700
 
    2,427,000  
Total AUA
(2)
 
$
  4,338,000
 
  $   5,653,600  
 
(1)   Geographic information is based on the location from where our clients are serviced.
(2)   Comparative amounts have been revised from those previously presented.
Assets under management
AUM are assets managed by us which are beneficially owned by our clients. Management fees are paid by the investment funds and other clients for the investment capabilities of an investment manager and can also cover administrative services. Management fees may be calculated daily, monthly or quarterly as a percentage of the AUM, depending on the distribution channel, product and investment strategies. In general, equity strategies carry a higher fee rate than fixed income or money market strategies. Fees are also impacted by asset mix and relationship pricing for clients using multiple services. Higher risk assets generally produce higher fees, while clients using multiple services can take advantage of synergies which reduce the fees they are charged. Certain funds may have performance fee arrangements where fees are recorded when certain benchmarks or performance targets are achieved. These factors could lead to differences in fees earned by product and therefore net return by asset class may vary despite similar average AUM. Our Wealth Management segment is the primary business segment that has AUM with approximately 99% of total AUM as at October 31, 2023.
2023 vs. 2022
AUM increased $68 billion or 7% from last year, mainly due to the impact of market appreciation and net sales.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            31

The following table presents the change in AUM for the year ended October 31, 2023:
 
Client assets – AUM
 
Table 13  
   
2023
          2022  
               
(Millions of Canadian dollars)
 
Money market
   
Fixed income
   
Equity
   
 
Multi-asset

and other
 
   
Total
           Total  
AUM, beginning balance
 
$
37,800
 
 
$
197,800
 
 
$
129,900
 
 
$
634,200
 
 
$
999,700
 
          $   1,008,700  
Institutional inflows
 
 
  160,200
 
 
 
52,500
 
 
 
7,000
 
 
 
19,400
 
 
 
239,100
 
            175,600  
Institutional outflows
 
 
(159,400
 
 
(42,300
 
 
(10,000
 
 
(14,300
 
 
(226,000
            (180,000
Personal flows, net
 
 
800
 
 
 
2,600
 
 
 
(2,100
 
 
9,100
 
 
 
10,400
 
 
 
 
 
    21,400  
Total net flows
 
 
1,600
 
 
 
12,800
 
 
 
(5,100
 
 
14,200
 
 
 
23,500
 
            17,000  
Market impact
 
 
800
 
 
 
3,200
 
 
 
4,600
 
 
 
19,300
 
 
 
27,900
 
            (117,400
Acquisition/dispositions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
            58,500  
Foreign exchange
 
 
400
 
 
 
3,500
 
 
 
800
 
 
 
11,700
 
 
 
16,400
 
 
 
 
 
    32,900  
Total market, acquisition/dispositions and foreign exchange impact
 
 
1,200
 
 
 
6,700
 
 
 
5,400
 
 
 
31,000
 
 
 
44,300
 
 
 
 
 
    (26,000
AUM, balance at end of year
 
$
40,600
 
 
$
  217,300
 
 
$
  130,200
 
 
$
  679,400
 
 
$
  1,067,500
 
 
 
 
 
  $ 999,700  
 
Business segment results
 
Results by business segments
 
 
 
Table 14  
   
2023
          2022  
                 
(Millions of Canadian dollars,
except percentage amounts)
 
Personal &
Commercial
Banking
   
Wealth
Management
   
Insurance
   
Capital
Markets 
(1)
   
Corporate
Support 
(1)
   
Total
           Total  
Net interest income
 
$
  16,074
 
 
$
4,495
 
 
$
 
 
$
  3,379
 
 
$
1,181
 
 
$
25,129
 
          $ 22,717  
Non-interest
income
 
 
6,046
 
 
 
13,049
 
 
 
  5,675
 
 
 
7,672
 
 
 
(1,442
 
 
31,000
 
 
 
 
 
    26,268  
Total revenue
 
 
22,120
 
 
 
17,544
 
 
 
5,675
 
 
 
11,051
 
 
 
(261
 
 
56,129
 
            48,985  
PCL
 
 
1,579
 
 
 
328
 
 
 
 
 
 
561
 
 
 
 
 
 
2,468
 
            484  
PBCAE
 
 
 
 
 
 
 
 
4,022
 
 
 
 
 
 
 
 
 
4,022
 
            1,783  
Non-interest
expense
 
 
9,215
 
 
 
14,128
 
 
 
653
 
 
 
6,509
 
 
 
668
 
 
 
31,173
 
 
 
 
 
    26,609  
Income before income taxes
 
 
11,326
 
 
 
3,088
 
 
 
1,000
 
 
 
3,981
 
 
 
(929
 
 
18,466
 
            20,109  
Income taxes
 
 
3,060
 
 
 
661
 
 
 
197
 
 
 
(158
 
 
(160
 
 
3,600
 
 
 
 
 
    4,302  
Net income
 
$
8,266
 
 
$
2,427
 
 
$
803
 
 
$
4,139
 
 
$
  (769
 
$
14,866
 
 
 
 
 
  $ 15,807  
ROE
(2)
 
 
27.8%
 
 
9.9%
 
 
37.3%
 
 
14.6%
 
 
n.m.
 
 
14.2%
 
 
 
 
    16.4%  
Average assets
 
$
  616,600
 
 
$
193,100
 
 
$
  23,500
 
 
$
  1,107,100
 
 
$
  62,600
 
 
$
  2,002,900
 
 
 
 
 
  $   1,886,900  
 
(1)   Net interest income,
Non-interest
income, Total revenue, Income before income taxes, and Income taxes are presented in Capital Markets on a taxable equivalent basis (teb). The teb adjustment is eliminated in the Corporate Support segment. For a further discussion, refer to the How we measure and report our business segments section.
(2)   For further details, refer to the Key performance and
non-GAAP
measures section.
n.m.
not meaningful
 
How we measure and report our business segments
Our management reporting framework is intended to measure the performance of each business segment as if it were a stand-alone business and reflects the way that the business segment is managed. This approach is intended to ensure that our business segments’ results include all applicable revenue and expenses associated with the conduct of their business and depicts how management views those results.
Key methodologies
The following outlines the key methodologies and assumptions used in our management reporting framework. These are periodically reviewed by management to ensure they remain valid. Effective the first quarter of 2023, we simplified our reporting structure by eliminating the Investor & Treasury Services segment and moving its former businesses to existing segments. Effective the fourth quarter of 2023, we moved the Investor Services lending business from our Wealth Management segment to our Capital Markets segment. For further details, refer to the About Royal Bank of Canada section.
Expense and tax allocation
To ensure that our business segments’ results include expenses associated with the conduct of their business, we allocate costs incurred or services provided by Technology & Operations and Functions, which are directly undertaken or provided on the business segments’ behalf. For other costs not directly attributable to our business segments, including overhead costs and other indirect expenses, we use our management reporting framework for allocating these costs to each business segment in a manner that is intended to reflect the underlying benefits.
 
32            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Capital attribution
Our management reporting framework also determines the attribution of capital to our business segments in a manner that is intended to consistently measure and align economic costs with the underlying benefits and risks associated with the activities of each business segment. The amount of capital assigned to each business segment is referred to as attributed capital. Unattributed capital and associated amounts are reported in Corporate Support. For further information, refer to the Capital management section.
Funds transfer pricing
Funds transfer pricing refers to the pricing of intra-company borrowing or lending for management reporting purposes. We employ a funds transfer pricing process to enable risk-adjusted management reporting of segment results. This process determines the costs and revenue for intra-company borrowing and lending of funds after taking into consideration our interest rate risk and liquidity risk management objectives, as well as applicable regulatory requirements.
Provisions for credit losses
PCL is recorded to recognize expected credit losses on all financial assets, except for financial assets classified or designated as FVTPL and equity securities designated as FVOCI, which are not subject to impairment assessment. For details on our accounting policy on Allowance for credit losses (ACL), refer to Note 2 of our 2023 Annual Consolidated Financial Statements.
PCL is included in the results of each business segment to fully reflect the appropriate expenses related to the conduct of each business segment.
In addition to the key methodologies described above, the following components of our management reporting framework also impact how our business segments are managed and reported:
 
Wealth Management results include disclosure in U.S. dollars, primarily for U.S. Wealth Management (including City National) as we review and manage the results of this business largely in this currency.
 
Capital Markets results are reported on a teb basis, which grosses up total revenue from certain
tax-advantaged
sources (Canadian taxable corporate dividends and the U.S. tax credit investment business) to their effective taxable equivalent value with a corresponding offset recorded in the provision for income taxes. We record the elimination of the teb adjustments in Corporate Support. We believe these adjustments are useful and reflect how Capital Markets manages its business, since it enhances the comparability of revenue and related ratios across taxable revenue and our principal
tax-advantaged
sources of revenue. The use of teb adjustments and measures may not be comparable to similar GAAP measures or similarly adjusted amounts disclosed by other financial institutions.
 
Corporate Support results include all enterprise level activities that are undertaken for the benefit of the organization that are not allocated to our four business segments, such as certain treasury and liquidity management activities, including amounts associated with unattributed capital, and consolidation adjustments, including the elimination of the teb
gross-up
amounts. In addition, we record gains (losses) on economic hedges of our U.S. Wealth Management (including City National) share-based compensation plans, which are reflected in revenue, and related variability in share-based compensation expense driven by changes in the fair value of liabilities relating to these plans in Corporate Support as we believe this presentation more closely aligns with how we view business performance and manage the underlying risks.
 
Key performance and non-GAAP measures
Performance measures
We measure and evaluate the performance of our consolidated operations and each business segment using a number of financial metrics, such as net income and ROE. Certain financial metrics, including ROE, do not have a standardized meaning under generally accepted accounting principles (GAAP) and may not be comparable to similar measures disclosed by other financial institutions.
Return on common equity
We use ROE, at both the consolidated and business segment levels, as a measure of return on total capital invested in our business. Management views the business segment ROE measure as a useful measure for supporting investment and resource allocation decisions because it adjusts for certain items that may affect comparability between business segments and certain competitors.
Our consolidated ROE calculation is based on net income available to common shareholders divided by total average common equity for the period. Business segment ROE calculations are based on net income available to common shareholders divided by average attributed capital for the period. For each segment, average attributed capital includes the capital required to underpin various risks as described in the Capital management section and amounts invested in goodwill and intangibles.
The attribution of capital involves the use of assumptions, judgments and methodologies that are regularly reviewed and revised by management as deemed necessary. Changes to such assumptions, judgments and methodologies can have a material effect on the business segment ROE information that we report. Other companies that disclose information on similar attributions and related return measures may use different assumptions, judgments and methodologies.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            33

The following table provides a summary of our ROE calculations:
 
Calculation of ROE
 
Table 15  
   
2023
         
2022
 
(Millions of Canadian dollars,
except percentage amounts)
 
Personal &
Commercial
Banking
   
Wealth
Management
   
Insurance
   
Capital
Markets
   
Corporate
Support
   
Total
           Total  
Net income available to common shareholders
 
$
8,192
 
 
$
2,372
 
 
$
798
 
 
$
    4,077
 
 
$
(816
 
$
  14,623
 
    $ 15,547  
Total average common equity
(1), (2)
 
 
29,500
 
 
 
24,050
 
 
 
2,150
 
 
 
27,850
 
 
 
19,250
 
 
 
  102,800
 
 
 
 
 
    94,700  
ROE
(3)
 
 
27.8%
 
 
9.9%
 
 
37.3%
 
 
14.6%
 
 
n.m.
 
 
14.2%
 
 
 
 
    16.4%
 
(1)   Total average common equity represents rounded figures.
(2)   The amounts for the segments are referred to as attributed capital.
(3)   ROE is based on actual balances of average common equity before rounding.
n.m.
not meaningful
Non-GAAP
measures
We believe that certain
non-GAAP
measures (including
non-GAAP
ratios) are more reflective of our ongoing operating results and provide readers with a better understanding of management’s perspective on our performance. These measures enhance the comparability of our financial performance for the year ended October 31, 2023 with the results from last year.
Non-GAAP
measures do not have a standardized meaning under GAAP and may not be comparable to similar measures disclosed by other financial institutions.
The following discussion describes the
non-GAAP
measures we use in evaluating our operating results.
Adjusted results
We believe that providing adjusted results and certain measures excluding the impact of the specified items discussed below and amortization of acquisition-related intangibles enhance comparability with prior periods and enables readers to better assess trends in the underlying businesses. Specified items impacting our results for the current year are:
 
Impairment losses: reflects impairment losses on our interest in an associated company in the fourth quarter of 2023. For further details, refer to Note 12 of our 2023 Annual Consolidated Financial Statements.
 
Certain deferred tax adjustments: reflects the recognition of deferred tax assets relating to realized losses in City National associated with the intercompany sale of certain debt securities in the fourth quarter of 2023
 
CRD and other tax related adjustments: reflects the impact of the CRD and the 1.5% increase in the Canadian corporate tax rate applicable to fiscal 2022, net of deferred tax adjustments, which were announced in the Government of Canada’s 2022 budget and enacted in the first quarter of 2023
 
Transaction and integration costs relating to our planned acquisition of HSBC Canada
Adjusted efficiency ratio
The adjusted efficiency ratio is a
non-GAAP
ratio and is calculated based on adjusted
Non-interest
expenses excluding specified items and amortization of acquisition-related intangibles divided by total revenue excluding specified items and net of PBCAE, both of which are
non-GAAP
measures. We believe that the adjusted efficiency ratio is a useful measure as the change in fair value of investments backing policyholder liabilities can lead to volatility in revenue, which is largely offset within PBCAE, that could obscure trends in underlying business performance and reduce comparability with prior periods.
 
34            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Consolidated results, reported and adjusted
The following table provides a reconciliation of adjusted results to our reported results and illustrates the calculation of adjusted measures presented. The adjusted results and measures presented below are
non-GAAP
measures or ratios.
 
 
 
Table 16  
(Millions of Canadian dollars, except per share, number of and percentage amounts)
 
 
2023
    2022
(1)
 
Total revenue
 
$
56,129
 
  $ 48,985  
PCL
 
 
2,468
 
    484  
Non-interest
expense
 
 
31,173
 
    26,609  
Income before income taxes
 
 
18,466
 
    20,109  
Income taxes
 
 
3,600
 
    4,302  
Net income
 
$
14,866
 
  $ 15,807  
Net income available to common shareholders
 
$
14,623
 
  $ 15,547  
Average number of common shares (thousands)
 
 
1,391,020
 
    1,403,654  
Basic earnings per share (in dollars)
 
$
10.51
 
  $ 11.08  
Average number of diluted common shares (thousands)
 
 
1,392,529
 
    1,406,034  
Diluted earnings per share (in dollars)
 
$
10.50
 
  $ 11.06  
ROE
(2)
 
 
14.2%
    16.4%
Effective income tax rate
 
 
19.5%
    21.4%
Total adjusting items impacting net income
(before-tax)
 
$
963
 
  $ 256  
Specified item: HSBC Canada transaction and integration costs
(3)
 
 
380
 
     
Specified item: Impairment losses on our interest in an associated company
(4)
 
 
242
 
     
Amortization of acquisition-related intangibles
(5)
 
 
341
 
    256  
Total income taxes for adjusting items impacting net income
 
$
(254
  $ 65  
Specified item: CRD and other tax related adjustments
(3), (6)
 
 
(1,050
     
Specified item: Certain deferred tax adjustments
(3)
 
 
578
 
     
Specified item: Impairment losses on our interest in an associated company
(4)
 
 
65
 
     
Specified item: HSBC Canada transaction and integration costs
(3)
 
 
78
 
     
Amortization of acquisition-related intangibles
(5)
 
 
75
 
    65  
Adjusted results
(7)
   
Income before income taxes – adjusted
 
 
19,429
 
    20,365  
Income taxes – adjusted
 
 
3,346
 
    4,367  
Net income – adjusted
 
$
16,083
 
  $ 15,998  
Net income available to common shareholders – adjusted
 
$
15,840
 
  $ 15,738  
Average number of common shares (thousands)
 
 
1,391,020
 
    1,403,654  
Basic earnings per share (in dollars) – adjusted
 
$
11.39
 
  $ 11.21  
Average number of diluted common shares (thousands)
 
 
1,392,529
 
    1,406,034  
Diluted earnings per share (in dollars) – adjusted
 
$
11.38
 
  $ 11.19  
ROE – adjusted
 
 
15.4%
    16.6%
Adjusted effective income tax rate
 
 
17.2%
    21.4%
Adjusted efficiency ratio
(8)
 
 
 
 
 
 
 
 
Total revenue
 
$
56,129
 
  $ 48,985  
Less: PBCAE
 
 
4,022
 
    1,783  
Add specified item: Impairment losses on our interest in an associated company (before-tax) 
(4)
 
 
242
 
     
Total revenue – adjusted
 
$
52,349
 
  $ 47,202  
Non-interest
expense
 
$
31,173
 
  $ 26,609  
Less specified item: HSBC Canada transaction and integration costs
(before-tax)
(3)
 
 
380
 
     
Less: Amortization of acquisition-related intangibles
(before-tax)
(5)
 
 
341
 
    256  
Non-interest
expense – adjusted
 
$
30,452
 
  $ 26,353  
Efficiency ratio
 
 
55.5%
    54.3%
Efficiency ratio – adjusted
 
 
58.2%
    55.8%
 
(1)   There were no specified items for the year ended October 31, 2022.
(2)   ROE is based on actual balances of average common equity before rounding.
(3)   These amounts have been recognized in Corporate Support.
(4)   During the fourth quarter of 2023, we recognized impairment losses on our interest in an associated company. This amount has been recognized in Wealth Management.
(5)   Represents the impact of amortization of acquisition-related intangibles (excluding amortization of software), and any goodwill impairment.
(6)   The impact of the CRD and other tax related adjustments does not include $0.2 billion recognized in other comprehensive income.
(7)   Effective the second quarter of 2023, we included HSBC Canada transaction and integration costs and amortization of acquisition-related intangibles as adjusting items for
non-GAAP
measures and
non-GAAP
ratios. Therefore, comparative adjusted results have been revised from those previously presented to conform to our basis of presentation for this
non-GAAP
measure.
(8)   Effective the second quarter of 2023, we revised the composition of this
non-GAAP
ratio, which is calculated based on
Non-interest
expense adjusted divided by total revenue adjusted. Therefore, comparative adjusted results have been revised from those previously presented to conform to our basis of presentation for this
non-GAAP
ratio.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            35

Segment results, reported and adjusted
The following table provides a reconciliation of Wealth Management adjusted results to our reported results. The adjusted results and measures presented below are
non-GAAP
measures or ratios.
 
Wealth Management
 
Table 17  
    
2023 
(1)
 
         
 
Item excluded
        
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)  
As reported
   
Specified item 
(2)
    
Adjusted
 
Total revenue
 
$
  17,544
 
 
$
242
 
  
$
  17,786
 
PCL
 
 
328
 
 
 
 
  
 
328
 
Non-interest
expense
 
 
14,128
 
 
 
 
  
 
14,128
 
Net income before income taxes
 
 
3,088
 
 
 
242
 
  
 
3,330
 
Net income
 
$
2,427
 
 
$
177
 
  
$
2,604
 
Net income available to common shareholders
 
 
2,372
 
 
 
177
 
  
 
2,549
 
Total average common equity
(3), (4)
 
 
24,050
 
 
 
 
 
  
 
24,050
 
Revenue by business
      
U.S. Wealth Management (including City National)
 
$
7,969
 
 
$
242
 
  
$
8,211
 
U.S. Wealth Management (including City National) (US$ millions)
 
 
5,908
 
 
 
175
 
  
 
6,083
 
Key ratios
      
ROE
(5)
 
 
9.9%
 
    
 
10.6%
 
Pre-tax
margin
(6)
 
 
17.6%
 
 
 
 
 
  
 
18.7%
 
 
(1)   There were no specified items for the year ended October 31, 2022.
(2)   Impairment losses on our interest in an associated company.
(3)   Total average common equity represents rounded figures.
(4)   The amounts for the segments are referred to as attributed capital.
(5)   ROE is based on actual balances of average common equity before rounding.
(6)   Pre-tax margin is defined as Income before income taxes divided by Total revenue.
 
36            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Personal & Commercial Banking
Personal & Commercial Banking provides a broad suite of financial products and services to individual and business clients for their
day-to-day
banking, investing and financing needs. We are focused on building deep and meaningful relationships with our clients, underscored by the delivery of exceptional client experiences, the breadth of our product suite, our depth of expertise, and the features of our digital solutions.
 
 
~15 million
    
 
#1 or #2
    
 
38,027
 
Number of Canadian Banking clients
 
    
Ranking in market share for all key retail and business products
 
    
Employees
 
         
 
Revenue by business lines
    
 
 
We operate through two businesses – Canadian Banking and Caribbean & U.S. Banking. Canadian Banking serves our home market in Canada. We have the largest branch network, the most ATMs, and one of the largest mobile sales forces across Canada along with market-leading digital capabilities. In Caribbean & U.S. Banking, we offer a broad range of financial products and services in targeted markets.
 
In Canada, we compete with other Schedule 1 banks, independent trust companies, foreign banks, credit unions, caisses populaires, auto financing companies, as well as emerging entrants to the financial services industry.
 
In the Caribbean, our competition includes banks, emerging digital banks, trust companies and investment management companies serving retail and corporate clients, as well as public institutions. In the U.S., we compete primarily with other Canadian banking institutions that have U.S. operations.
 
 

 
                   
2023 Operating environment
 
 
In response to persistent inflation, the BoC continued tightening its monetary policy, raising the benchmark interest rate by 125 basis points in fiscal 2023; and by 475 basis points since the beginning of March 2022. As a result of these interest rate increases, we continued to see NIM expansion. The combination of higher NIM and solid volumes drove strong growth in net interest income.
 
 
The credit environment was impacted by slowing economic growth and rising interest rates, resulting in higher provisions on performing and impaired loans.
 
 
For Canadian Banking, non-interest expense reflects investments in staff, mainly increased average FTE, marketing costs and ongoing investments in technology.
 
 
Our results were also impacted by a higher effective tax rate reflecting the 1.5% increase in the Canadian corporate tax rate, which was implemented at the beginning of the fiscal year.
 
 
As a result of interest rate increases, housing activity has slowed and household debt servicing costs have increased, driving a decline in mortgage originations from prior year levels.
 
 
We experienced significant growth in term deposit products, reflecting client preference for low-risk products at higher yields, driven by the BoC’s monetary policy. Despite this, volumes for personal and business demand deposits remained above
pre-pandemic
levels.
 
 
We continued to see unfavourable market conditions in fiscal 2023, driving lower sales of mutual fund products, which was also impacted by the client preference shift to term deposit products. We also continued to see a declining trend in overall trade volume activity in our Direct Investing business.
 
 
Growth in cards volume was strong in fiscal 2023, reflecting strong acquisition levels. Purchase volumes were stable and reflect an environment where clients are increasingly mindful of their spending habits.
 
 
Clients are increasingly demonstrating a preference for digital offerings, and we continue to invest in digital solutions to improve the client experience and deliver personalized advice.
 
 
Our Caribbean Banking business was favourably impacted by increases in interest rates, driving strong net interest income growth. As well, we saw higher
fee-based
income, reflecting higher client activity driven by the recovery of the travel industry since the
COVID-19
pandemic.
 
 
In the U.S., higher interest rates had a favourable impact on net interest income.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            37

Strategic priorities
 
OUR STRATEGY
 
PROGRESS IN 2023
 
PRIORITIES IN 2024
 
Accelerate our growth and deepen relationships
 
 
Avion Rewards, the largest proprietary loyalty program in Canada, was recognized as the International Loyalty Program of the Year in Americas and Best Loyalty / Benefits in a Financial Product at the 2023 International Loyalty Awards; In 2023, Avion Rewards expanded access to all Canadians regardless of where they bank or shop, bringing unparalleled savings and flexibility and making a fundamental shift in how the rewards program delivers benefits
 
Announced a new loyalty partnership with METRO Inc. with the launch of the no annual fee
moi
RBC
®
Visa
credit card, which earns
Moi
points on all purchases as well as allows cardholders access to unique savings and offers from Avion Rewards and its extensive merchant partner network
 
Launched Canada’s new First Home Savings Account (FHSA) in April 2023 to help Canadians save tax free for their first home, making it available as quickly and conveniently as possible through multiple channels, including RBC Direct Investing, RBC InvestEase
®
and RBC
in-branch
advisors
 
Acquired OJOHome Canada Ltd., which operates a comprehensive real estate technology platform, Houseful
TM
(formerly OJO), bolstered by artificial intelligence (AI), to further streamline the home buying journey for Canadians while supporting them at every stage with intuitive, digitally-enabled and insights-driven experiences
 
Continued to build world-class capabilities through the RBC PayEdge
TM
platform, leveraging data to increase strategic value through industry and client-specific insights to offer superior working capital solutions to our business clients
 
Maintained our focus on key high-growth and high-value segments, such as youth and young adults, newcomers, business owners, healthcare professionals, retirees, and HNW clients
 
Drove significant new-to-RBC client acquisition from newcomers and new partnerships, including ICICI Bank Canada
 
 
 
Continue to build a suite of
best-in-class
value propositions, digital experiences and Beyond Banking Ventures to accelerate client acquisition, engaging Canadians earlier, more often and in more compelling ways
 
Focus on engaging key high-growth client segments and empowering our advisors to build new and deeper relationships with superior advice to drive industry-leading volume growth
 
Establish additional key partnerships to continue to add value for our clients
 
Enable unparalleled value for both consumers and merchants through a
best-in-class
loyalty program
 
Transform sales, advice and service, while digitizing to unlock productivity
 
 
Enhanced NOMI
®
Forecast – RBC’s cutting-edge capability that provides clients with a
seven-day
view into their future cashflow – to include bill payments,
e-transfers,
investment contributions and salary payments; NOMI Forecast was awarded the Best Use of AI for Customer Experience at The 2023 Digital Banker Digital CX Awards
 
Received highest ranking in Customer Satisfaction with Retail Banking Advice for a third consecutive year in the J.D. Power 2023 Canada Retail Banking Advice Satisfaction Study
 
Entered a strategic partnership with Conquest Planning Inc. to bring a next-generation financial planning platform to clients and financial advisors, using powerful AI to identify effective financial strategies and deliver world-class digital advice and planning for clients to help them achieve their financial goals
 
Recognized as the best small and medium enterprise (SME) bank in North America by Global Finance Magazine, for the broad array of services offered to businesses beyond traditional banking, including Ownr, the online platform that has helped more than 55,000 entrepreneurs launch their businesses, and RBC Insight Edge which enables companies to leverage aggregated data to gain relevant insights into their markets and attract new clients
 
Collaborated with the Canadian Chamber of Commerce on the launch of SME Institute, a
first-of-its
kind,
one-stop
service that provide SMEs the training, support, and advice they need to adapt, grow and thrive in a rapidly evolving economy
 
The first bank in Canada to launch Swift Go through the RBC PayEdge
TM
platform, a new way to make fast, secure, and cost-effective cross-border payments, highlighting RBC’s ongoing commitment to innovations in digital banking and payments
 
 
 
Provide flexibility by continuing to deliver anytime, anywhere solutions to our clients across all channels
 
Lead in mobile capabilities and enable fulfillment of servicing through digital channels with access to advisors to help clients on their chosen path of interaction
 
Continue to reimagine our branch network to meet the evolving needs of our clients
 
Continuously upskill our expert advisor network to deliver more personalized insights and address complex advice needs for superior client experience
 
Leverage digital and agile to drive faster delivery of products and services while improving productivity and efficiency
 
Transform our Moneris joint venture to deliver greater value to Canadian merchants, through integrated value propositions, products and services
 
38            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

OUR STRATEGY
 
PROGRESS IN 2023
 
PRIORITIES IN 2024
 
Build sustainable communities
 
 
Launched the RBC Electric Vehicle (EV) Cost Calculator and established exclusive relationships with two EV manufacturers – VinFast and Lucid – to contribute to the expansion of the EV market across Canada
 
Expanded our sustainable finance product suite for businesses, including leveraging Export Development Canada’s Sustainable Financing Guarantee to increase our lending support aimed at carbon reduction and sustainable finance
 
Continued to help clients reduce emissions through new solutions, delivery of tailored advice through dedicated teams, and developed industry-specific value propositions, such as championing climate-smart agriculture insights and incentives for Canadian farmers
 
Launched RBC My Money Matters
TM
, a new digital destination with comprehensive content, resources, and tools to help Canadians take control of their financial wellbeing and make thinking about money less stressful
 
Continued to expand RBC’s Survivor Inclusion Initiative to provide survivors of human trafficking with financial literacy programming, basic banking services, and access to specially trained financial advisors who have undertaken trauma-informed sensitivity training
 
Continued to support the path to prosperity and growth of Black entrepreneurs through inclusive financing, community advocacy and sponsorship programs as part of a five year
$100-million
commitment to supporting Black entrepreneurs announced in 2020
 
 
 
Continue to focus on opportunities to support Canadians and businesses in their transition to net zero, including building upon our existing portfolio of products, services and advice
 
Continue to focus on increasing employee awareness, knowledge and engagement on climate initiatives to better support clients on their sustainability journey
 
Continue to support the financial wellbeing of Canadians by enabling individuals and small businesses to build confidence, establish financial security, and reach their goals through dedicated products, services and ecosystem partnerships
 
Attract, grow and retain future-ready talent
 
 
Provided numerous solutions to ensure employees continued to be productive and engaged, including targeted initiatives to develop and retain our best talent, advancing return to premises strategy to
re-ignite
connection and collaboration
 
Invested in future skills development, elevating performance and fostering a culture of inclusive leadership through programs, such as people manager masterclasses, reskilling programs and learning series
 
Helped employees achieve their work and life goals and supported health and wellbeing through initiatives, such as the Make It Yours
TM
campaign, increased vacation entitlement for select workforces, and increased paternity leave benefits for employees in the Caribbean
 
Strengthened our culture of inclusion and belonging by driving growth and development of diverse talent through targeted initiatives and programs, including: Canadian Banking Women’s Forum, BIPOC Rotational Program, and Indigenous People’s Development Program
 
 
 
Elevate leadership capabilities to grow and develop talent
 
Continue to strengthen our culture of inclusion and belonging
 
Drive a high-performance culture that empowers and enables people to deliver on our ambitious goals
 
In the Caribbean
 
 
Accelerated actions focused on enhancing the client experience underpinned by programs across our growth and transformation priorities, including product development and digitization
 
 
Continue our Investing for Growth strategy by expanding product offerings while progressing initiatives to simplify and digitize our operational processes to deliver an enhanced client and employee experience
 
In the U.S.
 
 
Leveraged momentum from higher cross-border travel after the
COVID-19
pandemic to drive solid business growth.
 
Continued focus on automation of processes and controls, and development of digital tools to enhance scalability, simplify processes and improve the client experience
 
 
 
Further aligning products and channel experiences through deeper integration with the Canadian franchise to support market share growth while making it easier to do banking in the U.S.
 
Continue digitization efforts, focusing on real estate financing processes and client experience
 
Outlook
The lagged impact of higher interest rates is slowing economic growth in Canada. The Canadian unemployment rate is still low but has increased 0.7% since April. Canadian GDP growth has slowed significantly
to-date
in calendar 2023. The Canadian housing market has cooled after an unexpected strong rebound in the spring following an additional 50 basis points of interest rate increases from the BoC over the summer. The U.S. economy has remained exceptionally resilient. However, excess pandemic savings and excess job openings have been declining, the global growth backdrop is softening, credit conditions continue to tighten, and inflation growth has slowed. We do not expect further interest rate increases from the Fed or the BoC with economic growth and inflation pressures expected to soften. We expect the Fed to shift to interest rate decreases beginning in the second calendar quarter of 2024, with the BoC following with the first cuts to the overnight rate expected in the second half of calendar 2024. In response to this economic environment, we will continue to pursue industry-leading growth and deepen client relationships to meet the evolving needs of our clients.
The Caribbean region maintained its growth momentum during 2023, supported by tourism-related travel. Real GDP is projected to continue to expand in 2024, but at a more normalized rate as economic recovery matures. Regionally, inflation rates decelerated during 2023 and are forecasted to normalize through 2024. Risks to the regional outlook remain tilted to the downside as the spillover effects of global risks could weigh on growth prospects. In addition, the threat of weather-induced shocks, particularly hurricanes also pose a risk to the Caribbean’s economic outlook. Our Investing for Growth strategy continues, with a refreshed focus on delivering exceptional client value, enhancing operational efficiency and resilience, and developing engaged and empowered teams.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            39

For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.
 
Personal & Commercial Banking
 
Table 18  
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
 
 
2023
    2022  
Net interest income
 
$
16,074
 
  $ 14,019  
Non-interest
income
 
 
6,046
 
    6,124  
Total revenue
 
 
22,120
 
    20,143  
PCL on performing assets
 
 
371
 
    (283
PCL on impaired assets
 
 
1,208
 
    746  
PCL
 
 
1,579
 
    463  
Non-interest
expense
 
 
9,215
 
    8,437  
Income before income taxes
 
 
11,326
 
    11,243  
Net income
 
$
8,266
 
  $ 8,370  
Revenue by business
   
Canadian Banking
 
$
21,050
 
  $ 19,282  
Personal Banking
 
 
15,018
 
    13,957  
Business Banking
 
 
6,032
 
    5,325  
Caribbean & U.S. Banking
 
 
1,070
 
    861  
Key ratios
   
ROE
 
 
27.8%
 
    30.9%  
NIM
 
 
2.74%
 
    2.55%  
Efficiency ratio
(1)
 
 
41.7%
 
    41.9%  
Operating leverage
(1)
 
 
0.6%
 
    4.0%  
Selected balance sheet information
   
Average total assets
 
$
616,600
 
  $ 575,900  
Average total earning assets, net
 
 
  585,900
 
      548,900  
Average loans and acceptances, net
 
 
593,000
 
    553,300  
Average deposits
 
 
597,500
 
    552,100  
Other information
   
AUA
(2), (3), (4)
 
$
336,800
 
  $ 340,300  
Average AUA
(4)
 
 
350,800
 
    356,300  
AUM
(3)
 
 
5,900
 
    5,600  
Number of employees (FTE)
 
 
38,027
 
    38,450  
Credit information
   
PCL on impaired loans as a % of average net loans and acceptances
 
 
0.21%
 
    0.14%  
Other selected information – Canadian Banking
   
Net income
 
$
7,922
 
  $ 8,024  
NIM
 
 
2.69%
 
    2.54%  
Efficiency ratio
 
 
40.4%
 
    40.5%  
Operating leverage
 
 
0.2%
 
    3.8%  
 
(1)   See Glossary for composition of this measure.
(2)   AUA includes securitized residential mortgages and credit card loans as at October 31, 2023 of $13 billion and $7 billion, respectively (October 31, 2022 – $15 billion and $6 billion).
(3)   Represents
year-end
spot balances.
(4)   Comparative amounts have been revised from those previously presented.
Financial performance
2023 vs. 2022
Net income decreased $104 million or 1% from last year, primarily attributable to higher PCL, and higher expenses mainly reflecting staff-related and marketing costs. These factors were partially offset by higher net interest income.
Total revenue increased $1,977 million or 10%, primarily due to higher net interest income, reflecting higher spreads and average volume growth of 8% in deposits and 7% in loans in Canadian Banking.
NIM increased 19 bps, mainly due to the impact of the higher interest rate environment, partially offset by an unfavourable shift in deposit mix.
PCL increased $1,116 million, mainly reflecting provisions taken on performing loans this year, largely in our Canadian Banking portfolios, primarily driven by unfavourable changes in credit quality and portfolio growth as compared to releases last year which reflected reduced uncertainty relating to the
COVID-19
pandemic. Higher provisions on impaired loans, primarily in our Canadian Banking retail portfolios, also contributed to the increase, resulting in an increase of 7 bps in the PCL on impaired loans ratio.
Non-interest
expense increased $778 million or 9%, mainly attributable to higher staff-related costs and higher marketing costs.
Average loans and acceptances increased $40 billion or 7%, mainly driven by mortgage and business banking loan growth, reflecting client activity.
Average deposits increased $45 billion or 8%, largely reflecting an increase in term deposits, partially offset by a decline in demand deposits.
 
Business line review
In Canada, we operate through two business lines: Personal Banking and Business Banking.
 
40            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Personal Banking
Personal Banking offers a full range of products focused on meeting the needs of our individual Canadian clients at every stage of their lives through a wide range of financing and investment products and services. This includes home equity financing, personal lending, chequing and savings accounts, private banking, indirect lending (including auto financing), mutual funds and self-directed brokerage accounts, GICs, credit cards, and payment products and solutions.
We rank #1 or #2 in market share for all key Personal Banking products in Canada supported by the largest retail banking network in Canada, with 1,143 branches and 4,003 ATMs.
Financial performance
Total revenue increased $1,061 million or 8% compared to last year, primarily due to higher net interest income reflecting higher spreads and average volume growth of 14% in deposits and 5% in loans.
Average residential mortgages increased 6% compared to last year, mainly due to strong mortgage origination in the first half of the year.
Average deposits increased 14% from last year, largely reflecting an increase in term deposits, partially offset by a decline in demand deposits.
 
Selected highlights
 
Table 19  
(Millions of Canadian dollars, except number of)
 
2023
    2022  
Total revenue
 
$
  15,018
 
  $ 13,957  
Other information
   
Average residential mortgages
 
 
  358,400
 
      338,400  
Average other loans and acceptances, net
 
 
76,300
 
    75,700  
Average deposits
 
 
333,800
 
    293,500  
Average credit card balances
 
 
20,800
 
    18,200  
Credit card purchase volumes
 
 
174,200
 
    162,200  
Branch mutual fund balances
(1)
 
 
174,700
 
    178,600  
Average branch mutual fund balances
 
 
183,100
 
    194,400  
AUA – Self-directed brokerage
(1)
 
 
128,700
 
    127,600  
Number as at October 31:
   
Branches
 
 
1,143
 
    1,162  
ATMs
 
 
4,003
 
    4,028  
 
(1)   Represents
year-end
spot balances.

 
Business Banking
Business Banking offers a wide range of lending, leasing, deposit, investment, foreign exchange, cash management, auto dealer financing, trade products, and services to small- and
medium-sized
commercial businesses across Canada. With one of the largest teams of relationship managers and specialists in the industry, our commitment to client experience and trusted advice has earned us leading market share in business lending and deposits.
Financial performance
Total revenue increased $707 million or 13% compared to last year, primarily due to higher net interest income reflecting higher spreads, and average volume growth of 14% in loans and 2% in deposits. Higher volumes contributed to higher credit fees.
Average loans and acceptances increased 14% and average deposits increased 2%, mainly due to strong growth in priority sectors and from new client acquisition.
 
Selected highlights
 
Table 20  
(Millions of Canadian dollars)
 
2023
    2022  
Total revenue
 
$
    6,032
 
  $ 5,325  
Other information (average)
   
Loans and acceptances, net
 
 
  125,800
 
      110,800  
Deposits
 
 
241,800
 
    237,900  

 
Caribbean & U.S. Banking
Our Caribbean Banking business provides personal and commercial banking to a range of clients, including individuals, small businesses, general commercial entities, regional and multi-national corporations, and governments; supported by an extensive branch, ATM, online, and mobile banking network.
Our U.S. Banking business serves the needs of Canadian retail and small business clients providing personalized, digitally-enabled cross-border banking solutions enabling a cross-border lifestyle in all 50 states across the U.S.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            41

Financial performance
Total revenue increased $209 million or 24% from last year, primarily due to higher net interest income reflecting improved spreads.
Average loans and acceptances increased 15% and average deposits increased 5%, primarily due to the impact of foreign exchange translation and increased client activity.
 
Selected highlights
 
 
Table 21  
 
(Millions of Canadian dollars,

except number of and percentage amounts)
 
2023
     2022  
Total revenue
 
$
1,070
 
   $ 861  
Other information
    
NIM
 
 
  4.08%
 
     2.90%  
Average loans and acceptances, net
 
 
11,700
 
     10,200  
Average deposits
 
 
21,900
 
       20,800  
AUA
(1), (2)
 
 
10,800
 
     10,400  
Average AUA
(2)
 
 
10,500
 
     10,200  
AUM
(1)
 
 
5,500
 
     5,300  
Number as at October 31:
    
Branches
 
 
38
 
     38  
ATMs
 
 
271
 
     269  
(1)   Represents
year-end
spot balances.
(2)   Comparative amounts have been revised from those previously presented.
 
 
 
Wealth Management
Wealth Management is a global business serving clients in key financial centres. We serve affluent, HNW and UHNW individual and institutional clients with a comprehensive suite of advice-based solutions and strategies to help them achieve their financial goals.
 
 
$17.5 billion
   
 
> 6,100
   
 
~ 83%
 
 
Total revenue
   
Client-facing advisors
   
GAM AUM outperforming the benchmark on a 3-year basis
1
 
              
 
Asset under Administration
(AUA)
 
 
 

    
 
Assets under Management (AUM)
 
 
 

   
 
 
Our lines of business include Canadian Wealth Management, U.S. Wealth Management (including City National), Global Asset Management (GAM), International Wealth Management and Investor Services.
 
•   Canadian Wealth Management is the largest full-service wealth advisory business in Canada, as measured by AUA, serving HNW and UHNW clients
•   U.S. Wealth Management (including City National) encompasses our private client group (PCG) and clearing and custody (C&C) businesses. PCG is the 6
th
largest full-service wealth advisory firm in the U.S., as measured by AUA, and City National is a U.S.-based relationship bank serving the entertainment industry, mid-market businesses, HNW individuals and other clients who value personalized banking relationships
•   GAM is the largest retail mutual fund company in Canada as measured by AUM, as well as a leading institutional asset manager
•   International Wealth Management serves HNW and UHNW clients, primarily through key financial centres in the U.K., Ireland, the Channel Islands and Asia
•   Investor Services safeguards client assets and supports the growth of Canadian and U.K. asset managers and asset owners, investment counsellors and other financial institutions
 
   
                  
 
1
 
  As at September 2023, gross of fees.
 
42            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

2023 Operating environment
 
 
Earnings in the current fiscal year benefitted from the high interest rate environment reflecting rate increases by the Fed, BoC and other central banks, while shifting client preferences in favour of higher yielding products and unfavourable market conditions impacted our
fee-based
revenue.
 
 
Our wealth advisory businesses performed well with continued net positive flows of
fee-based
client assets reflecting the strength of our business driven by the quality of our advice, the breadth of our investment and holistic wealth planning solutions and clients’ trust in our brand. The mutual fund sector continues to be impacted by lower sales due to the high interest rate environment and market volatility.
 
 
Results for our Investor Services business were impacted by industry headwinds, such as continued pricing pressure, partially offset by rising interest rates.
 
 
We continued to invest in our people and technology to maintain our competitive advantage and increase efficiencies in an environment characterized by market volatility, rapidly changing client preferences and increasing regulatory requirements.
 
 
The credit environment was impacted by slowing economic growth and rising interest rates, resulting in higher provisions on impaired and performing loans.
Strategic priorities
 
OUR STRATEGY
 
PROGRESS IN 2023
 
PRIORITIES IN 2024
 
In Canada, be the premier service provider for HNW and UHNW clients
 
 
Further extended our position as industry leader in our full-service private wealth business
 
Continued to focus on holistic wealth planning, including advisor training on intergenerational and business wealth transfer
 
Continued to expand RBC
®
Premier Banking to deepen banking relationships with Wealth Management clients
 
Focused on the business owner client segment, deepening client relationships across the various business segments
 
Continued to enhance our digital and data capabilities to drive increased client satisfaction and advisor productivity
 
Implemented unique capabilities that are becoming increasingly important to our client base, such as private alternative investment products
 
 
Continue to retain and attract
top-performing
advisors to strengthen our talent advantage
 
Deliver a differentiated client experience through enriched advisor-client interactions and seamless digital experiences
 
Deepen client relationships by leveraging the combined strengths across other business segments with a focus on the business owner client segment
 
Continue to invest in digital solutions to streamline and improve efficiency and advisor productivity
 
Modernize legacy infrastructure and systems to ensure ongoing resiliency in our technology platforms
 
In the U.S., become the leading private and commercial bank and wealth manager in our key markets
 
 
Continued to invest in key areas needed to grow our U.S. Wealth Management business, including substantial financial advisor recruitment, executing on our technology transformation and providing proactive liquidity to our clients through a revamped securities-based lending platform
 
At City National, we continued to focus on enhancing our risk management and compliance capabilities across the three lines of defence for sustainable, organic growth in the future
 
 
Continue to deliver an exceptional client experience for targeted HNW, UHNW, middle market and business banking segments
 
Leverage the combined strengths within U.S. Wealth Management (including City National) and Capital Markets to deepen client relationships
 
At City National, we will continue to focus on enhancing our risk management and compliance capabilities across the three lines of defence for sustainable, organic growth in the future
 
In select global financial centres, become the most trusted regional private bank
 
 
Continued to deliver on successful growth initiatives, bringing the full strength and breadth of RBC to our clients
 
Focused on delivering a differentiated client experience by leveraging our global capabilities
 
Leveraged RBC Brewin Dolphin to increase distribution, AUM and client base to position ourselves as top five largest wealth manager in the U.K.
 
In Asia, continued growth momentum achieved through the addition of experienced client-facing advisors and net new assets
 
 
Focus on growing market share in target markets
 
Continue to leverage our global strengths to better serve clients
 
Continue to deliver an exceptional client experience and increase business effectiveness and talent capabilities
 
Successful integration of RBC Brewin Dolphin to enhance client value proposition and consolidation of position in the U.K. local market
 
In Asia, focus on deepening cross-business, global collaboration and enhancing digital and product capabilities
 
In asset management, be a leading, diversified asset manager focused on global institutional and North American retail clients
 
 
Maintained #1 market share in Canadian mutual fund AUM
 
RBC
®
iShares strategic alliance maintained #1 market share in Canadian ETFs
 
Completed shift to a more unified asset management operating model to increase collaboration and better leverage infrastructure and people resources
 
 
Continue to focus on delivering exceptional investment performance and valued insights with the client experience at the centre of all that we do
 
Continue to expand our investment capabilities to meet evolving client needs in our target distribution regions
 
Attract, grow and retain future-ready talent
 
 
Advanced our representation and strengthened inclusion of historically underrepresented groups through targeted engagement initiatives and partnerships including: Ivey’s Women in Asset Management Program, Women Advisor Experience Listening Sessions, Diversity Leadership Councils and Employee Resource Groups
 
 
 
Elevate leadership capabilities to grow and develop talent
 
Continue to strengthen our culture of inclusion and belonging
 
Drive a high-performance culture that empowers and enables people to deliver on our ambitious goals
Outlook
The ongoing uncertainty in the macroeconomic environment, including the impact of high interest rates and an expected slowdown in economic growth, will continue to impact markets.
Despite this uncertainty, we believe our diversified businesses remain well-positioned to continue growing our leading position in Canada and increasing our market share in the HNW and UHNW client segments globally, leveraging the strength of
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            43

our brand, reputation and solid financial position. Our strategy remains unchanged as we continue to focus on delivering an unmatched client experience through holistic goals-based advice, attracting and retaining
top-performing
advisors, and collaborating across the enterprise to bring the full breadth of our capabilities to our clients. We will continue to invest in our people and technology to improve client and advisor experiences, drive operational efficiencies, and further strengthen our risk, compliance and controls infrastructure to meet heightened regulatory requirements.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.
 
Wealth Management
 
Table 22  
(Millions of Canadian dollars, except number of, percentage amounts and as otherwise noted)
 
2023
    2022 
(1)
 
Net interest income
 
$
4,495
 
  $ 3,886  
Non-interest
income
 
 
13,049
 
    12,357  
Total revenue
 
 
17,544
 
    16,243  
PCL on performing assets
 
 
153
 
    20  
PCL on impaired assets
 
 
175
 
    13  
PCL
 
 
328
 
    33  
Non-interest
expense
 
 
14,128
 
    12,015  
Income before income taxes
 
 
3,088
 
    4,195  
Net income
 
$
2,427
 
  $ 3,210  
Revenue by business
   
Canadian Wealth Management
 
$
4,443
 
  $ 4,308  
U.S. Wealth Management (including City National)
 
 
7,969
 
    7,448  
U.S. Wealth Management (including City National) (US$ millions)
 
 
5,908
 
    5,757  
Global Asset Management
 
 
2,626
 
    2,667  
International Wealth Management
 
 
1,273
 
    426  
Investor Services
(2)
 
 
1,233
 
    1,394  
Key ratios
   
ROE
 
 
9.9%
 
    15.8%  
NIM
 
 
2.66%
 
    2.47%  
Pre-tax
margin
(3)
 
 
17.6%
 
    25.8%  
Selected balance sheet information
   
Average total assets
 
$
193,100
 
  $ 177,400  
Average total earning assets, net
 
 
169,300
 
    157,100  
Average loans and acceptances, net
 
 
113,800
 
    102,400  
Average deposits
(2)
 
 
163,800
 
    198,000  
Other information
   
AUA
(2), (4), (5)
 
$
3,981,500
 
  $ 5,294,800  
U.S. Wealth Management (including City National)
(4)
 
 
752,700
 
    700,100  
U.S. Wealth Management (including City National) (US$ millions)
(4)
 
 
542,800
 
    513,700  
Investor Services
(4)
 
 
2,488,600
 
    3,906,900  
AUM
(4)
 
 
1,058,900
 
    991,500  
Average AUA
(2)
 
 
4,987,200
 
    5,710,700  
Average AUM
 
 
1,058,000
 
    966,300  
PCL on impaired loans as a % of average net loans and acceptances
 
 
0.15%
 
    0.01%  
Number of employees (FTE)
 
 
25,196
 
    26,150  
Number of advisors
(6)
 
 
6,169
 
    6,158  
Adjusted results
(7)
   
Total revenue – adjusted
 
$
17,786
 
  $ 16,243  
Income before income taxes – adjusted
 
 
3,330
 
    4,195  
Net income – adjusted
 
 
2,604
 
    3,210  
U.S. Wealth Management (including City National) revenue – adjusted
 
 
8,211
 
    7,448  
U.S. Wealth Management (including City National) revenue (US$ millions) – adjusted
 
 
6,083
 
    5,757  
Key ratios – adjusted
(7)
   
Selected balance sheet and other information
   
ROE – adjusted
 
 
10.6%
 
    15.8%  
Pre-tax margin – adjusted
 
 
18.7%
 
    25.8%  
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items
 
 
 
(Millions of Canadian dollars, except percentage amounts)
 
2023 vs. 2022
        
Increase (decrease):
   
Total revenue
 
$
441
 
 
PCL
 
 
10
 
 
Non-interest
expense
 
 
369
 
 
Net income
 
 
50
 
 
Percentage change in average U.S. dollar equivalent of C$1.00
 
 
(4)%
 
 
Percentage change in average British pound equivalent of C$1.00
 
 
(3)%
 
 
Percentage change in average Euro equivalent of C$1.00
 
 
(5)%
 
 
 
(1)   Amounts have been revised from those previously presented to conform to our new basis of segment presentation. For further details, refer to the About Royal Bank of Canada section.
(2)   On July 3, 2023, we completed the partial sale of RBC Investor Services operations. The completion of the sale of the business of the U.K. branch of RBC Investor Services Trust and the RBC Investor Services business in Jersey remains subject to customary closing conditions, including regulatory approvals. For further details, refer to Note 6 of our 2023 Annual Consolidated Financial Statements.
(3)  
Pre-tax
margin is defined as Income before income taxes divided by Total revenue.
(4)   Represents
year-end
spot balances.
(5)   In addition to Canadian Wealth Management, U.S. Wealth Management (including City National), International Wealth Management and Investor Services AUA includes $6,200 million (2022 – $6,400 million) related to GAM.
(6)   Represents client-facing advisors across all our Wealth Management businesses.
(7)   These are non-GAAP measures and non-GAAP ratios. During the year ended October 31, 2023, we recognized impairment losses of $177 million (before–tax $242 million) on our interest in an associated company. For further details on this specified item, including a reconciliation, refer to the Key performance and non-GAAP measures section.
 
44            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Client assets – AUA
 
Table 23  
 
(Millions of Canadian dollars)
 
 
2023
   
 
2022
 
AUA, beginning balance
(1)
 
$
1,387,900
 
  $ 1,322,300  
Asset inflows
 
 
414,600
 
    380,600  
Asset outflows
 
 
(396,400
    (325,100
Total net flows
(1)
 
 
18,200
 
    55,500  
Market impact
 
 
44,400
 
    (153,000
Acquisitions/dispositions
 
 
 
    79,800  
Foreign exchange/other
 
 
42,400
 
    83,300  
Total market, acquisition/dispositions and foreign exchange/other impact
(1)
 
 
86,800
 
    10,100  
AUA, balance at end of year
(1)
 
 
1,492,900
 
    1,387,900  
Investor Services, balance at end of year
(2)
 
 
2,488,600
 
    3,906,900  
Total AUA
 
$
3,981,500
 
  $ 5,294,800  
 
(1)   Includes AUA from the following lines of business; Canadian Wealth Management, U.S. Wealth Management (including City National), Global Asset Management and International Wealth Management.
 
(2)   Includes the impact from the partial sale of RBC Investor Services operations. For further details, refer to Note 6 of our 2023 Annual Consolidated Financial Statements.
 
AUA by geographic mix and asset class
 
Table 24  
(Millions of Canadian dollars)
 
2023
    2022  
Canada
(1), (2)
   
Money market
 
$
21,600
 
  $ 26,200  
Fixed income
 
 
46,100
 
    30,500  
Equity
 
 
86,700
 
    81,800  
Multi-asset and other
 
 
388,800
 
    369,500  
Total Canada
 
 
543,200
 
    508,000  
U.S.
(1), (2)
   
Money market
 
 
31,600
 
    40,700  
Fixed income
 
 
131,600
 
    116,000  
Equity
 
 
271,600
 
    246,300  
Multi-asset and other
 
 
318,000
 
    297,100  
Total U.S.
 
 
752,800
 
    700,100  
Other International
(1), (2)
   
Money market
 
 
18,800
 
    16,600  
Fixed income
 
 
11,300
 
    8,900  
Equity
 
 
49,300
 
    47,000  
Multi-asset and other
 
 
117,500
 
    107,300  
Total International
 
 
196,900
 
    179,800  
AUA, balance at end of year
(2)
 
 
1,492,900
 
    1,387,900  
Investor Services, balance at end of year
(3)
 
 
2,488,600
 
    3,906,900  
Total AUA
 
$
3,981,500
 
  $ 5,294,800  
 
(1)   Geographic information is based on the location from where our clients are served.
 
(2)   Includes AUA from the following lines of business; Canadian Wealth Management, U.S. Wealth Management (including City National), Global Asset Management and International Wealth Management.
 
(3)   Includes the impact from the partial sale of RBC Investor Services operations. For further details, refer to Note 6 of our 2023 Annual Consolidated Financial Statements.
 
Client assets – AUM
 
Table 25  
    
2023
    2022  
(Millions of Canadian dollars)
  
Money
market
   
Fixed
income
   
Equity
   
Multi-asset

and other
   
Total
    Total  
AUM, beginning balance
  
$
37,800
 
 
$
195,600
 
 
$
129,400
 
 
$
628,700
 
 
$
991,500
 
 
$
  1,000,600
 
Institutional inflows
  
 
  160,200
 
 
 
52,500
 
 
 
7,000
 
 
 
19,500
 
 
 
239,200
 
    175,600  
Institutional outflows
  
 
(159,400
 
 
(42,300
 
 
(10,000
 
 
(14,300
 
 
(226,000
    (180,000
Personal flows, net
  
 
800
 
 
 
2,600
 
 
 
(2,100
 
 
9,000
 
 
 
10,300
 
    21,000  
Total net flows
  
 
1,600
 
 
 
12,800
 
 
 
(5,100
 
 
14,200
 
 
 
23,500
 
    16,600  
Market impact
  
 
800
 
 
 
2,900
 
 
 
4,600
 
 
 
19,200
 
 
 
27,500
 
    (116,700
Acquisition/dispositions
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    58,500  
Foreign exchange
  
 
400
 
 
 
3,500
 
 
 
800
 
 
 
11,700
 
 
 
16,400
 
    32,500  
Total market, acquisition/dispositions and foreign exchange impact
  
 
1,200
 
 
 
6,400
 
 
 
5,400
 
 
 
30,900
 
 
 
43,900
 
    (25,700
AUM, balance at end of year
  
$
40,600
 
 
$
  214,800
 
 
$
  129,700
 
 
$
  673,800
 
 
$
  1,058,900
 
  $ 991,500  
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            45

Financial performance
2023 vs. 2022
Net income decreased $783 million or 24% from last year, mainly attributable to higher staff costs and professional fees, largely reflecting continued investments in the operational infrastructure of City National. Higher PCL and the impact of the specified item relating to impairment losses on our interest in an associated company also contributed to the decrease. These factors were partially offset by higher net interest income driven by higher interest rates. Adjusted net income decreased $606 million or 19%.
Total revenue increased $1,301 million or 8%, primarily due to the inclusion of RBC Brewin Dolphin, higher net interest income driven by higher interest rates partially offset by lower deposits, as well as the impact of foreign exchange translation. These factors were partially offset by the impact of the specified item relating to impairment losses on our interest in an associated company. Adjusted total revenue increased $1,543 million or 9%.
PCL increased $295 million, primarily in U.S. Wealth Management (including City National), mainly reflecting higher provisions on impaired loans largely in the real estate and related and telecom and media sectors resulting in a 14 bps increase in the PCL on impaired loans ratio. Higher provisions on performing loans, primarily reflecting unfavourable changes to our macroeconomic forecast and credit quality, also contributed to the increase.
Non-interest
expense increased $2,113 million or 18%, mainly due to the inclusion of RBC Brewin Dolphin and related costs. Higher staff costs and professional fees, largely reflecting continued investments in the operational infrastructure of City National, as well as the impact of foreign exchange translation also contributed to the increase.
AUA decreased $1,313 billion or 25%, primarily in the Investor Services line of business reflecting the partial sale of RBC Investor Services operations. This was partially offset by AUA growth in other Wealth Management lines of business, mainly due to the impact of market appreciation and foreign exchange translation as well as net sales.
AUM increased $67 billion or 7%, primarily due to the impact of market appreciation. Net sales and the impact of foreign exchange translation also contributed to the increase.
For further details on specified items, including a reconciliation, refer to the Key performance and non-GAAP measures section.
 
Business line review
 
Canadian Wealth Management
Canadian Wealth Management includes our full-service Canadian wealth advisory business, which is the largest in Canada as measured by AUA, with over 2,000 investment advisors providing comprehensive financial solutions with a focus on HNW and UHNW clients. Additionally, we provide discretionary investment management and estate and trust services to our clients through over 120 investment counsellors and over 115 trust professionals across Canada.
We compete with domestic banks and trust companies, investment counselling firms, bank-owned full-service brokerages and boutique brokerages, mutual fund companies and global private banks. In Canada, bank-owned wealth managers continue to be the major players.
Financial performance
Revenue increased $135 million or 3% from last year, primarily due to higher average fee-based client assets, largely driven by net sales, as well as higher net interest income from higher interest rates partially offset by lower deposits.
 
Selected highlights
 
Table 26  
(Millions of Canadian dollars)
 
2023
    2022  
Total revenue
 
$
  4,443
 
  $ 4,308  
Other information
               
Average loans and acceptances, net
 
 
5,200
 
    5,600  
Average deposits
 
 
20,900
 
    28,600  
AUA
(1)
 
 
548,600
 
    511,300  
AUM
(1)
 
 
184,300
 
      171,700  
Average AUA
 
 
536,100
 
    519,600  
Average AUM
 
 
182,200
 
    171,800  
 
(1)   Represents
year-end
spot balances.
 
U.S. Wealth Management (including City National)
U.S. Wealth Management (including City National) encompasses PCG and our C&C businesses. PCG is the 6
th
largest full-service wealth advisory firm in the U.S., as measured by number of advisors, with over 2,100 financial advisors. Our C&C business delivers clearing and execution services for small to
mid-sized
independent broker-dealers and registered investment advisor firms. City National provides comprehensive financial solutions to affluent individuals, entrepreneurs, professionals, their businesses and their families, and other clients who value personalized banking relationships through a high-touch service model, proactive advice and financial solutions. City National offers a broad range of lending, deposit, cash management, equipment financing, wealth management and other products and services. In the U.S., we operate in a fragmented and highly competitive industry. Our competitors include other broker-dealers, commercial banks and other financial institutions that service HNW and UHNW individuals, entrepreneurs and their businesses.
 
46            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Financial performance
Revenue increased $521 million or 7% from last year. In U.S. dollars, revenue increased $151 million or 3%, mainly due to higher net interest income driven by higher interest rates partially offset by lower deposits. Higher revenue from sweep deposits also contributed to an increase in transactional revenue. These factors were partially offset by the impact of the specified item relating to impairment losses on our interest in an associated company and gains on the sale of certain non-core affiliates in the same period last year. Adjusted revenue in U.S. dollars increased $326 million or 6%.
NIM was up 15 bps, reflecting the impact of the higher interest rate environment.
For further details on specified items, including a reconciliation, refer to the Key performance and non-GAAP measures section.
 
Selected highlights
 
Table 27  
(Millions of Canadian dollars,
except as otherwise noted)
 
2023
    2022  
Total revenue
 
$
7,969
 
  $ 7,448  
Other information
(Millions of U.S. dollars)
               
Total revenue
 
 
5,908
 
    5,757  
NIM
 
 
  2.53%
 
    2.38%  
Average earning assets, net
 
 
  103,500
 
    98,100  
Average loans, guarantees and letters of credit, net
 
 
75,900
 
    68,800  
Average deposits
 
 
83,200
 
    90,600  
AUA
(1)
 
 
542,800
 
    513,700  
AUM
(1)
 
 
176,900
 
    159,200  
Average AUA
 
 
544,000
 
      538,100  
Average AUM
 
 
174,500
 
    168,100  
 
(1)   Represents
year-end
spot balances.
 
Global Asset Management
GAM provides global investment management services and solutions for individual and institutional investors in Canada, the U.K., the U.S., Europe and Asia. We provide a broad range of investment management services through mutual, pooled and private funds,
fee-based
accounts and separately managed portfolios. We distribute our investment solutions through a broad network of bank branches, our self-directed and full-service wealth advisory businesses, independent third-party advisors and private banks, and directly to individual clients. We also provide investment solutions directly to institutional clients, including pension plans, insurance companies, corporations, endowments and foundations.
We are the largest retail fund company in Canada measured by AUM, as well as a leading institutional asset manager. We face competition in Canada from banks, insurance companies and asset management organizations. The Canadian fund management industry is large and mature, but remains a relatively fragmented industry.
In the U.S., our asset management business offers investment management solutions and services, primarily to institutional investors, and competes with independent asset management firms, as well as those that are part of national and international banks and insurance companies.
Internationally, through our global capabilities distributed under the brand RBC BlueBay Asset Management, we offer investment management solutions for institutions and, through private banks including RBC Wealth Management
®
, to HNW and UHNW investors. We face competition from asset managers that are owned by international banks, as well as national and regional asset managers in the geographies where we serve clients.
Financial performance
Revenue decreased $41 million or 2% from last year, mainly due to lower average fee-based client assets, largely driven by unfavourable market conditions. This was partially offset by changes in the fair value of seed capital investments.
 
Selected highlights
 
Table 28  
(Millions of Canadian dollars)
 
2023
    2022  
Total revenue
 
$
  2,626
 
  $ 2,667  
Other information
               
Canadian net long-term mutual fund sales (redemptions)
(1)
 
 
(11,367
    (5,246
Canadian net money market mutual fund sales (redemptions) 
(1)
 
 
1,121
 
    (127
AUM
(2)
 
 
  541,300
 
    522,700  
Average AUM
 
 
550,700
 
      562,200  
 
(1)   As reported to the Investment Funds Institute of Canada. Includes all prospectus-based mutual funds across our Canadian GAM businesses.
(2)   Represents
year-end
spot balances.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            47

International Wealth Management
International Wealth Management includes operations in the U.K., Ireland, the Channel Islands and Asia. We provide customized and integrated wealth management solutions to HNW, UHNW and corporate clients in key financial centres. Competitors to our International Wealth Management business include global wealth managers, traditional private banks and domestic wealth managers.
Financial performance
Revenue increased $847 million from last year, primarily reflecting the inclusion of RBC Brewin Dolphin, as well as an increase in net interest income driven by higher interest rates.
 
Selected highlights
 
Table 29  
(Millions of Canadian dollars)
 
2023
    2022  
Total revenue
 
$
       1,273
 
  $ 426  
Other information
   
Average loans, guarantees and letters of credit, net
 
 
4,800
 
    5,000  
Average deposits
 
 
11,800
 
    12,300  
AUA
(1), (2)
 
 
185,400
 
      170,100  
AUM
(1), (2)
 
 
87,900
 
    80,100  
Average AUA
 
 
  185,200
 
    97,200  
Average AUM
 
 
89,600
 
    15,400  
 
(1)   Represents
year-end
spot balances.
(2)   AUA and AUM reflect the inclusion of $79,800 million and $72,400 million, respectively, due to the acquisition of RBC Brewin Dolphin, which closed on September 27, 2022.

 
Investor Services
Investor Services delivers asset servicing solutions to Canadian and U.K. asset managers and asset owners, investment counsellors and other financial institutions. Our product and service offering includes custody, fund administration, shareholder services, middle office and market services (including foreign exchange, securities finance and cash/liquidity management). Competitors to our Investor Services business include domestic and international custodians with Canadian and U.K. operations.
Financial performance
Revenue decreased $161 million or 12% from last year, primarily due to reduced revenue following the partial sale of RBC Investor Services operations, partially offset by the gain on the sale.
 
Selected highlights
 
Table 30  
(Millions of Canadian dollars)
 
2023
    2022  
Total revenue
(1)
 
$
       1,233
 
  $ 1,394  
Other information
   
Average deposits
(1)
 
 
18,000
 
    39,203  
AUA
(1), (2)
 
 
2,488,600
 
    3,906,900  
Average AUA
(1)
 
 
  3,525,500
 
      4,392,600  
 
(1)   Amounts reflect the impact of the partial sale of RBC Investor Services operations, which was completed on July 3, 2023. For further details, refer to Note 6 of our 2023 Annual Consolidated Financial Statements.
(2)   Represents
year-end
spot balances.

 
48            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Insurance
RBC Insurance
®
offers a comprehensive suite of advice and solutions for individual and business clients, including life, health, wealth, property & casualty, travel, group benefits, annuities, and reinsurance.
 
 
$5.7 billion
    
 
> 4.8 million
    
 
2,781
 
Total revenue
 
    
Number of clients
 
    
Employees
 
         
 
 
 
Premiums and Deposits
 

 
    
 
RBC Insurance
®
is one of the largest Canadian bank-owned insurance organizations on a total revenue basis and operates under two business lines: Canadian Insurance and International Insurance.
 
In Canada, we offer life, health, travel, wealth accumulation solutions, and annuities to individuals and businesses. We also offer property & casualty insurance through a distribution agreement with Aviva Canada. Our products and services are distributed through multiple channels, including proprietary sales force, digital platforms, and a network of independent brokers and partners.
 
Outside Canada, we operate globally in the reinsurance and retrocession markets offering longevity reinsurance, life retrocession, and reinsurance for creditor life, disability, and critical illness.
                   
2023 Operating environment
 
 
In Canada, the industry continued to face challenges and opportunities, including a higher interest rate environment, generational and demographic change, the growing importance of an omnichannel experience, and novel distribution partnerships to reach new client segments. In response, we continued our journey towards becoming a
client-led
organization underpinned by superior advice and solutions to provide clients with the coverage they need. We sustained a strong presence across most insurance businesses serving retail and business clients and remain well-positioned to deliver innovative products through our strong network of advisors and partners. Additionally, progress has been realized across our strategic objectives to establish digital leadership and to develop and sustain excellence in distribution. Prioritizing investment in our people and positioning ourselves as an employer of choice also remains a key area of focus. Our ambition is to be at the forefront of tailored,
client-led
advice and solutions, leveraging technology and data.
 
 
In the U.K., the reinsurance market for longevity risk transfer remains competitive. Our business strategy continues to selectively pursue niche opportunities in the longevity markets as potential clients actively manage longevity risk.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            49

Strategic priorities
 
 
OUR STRATEGY
 
 
 
PROGRESS IN 2023
 
 
 
PRIORITIES IN 2024
 
Grow our core insurance business
 
Generated over $1B in group annuity new business sales representing ~20% growth, and providing retirement income security to more Canadian retirees
 
Maintained leadership in market share for individual disability insurance
 
Enhanced our mental health offering in partnership with Personalize Prescribing Inc. (PPI), providing access to affordable drug compatibility testing for all group plan members and their eligible dependents before a mental illness becomes debilitating
 
 
Drive profitable business growth by continuing the journey to become a
client-led
organization underpinned by superior advice and solutions
 
Grow our client base by leveraging proprietary channels to deepen client relationships across multiple products and solutions
 
Develop and sustain excellence in distribution
 
 
Ranked #1 for broker relationship management capabilities
1
and #1 proprietary insurance distribution network
2
 
Reduced
end-to-end
cycle time for life insurance applications by 5 days through process
re-design
 
Launched RBC YourTerm
®
on the eApplication platform for our proprietary sales force, providing digital signature capability, and eliminating the need for signature booklets
 
 
 
Drive deep client relationships through distribution excellence, including channel growth and by supporting our agents and partners with
best-in-class
tools, and unique value propositions
 
Accelerate investments in product innovation, digitization, and data
 
 
Achieved a near 40% reduction in claim decision time for individual disability claims through
end-to-end
process review and optimization
 
Developed and implemented predictive analytics data models to assist in claims processing, fraud detection, and personalized product recommendations for clients
 
Launched digital enrollment solutions for Guarantee Standard Issue
®
(GSI
®
) clients, automating the entire intake process including application, underwriting, policy issue, settlement, and online policy view
 
Partnered with Epilogue Wills, one of the leading digital estate planning tools in the market, launching a new digital capability to embed a fully integrated and interactive quote for the RBC Simplified
®
Term insurance product
 
Launched Wealth electronic forms for segregated funds to simplify the way we do business by reducing manual transaction costs while also improving the advisor and client experience
 
 
 
Invest in technology, digital, and data capabilities to drive market leading experience with personalized, easy to navigate
end-to-end
integrated consumer journeys
 
Evolve our risk culture
 
 
Published the inaugural market update on the funds in participating life account. The funds outperformed the overall market as well as participating competitor funds in a turbulent year
 
In partnership with Medaca Health Group, we enhanced our disability claims management practices by providing individuals on disability and struggling with mental health diagnosis, with rapid access to workplace psychiatrists and mental health professionals
 
Progressed final preparations for the implementation of the new accounting standard IFRS 17 effective for us on November 1, 2023
 
 
 
Evolve our robust risk frameworks, controls, and risk culture to enable business growth in strategic areas, protect clients, and meet the expectations of both federal and provincial regulators
 
Attract, grow, and retain future-ready talent
 
 
Remained a highly engaged, diverse workforce receptive to change and willing to go above and beyond to serve our clients and deliver strong ROE to RBC
 
Launched a Diversity Champion program to promote awareness and discussion on psychological safety and explore the individual and collective meaning of diversity, inclusion, equity and belonging
 
 
 
Elevate leadership capabilities to grow and develop talent
 
Continue to strengthen our culture of inclusion and belonging
 
Drive a high-performance culture that empowers and enables people to deliver on our ambitious goals
 
Outlook
The insurance industry is expected to continue experiencing change in fiscal 2024 driven by demographic change, the growing importance of the omnichannel experience, clients’ need for holistic financial advice, and distribution innovation. As Canadians focus more attention on having a seamless experience transitioning between a digital interface and advisors, we will remain focused on further strengthening our
client-led
advice and solutions and leveraging technology and data to provide a seamless client experience. We will seek to maintain our strength by investing in operational improvements, enhancing the omnichannel client experience, and focusing on sustainable growth. This will enable achievement of our goal of being an innovative, client-focused provider of a full suite of insurance solutions and should allow us to thrive in a rapidly changing environment.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.
 
1
 
  NMG Consulting Canadian Individual Life Insurance Study 2022
2
 
  Investment Executive Insurance Advisors’ Report Card
 
50            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Insurance
 
Table 31  
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
 
 
2023
    2022  
Non-interest
income
   
Net earned premiums
 
$
5,131
 
  $ 4,653  
Investment Income, gains/(losses) on assets supporting insurance policyholder liabilities
(1)
 
 
326
 
    (1,363
Fee income
 
 
218
 
    220  
Total revenue
 
 
5,675
 
    3,510  
PCL
 
 
 
     
Insurance policyholder benefits and claims
(1)
 
 
3,699
 
    1,468  
Insurance policyholder acquisition expense
 
 
323
 
    315  
Non-interest
expense
 
 
653
 
    588  
Income before income taxes
 
 
1,000
 
    1,139  
Net income
 
$
803
 
  $ 857  
Revenue by business
   
Canadian Insurance
 
$
3,087
 
  $ 653  
International Insurance
 
 
2,588
 
    2,857  
Key ratios
   
ROE
 
 
37.3%
    36.4%
Selected balance sheet information
   
Average total assets
 
$
23,500
 
  $ 22,500  
Other information
   
Premiums and deposits
(2)
 
$
5,929
 
  $ 5,498  
Canadian Insurance
 
 
3,385
 
    2,999  
International Insurance
 
 
2,544
 
    2,499  
Insurance claims and policy benefit liabilities
 
 
11,966
 
    11,511  
Fair value changes on investments backing policyholder liabilities
(1)
 
 
(91
    (1,888
Number of employees (FTE)
 
 
2,781
 
    2,731  
 
(1)   Includes unrealized gains and losses on investments backing policyholder liabilities attributable to fluctuation of assets designated as FVTPL. The investments which support actuarial liabilities are predominantly fixed income assets designated as FVTPL. Consequently, changes in the fair values of these assets are recorded in Insurance premiums, investment and fee income in the Consolidated Statements of Income and are largely offset by changes in the fair value of the actuarial liabilities, the impact of which is reflected in PBCAE.
(2)   Premiums and deposits include premiums on risk-based individual and group insurance and annuity products as well as segregated fund deposits, consistent with insurance industry practices.
Financial performance
2023 vs. 2022
Net income decreased $54 million or 6% from last year, largely due to higher capital funding costs, partially offset by improved claims experience.
Total revenue increased $2,165 million or 62%, primarily reflecting the change in fair value of investments backing policyholder liabilities, higher group annuity sales, and business growth across most products, all of which are largely offset in PBCAE as indicated below.
PBCAE increased $2,239 million, primarily reflecting the change in fair value of investments backing policyholder liabilities, higher group annuity sales, and business growth across most products, all of which are largely offset in revenue. These factors were partially offset by improved claims experience.
Non-interest
expense increased $65 million or 11%, largely due to higher staff-related costs and ongoing technology investments.
 
Business line review
 
Canadian Insurance
We offer life, health, travel, wealth accumulation solutions, and annuities to individuals and businesses across Canada. We also offer property & casualty insurance through a distribution agreement with Aviva Canada. Our life and health portfolio includes participating whole life, term life, critical illness, disability, and group benefits, including long-term disability, and health and dental insurance. Wealth solutions include a family of segregated funds as well as individual annuities. Our travel products include
out-of-province/country
medical coverage, and trip cancellation and interruption insurance.
Our group annuities business helps defined benefit pension plan sponsors better manage and control risk. RBC Insurance
®
has a set of strategies and initiatives aimed at building our momentum and positioning us for growth in this product line, where companies are increasingly looking to transfer the risks associated with their pension obligations to insurance companies – either through group annuity contracts or longevity swap products.
In Canada, many of our competitors specialize in either life and health, wealth, or in property and casualty products. As a multi-line carrier, we offer a broad suite of solutions, increasing convenience for our clients. Many of our solutions hold market leadership positions, including our disability insurance, term life, and group annuity products.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            51

Financial performance
Total revenue increased $2,434 million from last year, primarily reflecting the change in fair value of investments backing policyholder liabilities, higher group annuity sales, and business growth across most products, all of which are largely offset in PBCAE.
Premiums and deposits increased $386 million or 13%, mainly driven by group annuity and individual and group life and health sales, partially offset by segregated fund products.
 
Selected highlights
 
Table 32  
(Millions of Canadian dollars)
 
2023
    2022  
Total revenue
 
$
3,087
 
  $ 653  
Other information
   
Premiums and deposits
   
Life and health
 
 
1,614
 
      1,416  
Property and casualty
 
 
108
 
    81  
Annuity
 
 
1,067
 
    834  
Segregated fund deposits
 
 
596
 
    668  
Fair value changes on investments backing policyholder liabilities
 
 
(224
    (2,259
 

 
International Insurance
International Insurance is comprised of our reinsurance product lines which reinsure risks of other insurance and reinsurance companies. We offer life, health, and longevity reinsurance solutions.
The global reinsurance market is competitive as there are many participants. Market share is largely held by a small number of reinsurers, with RBC Insurance
®
continuing to selectively pursue niche opportunities.
Financial performance
Total revenue decreased $269 million or 9% from last year, primarily reflecting the change in fair value of investments backing policyholder liabilities, which is largely offset in PBCAE.
Premiums and deposits increased $45 million or 2%.
 
Selected highlights
 
 
Table 33  
 
(Millions of Canadian dollars)
 
2023
    2022  
Total revenue
 
$
2,588
 
  $   2,857  
Other information
   
Premiums and deposits
   
Life and health
 
 
1,040
 
    1,044  
Annuity
 
 
1,504
 
    1,455  
Fair value changes on investments backing policyholder liabilities
 
 
133
 
    371  

 
52            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Capital Markets
RBC Capital Markets
®
is a premier global investment bank providing expertise in advisory & origination, sales & trading, lending & financing and transaction banking to corporations, institutional clients, asset managers, private equity firms and governments globally. Our professionals provide clients with the advice, products, and services their businesses need from 60 offices in 16 countries. Our presence extends across North America, the U.K. & Europe, Australia, Asia and other regions.
 
 
> 21,500
    
 
#9
    
 
7,253
 
Number of clients
 
    
Global league table rankings
1
 
    
Employees
 
         
 
Revenue by Geography
 

    
 
We operate two main business lines, Corporate & Investment Banking and Global Markets.
 
In North America, we offer a full suite of products and services which include equity and debt origination and distribution, advisory services, sales & trading, and transaction banking. In Canada, we are a market leader with a strategic presence in all lines of capital markets businesses. In the U.S., where our competitors include large global investment banks, we have a full industry sector coverage and investment banking product range, as well as capabilities in credit, secured lending, municipal finance, fixed income, currencies & commodities, and equities.
 
Outside North America, we have a targeted strategic presence in the U.K. & Europe, Australia, Asia & other markets aligned to our global expertise. In the U.K. & Europe, we offer a diversified set of capabilities in key industry sectors of focus. In Australia and Asia, we compete with global and regional investment banks in targeted areas aligned to our global expertise, including fixed income distribution and currencies trading, secured financing, as well as corporate & investment banking.
                   
2023 Operating environment
 
 
The fiscal 2023 operating environment was characterized by an uncertain outlook amidst financial sector turmoil, slower economic growth, persistent inflation and ongoing geopolitical risks. While industry-wide fee pools continue to remain muted as clients largely maintain a
risk-off
position, our market share gains helped deliver strong results.
 
 
Trading activity remained elevated as we saw improvement in the credit trading environment as well as robust results in macro-focused businesses, such as rates and foreign exchange, underpinned by strong client flows. We continued to be disciplined with our moderate growth strategy in our lending business. Despite elevated funding costs putting pressure on net interest margins, we delivered strong results and our balance sheet strength enabled us to continue to support our clients during the 2023 fiscal year.
 
 
The credit environment was impacted by slowing economic growth and rising interest rates, resulting in higher provisions on impaired and performing loans.
 
1
 
  Source: Dealogic, based on global investment bank fees, Fiscal 2023
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            53

Strategic priorities
 
OUR STRATEGY
 
PROGRESS IN 2023
 
PRIORITIES IN 2024
 
Grow and deepen client relationships
 
 
Delivered holistic coverage to clients and deepened key relationships, resulting in high quality mandates and notable wins in Corporate & Investment Banking and Global Markets
 
Awarded Best Investment Bank in Canada as part of Euromoney’s Awards of Excellence in 2023
 
Notable client examples include:
 
•   Exclusive Buyside Advisor to Saint-Gobain on its C$1.3 billion acquisition of Building Products of Canada
 
•   Joint Active Bookrunner on American Water Works Company’s US$1.7 billion follow-on equity offering
 
 
Extend our client centric approach and drive multi-product global client relationships to gain market share
 
Strengthen client coverage in underpenetrated sectors and products
 
Drive greater collaboration and connectivity across RBC to better support clients
 
Lead with advice and extend capabilities
 
 
Built new product capabilities, including in U.S. Cash Management, and expanded in advisory areas including in risk solutions to lead with ideas and insights
 
Notable client examples include:
 
•   Exclusive Financial Advisor to TransAlta Corporation and provided fairness opinion to the Board of Directors on the acquisition of the outstanding common shares of TransAlta Renewables for consideration of C$1.4 billion
 
•   Exclusive Financial Advisor on the sale of 20% of Corient (CI Financial’s U.S. Wealth Management business) for US$1.0 billion (implying US$5 billion Enterprise Value), the largest private transaction in the wealth management sector in 2023
 
 
Further grow in areas of advisory and origination, through additional investments and partnerships across Corporate & Investment Banking and Global Markets
 
Continue to advance ESG initiatives, including supporting clients in achieving their energy transition goals
 
Leverage digital and data to deliver innovative solutions
 
 
Expanded our digital research platform into next generation applications, utilizing alternative data
 
Launched Aiden
®
Arrival, the second algorithm on RBC’s
AI-based
electronic trading platform, in Europe. RBC Capital Markets was ranked 2nd overall among North American and European banks at incorporating and advancing AI technology by Evident AI Index in February 2023
 
 
Generate differentiated insights and thought leadership leveraging Elements, RBC’s alternative data and analytics platform
 
Advance the client digital experience and broaden electronic execution capabilities
 
Prioritize and align for impact
 
 
Integrated Treasury Services and Transaction Banking into Capital Markets, driving stronger strategic alignment across the business
 
Further embedded a culture of productivity and efficiency to enable accelerated investments
 
 
Strategically invest across talent, technology and capital, prioritizing areas of greatest impact
 
Align business and functional strategies to improve execution on an end-to-end basis to build scale and maximize return on investment
 
Drive agility and ease of doing business
 
 
Prioritized investments in technology and functional infrastructure in alignment with business strategy
 
Shifted investment mix more towards client digitization and new product capabilities
 
 
Simplify functional processes to improve client and employee experience
 
Continue to drive cross-platform and geographic collaboration across businesses and asset classes
 
Engage, enable and empower our talent    
 
 
Invested in talent across internal promotions and external senior hires, and increased internal mobility
 
Progressed diverse representation by embedding our Diversity & Inclusion (D&I) strategy more deeply into the business
 
Recognized as the Best FX Bank for Diversity as part of the Euromoney’s 2023 FX Awards
 
 
Elevate leadership capabilities to grow and develop talent
 
Advance diverse representation and continue to strengthen our culture of inclusion and belonging
 
Drive a high-performance culture that empowers and enables people to deliver on our ambitious goals
Outlook
In fiscal 2024, the outlook remains uncertain and financial market volatility is expected to persist. Amidst these market dynamics, we expect Global Investment Banking fee pools to return to historical levels with some moderation in Global Markets industry revenue pools. We will continue to pursue market share growth in both our Corporate & Investment Banking and Global Markets businesses. In Investment Banking, we will continue to focus on targeted sectors and investment in talent, with an emphasis on advisory products. In Global Markets, our focus remains on delivering robust results through continued resource optimization, acceleration of cross-selling activities, further deployment of electronic and digital capabilities, and building on our strong risk management practices. In Corporate Banking, following higher levels of balance sheet deployment in support of client financing demands in fiscal 2023, we will continue to pursue a disciplined growth approach to deepen relationships with lending clients to drive growth in our
non-lending
businesses. This strategy will continue to be underpinned by strong credit risk management practices, optimization of our financial resources and supporting our clients in the execution of their strategies.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.
 
54            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Capital Markets
 
Table 34  
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
 
 
2023
    2022 
(1)
 
Net interest income
(2)
 
$
3,379
 
  $ 4,944  
Non-interest
income
(2)
 
 
7,672
 
    5,005  
Total revenue
(2)
 
 
11,051
 
    9,949  
PCL on performing assets
 
 
125
 
    (32
PCL on impaired assets
 
 
436
 
    19  
PCL
 
 
561
 
    (13
Non-interest
expense
 
 
6,509
 
    5,816  
Income before income taxes
 
 
3,981
 
    4,146  
Net income
 
$
4,139
 
  $ 3,368  
Revenue by business
   
Corporate & Investment Banking
 
$
5,375
 
  $ 4,765  
Global Markets
 
 
6,013
 
    5,619  
Other
 
 
(337
    (435
Key ratios
   
ROE
 
 
14.6%
    12.1%
Selected balance sheet information
   
Average total assets
 
$
1,107,100
 
  $ 1,056,100  
Average trading securities
 
 
160,900
 
    139,400  
Average loans and acceptances, net
 
 
144,900
 
    131,400  
Average deposits
 
 
291,700
 
    284,800  
Other information
   
Number of employees (FTE)
 
 
7,253
 
    7,017  
Credit information
   
PCL on impaired loans as a % of average net loans and acceptances
 
 
0.30%
    0.01%
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items
 
 
 
(Millions of Canadian dollars, except percentage amounts)
 
2023 vs. 2022
       
Increase (decrease):
   
Total revenue
 
$
374
 
 
PCL
 
 
19
 
 
Non-interest
expense
 
 
186
 
 
Net income
 
 
165
 
 
Percentage change in average U.S. dollar equivalent of C$1.00
 
 
(4)%
 
Percentage change in average British pound equivalent of C$1.00
 
 
(3)%
 
Percentage change in average Euro equivalent of C$1.00
 
 
(5)%
 
 
(1)   Amounts have been revised from those previously presented to conform to our new basis of segment presentation. For further details, refer to the About Royal Bank of Canada section.
(2)   The teb adjustment for 2023 was $559 million (2022 – $572 million). For further discussion, refer to the How we measure and report our business segments section.
 
 

Financial performance
2023 vs. 2022
Net income increased $771 million or 23% from last year, mainly due to lower taxes reflecting changes in earnings mix, higher revenue in Corporate & Investment Banking and Global Markets and the impact of foreign exchange translation. These factors were partially offset by higher PCL, higher compensation and ongoing technology investments.
Total revenue increased $1,102 million or 11%, mainly due to higher fixed income trading across all regions. The prior year also included the impact of loan underwriting markdowns. The impact of foreign exchange translation also contributed to the increase. These factors were partially offset by lower equity trading revenue across all regions.
PCL was $561 million compared to $(13) million last year, mainly reflecting higher provisions on impaired loans across most sectors, resulting in a 29 bps increase in the PCL on impaired loans ratio. Provisions taken on performing loans in the current year driven by unfavourable changes to our macroeconomic forecast and credit quality outlook also contributed to the increase.
Non-interest
expense increased $693 million or 12%, mainly due to higher compensation on increased results, the impact of foreign exchange translation and ongoing technology investments.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            55

Business line review
 
Corporate 
&
Investment Banking
Corporate & Investment Banking comprises our corporate lending, municipal finance, loan syndication, debt and equity origination, M&A advisory services and transaction banking services. For debt and equity origination, revenue is allocated between Corporate & Investment Banking and Global Markets based on the contribution of each group in accordance with an established agreement.
Financial performance
Corporate & Investment Banking revenue of $5,375 million increased $610 million or 13% from last year.
Investment Banking revenue increased $279 million or 16%, as the prior year included the impact of loan underwriting markdowns, partially offset by lower loan syndication activity across most regions this year.
Lending and other revenue increased $331 million or 11%, primarily due to improved margins in transaction banking and higher securitization financing revenue.
 
Selected highlights
 
Table 35  
(Millions of Canadian dollars)
 
 
2023
    2022
(1)
 
Total revenue
(2)
 
$
5,375
 
  $ 4,765  
Breakdown of revenue
(2)
   
Investment banking
 
 
2,065
 
    1,786  
Lending and other
(3)
 
 
3,310
 
    2,979  
Other information
   
Average assets
 
 
125,000
 
    109,000  
Average loans and acceptances, net
 
 
117,000
 
    101,500  
(1)   Amounts have been revised from those previously presented to conform to our new basis of segment presentation. For further details, refer to the About Royal Bank of Canada section.
(2)   The teb adjustment for the year ended October 31, 2023 was $135 million (October 31, 2022 – $39 million). For further discussion, refer to the How we measure and report our business segments section.
(3)   Comprises our corporate lending, client securitization, and global credit businesses.

 
Global Markets
Global Markets comprises our sales and trading businesses including fixed income, foreign exchange, commodities, and equities, as well as our repo and secured financing products.
Financial performance
Global Markets revenue of $6,013 million increased $394 million or 7% from last year.
Revenue in our Fixed income, currencies and commodities business increased $654 million or 24%, largely driven by higher fixed income trading in the U.S. and Europe.
Revenue in our Equities business decreased $149 million or 10%, primarily due to lower equity trading revenue primarily in the U.S., partially offset by the impact of foreign exchange translation.
Revenue in our Treasury services & funding business decreased $111 million or 8%, mainly due to lower securities lending revenue.
 
Selected highlights
 
Table 36  
(Millions of Canadian dollars)
 
 
2023
    2022
(1)
 
Total revenue
(2)
 
$
6,013
 
  $ 5,619  
Breakdown of revenue
(2)
   
Fixed income, currencies
and commodities
 
 
3,335
 
    2,681  
Equities
 
 
1,309
 
    1,458  
Treasury services and funding
(3), (4)
 
 
1,369
 
    1,480  
Other information
   
Average assets
 
 
968,000
 
    930,000  
(1)   Amounts have been revised from those previously presented to conform to our new basis of segment presentation. For further details, refer to the About Royal Bank of Canada section.
(2)   The teb adjustment for the year ended October 31, 2023 was $424 million (October 31, 2022 – $533 million). For further discussion, refer to the How we measure and report our business segments section.
(3)   Effective the first quarter of 2023, the Treasury Services business moved to the Capital Markets segment, combining with our Repo and secured financing business. For further details, refer to the About Royal Bank of Canada section.
(4)   Comprises our secured funding businesses for internal businesses and external clients.

 
56            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Other
Other includes our legacy portfolio, which mainly consists of our U.S. commercial mortgage-backed securities (MBS), bank-owned life insurance (BOLI) derivative contracts and structured rates in Asia.
Financial performance
Other revenue increased $98 million or 22% from last year, mainly reflecting changes in the fair value of hedges related to our share-based compensation plans, which was largely offset in non-interest expense, as well as the impact of fair value changes in our legacy U.S. portfolios.
 
Corporate Support
Corporate Support consists of Technology & Operations, which provides the technological and operational foundation required to effectively deliver products and services to our clients, Functions, which includes our finance, human resources, risk management, internal audit and other functional groups, as well as our Corporate Treasury function. Reported results for Corporate Support mainly reflect enterprise level activities which are not allocated to business segments. For further details, refer to the How we measure and report our business segments section.
 
Corporate Support
 
Table 37  
(Millions of Canadian dollars)
 
 
2023
    2022  
Net interest income (loss)
(1)
 
$
1,181
 
  $ (132
Non-interest
income (loss)
(1), (2)
 
 
(1,442
    (728
Total revenue
(1), (2)
 
 
(261
    (860
PCL
 
 
 
    1  
Non-interest
expense
(2)
 
 
668
 
    (247
Income (loss) before income taxes
(1)
 
 
(929
    (614
Income taxes (recoveries)
(1)
 
 
(160
    (616
Net income (loss)
 
$
(769
  $ 2  
(1)   Teb adjusted.
(2)   Revenue for the year ended October 31, 2023, included gains of $111 million (October 31, 2022 – losses of $363 million) on economic hedges of our U.S. Wealth Management (including City National) share-based compensation plans, and
non-interest
expense included $109 million (October 31, 2022 – $(289) million) of share-based compensation expense driven by changes in the fair value of liabilities relating to our U.S. Wealth Management (including City National) share-based compensation plans.
Due to the nature of activities and consolidation adjustments reported in this segment, we believe that a comparative period analysis is not relevant.
Total revenue and Income taxes (recoveries) in each period in Corporate Support include the deduction of the teb adjustments related to the
gross-up
of income from Canadian taxable corporate dividends and the U.S. tax credit investment business recorded in Capital Markets. The amount deducted from revenue was offset by an equivalent increase in Income taxes (recoveries).
The teb amount for the year ended October 31, 2023 was $559 million and was $572 million last year.
The following identifies the material items, other than the teb impacts noted previously, affecting the reported results in each year.
2023
Net loss was $769 million, primarily due to the impact of the CRD and other tax related adjustments of $1,050 million, as well as the after-tax impact of transaction and integration costs of $302 million relating to the planned acquisition of HSBC Canada, both of which are specified items. These factors were partially offset by a specified item relating to certain deferred tax adjustments of $578 million. In addition, the net loss includes an unfavourable impact from residual unallocated items offset by a favourable impact from tax-related items.
For further details on specified items, refer to the Key performance and non-GAAP measures section.
2022
Net income was $2 million. Net favourable tax adjustments and asset/liability management activities were offset by residual unallocated items.
 
Quarterly financial information
 
Fourth quarter performance
Q4 2023 vs. Q4 2022
Fourth quarter net income of $4,131 million was up $249 million or 6%. Diluted EPS of $2.90 was up $0.16 and ROE of 15.2% was down 40 bps. Our CET1 ratio of 14.5% was up 190 bps from a year ago. Our earnings were up primarily due to a specified item relating to certain deferred tax adjustments, as well as a favourable impact from tax-related items, which are both reported in Corporate Support. Higher earnings in Capital Markets and Insurance also contributed to the increased results, which were partially offset by lower earnings in Wealth Management and Personal & Commercial Banking.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            57

Total revenue increased $459 million or 4%, largely due to higher average fee-based client assets reflecting net sales and the inclusion of RBC Brewin Dolphin and higher spreads and average volume growth in Canadian Banking. A favourable impact from tax-related items also contributed to the increase. These factors were partially offset by the impact of economic hedges, impairment losses on our interest in an associated company in Wealth Management, and lower equity trading revenue in Capital Markets.
Total PCL of $720 million increased $339 million or 89%, primarily reflecting higher provisions in Personal & Commercial Banking and Capital Markets. The PCL on loans ratio of 34 bps increased 16 bps.
PBCAE decreased $24 million or 21%, primarily reflecting the change in fair value of investments backing policyholder liabilities, improved claims experience and benefits from favourable reinsurance contract renegotiations. These factors were partially offset by lower favourable investment-related experience, business growth including group annuity sales and lower favourable annual actuarial assumption updates.
Non-interest
expense increased $934 million or 13%, mainly attributable to higher staff costs, including severance, transaction and integration costs relating to the planned acquisition of HSBC Canada and the impact of legal provisions in our Wealth Management segment. The inclusion of RBC Brewin Dolphin and related costs and higher professional fees, largely reflecting continued investments in the operational infrastructure of City National, also contributed to the increase. These factors were partially offset by reduced expenses following the partial sale of RBC Investor Services operations.
Income tax expense decreased $1,039 million, primarily due to the impact of a specified item relating to certain deferred tax adjustments, changes in earnings mix and lower income before income taxes. The effective income tax rate of (1.5)% decreased 21.6% from last year, primarily due to the impact of certain deferred tax adjustments as noted above and changes in earnings mix.
Q4 2023 vs. Q3 2023
Net income of $4,131 million was up $259 million or 7% compared to last quarter, primarily due to a specified item relating to certain deferred tax adjustments, as well as a favourable impact from tax-related items, both in Corporate Support. These factors were partially offset by a specified item relating to impairment losses on our interest in an associated company, as well as the impact of legal provisions, both in Wealth Management.
 
Quarterly results and trend analysis
Our quarterly results are impacted by a number of trends and recurring factors, which include seasonality of certain businesses, general economic and market conditions, and fluctuations in the Canadian dollar relative to other currencies. The following table summarizes our results for the last eight quarters (the period):
 
Quarterly results
(1)
 
Table 38  
   
2023
          2022  
                   
(Millions of Canadian dollars, except per share and percentage amounts)
 
 
Q4
    Q3       Q2       Q1    
 
 
 
    Q4       Q3       Q2       Q1  
Personal & Commercial Banking
 
$
5,718
 
  $ 5,563     $ 5,298     $ 5,541             $ 5,419     $ 5,182     $ 4,739     $ 4,803  
Wealth Management
(2)
 
 
4,188
 
    4,402       4,394       4,560               4,287       3,997       3,973       3,986  
Insurance
 
 
589
 
    1,848       1,347       1,891               644       1,233       234       1,399  
Capital Markets
(2), (3)
 
 
2,564
 
    2,679       2,662       3,146               2,505       1,889       2,531       3,024  
Corporate Support
(3)
 
 
(33
    (3     (181     (44  
 
 
 
    (288     (169     (257     (146
Total revenue
 
 
13,026
 
      14,489         13,520         15,094                 12,567         12,132         11,220         13,066  
PCL
 
 
720
 
    616       600       532               381       340       (342     105  
PBCAE
 
 
92
 
    1,379       1,006       1,545               116       850       (180     997  
Non-interest
expense
 
 
8,143
 
    7,861       7,494       7,675    
 
 
 
    7,209       6,386       6,434       6,580  
Income before income taxes
 
 
4,071
 
    4,633       4,420       5,342               4,861       4,556       5,308       5,384  
Income taxes
 
 
(60
    761       771       2,128    
 
 
 
    979       979       1,055       1,289  
Net income
 
$
4,131
 
  $ 3,872     $ 3,649     $ 3,214    
 
 
 
  $ 3,882     $ 3,577     $ 4,253     $ 4,095  
EPS – basic
 
$
2.90
 
  $ 2.74     $ 2.58     $ 2.29             $ 2.75     $ 2.52     $ 2.97     $ 2.84  
     – diluted
 
 
2.90
 
    2.73       2.58       2.29    
 
 
 
    2.74       2.51       2.96       2.84  
Effective income tax rate
 
 
(1.5)%
    16.4%       17.4%       39.8%               20.1%       21.5%       19.9%       23.9%  
Period average US$ equivalent of C$1.00
 
$
0.732
 
  $ 0.750     $ 0.737     $ 0.745    
 
 
 
  $ 0.739     $ 0.783     $ 0.789     $ 0.787  
(1)   Fluctuations in the Canadian dollar relative to other foreign currencies have affected our consolidated results over the period.
(2)   Amounts have been revised from those previously presented to conform to our new basis of segment presentation. For further details, refer to the About Royal Bank of Canada section.
(3)   Teb adjusted. For further discussion, refer to the How we measure and report our business segments section.
 
58            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Seasonality
Seasonal factors may impact our results in certain quarters. The first quarter has historically been stronger for our Capital Markets businesses. The second quarter has fewer days than the other quarters, which generally results in a decrease in net interest income and certain expense items. The third and fourth quarters include the summer months which generally results in lower client activity and may negatively impact the results of our Capital Markets trading business.
Trend analysis
Earnings over the period have been impacted by the factors noted below.
Personal & Commercial Banking revenue has benefitted from solid volume growth in loans and deposits over the period. NIM has been favourably impacted over the majority of the period by the higher interest rate environment. NIM has been adversely impacted by a shift in deposit mix in fiscal 2023.
Wealth Management revenue has generally benefitted from growth in average
fee-based
client assets, which was impacted by market conditions, and volume growth in loans over the period. The higher interest rate environment also favourably impacted revenue over the majority of the period. The revenue of RBC Brewin Dolphin has been included since the acquisition closed on September 27, 2022. On July 3, 2023, we completed the sale of the European asset servicing activities of RBC Investor Services and its associated Malaysian centre of excellence. The fourth quarter of 2023 reflected impairment losses on our interest in an associated company.
Insurance revenue has fluctuated over the period, primarily due to the impact of changes in the fair value of investments backing policyholder liabilities as well as the timing of group annuity sales, both of which are largely offset in PBCAE. Group annuity sales can vary significantly by quarter and are generally higher in the first half of the fiscal year.
Capital Markets revenue is influenced, to a large extent, by market conditions that impact client activity. In the second half of fiscal 2022, there was a decline in global investment banking fee pools amidst challenging market conditions, including the impact of loan underwriting markdowns in the third quarter. In 2023, we saw strong client activity, driving higher sales & trading revenues particularly in the first quarter.
PCL is comprised of provisions taken on performing assets and provisions taken on impaired assets. PCL on performing assets fluctuated over the period as it is impacted by changes in credit quality, macroeconomic conditions, and exposures. Throughout the first half of 2022, we saw improvements in our macroeconomic forecast and credit quality outlook, as the economic impact from the
COVID-19
pandemic eased in most regions, resulting in releases of provisions on performing assets. We have seen provisions on performing assets over the remainder of the period generally reflecting unfavourable changes in credit quality and our macroeconomic forecast. PCL on impaired assets was low during the early part of the period, but has trended upwards over the remainder of the period.
PBCAE has fluctuated over the period reflecting changes in the fair value of investments backing policyholder liabilities, which is impacted by changes in market conditions, as well as group annuity sales, both of which are largely offset in revenue. PBCAE has also fluctuated due to the impact of investment-related experience and claims costs over the period. Actuarial adjustments, which generally occur in the fourth quarter of each year, also impact PBCAE.
Non-interest
expense has been impacted by fluctuations in variable compensation over the period, commensurate with fluctuations in revenue and earnings. Changes in the fair value of our U.S. share-based compensation plans, which are largely offset in revenue, have also contributed to fluctuations over the period and are impacted by market conditions. While we continue to focus on efficiency management activities, expenses over the period also reflect investments in staff and technology.
Non-interest
expenses of RBC Brewin Dolphin have been included since the acquisition closed on September 27, 2022. Beginning in fiscal 2023, expenses have also included transaction and integration costs relating to the planned acquisition of HSBC Canada.
Our effective income tax rate has fluctuated over the period, mostly due to varying levels of tax adjustments and changes in earnings mix. The second and fourth quarters of 2022 reflected the impact of net favourable tax adjustments and an increase in income from lower tax rate jurisdictions, respectively. The first quarter of 2023 reflects the impact of the CRD and other tax related adjustments. The fourth quarter of 2023 reflects the recognition of deferred tax assets relating to realized losses in City National associated with the intercompany sale of certain debt securities.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            59

Financial condition
 
Condensed balance sheets
 
 
 
Table 39  
 
As at October 31 (Millions of Canadian dollars)
 
 
2023
    2022  
Assets
   
Cash and due from banks
 
$
61,989
 
  $ 72,397  
Interest-bearing deposits with banks
 
 
71,086
 
    108,011  
Securities, net of applicable allowance
(1)
 
 
409,730
 
    318,223  
Assets purchased under reverse repurchase agreements and securities borrowed
 
 
340,191
 
    317,845  
Loans
   
Retail
 
 
569,951
 
    549,751  
Wholesale
 
 
287,826
 
    273,967  
Allowance for loan losses
 
 
(5,004
    (3,753
Other – Derivatives
 
 
142,450
 
    154,439  
          – Other
(2)
 
 
126,773
 
    126,339  
Total assets
 
$
2,004,992
 
  $   1,917,219  
Liabilities
   
Deposits
 
$
1,231,687
 
  $ 1,208,814  
Other – Derivatives
 
 
142,629
 
    153,491  
          – Other
(2)
 
 
501,530
 
    436,714  
Subordinated debentures
 
 
11,386
 
    10,025  
Total liabilities
 
 
1,887,232
 
    1,809,044  
Equity attributable to shareholders
 
 
117,661
 
    108,064  
Non-controlling
interests
 
 
99
 
    111  
Total equity
 
 
117,760
 
    108,175  
Total liabilities and equity
 
$
2,004,992
 
  $ 1,917,219  
(1)   Securities are comprised of trading and investment securities.
(2)   Other – Other assets and liabilities include Segregated fund net assets and liabilities, respectively.
2023 vs. 2022
Total assets increased $88 billion or 5% from last year. Foreign exchange translation increased total assets by $14 billion.
Cash and due from banks was down $10 billion or 14%, mainly due to lower deposits with central banks, reflecting our short-term cash management activities.
Interest-bearing deposits with banks decreased $37 billion or 34%, largely due to the impact of the partial sale of RBC Investor Services operations. For further details, refer to Note 6 of our 2023 Annual Consolidated Financial Statements. Lower deposits with central banks also contributed to the decrease, reflecting our cash and liquidity management activities.
Securities, net of applicable allowance, were up $92 billion or 29%, largely due to higher government debt securities mainly reflecting cash management activities and business activities. Higher equity trading and corporate debt securities also contributed to the increase.
Assets purchased under reverse repurchase agreements (reverse repos) and securities borrowed increased $22 billion or 7%, largely due to increased client demand. The impact of foreign exchange translation also contributed to the increase.
Loans (net of Allowance for loan losses) were up $33 billion or 4%, largely due to volume growth in residential mortgages and wholesale loans. The impact of foreign exchange translation also contributed to the increase.
Derivative assets were down $12 billion or 8%, primarily attributable to the impact of foreign exchange translation.
Total liabilities increased $78 billion or 4% from last year. Foreign exchange translation increased total liabilities by $14 billion.
Deposits increased $23 billion or 2% due to an increase in term deposits attributable to higher interest rates and the impact of foreign exchange translation. These factors were partially offset by a decrease in demand and notice deposits and the impact of the partial sale of RBC Investor Services operations.
Derivative liabilities were down $11 billion or 7%, primarily attributable to the impact of foreign exchange translation.
Other liabilities increased $65 billion or 15%, primarily due to higher obligations related to repurchase agreements (repos) reflecting increased client demand.
Total equity increased $10 billion or 9%, primarily reflecting earnings, net of dividends, and the issuance of common shares.
 
Off-balance
sheet arrangements
In the normal course of business, we engage in a variety of financial transactions that, for accounting purposes, are not recorded on our Consolidated Balance Sheets.
Off-balance
sheet transactions are generally undertaken for risk, capital and funding management purposes which benefit us and our clients. These include transactions with structured entities and may also include the issuance of guarantees. These transactions give rise to, among other risks, varying degrees of market, credit, liquidity and funding risk, which are discussed in the Risk management section.
We use structured entities to securitize our financial assets as well as assist our clients in securitizing their financial assets. These entities are not operating entities, typically have no employees, and may or may not be recorded on our Consolidated Balance Sheets.
 
60            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

In the normal course of business, we engage in a variety of financial transactions that may qualify for derecognition. We apply the derecognition rules to determine whether we have transferred substantially all the risks and rewards or control associated with the financial assets to a third party. If the transaction meets specific criteria, it may qualify for full or partial derecognition from our Consolidated Balance Sheets.
Securitizations of our financial assets
We periodically securitize our credit card receivables and residential and commercial mortgage loans primarily to diversify our funding sources, enhance our liquidity position and for capital purposes. We also securitize residential and commercial mortgage loans as part of our sales and trading activities.
We securitize our credit card receivables, on a revolving basis, through a consolidated structured entity. We securitize single and multiple-family residential mortgages through the National Housing Act Mortgage-Backed Securities (NHA MBS) program. The majority of our securitization activities are recorded on our Consolidated Balance Sheets as we do not meet the derecognition criteria. During 2023 and 2022, we did not derecognize any mortgages securitized through the NHA MBS program. For further details, refer to Note 7 and Note 8 of our 2023 Annual Consolidated Financial Statements.
We also periodically securitize commercial mortgage loans by selling them in collateral pools, which meet certain diversification, leverage and debt coverage criteria, to structured entities, one of which is sponsored by us. Securitized commercial mortgage loans are derecognized from our Consolidated Balance Sheets as we have transferred substantially all of the risks and rewards of ownership of the securitized assets. During the year ended October 31, 2023, we did not securitize any commercial mortgages (October 31, 2022 – $450 million). Our continuing involvement with the transferred assets is limited to servicing certain of the underlying commercial mortgages sold. As at October 31, 2023, there was $2 billion of commercial mortgages outstanding that we continue to service related to these securitization activities (October 31, 2022 – $2 billion).
Involvement with unconsolidated structured entities
In the normal course of business, we engage in a variety of financial transactions with structured entities to support our customers’ financing and investing needs, including securitization of our clients’ financial assets, creation of investment products, and other types of structured financing.
We have the ability to use credit mitigation tools such as third-party guarantees, credit default swaps, and collateral to mitigate risks assumed through securitization and
re-securitization
exposures. The process in place to monitor the credit quality of our securitization and
re-securitization
exposures involves, among other things, reviewing the performance data of the underlying assets. We affirm our ratings each quarter and formally confirm or assign a new rating at least annually. For further details on our activities to manage risks, refer to the Risk management section.
Below is a description of our activities with respect to certain significant unconsolidated structured entities. For a complete discussion of our interests in consolidated and unconsolidated structured entities, refer to Note 8 of our 2023 Annual Consolidated Financial Statements.
Multi-seller conduits
We administer multi-seller conduits which are used primarily for the securitization of our clients’ financial assets. Our clients primarily use our multi-seller conduits to diversify their financing sources and to reduce funding costs by leveraging the value of high-quality collateral. The conduits offer us a favourable revenue stream and risk-adjusted return.
We provide services such as transaction structuring, administration, backstop liquidity facilities and partial credit enhancements to the multi-seller conduits. Revenue for all such services amounted to $387 million during the year (October 31, 2022 – $296 million).
Our total commitment to the conduits in the form of backstop liquidity and credit enhancement facilities is shown below. The total committed amount of these facilities exceeds the total amount of the maximum assets that may have to be purchased by the conduits under the purchase agreements. As a result, the maximum exposure to loss attributable to our backstop liquidity and credit enhancement facilities is less than the total committed amounts of these facilities.
 
Liquidity and credit enhancement facilities
 
Table 40  
   
 
2023
    2022
As at October 31 (Millions of Canadian dollars)  
Notional of
committed
amounts 
(1)
    
Allocable
notional
amounts
    
Maximum
exposure
to loss 
(2)
    Notional of
committed
amounts (1)
     Allocable
notional
amounts
     Maximum
exposure
to loss (2)
Backstop liquidity facilities
 
$
  54,713
 
  
$
  51,469
 
  
$
  51,469
 
  $   48,235      $   45,261      $  45,261
Credit enhancement facilities
(3)
 
 
3,244
 
  
 
3,244
 
  
 
3,244
 
    2,974        2,974      2,974
Total
 
$
57,957
 
  
$
54,713
 
  
$
54,713
 
  $ 51,209      $ 48,235      $  48,235
(1)   Based on total committed financing limit.
(2)   Not presented in the table above are derivative assets with a fair value of $2 million (October 31, 2022 – $25 million) which are a component of our total maximum exposure to loss from our interests in the multi-seller conduits. Refer to Note 8 of our 2023 Annual Consolidated Financial Statements for more details.
(3)   Includes $18 million (October 31, 2022 – $14 million) of Financial standby letters of credit.
As at October 31, 2023, the notional amount of backstop liquidity facilities we provide increased $6 billion or 13% from last year, primarily due to an increase in outstanding securitized assets of the multi-seller conduits. The notional amount of partial credit enhancement facilities we provide increased $270 million or 9% from last year, primarily due to higher client usage of the
multi-seller
conduits.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            61

Maximum exposure to loss by client type
 
Table 41  
   
 
2023
    2022  
As at October 31 (Millions of dollars)  
US$
    
C$
    
Total C$
    US$      C$      Total C$  
Outstanding securitized assets
 
 
                
 
  
 
                
 
  
 
                
 
                                                                      
Auto and truck loans and leases
 
$
11,197
 
  
$
3,874
 
  
$
19,402
 
  $ 10,553      $ 3,967      $ 18,351  
Consumer loans
 
 
4,170
 
  
 
 
  
 
5,783
 
    3,198               4,359  
Credit cards
 
 
4,226
 
  
 
510
 
  
 
6,371
 
    4,932        719        7,441  
Dealer floor plan receivables
 
 
1,075
 
  
 
592
 
  
 
2,083
 
    1,012        580        1,960  
Equipment receivables
 
 
2,086
 
  
 
965
 
  
 
3,858
 
    2,291        243        3,365  
Fleet finance receivables
 
 
1,835
 
  
 
190
 
  
 
2,735
 
    785        213        1,283  
Commercial loans
(1)
 
 
542
 
  
 
530
 
  
 
1,282
 
    143        428        624  
Residential mortgages
 
 
 
  
 
1,785
 
  
 
1,785
 
           1,785        1,785  
Student loans
 
 
2,312
 
  
 
141
 
  
 
3,348
 
    2,013        139        2,882  
Trade receivables
 
 
2,954
 
  
 
 
  
 
4,097
 
    2,306               3,144  
Transportation finance
 
 
2,752
 
  
 
153
 
  
 
3,969
 
    2,119        153        3,041  
Total
 
$
33,149
 
  
$
8,740
 
  
$
54,713
 
  $ 29,352      $ 8,227      $ 48,235  
Canadian equivalent
 
$
45,973
 
  
$
8,740
 
  
$
54,713
 
  $ 40,007      $ 8,227      $ 48,235  
 
(1)   Exposures previously classified as Insurance premiums are now classified as Commercial loans, reflecting an alignment with rating agency classification and reporting.
Our overall exposure increased $6 billion or 13% compared to last year, primarily due to an increase in the outstanding securitized assets of the multi-seller conduits. All of the multi-seller conduits transactions were internally rated A or above. All transactions funded by the unconsolidated multi-seller conduits are internally rated using a rating system as outlined in the internal ratings map in the credit risk section.
Multiple independent debt rating agencies review all of the transactions in the multi-seller conduits. Transactions financed in the U.S. multi-seller conduits are reviewed by Moody’s Investors Service (Moody’s‡), Standard & Poor’s (S&P‡) and Fitch Ratings (Fitch‡). Transactions in two of the Canadian multi-seller conduits are reviewed by DBRS Morningstar (DBRS‡) and Moody’s while one of the Canadian multi-seller conduits is also reviewed by S&P. Each applicable rating agency also reviews ongoing transaction performance on a monthly basis and may publish reports detailing portfolio and program information related to the conduits.
As at October 31, 2023, the total asset-backed commercial paper (ABCP) issued by the conduits amounted to $37 billion, an increase of $4 billion or 12% from last year, primarily due to higher client usage. The rating agencies that rate the ABCP rated 100% (October 31, 2022 – 100%) of the total amount issued within the top ratings category.
Structured finance
We provide liquidity facilities to certain municipal bond tender option bond trusts in which we have an interest but do not consolidate because the residual certificates issued by the tender option bond trusts are held by third parties. As at October 31, 2023, our maximum exposure to loss from these unconsolidated municipal bond tender option bond trusts was $3 billion (October 31, 2022 – $3 billion).
We provide senior warehouse financing to unaffiliated structured entities that are established by third parties to acquire loans and issue term collateralized loan obligations (CLO). Subordinated financing is provided during the warehouse phase by either the collateral manager or third-party investors. Subordinated financing serves as the first loss tranche which absorbs losses prior to ourselves as the senior lender. A portion of the proceeds from the sale of the term CLO is used to fully repay the senior warehouse financing that we provide. As at October 31, 2023, our maximum exposure to loss associated with the outstanding senior warehouse financing facilities was $796 million (October 31, 2022 – $640 million). The increase in our maximum exposure to loss from last year was driven by the addition of new financing facilities partially offset by the repayment of existing financing facilities.
We provide senior financing to unaffiliated structured entities that are established by third parties to acquire loans. Subordinated financing is provided by either the collateral manager or third-party investors. Subordinated financing serves as the first loss tranche which absorb losses prior to ourselves as the senior lender. These facilities tend to be longer in term than the CLO warehouse facilities and benefit from credit enhancement designed to cover a multiple of historical losses. As at October 31, 2023, our maximum exposure to loss associated with the outstanding senior financing facilities was $6 billion (October 31, 2022 – $5 billion). The increase in our maximum exposure to loss from last year was driven by the addition of new financing facilities partially offset by the repayment of existing financing facilities.
Non-RBC managed investment funds
We invest in hedge funds primarily to provide clients with desired exposures to reference funds. As we make investments in the reference funds, exposures to the funds are simultaneously transferred to clients through derivative transactions. Our maximum exposure to loss in the reference funds is limited to our investments in the funds. As at October 31, 2023, our maximum exposure to loss was $2 billion (October 31, 2022 – $3 billion). The decrease in our maximum exposure to loss from last year was driven by redemptions in third-party investment funds.
We also provide liquidity facilities to certain third-party investment funds. The funds issue unsecured variable-rate preferred shares and invest in portfolios of tax-exempt bonds. As at October 31, 2023, our maximum exposure to loss on these funds was $632 million (October 31, 2022 – $667 million). The decrease in our maximum exposure to loss from last year was driven by redemption of capital by third-party investors of the funds.
Third-party securitization vehicles
We hold interests in certain unconsolidated third-party securitization vehicles, which are structured entities. We, as well as other financial institutions, are obligated to provide funding to these entities up to our maximum commitment level and are exposed to credit losses on the underlying assets after various credit enhancements. As at October 31, 2023, our maximum exposure to loss
 
62            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

in these entities was $15 billion (October 31, 2022 – $14 billion). The increase in our maximum exposure to loss compared to last year reflects an increase in client activity with third-party securitization vehicles. Interest and
non-interest
income earned in respect of these investments was $528 million (October 31, 2022 – $186 million).
Other
Other unconsolidated structured entities include managed investment funds, arrangements to pass credit risk to third parties, credit investment products and tax credit funds. Refer to Note 8 of our 2023 Annual Consolidated Financial Statements for more details regarding our other unconsolidated structured entities.
Guarantees, retail and commercial commitments
We provide our clients with guarantees and commitments that expose us to liquidity and funding risks. Our maximum potential amount of future payments in relation to our commitments and guarantee products as at October 31, 2023 amounted to $496 billion compared to $453 billion last year. The increase compared to last year was primarily driven by growth in other commitments to extend credit, sponsored member guarantees, backstop liquidity facilities and financial standby letters of credit. Refer to Liquidity and funding risk and Note 24 of our 2023 Annual Consolidated Financial Statements for details regarding our guarantees and commitments.
 
Risk management
We are in the business of managing the risks inherent to the financial services industry as we aim to create maximum value for our shareholders, clients, employees and communities. The ability to manage risk is a core competency of the bank, and is supported by our risk-aware culture and risk management approach. Our view of risks is dynamic, and reflects the pace of change in the financial services industry.
 
Top and emerging risks
An important component of our risk management approach is to ensure that top and emerging risks, as they evolve, are identified, managed and incorporated into our existing risk management assessment, measurement, monitoring and escalation processes and addressed in our risk frameworks and policies. These practices are intended to ensure a forward-looking risk assessment is maintained by management in the course of business development and as part of the execution of ongoing risk oversight responsibilities. Top and emerging risks are discussed by senior management and the Board on a regular basis.
We have developed supplementary internal guidance to support enterprise-wide identification and assessment of all material risks, including those that are not readily apparent. Top and emerging risks encompass those that could materially impact our financial results, financial and operational resilience, reputation, business model or strategy, as well as those that may materially impact us as the risks evolve. The following represents our top and emerging risks:
 
    Top & emerging risks
 
 
 
Description
 
 
Business and economic
conditions
 

 
 
Our financial results are affected to varying degrees by the general business and economic conditions in the geographic regions in which we operate. These conditions may include factors such as: economic growth or contraction trends, consumer saving and spending habits; consumer and corporate borrowing and repayment patterns; unemployment rates; the differing economic trajectories among nations across the globe; global tensions and geopolitical uncertainty; the level of business investment and overall business sentiment; trade; the emergence of a new outbreak of a pandemic or other health crisis; the level of government spending, as well as fiscal and monetary policy; the level of activity and volatility of the financial markets; disruptions to energy and other commodity markets; competitiveness; supply chain challenges and labour shortages; the evolution of elevated inflationary pressures; and possible stagflation or deflation. Moreover, interest rate changes and actions taken by central banks to manage inflation or the broader economy have implications for us. Our financial results are sensitive to changes in interest rates, as described in the Systemic risk section.
 
For example, a slowdown in economic growth or an economic downturn could adversely impact employment rates and household incomes, consumer spending, housing prices, corporate earnings and business investment, and could adversely affect our business, including, but not limited to, the demand for our loan and other products, and result in lower earnings, and higher credit losses. In addition to risks arising from monetary policy tightening, risks are also emerging around how governments may continue to seek to recoup pandemic-related support, or any new support provided to deal with emerging economic challenges. This may include, for example, changes to tax policy to address fiscal capacity concerns and to balance budgets in the future.
 
There are also emerging risks related to wealth and income inequality, as well as changing demographics and immigration, which could impact the labour market, the housing market, inflation, demand and consumer trends, and potentially have broader societal and government policy implications.
 
 
Canadian housing and
household indebtedness
 

 
 
Canadian housing and household indebtedness risks remain heightened in the current interest rate environment. Concerns around elevated levels of Canadian household debt, which accelerated during the
COVID-19
pandemic, could escalate if interest rates remain higher for longer, if the cost of living increases further, or if job losses increase significantly, potentially resulting in, among other things, higher credit losses. Moreover, continued interest rate increases or slowing economic growth could adversely impact housing market activity and housing prices, which could push
loan-to-value
(LTV) ratios higher and further increase credit losses.
 
While real estate rental activity has rebounded in certain markets, challenging affordability conditions, supply constraints, elevated borrowing and construction costs may have an adverse impact on future real estate investment and demand.
 
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            63

    Top & emerging risks
 
 
Description
 
 
Information technology,
cyber and third-party risks
 
 
 
Information technology (IT) risk, cyber risks and third-party risk remain top risks, not only for the financial services sector, but for other industries worldwide. Geopolitical tensions have increased the risk of nation state actors attacking critical infrastructure, including banks and critical third parties (e.g., utilities, telecom providers, etc.). We continue to be subject to the heightened inherent risk of cyberattacks, data breaches, cyber extortion and similar compromises, due to: (i) the size, scale and global nature of our operations; (ii) our heavy reliance on the internet to conduct
day-to-day
business activities; (iii) our intricate technological infrastructure; and (iv) our reliance on third-party service providers. Our potential exposure to these risks increases as we continue to partner with third-party service providers and adopt new business models and technologies (e.g., cloud computing, Artificial Intelligence (AI) and machine learning). Threat actors gravitate towards vulnerabilities in an ecosystem, and the weakest link in the supply chain can be a supplier or third-party service provider that may not have sufficiently robust controls. Other key drivers of third-party risk include global economic pressures related to inflation, and concentration of suppliers and fourth parties (i.e. vendors of our third party providers) within the broader supply chain. Third-party providers critical to our operations are actively monitored for impacts on their ability to deliver services to us, including impacts resulting from fourth parties.
 
Ransomware threats are growing in sophistication and being used to launch major supply chain attacks. Additionally, clients’ use of personal devices can create further avenues for potential cyber-related incidents, as the bank has little or no control over the safety of these devices. Resulting implications could include business interruptions, client service disruptions, financial loss, theft of intellectual property and confidential information, litigation, enhanced regulatory attention and penalties, as well as reputational damage. Furthermore, the adoption of emerging technologies, such as cloud computing, AI, including generative AI, and robotics, call for continued focus and investment to manage risks effectively. For more details on how we are managing these risks, refer to the Operational risk section.
 
 
Geopolitical uncertainty
 
 
 
In 2023, the Russia-Ukraine conflict continued to produce turmoil in the geopolitical landscape, with ongoing impacts to the global economy and markets. Domestic disturbances in Russia may also signal weakening internal stability and growing tail risks associated with Russia-West tensions. The duration and path of the conflict remains uncertain and could continue to exacerbate global tensions, energy and other commodity shortages, supply chain disruptions, inflationary pressures, weakening sentiment and growth prospects, market volatility, cyberattacks, and the proliferation of sanctions and trade measures. In particular, Europe continues to face uncertainty given its trade relationships with impacted regions and its weakening economic prospects.
 
Tensions remain elevated between China and the U.S. and its allies over a number of issues, including trade, technology, human rights, Taiwan, Hong Kong and Macau. Moreover, these trade tensions produce additional vulnerabilities to the Canadian economy given the country’s trading relationship with the U.S. and China, Canada’s two largest trading partners. Tensions between China and its neighbours over territorial claims, and the prospect of even closer relations between China and Russia, as well as closer relations between these two countries and Iran and North Korea, add further global and economic uncertainty.
 
Geopolitical tensions in the Middle East and other regions could also add to economic and market uncertainties. Should the war between Israel and Hamas broaden or escalate regionally, this may destabilize global security, markets, and economic growth, along with key commodity markets. In addition, an uncertain geopolitical or economic environment could lead to increases in polarization, social unrest or terrorism, each of which could have direct or indirect impacts to the bank.
 
More broadly, the future of global trade remains uncertain, as countries look to decrease reliance on the global supply chain and nations with differing values. Increased protectionism and economic nationalism could reshape global alliances and financial systems as the supply of critical goods of economic and national importance (e.g., energy, critical minerals, semiconductors) remains one of the top priorities of governments. We will continue to monitor these developments and others, and will assess the implications they have on us.
 
 
Environmental and
social risk
(including climate change)
 
 
 
 
We, like other organizations, are subject to increased regulatory requirements and stakeholder expectations to address social and racial inequality and other human rights issues.
 
Risks associated with climate change are evolving as it relates to the global transition to a
net-zero
economy and physical climate risks (e.g., extreme weather events and chronic shifts in climate).
 
Environmental and social risks, including climate change, are each unique and transverse risks, and impact all of our principal risk types in different ways and to varying degrees, including but not limited to strategic, operational, credit, reputation, legal and regulatory environment, and regulatory compliance risks.
 
For details on these risks and how we are managing them, refer to the Overview of other risks – Environmental and Social risk section.
 
 
64            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

    Top & emerging risks
 
 
Description
 
 
Digital disruption
and innovation
 
 
 
As the demand for digital banking services grow, the need to meet the rapidly evolving needs of clients and compete with traditional and
non-traditional
competitors has increased our strategic and reputation risks. Additional risks continue to emerge as demographic trends, evolving client expectations, the increased power to analyze data and the emergence of disruptors are creating competitive pressures across a number of sectors. Moreover, established technology companies, new competitors, and regulatory changes continue to foster new business models that could challenge traditional banks and financial products. Finally, while the adoption of new technologies, such as AI (including generative AI) and machine learning, presents opportunities for us, it is resulting or could result in new and complex strategic, operational, regulatory, compliance and reputation risks that would need to be managed effectively.
 
 
Privacy and data
related risks
 
 
 
The protection and responsible use of personal information are critical to maintaining our clients’ trust. In addition, the management and governance of our data also remains a top risk given the high value attributed to our data for the insights it can generate for clients and communities. Resulting implications from failing to manage data and privacy risks could include financial loss, theft of intellectual property and/or confidential information, litigation, enhanced regulatory attention and penalties, as well as reputational damage. Effective privacy and information management practices continue to grow in importance, as demonstrated by the continued development of complex regulations in the jurisdictions in which we operate. Privacy and data related risks have also heightened as a result of the evolving threat landscape, and associated data breach risks. For details on how we are managing these risks, refer to the Operational risk section.
 
 
Regulatory changes
 
 
 
 
The ongoing introduction of new or revised regulations requires enhanced focus across the organization on meeting additional regulatory requirements across the multiple jurisdictions in which we operate. Financial and other reforms that have been implemented or are being implemented across multiple jurisdictions, such as digital, data and technology reforms, cyber security and anti-money laundering regulations, interest rate benchmark and payments reform, as well as privacy, climate, sustainability and consumer protection regulatory initiatives, continue to impact our operations and strategies. For more details, refer to the Legal and regulatory environment risk section.
 
 
Culture and conduct risks
 
 
 
Our Purpose, values and risk principles are key dimensions of our culture. We demonstrate our culture through our conduct – the behaviours, decisions and actions of the organization and our employees. Culture and conduct risks are considered top risks for the financial services industry due to the impact that our choices, behaviours, and overall risk governance can have on outcomes for our clients and other stakeholders. We embed client considerations into our decision-making processes and continue to focus on the fair treatment of clients which also aligns with regulatory direction. We seek to be responsive to evolving employee needs while expecting employees to always act with integrity.
 
Regulators continue to focus on conduct risks, and heightened expectations generally from regulators could lead to investigations, remediation requirements, higher compliance costs and enforcement actions and fines, and potential criminal prosecutions or imposition of sanctions, which may involve prohibitions or restrictions on some of our activities. While we take steps to continue to strengthen our conduct practices, and prevent and detect risk outcomes which could potentially harm clients, employees or the integrity of the markets, such outcomes may not always be prevented or detected. For more details, refer to the Culture and conduct risks section.
 
 
Overview
As a global financial institution with a diversified business model, we actively manage a variety of risks to help protect and enable our businesses by following these risk management principles:
 
Risk management principles
 
   
Effectively balance risk and reward to enable sustainable growth.
   
Collectively share the responsibility for risk management.
   
Undertake only risks we understand and make thoughtful and future-focused risk decisions.
   
Always uphold our Purpose and vision, and consistently abide by our values and Code of Conduct to maintain our reputation and the trust of our clients, colleagues and communities.
   
Maintain a healthy and robust control environment to protect our stakeholders.
   
Use judgment and common sense.
   
Always be operationally prepared and financially resilient for a potential crisis.
The dynamic nature of the financial services industry, and technological innovation, necessitate that our processes, tools, and practices are continuously improving and responding to the changing landscape and emerging risks. We seek to accomplish this through an effective and evolving risk management approach. All risk-taking activities and exposures are within the Board-approved risk appetite, corresponding constraints and risk limits. We seek to ensure that our business activities and transactions provide an appropriate balance of return for the risks assumed and the costs incurred. Our organizational design and governance processes are structured with the intent of maintaining independence of the Group Risk Management (GRM) function from the businesses it supports.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            65

Risk drivers
We define risk as the potential vulnerabilities in the short-, medium- or long-term that may impact our financial results, financial and operational resilience, reputation, business model or strategy. Risk can be realized through losses or an undesirable outcome with respect to volatility of earnings in relation to expected earnings, capital adequacy or liquidity. Our principal risks include credit, market, liquidity, insurance, operational, regulatory compliance, strategic, reputation, legal and regulatory environment, competitive, and systemic risks, that have been classified into four categories (risk drivers) based on the level of control and influence that we can exert against these risks. There are certain activities that we undertake that will give rise to several risks. There are also certain risks that are transverse (e.g., climate and conduct risks) that can impact other risk types. Top and emerging risk categories are maintained by GRM and reviewed regularly to ensure all principal risks are reflected. This classification methodology provides a common language and discipline for the identification and assessment of risk in existing businesses, new businesses, products or initiatives, as well as acquisitions and alliances.
 
 
 
Enterprise risk management
Under the oversight of the Board and senior management, the Enterprise Risk Management Framework (ERMF) provides an overview of our enterprise-wide programs for managing risk, including identifying, assessing, measuring, controlling, monitoring and reporting on the significant risks that face the organization.
Risk governance
We have an effective and well-established risk governance framework in place that seeks to ensure risks impacting our businesses are identified, appropriately categorized, assessed, managed and communicated to the Board in a timely manner. This framework has been established, and is maintained in alignment with, the expectations of OSFI, the Basel Committee on Banking Supervision’s (BCBS) corporate governance principles and the requirements and expectations of other regulators in the jurisdictions in which we conduct business, and in accordance with industry best practices. The Board oversees the implementation of our risk management framework, while employees at all levels of the organization are responsible for managing the
day-to-day
risks that arise in the context of their mandates. As illustrated below, we use the three lines of defence governance model so that risks are appropriately and adequately managed throughout the enterprise to achieve our strategic objectives.
 
66            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

 
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            67

Risk appetite
Effective risk management protects us from unacceptable losses or undesirable outcomes with respect to earnings volatility, capital adequacy or liquidity, reputation risk or other risks while supporting and enabling our overall business strategy. It requires the clear articulation of our risk appetite, which is the amount and type of risk that we are able and willing to accept in the pursuit of our business objectives. It reflects our self-imposed upper bound to risk-taking, set at levels inside of regulatory limits and constraints, and influences our risk management philosophy, Code of Conduct, business practices and resource allocation. It provides clear boundaries and sets an overall tone for balancing risk-reward trade-offs to ensure the long-term viability of the organization.
Our risk appetite is integrated into our strategic, financial, and capital planning processes, as well as ongoing business decision-making processes and is reviewed and approved annually by the Board.
Our Enterprise Risk Appetite Framework (ERAF) outlines the foundational aspects of our approach to risk appetite, articulates our quantitative and qualitative risk appetite statements and their supporting measures and associated constraints, which can be applied at the enterprise, business segment, business unit and legal entity level, and describes our requirements and expectations to embed effective risk appetite practices throughout the organization.
  
 

 
   
 
Risk appetite statements
       
   
Quantitative statements
 
             
Qualitative statements
 
       
     
•    Manage earnings volatility and exposure to future losses under normal and stressed conditions.
 
•    Avoid excessive concentrations of risk.
 
•    Ensure capital adequacy and sound management of liquidity and funding risk.
 
•    Ensure sound management of operational and regulatory compliance risk.
 
•    Maintain strong credit ratings and a risk profile in the top half of our peer group.
         
•   Always uphold our Purpose and vision and consistently abide by our values and Code of Conduct to maintain our reputation and the trust of our clients, colleagues and communities.
 
•   Undertake only risks we understand. Make thoughtful and future-focused risk decisions, taking environmental and social considerations into account.
 
•   Effectively balance risk and reward to enable sustainable growth.
 
•   Maintain a healthy and robust control environment to protect our stakeholders.
 
•   Always be operationally prepared and financially resilient for a potential crisis.
 
       
                         
The allocation of our risk appetite across the bank is supported by the establishment of delegated authorities or risk limits. These delegated authorities or risk limits represent the maximum level of risk permitted for a line of business, portfolio, individual or group and are used to govern ongoing operations. Risk posture, the anticipated shift in risk profile as a result of changes in objectives, strategies and external factors, is used to provide insights on key areas that may require management attention to ensure strategies are able to be executed successfully within our risk appetite.
Risk measurement
Quantifying risk is a key component of our enterprise-wide risk and capital management processes. Risk measurement and planning processes are integrated across the enterprise, especially in regards to forward-looking projections and analyses, including but not limited to, stress testing, recovery and resolution planning, and credit provisioning.
Certain risks, such as credit, market, liquidity and insurance risks, can be more easily quantified than others, such as operational, reputation, strategic, legal, and regulatory compliance risks. For the risks that are more difficult to quantify, greater emphasis is placed on qualitative risk factors and assessment of activities to gauge the overall level of risk. In addition, judgmental risk measures and techniques such as stress testing, and scenario and sensitivity analyses can be used to assess and measure risks, and we are continuously evolving our risk measures and techniques to manage our risks. Our primary methods for measuring risk include:
 
Quantifying expected loss: losses that are statistically expected to occur as a result of conducting business in a given time period;
 
Quantifying unexpected loss: an estimate of the deviation of actual earnings from expected earnings, over a specified time horizon;
 
Stress testing: evaluates, from a forward-looking perspective, the potential effects of a set of specified changes in risk factors, corresponding to exceptional but plausible adverse economic and financial market events; and
 
Back-testing: the realized values are compared to the parameter estimates that are currently used in an effort to ensure the parameters remain appropriate for regulatory and economic capital calculations.
 
68            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Stress testing
Stress testing is an important component of our risk management framework. Stress testing results are used for:
 
Assessing the viability of long-term business plans and strategies;
 
Monitoring our risk profile relative to our risk appetite in terms of earnings and capital at risk;
 
Setting limits;
 
Identifying key risks to, and potential shifts in, our capital and liquidity levels, as well as our financial position;
 
Enhancing our understanding of available mitigating actions in response to potential adverse events; and
 
Assessing the adequacy of our capital and liquidity levels.
Our enterprise-wide stress tests evaluate key balance sheet, income statement, leverage, capital and liquidity impacts arising from risk exposures and changes in earnings. The results are used by the Board, Group Risk Committee (GRC) and senior management risk committees to understand our performance drivers under stress, and review stressed capital, leverage and liquidity ratios against regulatory thresholds and internal limits. The results are also incorporated into our Internal Capital Adequacy Assessment Process (ICAAP) and capital plan analyses.
We evaluate a number of enterprise-wide stress scenarios over a multi-year horizon, featuring a range of severities. Our Board reviews the recommended scenarios, and GRM leads the scenario assessment process. Results from across the organization are integrated to develop an enterprise-wide view of the impacts, with input from subject matter experts in GRM, Corporate Treasury, Finance, Economics and the various business segments. Generally, our stress testing scenarios evaluate global recessions, equity market corrections, elevated debt levels, changes in interest rates, real estate price corrections, and shocks to credit spreads and commodity markets, among other factors. During our fiscal 2023 stress testing exercises, we addressed several top and emerging risks including geopolitical tensions, rising interest rates, cyber threats and climate risks, with a focus on the impacts of these risks on revenue, losses, net income and capital projections.
Ongoing stress testing and scenario analyses within specific risk types, such as market risk (including Interest Rate Risk in the Banking Book [IRRBB]), liquidity risk, retail and wholesale credit risk, operational risk and insurance risk, supplement and support our enterprise-wide analyses. Results from these risk-specific programs are used in a variety of decision-making processes including risk limit setting, portfolio composition evaluation, risk appetite articulation and business strategy implementation.
In addition to ongoing enterprise-wide and risk-specific stress testing, we use ad hoc and reverse stress testing to deepen our knowledge of the risks we face. Ad hoc stress tests are
one-off
analyses used to investigate developing conditions or to stress a particular portfolio in more depth. Reverse stress tests aim to reverse-engineer scenarios that might lead to a particular severe outcome, such as bank
non-viability,
and are used in resolution & recovery planning and to improve our understanding of risk/return boundaries.
In addition to internal stress tests, we participate in a number of regulatory stress testing exercises, on a periodic basis, across several jurisdictions.
Model governance and validation
Quantitative models are used for many purposes including, but not limited to, the valuation of financial products, the identification, measurement and management of different types of risk, stress testing, assessing capital adequacy, informing business and risk decisions, measuring compliance with internal limits, meeting financial reporting and regulatory requirements, and issuing public disclosures.
Model risk is the risk of adverse financial and/or reputational consequences to the enterprise arising from the use or misuse of a model at any stage throughout its life cycle and is managed through our model risk governance and oversight structure. The governance and oversight structure, which is implemented through our three lines of defence governance model, is founded on the basis that model risk management is a shared responsibility across the three lines spanning all stages of the model’s life cycle.
Prior to being used, models are subject to independent validation and approval by our enterprise model risk management function, a team of modelling professionals with reporting lines independent of those of the model owners, developers and users. The validation seeks to ensure that models are sound and capable of fulfilling their intended use. In addition to independently validating models prior to use, our enterprise model risk management function provides controls that span the life-cycle of a model, including model change management procedures, requirements for ongoing monitoring, and annual assessments to ensure each model continues to serve its intended purpose.
AI based applications are subject to the same model governance and validation requirements as other models and are assessed in conjunction with other relevant risk functions. Controls for predominant AI risks, including fairness and explainability, are subject to Risk Committee oversight and approval. Model risk reports including AI matters are reviewed periodically by the Board.
Risk control
Our enterprise-wide risk management approach is supported by a comprehensive set of risk controls that are defined in our ERMF. The ERMF serves as the foundation for our approach to risk management and promotes RBC’s risk management principles, approach and governance. It further sets the expectations for the development and communication of policies, the establishment of formal independent risk review and approval processes, and the establishment of delegated risk approval authorities and risk limits. The ERMF is further reinforced and supported by a number of additional Board-approved risk frameworks, various policies thereunder and a comprehensive set of risk controls. Together, our risk frameworks and supporting policies provide direction and insight on how respective risks are identified, assessed, measured, managed, mitigated, monitored and reported. The enterprise-wide policies are considered our minimum requirements, articulating the parameters within which business groups and employees must operate.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            69

 
LOGO
Risk appetite, risk approval authorities and risk limits
Risk Appetite is the amount and type of risk that we are able and willing to accept in the pursuit of our business objectives. It reflects our self-imposed upper bound to risk taking and influences our risk management philosophy, conduct, operating style and resource allocation. Risk Appetite is supported by Risk Approval Authorities delegated by the Board to senior management which provide thresholds for escalation of exposures and transactions to the Risk Committee of the Board for review and approval. The allocation of Risk Appetite and Board Delegated Authorities may be supported by the establishment of management delegated authorities and/or risk limits. These represent the maximum level of risk permitted for a line of business, portfolio, individual or other groups. These authorities and limits are used to implement risk management strategies and govern ongoing operations. Excesses to risk approval authorities and risk limits can act as early warning indicators for risk appetite constraints allowing for timely management attention. Senior management can delegate some or all of their authorities onwards to others in the organization. The delegated authorities enable the approval of single name, geographic and industry sectors, and product and portfolio exposures within defined parameters and limits. They are also used to manage concentration risk, establish underwriting and inventory limits for trading and investment banking activities and set market risk tolerances.
Risk review and approval processes
Risk review and approval processes provide an important control mechanism and are established by GRM based on the nature, size and complexity of the risk involved. In general, the risk review and approval process involves a formal review and approval by an individual, group or committee that is independent from the originator. The approval responsibilities are governed by the Enterprise Risk Appetite Framework and the delegated risk authorities and risk limits are based on the following categories: transactions, projects and initiatives, and new products and services.
Risk monitoring and reporting
Enterprise and business segment level risk monitoring and internal reporting are critical components of our enterprise risk management program and support the ability of senior management and the Board to effectively perform their risk management and oversight responsibilities. The ongoing monitoring of our risk profile, and the organization’s risk exposure against our risk appetite, enables proactive risk management and oversight. It seeks to ensure that our businesses operate within established and approved risk appetite; detect areas where business activity or growth may be constrained in the future; identify situations where risk taking may be overly conservative or aggressive; enable senior management to assess the impact of stress and unanticipated events; and inform the development and implementation of risk mitigation strategies in order to operate within risk appetite. The Risk Committee of the Board receives a CRO report at each meeting that has been reviewed by senior management, and which includes, among others, top and emerging risks, industry trends or other notable items. On a quarterly basis, we provide our Enterprise Risk Report to senior management and the Risk Committee of the Board which includes, among others, top and emerging risks, risk profile relative to our risk appetite, portfolio quality metrics and a range of risks we face along with an analysis of the related issues, key trends and, when required, management actions. On an annual basis, we provide a benchmarking review to the Board which compares our performance to peers across a variety of risk metrics and includes a composite risk scorecard which provides an objective measure of our ranking relative to the peer group. In addition to our regular risk monitoring, other risk-specific presentations are provided to, and discussed with, senior management and the Board on top and emerging risks or changes in our risk profile. In addition, we publish external reports on risk matters to comply with regulatory requirements.
 
70            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

The shaded text along with the tables specifically marked with an asterisk (*) in the following sections of the MD&A represent our disclosures on credit, market and liquidity and funding risks in accordance with IFRS 7
, Financial Instruments: Disclosures
, and include discussion on how we measure our risks and the objectives, policies and methodologies for managing these risks. Therefore, these shaded text and marked tables represent an integral part of our 2023 Annual Consolidated Financial Statements.
 
Transactional/positional risk drivers
 
Credit risk
 
Credit risk is the risk of loss associated with an obligor’s potential inability or unwillingness to fulfill its contractual obligations on a timely basis and may arise directly from the risk of default of a primary obligor (e.g., issuer, debtor, counterparty, borrower or policyholder), indirectly from a secondary obligor (e.g., guarantor or reinsurer), and/or through
off-balance
sheet exposures, contingent credit risk, associated credit risk and/or transactional risk. Credit risk includes counterparty credit risk arising from both trading and
non-trading
activities. Exposure to credit risk may occur any time funds are extended, committed or invested through an actual or implied contractual agreement.
The responsibility for managing credit risk is shared broadly following the three lines of defence governance model. The allocation of the Board approved credit risk appetite is supported by the establishment of risk approval authorities and risk limits, delegated by the Board to the President & CEO and CRO. Credit transactions in excess of these authorities must be approved by the Risk Committee of the Board. To facilitate
day-to-day
business activities, the CRO has been empowered to further delegate credit risk approval authorities to individuals within GRM, the business segments, and functional units as deemed necessary.
 
We balance our risk and return by setting the following objectives for the management of credit risk:
   
Ensuring credit quality is not compromised for growth;
 
   
Managing credit risks in transactions, relationships and portfolios;
 
   
Avoiding excessive concentrations in correlated credit risks;
 
   
Using our credit risk rating and scoring systems or other approved credit risk assessment or rating methodologies, policies and tools;
 
   
Pricing appropriately for the credit risk taken;
 
   
Detecting and preventing inappropriate credit risk through effective systems and controls;
 
   
Applying consistent credit risk exposure measurements;
 
   
Ongoing credit risk monitoring and administration;
 
   
Transferring credit risk to third parties where appropriate through approved credit risk mitigation techniques (e.g., sale, hedging, insurance, securitization); and
 
   
Avoiding activities that are inconsistent with our values, Code of Conduct or policies.
 
The Enterprise Credit Risk Management Framework (ECRMF) provides an overview of our approach to the management of Credit Risk including principles, methodologies, systems, roles and responsibilities, reports and controls. Additional supporting policies exist that are designed to provide further clarification of roles and responsibilities, acceptable practices, limits and key controls within the enterprise.
Credit risk measurement
We quantify credit risk at both the individual obligor and portfolio levels to manage expected credit losses and minimize unexpected losses to limit earnings volatility and ensure we are adequately capitalized.
We employ a variety of risk measurement methodologies to measure and quantify credit risk for our wholesale and retail credit portfolios. The wholesale portfolio is comprised of businesses, sovereigns, public sector entities, banks and other financial institutions, as well as certain HNW individuals. The retail portfolio is comprised of residential mortgages, personal loans, credit cards and small business loans. Our credit risk rating systems are designed to assess and quantify the risk inherent in credit activities in an accurate and consistent manner. The resulting ratings and scores are then used for both client- and transaction-level risk decision-making and as key inputs for our risk measurement and capital calculations.
Measurement of economic and regulatory capital
Economic capital, which is our internal quantification of risks, is used for limit setting. It is also used for internal capital adequacy and allocation of capital to the Insurance segment. Our methodology for allocating capital to our business segments, other than Insurance, is based on regulatory requirements. For further details, refer to the Capital management section.
In measuring credit risk to determine regulatory capital, two principal approaches are available: the Internal Ratings Based (IRB) Approach and the Standardized Approach as per OSFI’s CAR guideline. The IRB Approach allows both a full modelled based approach referred to as the Advanced Internal Ratings Based
(A-IRB)
Approach and a more supervisory-based approach know as the Foundation Internal Ratings Based Approach
(F-IRB).
The Standardized Approach applies primarily to
Wealth Management, including
our City National wholesale portfolio
,
as well as our Caribbean banking operations,
 
and is based on risk weights prescribed by OSFI that are used to calculate RWA for credit risk exposure.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            71


The A-IRB Approach, which applies to most of our retail and wholesale credit risk exposures (excluding
F-IRB
exposures discussed below), utilizes three key parameters which form the basis of our credit risk measures for both regulatory and economic capital:
   
Probability of default (PD): An estimated percentage that represents the likelihood of default within a given time period of an obligor for a specific rating grade or for a particular pool of exposure.
 
   
Exposure at default (EAD): An amount expected to be owed by an obligor at the time of default.
 
   
Loss given default (LGD): An estimated percentage of EAD that is not expected to be recovered during the collections and recovery process
 
following a default. 
 
These parameters are determined based primarily on historical experience from internal credit risk rating systems in accordance with supervisory standards.
PD is estimated based on a
long-run
average of default rates for a specific rating grade or for a particular pool of exposure. The PD assigned to a default grade(s) or pools, consistent with the definition of default, is 100%.
 
EAD is estimated based on the current exposure to the obligor and the possible future changes in that exposure driven by factors such
as
the current utilization of approved limit. As with LGD, rates are estimated to reflect an economic downturn, with added conservatism to reflect data and statistical uncertainties identified in the modelling process.
Each credit facility is assigned an LGD rate that is largely driven by factors that impact the extent of losses anticipated in the event the obligor defaults. These factors mainly include seniority of debt, collateral and the industry sector in which the obligor operates. Estimated LGD rates draw primarily on internal loss experiences. Where we have limited internal loss data, we also refer to appropriate external data to supplement the estimation process. LGD rates are estimated to reflect conditions that might be expected to prevail in a period of an economic downturn, with additional conservatism added to reflect data limitations and statistical uncertainties identified in the estimation process.
Estimates of PD, LGD and EAD are reviewed
 on an annual basis
and
updates are 
then validated by an independent validation team within the bank. In addition, quarterly monitoring and back-testing is performed by the estimation team. These ratings and risk measurements are used to determine our expected losses as well as economic and regulatory capital, setting of risk limits, portfolio management and product pricing.
The
F-IRB
Approach is a prescribed regulatory approach that must be used to determine RWA related to our exposures to all banks and large corporates defined as having total consolidated revenues in excess of $750 million annually. The
F-IRB
Approach uses the same PD parameter as the
A-IRB
Approach but requires the use of supervisory-prescribed EAD and LGD parameters.
Financial and regulatory measurement distinctions
Expected loss models are used for both regulatory capital and accounting purposes. Under both models, expected losses are calculated as the product of PD, LGD and EAD. However, there are certain key differences under current Basel and IFRS reporting frameworks which could lead to significantly different expected loss estimates, including:
   
Basel PDs are based on
long-run
averages over an entire economic cycle. IFRS PDs are based on current conditions, adjusted for estimates of future conditions that will impact PD under probability-weighted macroeconomic scenarios.
 
   
Basel PDs consider the probability of default over the next 12 months. IFRS PDs consider the probability of default over the next 12 months only for instruments in stage 1. Expected credit losses for instruments in stage 2 are calculated using lifetime PDs.
 
   
Basel LGDs are based on severe but plausible downturn economic conditions. IFRS LGDs are based on current conditions, adjusted for estimates of future conditions that will impact LGD under probability-weighted macroeconomic scenarios.
 
For further details, refer to the Critical accounting policies and estimates section.
Gross credit risk exposure
Gross credit risk is categorized as i) lending-related and other credit risk or ii) trading-related credit risk, and is calculated based on the Basel III framework. Under this method, EAD for all lending-related and other credit transactions and trading-related repo-style transactions is calculated before taking into account any collateral and is inclusive of an estimate of potential future changes to that credit exposure. EAD for derivatives is calculated inclusive of collateral in accordance with regulatory guidelines.
Lending-related and other credit risk includes:
   
Loans and acceptances outstanding, undrawn commitments, and other exposures, including contingent liabilities such as letters of credit and guarantees, debt securities carried at FVOCI or amortized cost and deposits with financial institutions. Undrawn commitments represent an estimate of the contractual amount that may be drawn upon at the time of default of an obligor.
 
Trading-related credit risk includes:
   
Repo-style transactions, which include repurchase and reverse repurchase agreements and securities lending and borrowing transactions. For repo-style transactions, gross exposure represents the amount at which securities were initially financed, before taking collateral into account.
 
   
Derivative amounts which represent the credit equivalent amount, as defined by OSFI as the replacement cost plus an
add-on
amount for potential future credit exposure, scaled by a regulatory factor. For further details on replacement cost and credit equivalent amounts, refer to Note 9 of our 2023 Annual Consolidated Financial Statements.
 
Credit risk assessment
Wholesale credit risk
The wholesale credit risk rating system is designed to measure the credit risk inherent in our wholesale credit activities.
Each obligor is assigned a borrower risk rating (BRR), reflecting an assessment of the credit quality of the obligor. Each BRR has a PD calibrated against it. The BRR differentiates the riskiness of an obligor and represents our evaluation of the obligor’s ability and willingness to meet its contractual obligations on time over a three year time horizon. The assignment of BRRs is based on the evaluation of the obligor’s business risk and financial risk through fundamental credit analysis, as well as data-driven modelling. The determination of the PD associated with each BRR relies primarily on internal default history
 
72            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

since 2006. PD estimates are designed to be a
long-run
average of our experience across the economic cycle in accordance with regulatory guidelines.
Our rating system is designed to stratify obligors into 22 grades. The following table aligns the relative rankings of our
22-grade
internal risk ratings with the external ratings used by S&P and Moody’s.
 
Internal ratings map*
 
Table 42  
           
 
 
PD Bands
 
 
     
 
    
             
Ratings
 
Business and Bank
 
Sovereign
 
BRR
 
S&P
 
Moody’s
  
Description
1   0.0000% – 0.0500%   0.0000% – 0.0150%   1+   AAA   Aaa    Investment Grade
2   0.0000% – 0.0500%   0.0151% – 0.0250%   1H   AA+   Aa1
3   0.0000% – 0.0500%   0.0251% – 0.0350%   1M   AA   Aa2
4   0.0000% – 0.0500%   0.0351% – 0.0450%   1L   AA-   Aa3
5   0.0000% – 0.0550%   0.0451% – 0.0550%   2+H   A+   A1
6   0.0551% – 0.0650%   2+M   A   A2
7   0.0651% – 0.0750%   2+L   A-   A3
8   0.0751% – 0.0850%   2H   BBB+   Baa1
9   0.0851% – 0.1030%   2M   BBB   Baa2
10   0.1031% – 0.1775%   2L   BBB-   Baa3
11   0.1776% – 0.3470%   2-H   BB+   Ba1   
Non-investment
Grade
12   0.3471% – 0.6460%   2-M   BB   Ba2
13   0.6461% – 1.0620%   2-L   BB-   Ba3
14   1.0621% – 1.5520%   3+H   B+   B1
15   1.5521% – 2.2165%   3+M   B   B2
16   2.2166% – 4.5070%   3+L   B-   B3
17   4.5071% – 7.1660%   3H   CCC+   Caa1
18   7.1661% – 13.1760%   3M   CCC   Caa2
19   13.1761% – 24.9670%   3L   CCC-   Caa3
20   24.9671% – 99.9990%   4   CC   Ca
21   100%   5   D   C    Impaired
22   100%   6   D   C
 
  *   This table represents an integral part of our 2023 Annual Consolidated Financial Statements.
Counterparty credit risk
Counterparty credit risk is the risk that a party with whom we have entered into a financial or
non-financial
contract will fail to fulfill its contractual agreement and default on its obligation. It incorporates not only the contract’s current value, but also considers how that value can move as market conditions change. Counterparty credit risk usually arises from trading-related derivative and repo-style transactions. Derivative transactions include forwards, futures, swaps and options, and can have underlying references that are either financial (e.g., interest rate, foreign exchange, credit, or equity) or
non-financial
(e.g., precious metal or other commodities). For further details on our derivative instruments and credit risk mitigation, refer to Note 9 of our 2023 Annual Consolidated Financial Statements.
Trading counterparty credit activities are undertaken in a manner consistent with the relevant requirements under enterprise Credit, Market, and Model risk management frameworks and with approval in accordance with the appropriate delegated authorities.
The primary risk mitigation techniques for trading counterparty credit risk are
close-out
netting and collateralization.
Close-out
netting considers the net value of contractual obligations between counterparties in a default situation, thereby reducing overall credit exposure. Collateralization is when a borrower pledges assets as security, which provides recourse to the lender in the event of default. The policies that we maintain in relation to the recognition of risk mitigation from these techniques incorporate such considerations as:
 
The use of standardized agreements such as the International Swaps and Derivatives Association Master Agreement and Credit Support Annex;
 
Generally restricting eligible collateral to high quality liquid assets, primarily cash and highly-rated government securities, subject to appropriate haircuts; and
 
The use of initial margin and variation margin arrangements in accordance with regulatory requirements and internal risk standards.
Similarly, for securities finance and repurchase trading activity we mitigate counterparty credit risk via the use of standardized securities finance agreements, and by taking collateral generally in the form of eligible liquid securities.
We also mitigate counterparty credit risk through the use of central counterparties (CCPs). These highly-regulated entities intermediate trades between participating bilateral counterparties and mitigate credit risk through the use of initial and variation margin and the ability to net offsetting trades amongst participants. The specific structure and capitalization, including contingent capital arrangements, of individual CCPs are analyzed as part of assigning an internal counterparty credit risk rating and determining appropriate counterparty credit risk limits.

 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            73

Wrong-way
risk
Wrong-way
risk is the risk that exposure to a counterparty is adversely correlated with the credit quality of that counterparty. There are two types of
wrong-way
risk:
 
Specific
wrong-way
risk, which exists when our exposure to a particular counterparty is positively correlated with the PD of the counterparty due to the nature of our transactions with them (e.g., loans collateralized by shares or debt issued by the counterparty or a related party). Specific
wrong-way
risk
over-the-counter
(OTC) derivative trades are done on an exception basis only, and are permitted only when explicitly
pre-approved
by GRM. Factors considered in reviewing such trades include the credit quality of the counterparty, the nature of the asset(s) underlying the derivative and the existence of credit mitigation.
 
General
wrong-way
risk, which exists when there is a positive correlation between the PD of the counterparties and general macroeconomic or market factors. General wrong way risk can arise in various circumstances, depending on the transaction, collateral type, and the nature of the counterparty. We monitor general
wrong-way
counterparty credit risk using a variety of metrics including stress scenarios, correlation analysis, and investment strategy concentration.
 
Retail credit risk
Credit scoring is the primary risk rating system for assessing obligor and transaction risk for retail exposures. Scoring models use internal and external data to assess and score borrowers, predict future performance and manage limits for existing loans and collection activities. Credit scores are one of the factors employed in the acquisition of new clients and management of existing clients. The credit score of the borrower is used to assess credit risk for each independent acquisition or account management action, leading to an automated decision or guidance for an adjudicator. Credit scoring improves credit decision quality, adjudication timeframes and consistency in the credit decision process and facilitates risk-based pricing.
We seek to continuously improve our credit scoring and analytic capabilities by exploring client behavioral data and advanced analytical techniques to make sound credit decisions.
 
To arrive at a retail risk rating, borrower scores are categorized and associated with PDs for further grouping into risk rating categories. The following table maps PD bands to various summarized risk levels for retail exposures:

 
 
Internal ratings map*
  
Table 43  
   
PD bands
  
Description
0.050% – 3.965%    Low risk
3.966% – 7.428%    Medium risk
7.429% – 99.99%    High risk
100%    Impaired/Default
 
  *   This table represents an integral part of our 2023 Annual Consolidated Financial Statements.
Credit risk mitigation
 
We seek to reduce our exposure to credit risk through a variety of means, including the structuring of transactions and the use of collateral.
 
Structuring of transactions
Specific credit policies and procedures set out the requirements for structuring transactions. Risk mitigants include the use of guarantees, collateral, seniority, LTV requirements and covenants. Product-specific guidelines set out appropriate product structuring as well as client and guarantor criteria.
 
Collateral
When we advance credit, we often require obligors to pledge collateral as security. The extent of risk mitigation provided by collateral depends on the amount, type and quality of the collateral taken. Specific requirements relating to collateral valuation and management are set out in our credit risk management policies.
The types of collateral
we use
to secure credit or trading facilities within the bank are varied. For example, our securities financing and collateralized OTC derivatives activities are primarily secured by cash and highly-rated liquid government and agency securities. Wholesale lending to business clients is often secured by pledges of the assets of the business, such as accounts receivable, inventory, operating assets and commercial real estate. In Canadian Banking and Wealth Management, collateral typically consists of a pledge over a real estate property, or a portfolio of debt securities and equities trading on a recognized exchange.
•   We employ a risk-based approach to property valuation. Property valuation methods include automated valuation models (AVM) and appraisals. An AVM is a tool that estimates the value of a property by reference to market data including sales of comparable properties and price trends specific to the Metropolitan Statistical Area in which the property being valued is located. Using a risk-based approach, we also employ appraisals which can include
drive-by
or full
on-site
appraisals.
  
 
•    We continue to actively manage our mortgage portfolio and perform stress testing, based on a combination of increasing unemployment, rising interest rates and a downturn in real estate markets.
•    We
seek to be in compliance
with regulatory requirements that govern residential mortgage underwriting practices, including LTV parameters and property valuation requirements.
  
 
There were no significant changes regarding our risk management policies on collateral or to the quality of the collateral held during the period.
 
 
74            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

 
Credit risk approval
The Board, GE, GRC and other senior management committees work together to ensure the ECRMF and supporting policies, processes and procedures exist to manage credit risk and approve related credit risk limits. Reports are provided to the Board, the GRC, and senior executives to keep them informed of our risk profile, including significant credit risk issues, shifts in exposures and trending information, to ensure appropriate and timely actions can be taken where necessary. Our enterprise-wide credit risk policies set out the minimum requirements for the management of credit risk in a variety of borrower, transactional and portfolio management contexts.
  
 
Transaction approval
Credit transactions are governed by our RBC Enterprise Policy on Risk Limits and Risk Approval Authorities that captures the authorities and risk limits delegated to management as well as the credit rules policy, which outlines the minimum standards for managing credit risk at the individual client relationship and/or transaction level. The credit rules policy is further supported by business and/or product-specific policies and guidelines as appropriate. Where a transaction will exceed senior management’s authorities, the approval of the Risk Committee of the Board is required.
  
 
 
Product approval
Proposals for credit products and services are comprehensively reviewed and approved under a risk assessment process and are subject to product and suitability risk approval authorities which increase as the level of risk increases. New and amended products must be reviewed relative to all risk drivers, including credit risk. All existing products must be reviewed on a regular basis following a risk-based assessment approach.
 
Credit risk limits
•   The allocation of risk appetite and Board delegated authorities are supported by the establishment of risk limits which take both regulatory constraints and internal risk management judgment into account. Risk limits are established at the following levels: single name limits, regional, country and industrial sector limits (notional and economic capital), regulatory large exposure limits, product and portfolio limits, and underwriting and distribution risk limits. These limits apply across all businesses, portfolios, transactions and products.
•   We actively manage credit exposures and limits to ensure alignment with our risk appetite, to maintain our target business mix and to ensure that there is no undue concentration risk.
•   Concentration risk is defined as the risk arising from large exposures that are highly correlated such that their ability to meet contractual obligations could be similarly affected by changes in economic, political, or other risk drivers.
•   Credit concentration limits are reviewed on a regular basis after considering business, economic, financial, and regulatory environments.
  
 
Credit risk administration

Loan forbearance
In our overall management of borrower relationships, economic or legal reasons may necessitate forbearance to certain clients with respect to the original terms and conditions of their loans. We have specialized groups and formalized policies that direct the management of high risk, delinquent or defaulted borrowers. We strive to identify borrowers in financial difficulty early and modify their loan terms to minimize losses and assist clients in need. A forbearance agreement may be entered into with the borrower where we will forbear from enforcing on security in exchange for concessions made by the borrower. In these circumstances, a borrower may be granted concessions that would not otherwise be considered. Examples of such concessions to retail borrowers may include rate reduction, payment deferral and term extensions. Concessions to wholesale borrowers may include payment deferral, restructuring the agreements, modifying the original terms of the agreement and/or relaxation of covenants. For both retail and wholesale loans, the appropriate remediation techniques are based on the individual borrower’s situation, our policy and the client’s willingness and capacity to meet the new arrangement.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            75


Credit risk exposure by portfolio, sector and geography
The following table presents our credit risk exposures under the Basel regulatory defined classes and reflects EAD. The classification of our sectors aligns with our view of credit risk by industry.
 
Credit risk exposure by portfolio, sector and geography
 
Table 44  
    As at  
   
 
October 31
2023
(1)
         
 
October 31
2022
 
   
Credit risk
(2), (3)
       
Counterparty credit risk 
(6)
                Credit risk (2), (3)         Counterparty credit risk 
(6)
       
   
On-balance
sheet amount
   
Off-balance
sheet
amount 
(4)
        
Repo-style
transactions
   
Derivatives
   
Total
exposure
          
On-balance
sheet amount
   
Off-balance
sheet
amount (4)
        
Repo-style
transactions
   
Derivatives
   
Total
exposure
 
(Millions of Canadian dollars)  
Undrawn
   
Other
(5)
    Undrawn     Other (5)  
Retail
                             
Residential secured
(7)
 
$
451,610
 
 
$
114,612
 
 
$
 
   
$
 
 
$
 
 
$
566,222
 
    $ 393,346     $ 107,604     $       $     $     $ 500,950  
Qualifying revolving
(8)
 
 
36,091
 
 
 
110,473
 
 
 
 
   
 
 
 
 
 
 
 
146,564
 
      32,474       94,949                           127,423  
Other retail
 
 
48,162
 
 
 
20,804
 
 
 
136
 
 
 
 
 
 
 
 
 
 
 
69,102
 
 
 
 
 
    98,070       19,993       136    
 
                118,199  
Total retail
 
$
535,863
 
 
$
245,889
 
 
$
136
 
 
 
 
$
 
 
$
 
 
$
781,888
 
 
 
 
 
  $ 523,890     $ 222,546     $ 136    
 
  $     $     $ 746,572  
Wholesale
                             
Agriculture
 
$
11,316
 
 
$
2,792
 
 
$
46
 
   
$
 
 
$
117
 
 
$
14,271
 
    $ 10,417     $ 2,089     $ 36       $     $ 161     $ 12,703  
Automotive
 
 
11,568
 
 
 
8,586
 
 
 
680
 
   
 
 
 
 
1,148
 
 
 
21,982
 
      8,919       9,184       317               1,606       20,026  
Banking
 
 
82,319
 
 
 
3,060
 
 
 
2,267
 
   
 
101,736
 
 
 
41,300
 
 
 
230,682
 
      73,335       5,487       1,036         111,559       38,830       230,247  
Consumer discretionary
 
 
18,348
 
 
 
9,132
 
 
 
650
 
   
 
 
 
 
1,030
 
 
 
29,160
 
      19,666       9,297       569               949       30,481  
Consumer staples
 
 
8,680
 
 
 
6,996
 
 
 
546
 
   
 
 
 
 
2,070
 
 
 
18,292
 
      7,103       6,750       346               1,923       16,122  
Oil and gas
 
 
6,498
 
 
 
8,373
 
 
 
1,614
 
   
 
 
 
 
3,134
 
 
 
19,619
 
      6,086       11,272       1,923               5,959       25,240  
Financial services
 
 
48,589
 
 
 
24,140
 
 
 
4,818
 
   
 
83,692
 
 
 
22,611
 
 
 
183,850
 
      45,394       25,017       3,530         69,790       24,546       168,277  
Financing products
 
 
3,988
 
 
 
1,265
 
 
 
1,447
 
   
 
472
 
 
 
1,079
 
 
 
8,251
 
      5,762       2,352       163         237       780       9,294  
Forest products
 
 
1,485
 
 
 
1,004
 
 
 
313
 
   
 
 
 
 
67
 
 
 
2,869
 
      1,143       1,033       230               78       2,484  
Governments
 
 
270,382
 
 
 
6,960
 
 
 
1,482
 
   
 
10,736
 
 
 
5,692
 
 
 
295,252
 
      279,401       5,678       1,563         18,745       6,290       311,677  
Industrial products
 
 
11,251
 
 
 
9,898
 
 
 
623
 
   
 
 
 
 
811
 
 
 
22,583
 
      10,755       9,319       601               1,216       21,891  
Information technology
 
 
5,252
 
 
 
6,942
 
 
 
357
 
   
 
118
 
 
 
704
 
 
 
13,373
 
      5,291       7,144       298         55       1,908       14,696  
Investments
 
 
25,921
 
 
 
4,608
 
 
 
701
 
   
 
 
 
 
383
 
 
 
31,613
 
      23,764       3,946       669         157       458       28,994  
Mining and metals
 
 
2,144
 
 
 
3,548
 
 
 
1,044
 
   
 
 
 
 
391
 
 
 
7,127
 
      2,377       4,259       945               467       8,048  
Public works and infrastructure
 
 
2,613
 
 
 
1,534
 
 
 
529
 
   
 
 
 
 
156
 
 
 
4,832
 
      2,614       2,417       497               144       5,672  
Real estate and related
 
 
102,235
 
 
 
20,406
 
 
 
1,592
 
   
 
 
 
 
850
 
 
 
125,083
 
      89,926       18,295       1,872               818       110,911  
Other services
 
 
30,617
 
 
 
14,203
 
 
 
2,598
 
   
 
 
 
 
741
 
 
 
48,159
 
      27,839       13,425       2,848         33       852       44,997  
Telecommunication and media
 
 
8,597
 
 
 
6,529
 
 
 
132
 
   
 
 
 
 
2,794
 
 
 
18,052
 
      7,301       8,298       79               2,751       18,429  
Transportation
 
 
8,461
 
 
 
5,925
 
 
 
1,009
 
   
 
 
 
 
2,408
 
 
 
17,803
 
      6,394       6,386       930               2,069       15,779  
Utilities
 
 
14,495
 
 
 
20,389
 
 
 
6,367
 
   
 
 
 
 
4,638
 
 
 
45,889
 
      12,318       20,651       5,275               5,081       43,325  
Other sectors
 
 
8,698
 
 
 
2,773
 
 
 
1,193
 
 
 
 
 
88
 
 
 
20,084
 
 
 
32,836
 
 
 
 
 
    4,113       1,700       71    
 
    73       20,126       26,083  
Total wholesale
 
$
683,457
 
 
$
169,063
 
 
$
30,008
 
 
 
 
$
196,842
 
 
$
112,208
 
 
$
1,191,578
 
 
 
 
 
  $ 649,918     $ 173,999     $ 23,798    
 
  $ 200,649     $ 117,012     $ 1,165,376  
Total exposure
(2)
 
$
1,219,320
 
 
$
414,952
 
 
$
30,144
 
 
 
 
$
196,842
 
 
$
112,208
 
 
$
1,973,466
 
 
 
 
 
  $ 1,173,808     $ 396,545     $ 23,934    
 
  $ 200,649     $ 117,012     $ 1,911,948  
By geography
(9)
                             
Canada
 
$
729,131
 
 
$
306,474
 
 
$
10,676
 
   
$
80,664
 
 
$
42,123
 
 
$
1,169,068
 
    $ 697,015     $ 284,705     $ 9,444       $ 79,795     $ 41,923     $ 1,112,882  
U.S.
 
 
358,605
 
 
 
79,256
 
 
 
13,459
 
   
 
62,966
 
 
 
24,878
 
 
 
539,164
 
      334,821       79,829       10,145         59,866       24,161       508,822  
Europe
 
 
58,496
 
 
 
21,987
 
 
 
3,467
 
   
 
27,637
 
 
 
31,749
 
 
 
143,336
 
      79,343       25,485       2,603         39,244       36,107       182,782  
Other International
 
 
73,088
 
 
 
7,235
 
 
 
2,542
 
 
 
 
 
25,575
 
 
 
13,458
 
 
 
121,898
 
 
 
 
 
    62,629       6,526       1,742    
 
    21,744       14,821       107,462  
Total exposure
(2)
 
$
  1,219,320
 
 
$
  414,952
 
 
$
  30,144
 
 
 
 
$
196,842
 
 
$
  112,208
 
 
$
  1,973,466
 
 
 
 
 
  $   1,173,808     $   396,545     $   23,934    
 
  $   200,649     $   117,012     $   1,911,948  
 
(1)   Balances as at October 31, 2023 reflect our adoption of the revised CAR guidelines that came into effect in Q2 2023 as part of OSFI’s implementation of the Basel III reforms.
(2)   Excludes securitization, banking book equities and other assets not subject to the standardized or IRB approach.
(3)   EAD for standardized exposures are reported net of allowance for impaired assets and EAD for IRB exposures are reported gross of all ACL and partial write-offs as per regulatory definitions.
(4)   EAD for undrawn credit commitments and other
off-balance
sheet amounts are reported after the application of credit conversion factors.
(5)   Includes other
off-balance
sheet exposures such as letters of credit and guarantees.
(6)   Counterparty credit risk EAD reflects exposure amounts after netting. Collateral is included in EAD for repo-style transactions to the extent allowed by regulatory guidelines. Exchange traded derivatives are included in Other sectors.
(7)   Includes residential mortgages and home equity lines of credit.
(8)   Includes credit cards, unsecured lines of credit and overdraft protection products.
(9)   Geographic profile is based on country of residence of the borrower.
2023 vs. 2022
Total credit risk exposure increased $62 billion or 3% from last year, primarily due to volume growth in loans and undrawn commitments.
 
76            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Net International exposure by region and client type
(1), (2)
 
Table 45  
    As at  
   
October 31
2023
         
October 31
2022
 
   
Asset type
         
Client type
                   
(Millions of Canadian dollars)  
Loans
Outstanding
   
Securities 
(3)
   
Repo-style
transactions
   
Derivatives
          
Financials
   
Sovereign
   
Corporate
   
Total
           Total   
Europe (excluding U.K.)
 
$
15,112
 
 
$
19,204
 
 
$
1,772
 
 
$
2,271
 
   
$
15,202
 
 
$
5,518
 
 
$
17,639
 
 
$
38,359
 
   
$
57,753
 
U.K.
 
 
7,144
 
 
 
23,919
 
 
 
534
 
 
 
3,131
 
   
 
9,318
 
 
 
17,791
 
 
 
7,619
 
 
 
34,728
 
   
 
39,949
 
Caribbean
 
 
8,331
 
 
 
11,029
 
 
 
381
 
 
 
186
 
   
 
7,267
 
 
 
4,190
 
 
 
8,470
 
 
 
19,927
 
   
 
19,688
 
Asia-Pacific
 
 
6,746
 
 
 
36,150
 
 
 
1,695
 
 
 
1,083
 
   
 
15,004
 
 
 
25,344
 
 
 
5,326
 
 
 
45,674
 
   
 
35,338
 
Other
(4)
 
 
357
 
 
 
1,876
 
 
 
332
 
 
 
20
 
 
 
 
 
 
 
427
 
 
 
1,693
 
 
 
465
 
 
 
2,585
 
 
 
 
 
 
 
3,043
 
Net International exposure 
(5), (6)
 
$
  37,690
 
 
$
  92,178
 
 
$
  4,714
 
 
$
  6,691
 
 
 
 
 
 
$
  47,218
 
 
$
  54,536
 
 
$
  39,519
 
 
$
  141,273
 
 
 
 
 
 
$
  155,771
 
 
(1)   Geographic profile is based on country of risk, which reflects our assessment of the geographic risk associated with a given exposure. Typically, this is the residence of the borrower.
(2)   Exposures are calculated on a fair value basis and net of collateral, which includes $326 billion against repo-style transactions (October 31, 2022 – $357 billion) and $15 billion against derivatives (October 31, 2022 – $14 billion).
(3)   Securities include $13 billion of trading securities (October 31, 2022 – $13 billion), $41 billion of deposits (October 31, 2022 – $56 billion), and $38 billion of investment securities (October 31, 2022 – $35 billion).
(4)   Includes exposures in the Middle East, Africa, and Latin America.
(5)   Excludes $4,790 million (October 31, 2022 – $5,213 million) of exposures to supranational agencies.
(6)   Reflects $2,533 million of mitigation through credit default swaps, which are largely used to hedge single name exposures and market risk (October 31, 2022 – $2,233 million).
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            77

Residential mortgages and home equity lines of credit (insured vs. uninsured)
(1)
Residential mortgages and home equity lines of credit are secured by residential properties. The following table presents a breakdown by geographic region.
 
Residential mortgages and home equity lines of credit
 
Table 46  
   
As at October 31, 2023
 
(Millions of Canadian dollars,
except percentage amounts)
 
Residential mortgages
         
Home equity
lines of credit 
(3)
 
 
Insured
(2)
         
Uninsured
         
Total
          
Total
 
Region
(4)
                 
Canada
                 
Atlantic provinces
 
$
8,474
 
 
 
44
   
$
10,765
 
 
 
56
   
$
19,239
 
   
$
1,630
 
Quebec
 
 
11,831
 
 
 
27
 
   
 
31,741
 
 
 
73
 
   
 
43,572
 
   
 
3,111
 
Ontario
 
 
30,359
 
 
 
15
 
   
 
168,264
 
 
 
85
 
   
 
198,623
 
   
 
16,558
 
Alberta
 
 
18,840
 
 
 
45
 
   
 
22,596
 
 
 
55
 
   
 
41,436
 
   
 
4,403
 
Saskatchewan and Manitoba
 
 
8,546
 
 
 
42
 
   
 
11,803
 
 
 
58
 
   
 
20,349
 
   
 
1,749
 
B.C. and territories
 
 
11,911
 
 
 
16
 
 
 
 
 
 
 
62,475
 
 
 
84
 
 
 
 
 
 
 
74,386
 
 
 
 
 
 
 
7,048
 
Total Canada
(5)
 
 
89,961
 
 
 
23
 
   
 
307,644
 
 
 
77
 
   
 
397,605
 
   
 
34,499
 
U.S.
 
 
 
 
 
 
   
 
33,683
 
 
 
100
 
   
 
33,683
 
   
 
2,090
 
Other International
 
 
 
 
 
 
 
 
 
 
 
 
3,213
 
 
 
100
 
 
 
 
 
 
 
3,213
 
 
 
 
 
 
 
1,538
 
Total International
 
 
 
 
 
 
 
 
 
 
 
 
36,896
 
 
 
100
 
 
 
 
 
 
 
36,896
 
 
 
 
 
 
 
3,628
 
Total
 
$
  89,961
 
 
 
21
 
 
 
 
 
$
  344,540
 
 
 
79
 
 
 
 
 
$
  434,501
 
 
 
 
 
 
$
  38,127
 
                                                       
   
    As at October 31, 2022  
(Millions of Canadian dollars,
except percentage amounts)
  Residential mortgages           Home equity
lines of credit 
(3)
 
  Insured 
(2)
          Uninsured           Total            Total  
Region
(4)
                 
Canada
                 
Atlantic provinces
  $ 8,460       46     $ 10,052       54     $ 18,512       $ 1,659  
Quebec
    12,444       29         30,623       71         43,067         3,300  
Ontario
    31,409       17         156,700       83         188,109         17,009  
Alberta
    19,663       47         22,154       53         41,817         4,923  
Saskatchewan and Manitoba
    8,847       43         11,808       57         20,655         1,940  
B.C. and territories
    12,290       17    
 
 
 
    59,347       83    
 
 
 
    71,637    
 
 
 
    7,386  
Total Canada
(5)
    93,113       24         290,684       76         383,797         36,217  
U.S.
                  31,956       100         31,956         1,776  
Other International
             
 
 
 
    3,043       100    
 
 
 
    3,043    
 
 
 
    1,621  
Total International
             
 
 
 
    34,999       100    
 
 
 
    34,999    
 
 
 
    3,397  
Total
  $   93,113       22  
 
 
 
  $   325,683       78  
 
 
 
  $   418,796    
 
 
 
  $   39,614  
 
  (1)   Disclosure is provided in accordance with the requirements of OSFI’s Guideline
B-20
(Residential Mortgage Underwriting Practices and Procedures).
 
  (2)   Insured residential mortgages are mortgages whereby our exposure to default is mitigated by insurance through the Canadian Mortgage and Housing Corporation or other private mortgage default insurers.  
  (3)   Includes $38,108 million and $19 million of uninsured and insured home equity lines of credit, respectively (October 31, 2022 – $39,591 million and $23 million, respectively), reported within the personal loan category. The amounts in the U.S. and Other International include term loans collateralized by residential mortgages.  
  (4)   Region is based upon the address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick, and B.C. and territories are comprised of British Columbia, Nunavut, Northwest Territories and Yukon.  
  (5)   Total consolidated residential mortgages in Canada of $398 billion (October 31, 2022 – $384 billion) includes $12 billion (October 31, 2022 – $12 billion) of mortgages with commercial clients in Canadian Banking, of which $9 billion (October 31, 2022 – $9 billion) are insured mortgages, and $18 billion (October 31, 2022 – $17 billion) of residential mortgages in Capital Markets, of which $18 billion (October 31, 2022 – $17 billion) are held for securitization purposes. All of the residential mortgages held for securitization purposes are insured (October 31, 2022 – all insured).  
 
78            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Residential mortgages portfolio by amortization period
(1)
The following table provides a summary of the percentage of residential mortgages that fall within the remaining amortization periods based upon current customer payment amounts, which incorporate payments larger than the minimum contractual amount and/or higher frequency of payments.
 
Residential mortgages portfolio by amortization period
 
Table 47  
    As at            
   
October 31
2023
       
October 31
2022
 
    
Canada 
(2)
    
U.S. and other
International
    
Total
         Canada      U.S. and other
International
     Total  
Amortization period
                 
25 years
 
 
57%
 
  
 
26%
 
  
 
55%
 
      57%        25%        54%  
> 25 years
30 years
 
 
20    
 
  
 
74    
 
  
 
24    
 
      16            75            21      
> 30 years
35 years
 
 
1    
 
  
 
–    
 
  
 
1    
 
      2            –            2      
> 35 years
 
 
22    
 
  
 
–    
 
  
 
20    
 
 
 
    25            –            23      
Total
 
 
100%
 
  
 
100%
 
  
 
100%
 
 
 
    100%        100%        100%  
 
  (1)   Disclosure is provided in accordance with the requirements of OSFI’s Guideline
B-20
(Residential Mortgage Underwriting Practices and Procedures).
 
  (2)   Our policy is to originate mortgages with amortization periods of 30 years or less. Amortization periods greater than 30 years reflect the impact of increases in interest rates on our variable rate mortgage portfolios. For these loans, the amortization period resets to the original amortization schedule upon renewal. We do not originate mortgage products with a structure that would result in negative amortization, as payments on variable rate mortgages automatically increase to ensure accrued interest is covered.  
Average LTV ratios
(1)
The following table provides a summary of our average LTV ratios for newly originated and acquired uninsured residential mortgages and RBC Homeline Plan
®
products by geographic region, as well as the respective LTV ratios for our total Canadian Banking residential mortgage portfolio outstanding.
 
Average LTV ratios
 
Table 48  
    For the year ended  
   
October 31
2023
       
October 31
2022
 
   
Uninsured
         Uninsured  
    
Residential
mortgages 
(2)
   
RBC Homeline
Plan
®
 products 
(3)
         Residential
mortgages 
(2)
    RBC Homeline
Plan
®
 products 
(3)
 
Average of newly originated and acquired for the period, by region
(4)
         
Atlantic provinces
 
 
71%
 
 
 
71%
 
      72%       73%  
Quebec
 
 
70    
 
 
 
70    
 
      72           72      
Ontario
 
 
70    
 
 
 
64    
 
      70           66      
Alberta
 
 
72    
 
 
 
71    
 
      73           73      
Saskatchewan and Manitoba
 
 
73    
 
 
 
73    
 
      73           75      
B.C. and territories
 
 
68    
 
 
 
63    
 
      68           66      
U.S.
 
 
74    
 
 
 
n.m.    
 
      75           n.m.      
Other International
 
 
69    
 
 
 
n.m.    
 
 
 
    72           n.m.      
Average of newly originated and acquired for the period 
(5), (6)
 
 
70%
 
 
 
66%
 
 
 
    71%       68%  
Total Canadian Banking residential mortgages portfolio
(7)
 
 
55%
 
 
 
47%
 
 
 
    52%       46%  
 
  (1)   Disclosure is provided in accordance with the requirements of OSFI’s Guideline
B-20
(Residential Mortgage Underwriting Practices and Procedures).
 
  (2)   Residential mortgages exclude residential mortgages within the RBC Homeline Plan
®
products.
 
  (3)   RBC Homeline Plan
®
products are comprised of both residential mortgages and home equity lines of credit.
 
  (4)   Region is based upon address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick, and B.C. and territories are comprised of British Columbia, Nunavut, Northwest Territories and Yukon.  
  (5)   The average LTV ratio for newly originated and acquired uninsured residential mortgages and RBC Homeline Plan
®
products is calculated on a weighted basis by mortgage amounts at origination.
 
  (6)   For newly originated mortgages and RBC Homeline Plan
®
products, LTV is calculated based on the total facility amount for the residential mortgage and RBC Homeline Plan
®
product divided by the value of the related residential property.
 
  (7)   Weighted by mortgage balances and adjusted for property values based on the Teranet – National Bank National Composite House Price Index.  
      n.m.   not meaningful
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            79

Credit quality performance
The following credit quality performance tables and analysis provide information on loans, which represents loans, acceptances and commitments, and other financial assets.
 
 
Gross impaired loans (GIL)
 
 
 
Table 49  
 
    As at and for the year ended  
(Millions of Canadian dollars, except percentage amounts)
 
October 31
2023
   
October 31
2022
 
Personal & Commercial Banking
 
$
1,905
 
  $ 1,362  
Wealth Management
 
 
514
 
    278  
Capital Markets
 
 
1,285
 
    559  
Total GIL
 
$
3,704
 
  $ 2,199  
Impaired loans, beginning balance
 
$
2,199
 
  $ 2,308  
Classified as impaired during the period (new impaired)
(1)
 
 
3,959
 
    1,711  
Net repayments
(1)
 
 
(622
    (450
Amounts written off
 
 
(1,572
    (1,149
Other
(2)
 
 
(260
    (221
Impaired loans, balance at end of period
 
$
3,704
 
  $ 2,199  
GIL as a % of related loans and acceptances
   
Total GIL as a % of related loans and acceptances
 
 
0.42%
 
    0.26%
Personal & Commercial Banking
 
 
0.31%
 
    0.23%
Canadian Banking
 
 
0.26%
 
    0.18%
Caribbean Banking
 
 
3.45%
 
    3.93%
Wealth Management
(3)
 
 
0.44%
 
    0.24%
Capital Markets
(3)
 
 
0.89%
 
    0.39%
 
  (1)   Certain GIL movements for Canadian Banking retail and wholesale portfolios are generally allocated to new impaired, as Net repayments and certain Other movements are not reasonably determinable. Certain GIL movements for Caribbean Banking retail and wholesale portfolios are generally allocated to Net repayments and new impaired, as Net repayments and certain Other movements are not reasonably determinable.  
  (2)   Includes return to performing status during the period, recoveries of loans and advances previously written off, sold, and foreign exchange translation and other movements.  
  (3)   Amounts have been revised from those previously presented to conform to our new basis of segment presentation. For further details, refer to the About Royal Bank of Canada section.  
2023 vs. 2022
Total GIL of $3,704 million increased $1,505 million or 68% from last year and the total GIL ratio of 42 bps increased 16 bps, due to higher impaired loans in Capital Markets, Personal & Commercial Banking and Wealth Management.
GIL in Personal & Commercial Banking increased $543 million or 40%, primarily due to higher impaired loans in our Canadian Banking retail and commercial portfolios. Higher impaired loans in our Canadian Banking commercial portfolios were in a few sectors, mainly the consumer discretionary and real estate and related sectors.
GIL in Wealth Management increased $236 million or 85%, mainly driven by higher impaired loans in U.S. Wealth Management (including City National) in a few sectors, including the real estate and related and telecom and media sectors, partially offset by lower impaired loans in the consumer discretionary sector.
GIL in Capital Markets increased $726 million, mainly due to higher impaired loans in the real estate and related and telecom and media sectors, partially offset by lower impaired loans in the other services sector.
 
 
Allowance for credit losses
 
 
 
Table 50  
 
    As at  
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
 
Personal & Commercial Banking
 
$
3,718
 
  $ 3,200  
Wealth Management
(1)
 
 
618
 
    383  
Capital Markets
(1)
 
 
1,012
 
    598  
ACL on loans
 
 
5,348
 
    4,181  
ACL on other financial assets
(2)
 
 
18
 
    33  
Total ACL
 
$
5,366
 
  $ 4,214  
ACL on loans is comprised of:
   
Retail
 
$
2,591
 
  $ 2,285  
Wholesale
 
 
1,609
 
    1,227  
ACL on performing loans
 
$
4,200
 
  $   3,512  
ACL on impaired loans
 
 
1,148
 
    669  
 
  (1)   Amounts have been revised from those previously presented to conform to our new basis of segment presentation. For further details, refer to the About Royal Bank of Canada section.  
  (2)   ACL on other financial assets mainly represents allowances on debt securities measured at FVOCI and amortized cost, accounts receivable and financial guarantees.  
2023 vs. 2022
Total ACL of $5,366 million increased $1,152 million or 27% from last year, primarily reflecting an increase of $1,167 million in ACL on loans.
 
80            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

ACL on performing loans of $4,200 million increased $688 million or 20%, mainly due to higher ACL in Personal & Commercial Banking, reflecting unfavourable changes in credit quality and portfolio growth. Higher ACL in Wealth Management and Capital Markets also contributed to the increase.
ACL on impaired loans of $1,148 million increased $479 million or 72%, primarily due to higher ACL in Capital Markets and Personal & Commercial Banking.
 
 
Market risk
 
 
Market risk is defined to be the impact of market prices upon our financial condition. This includes potential gains or losses due to changes in market determined variables such as interest rates, credit spreads, equity prices, commodity prices, foreign exchange rates and implied volatilities.
The measures of financial condition impacted by market risk are as follows:
 
  1.   Positions whose revaluation gains and losses are reported in revenue, which includes:
  a)   Changes in the fair value of instruments classified or designated as FVTPL, and
  b)   Hedge ineffectiveness.
 
  2.   CET1 capital, which includes:
  a)   All of the above, plus
  b)   Changes in the fair value of FVOCI securities where revaluation gains and losses are reported as OCI,
  c)   Changes in the Canadian dollar value of investments in foreign subsidiaries, net of hedges, due to foreign exchange translation, and
  d)   Changes in the fair value of employee benefit plan deficits.
 
  3.   CET1 ratio, which includes:
  a)   All of the above, plus
  b)   Changes in RWA resulting from changes in traded market risk factors, and
  c)   Changes in the Canadian dollar value of RWA due to foreign exchange translation.
 
  4.   The economic value of the Bank, which includes:
  a)   Points 1 and 2 above, plus
  b)   Changes in the economic value of other
non-trading
positions, net interest income, and fee based income, as a result of changes in market risk factors.
 
Market risk controls – FVTPL positions, including trading portfolios
1
As an element of the ERAF, the Board approves our overall market risk constraints. GRM creates and manages the control structure for FVTPL positions which
are designed to ensure
that business is conducted on a basis consistent with Board requirements. The Market and Counterparty Credit Risk function within GRM is responsible for creating and managing the controls and governance procedures that
are designed to 
ensure that risk taken is consistent with risk appetite constraints set by the Board. These controls include limits on probabilistic measures of potential loss such as
Value-at-Risk
and stress tests as defined below:
 
Value-at-Risk
(VaR)
is a statistical measure of potential loss for a financial portfolio computed at a given level of confidence and over a defined holding period. We measure VaR at the 99th percentile confidence level for price movements over a
one-day
holding period using historic simulation of the last two years of equally weighted historic market data. These calculations are updated daily with current risk positions, with the exception of certain less material positions that are not actively traded and are updated on at least a monthly basis.
Trading VaR captures potential loss for our trading portfolio that excludes the impacts of
non-trading
FVTPL positions such as loan underwriting commitments. Total VaR captures potential loss for all positions classified as FVTPL.
 
VaR is a statistical estimate based on historical market data and should be interpreted with knowledge of its limitations, which include the following:
•   VaR will not be predictive of future losses if the realized market movements differ significantly from the historical periods used to compute it.
•   VaR projects potential losses over a
one-day
holding period and does not project potential losses for risk positions held over longer time periods.
•   VaR is measured using positions at close of business and does not include the impact of trading and hedging activity over the course of a day.
 
We validate our VaR measures through a variety of means – including subjecting the models to vetting and validation by a group independent of the model developers and by back-testing the VaR against daily
marked-to-market
revenue to identify and examine events in which actual outcomes in trading revenue exceed the VaR projections.
 
Stress tests
– Our market risk stress testing program is used to identify and control risk due to large changes in market prices and rates. We conduct stress testing daily on positions that are
marked-to-market.
The stress tests simulate both historical and hypothetical events which are severe and long-term in duration. Historical scenarios are taken from actual market events and range in duration up to 90 days. Examples include the
COVID-19
Pandemic of 2020, Global Financial Crisis of 2008 and the Taper Tantrum of 2013. Hypothetical scenarios are designed to be forward-looking at potential future market stresses, and are designed to be severe but plausible. We are constantly evaluating and refining these scenarios as market conditions change. Stress results are calculated assuming an instantaneous revaluation of our positions with no management action.
 
1
 
  Trading portfolios are comprised of trading instruments in accordance with OSFI’s Capital Adequacy Requirements (CAR) Guideline. Trading involves market-making, positioning and arbitrage activities conducted primarily within our Global Markets business in the Capital Markets segment.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            81


These measures are computed on all positions that are FVTPL for financial reporting purposes, with the exception of those in a designated hedging relationship and those in our insurance businesses.
Market risk measures – FVTPL positions
 
 
Market risk measures*
 
 
 
Table 51  
 
   
 
October 31, 2023
   
 
October 31, 2022 (1)
 
         
For the year ended
          For the year ended  
                 
(Millions of Canadian dollars)  
As at
   
Average
   
High
   
Low
    As at     Average     High     Low  
Equity
 
$
      10
 
 
$
      11
 
 
$
    26
 
 
$
      6
 
  $     20     $     18     $     30     $     10  
Foreign exchange
 
 
4
 
 
 
3
 
 
 
25
 
 
 
2
 
    3       4       7       1  
Commodities
 
 
5
 
 
 
5
 
 
 
8
 
 
 
4
 
    6       5       6       3  
Interest rate
(2)
 
 
38
 
 
 
32
 
 
 
49
 
 
 
20
 
    31       29       65       13  
Credit specific
(3)
 
 
7
 
 
 
5
 
 
 
8
 
 
 
4
 
    5       7       9       4  
Diversification
(4)
 
 
(35
 
 
(31
 
 
n.m.
 
 
n.m.
    (34     (33     n.m.       n.m.  
Trading VaR
 
$
29
 
 
$
25
 
 
$
36
 
 
$
16
 
  $ 31     $ 30     $ 50     $ 19  
Total VaR
(5)
 
$
121
 
 
$
51
 
 
$
127
 
 
$
27
 
  $ 59     $ 53     $ 87     $ 34  
 
*   This table represents an integral part of our 2023 Annual Consolidated Financial Statements.
(1)   Amounts have been revised from those previously presented to align with a trading VaR view.
(2)   General credit spread risk and funding spread risk associated with uncollateralized derivatives are included under interest rate VaR.
(3)   Credit specific risk captures issuer-specific credit spread volatility.
(4)   Trading VaR is less than the sum of the individual risk factor VaR results due to risk factor diversification.
(5)   The average total VaR for the year ended October 31, 2023 includes $14 million (October 31, 2022 – $11 million) related to loan underwriting commitments.
n.m.   not meaningful
2023 vs. 2022
Average Trading VaR of $25 million decreased $5 million from last year, primarily driven by exposure changes in our equity derivatives portfolio.
Average total VaR of $51 million remained stable. Total VaR was elevated as at October 31, 2023, primarily reflecting the impact of economic hedges.
The following chart displays a bar graph of our daily trading revenue and a line graph of our daily market risk Trading VaR. We incurred 1 day of net trading losses in 2023, largely associated with stresses in the U.S. regional banking sector in Q2 2023.
 
 

 
(1)   Trading revenue (teb) amounts in the chart above exclude the impact of loan underwriting commitments.
(2)   VaR amounts in the chart above have been revised from those previously presented to reflect Trading VaR corresponding to our trading porfolios.
 
82            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

The following chart displays the distribution of daily trading revenue
 
in 2023 and 2022 with 1 day of net trading losses in 2023 as mentioned above and 4 days of net trading losses in 2022. The largest reported trading revenue was $56 million with an average daily revenue of $17 million.
 
 
LOGO
 
  (1)   Trading revenue (teb) amounts in the chart above exclude the impact of loan underwriting commitments and structured entities.
Market risk measures for assets and liabilities of RBC Insurance
®
We offer a range of insurance products to clients and hold investments to meet the future obligations to policyholders. The investments which support actuarial liabilities are predominantly fixed income assets designated as FVTPL. Consequently, changes in the fair values of these assets are recorded in the Consolidated Statements of Income and are largely offset by changes in the fair value of the actuarial liabilities, the impact of which is reflected in PBCAE. As at October 31, 2023, we held assets in support of approximately $12 billion of liabilities with respect to insurance obligations (October 31, 2022 – $12 billion).
 
Market risk controls – Interest Rate Risk in the Banking Book (IRRBB) positions
2
IRRBB arises primarily from traditional customer-originated banking products such as deposits and loans, and includes related hedges and interest rate risk from securities held for liquidity management purposes. Factors contributing to IRRBB include mismatches between asset and liability repricing dates, relative changes in asset and liability rates in response to market rate scenarios, and other product features affecting the expected timing of cash flows, such as options to
pre-pay
loans or redeem term deposits prior to contractual maturity. IRRBB sensitivities are regularly measured and reported, and subject to limits and controls with independent oversight from GRM.
The Board approves the risk appetite for IRRBB, and the Asset Liability Committee (ALCO) and GRM provide ongoing governance through IRRBB risk policies, limits, operating standards and other controls. IRRBB reports are reviewed regularly by GRM, ALCO, the GRC, the Risk Committee of the Board and the Board.
 
 
IRRBB measurement
 
To monitor and control IRRBB, we assess two primary metrics, Net Interest Income (NII) risk and Economic Value of Equity (EVE) risk, under a range of market shocks, scenarios, and time horizons. Market scenarios include currency-specific parallel and
non-parallel
yield curve changes, interest rate volatility shocks, and interest rate scenarios prescribed by regulators.
In measuring NII risk, detailed banking book balance sheets and income statements are dynamically simulated to estimate the impact of market stress scenarios on projected NII. Assets, liabilities and
off-balance
sheet positions are simulated over various time horizons. The simulations incorporate maturities, renewals, and new originations along with prepayment and redemption behaviour. Product pricing and volumes are forecasted based on past experience to determine response expectations under a given market shock scenario. EVE risk captures the market value sensitivity to changes in rates. In measuring EVE risk, deterministic (single-scenario) and stochastic (multiple-scenario) valuation techniques are applied to spot position data. NII and EVE risks are measured for a range of market risk stress scenarios which include extreme but plausible changes in market rates and volatilities. IRRBB measures assume continuation of existing hedge strategies.
Management of NII and EVE risk is complementary and supports our efforts to generate a sustainable high-quality NII stream. NII and EVE risks for specific units are measured daily, weekly or monthly depending on materiality, complexity and hedge strategy.
A number of assumptions affecting cash flows, product
re-pricing
and the administration of rates underlie the models used to measure NII and EVE risk. The key assumptions pertain to the projected funding date of mortgage rate commitments, fixed-rate loan prepayment behaviour, term deposit redemption behaviour, and the term and rate profile of
non-maturity
deposits. All assumptions are derived empirically based on historical client behaviour and product pricing with consideration of possible forward-looking changes. All models and assumptions used to measure IRRBB are subject to independent oversight by GRM.
 
 
Market risk measures – IRRBB Sensitivities
 
The following table shows the potential
before-tax
impact of an immediate and sustained 100 bps increase or decrease in interest rates on projected EVE and
12-month
NII, assuming no subsequent hedging. Interest rate risk measures are based on current on and
off-balance
sheet positions which can change over time in response to business activity and management actions.
 
2
 
  IRRBB positions include the impact of derivatives in hedge accounting relationships, FVOCI securities used for interest rate risk management and economic hedges.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            83

 
Market risk – IRRBB measures*
 
 
 
Table 52  
 
 
 
October 31
2023
 
 
 
 
October 31
2022
 
 
 
EVE risk
 
 
 
 
NII risk
 
(1)
 
 
 
 
 
 
 
 
 
(Millions of Canadian dollars)
 
Canadian
dollar impact
 
 
U.S. dollar
impact
 
 
Total
 
 
  
 
Canadian
dollar impact
 
 
U.S. dollar
impact
 
 
Total
 
 
  
 
EVE risk
 
 
NII risk (1)
 
                     
Before-tax
impact of:
                                                                       
100 bps increase in rates
 
$
(1,445
 
$
(107
 
$
(1,552
     
$
381
 
 
$
270
 
 
$
 
 
 
 
651
 
      $ (1,900   $      781  
100 bps decrease in rates
 
 
1,430
 
 
 
(77
 
 
1,353
 
 
 
 
 
(409
 
 
(342
 
 
(751
 
 
        1,709       (839
 
*   This table represents an integral part of our 2023 Annual Consolidated Financial Statements.
(1)   Represents the
12-month
NII exposure to an instantaneous and sustained shift in interest rates.
As at October 31, 2023, an immediate and sustained
-100
bps shock would have had a negative impact to our NII of $751 million, down from $839 million last year, and an immediate and sustained +100 bps shock would have had a negative impact to our EVE of $1,552 million, down from $1,900 million last year. The change in NII sensitivity reflects a change in product mix and the change in EVE sensitivity can be attributed to a reduction in the term of fixed rate assets. During 2023, NII and EVE risks remained within approved limits.
Market risk measures for other material
non-trading
portfolios
Investment securities carried at FVOCI
We held $128 billion of investment securities carried at FVOCI as at October 31, 2023, compared to $93 billion at the end of the prior year. We hold debt securities carried at FVOCI primarily as investments, as well as to manage liquidity risk and hedge interest rate risk in our
non-trading
banking balance sheet. As at October 31, 2023, our portfolio of investment securities carried at FVOCI is interest rate sensitive and would impact OCI by a
pre-tax
change in value of $5 million as measured by the change in the value of the securities for a one basis point parallel increase in yields. The portfolio also exposes us to credit spread risk of a
pre-tax
change in value of $28 million, as measured by the change in value for a one basis point widening of credit spreads. The value of the investment securities carried at FVOCI included in our IRRBB measures as at October 31, 2023 was $125 billion. Our investment securities carried at FVOCI also include equity exposures of $1 billion as at October 31, 2023, compared to $1 billion at the end of the prior year.
 
 
Non-trading
foreign exchange rate risk
Foreign exchange rate risk is the potential adverse impact on earnings and economic value due to changes in foreign currency rates. Our revenue, expenses and income denominated in currencies other than the Canadian dollar are subject to fluctuations as a result of changes in the value of the average Canadian dollar relative to the average value of those currencies. Our most significant exposure is to the U.S. dollar, due to our operations in the U.S. and other activities conducted in U.S. dollars.
Our other
significant
exposure is
to the British pound due to our activities conducted internationally in
this currency
. A strengthening or weakening of the Canadian dollar compared to the U.S. dollar
 and
British pound could reduce or increase, as applicable, the translated value of our foreign currency denominated revenue, expenses and earnings and could have a significant effect on the results of our operations. We are also exposed to foreign exchange rate risk arising from our investments in foreign operations. For unhedged equity investments, when the Canadian dollar appreciates against other currencies, the unrealized translation losses on net foreign investments decreases our shareholders’ equity through the other components of equity and decreases the translated value of the RWA of the foreign currency-denominated asset. The reverse is true when the Canadian dollar depreciates against other currencies. Consequently, we consider these impacts in selecting an appropriate level of our investments in foreign operations to be hedged.
Derivatives related to
non-trading
activity
Derivatives are also used to hedge market risk exposure unrelated to our trading activity. Hedge accounting is elected where applicable. These derivatives are included in our IRRBB measures and other internal
non-trading
market risk measures. We use interest rate swaps to manage our IRRBB, funding and investment activities. Interest rate swaps are also used to hedge changes in the fair value of certain fixed-rate instruments. We also use foreign exchange derivatives to manage our exposure to equity investments in subsidiaries that are denominated in foreign currencies, particularly the U.S. dollar, British Pound, and Euro.
For further details on the application of hedge accounting and the use of derivatives for hedging activities, refer to Notes 2 and 9 of our 2023 Annual Consolidated Financial Statements.
 
84            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Linkage of market risk to selected balance sheet items
The following tables provide the linkages between selected balance sheet items with positions included in our trading market risk and
non-trading
market risk disclosures, which illustrates how we manage market risk for our assets and liabilities through different risk measures:
 
 
Linkage of market risk to selected balance sheet items
 
 
 
Table 53  
 
   
 
As at October 31, 2023
         
Market risk measure
     
         
(Millions of Canadian dollars)
 
Balance sheet
amount
   
Traded risk 
(1)
   
Non-traded

risk 
(2)
   
Non-traded
risk   
primary risk sensitivity   
Assets subject to market risk
                           
Cash and due from banks
 
$
61,989
 
 
$
 
 
$
61,989
 
 
Interest rate  
Interest-bearing deposits with banks
 
 
71,086
 
 
 
1
 
 
 
71,085
 
 
Interest rate  
Securities
                           
Trading
 
 
190,151
 
 
 
171,483
 
 
 
18,668
 
 
Interest rate, credit spread  
Investment, net of applicable allowance
 
 
219,579
 
 
 
 
 
 
219,579
 
 
Interest rate, credit spread, equity  
Assets purchased under reverse repurchase agreements and securities borrowed
 
 
340,191
 
 
 
304,672
 
 
 
35,519
 
 
Interest rate  
Loans
                           
Retail
 
 
569,951
 
 
 
 
 
 
569,951
 
 
Interest rate  
Wholesale
 
 
287,826
 
 
 
3,134
 
 
 
284,692
 
 
Interest rate  
Allowance for loan losses
 
 
(5,004
 
 
 
 
 
(5,004
 
Interest rate  
Segregated fund net assets
 
 
2,760
 
 
 
 
 
 
2,760
 
 
Interest rate  
Other
                           
Derivatives
 
 
142,450
 
 
 
139,011
 
 
 
3,439
 
 
Interest rate, foreign exchange  
Other assets
 
 
108,178
 
 
 
8,699
 
 
 
99,479
 
 
Interest rate  
Assets not subject to market risk
(3)
 
 
15,835
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
2,004,992
 
 
$
627,000
 
 
$
1,362,157
 
 
 
Liabilities subject to market risk
                           
Deposits
 
$
1,231,687
 
 
$
51,025
 
 
$
1,180,662
 
 
Interest rate  
Segregated fund liabilities
 
 
2,760
 
 
 
 
 
 
2,760
 
 
Interest rate  
Other
                           
Obligations related to securities sold short
 
 
33,651
 
 
 
33,555
 
 
 
96
 
   
Obligations related to assets sold under repurchase agreements and securities loaned
 
 
335,238
 
 
 
312,551
 
 
 
22,687
 
 
Interest rate  
Derivatives
 
 
142,629
 
 
 
130,094
 
 
 
12,535
 
 
Interest rate, foreign exchange  
Other liabilities
 
 
109,533
 
 
 
12,491
 
 
 
97,042
 
 
Interest rate  
Subordinated debentures
 
 
11,386
 
 
 
 
 
 
11,386
 
 
Interest rate  
Liabilities not subject to market risk
(4)
 
 
20,348
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
$
1,887,232
 
 
$
539,716
 
 
$
1,327,168
 
 
 
Total equity
 
 
117,760
 
                   
Total liabilities and equity
 
$
2,004,992
 
                   
 
(1)   Traded risk includes positions that are classified or designated as FVTPL and positions whose revaluation gains and losses are reported in revenue within our trading portfolios. Market risk measures of VaR and stress tests are used as risk controls for traded risk.
(2)  
Non-traded
risk includes positions used in the management of IRRBB and other
non-trading
portfolios. Other material
non-trading
portfolios include positions from RBC Insurance
®
and investment securities, net of applicable allowance, not included in IRRBB.
(3)   Assets not subject to market risk include physical and other assets.
(4)   Liabilities not subject to market risk include payroll related and other liabilities.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            85

     As at October 31, 2022 (1)  
       
          Market risk measure        
         
(Millions of Canadian dollars)
  Balance sheet
amount
    Traded risk 
(2)
   
Non-traded

risk 
(3)
   
Non-traded
risk   
primary risk sensitivity   
 
Assets subject to market risk
                               
Cash and due from banks
  $ 72,397     $     $ 72,397       Interest rate    
Interest-bearing deposits with banks
    108,011       2       108,009       Interest rate    
Securities
                               
Trading
    148,205       131,071       17,134       Interest rate, credit spread    
Investment, net of applicable allowance
    170,018             170,018       Interest rate, credit spread, equity    
Assets purchased under reverse repurchase agreements and securities borrowed
    317,845       287,454       30,391       Interest rate    
Loans
                               
Retail
    549,751       26       549,725       Interest rate    
Wholesale
    273,967       5,921       268,046       Interest rate    
Allowance for loan losses
    (3,753           (3,753     Interest rate    
Segregated fund net assets
    2,638             2,638       Interest rate    
Other
                               
Derivatives
    154,439       151,244       3,195       Interest rate, foreign exchange    
Other assets
    109,629       8,826       100,803       Interest rate    
Assets not subject to market risk
(4)
    14,072    
 
 
 
 
 
 
 
 
 
 
 
Total assets
  $ 1,917,219     $ 584,544     $ 1,318,603    
 
 
 
Liabilities subject to market risk
                               
Deposits
  $ 1,208,814     $ 39,000     $ 1,169,814       Interest rate    
Segregated fund liabilities
    2,638             2,638       Interest rate    
Other
                               
Obligations related to securities sold short
    35,511       35,482       29          
Obligations related to assets sold under repurchase agreements and securities loaned
    273,947       264,025       9,922       Interest rate    
Derivatives
    153,491       139,406       14,085       Interest rate, foreign exchange    
Other liabilities
    102,881       10,594       92,287       Interest rate    
Subordinated debentures
    10,025             10,025       Interest rate    
Liabilities not subject to market risk
(5)
    21,737    
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
  $ 1,809,044     $ 488,507     $ 1,298,800    
 
 
 
Total equity
    108,175                          
Total liabilities and equity
  $ 1,917,219                          
 
(1)
 
Amounts have been revised from those previously presented to align with the definition of trading risk in accordance with OSFI’s CAR Guidelines.
(2)   Traded risk includes positions that are classified or designated as FVTPL and positions whose revaluation gains and losses are reported in revenue within our trading portfolios. Market risk measures of VaR and stress tests are used as risk controls for traded risk.
(3)  
Non-traded
risk includes positions used in the management of IRRBB and other
non-trading
portfolios. Other material
non-trading
portfolios include positions from RBC Insurance
®
and investment securities, net of applicable allowance, not included in IRRBB.
(4)   Assets not subject to market risk include physical and other assets.
(5)   Liabilities not subject to market risk include payroll related and other liabilities.
 
 
Liquidity and funding risk
 
 
Liquidity and funding risk (liquidity risk) is the risk that we may be unable to generate sufficient cash or its equivalents in a timely and cost-effective manner to meet our commitments. Liquidity risk arises from mismatches in the timing and value of
on-balance
sheet and
off-balance
sheet cash flows.
 
Governance of liquidity risk
Our liquidity risk management activities are conducted in accordance with internal frameworks and policies, including the Enterprise Risk Management Framework (ERMF), the Enterprise Risk Appetite Framework (ERAF), the Enterprise Liquidity Risk Management Framework (LRMF), the Enterprise Liquidity Risk Policy, and the Enterprise Pledging Policy. Collectively, our frameworks and policies establish liquidity and funding management requirements appropriate for the execution of our strategy and ensuring liquidity risk remains within our risk appetite.
Liquidity risk objectives, policies and risk appetite are reviewed regularly, and updated to reflect changes in industry practice and relevant regulatory guidance. Enterprise policies are supported by subsidiary, operational, desk and product-level policies and standards that specify risk control elements, such as parameters, methodologies, limits and authorities governing the measurement and management of liquidity. Management practices, parameters, models and methodologies are also subject to regular review, and are updated to reflect market conditions and business mix. Stress testing is employed to assess the robustness of the control framework and inform liquidity contingency plans.
 
 
86            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Responsibilities for liquidity risk oversight and management
The Board, the Risk Committee of the Board, the Group Risk committee (GRC), the Asset Liability Committee (ALCO), and the Policy Review Committee (PRC) are accountable for the identification, assessment, control, monitoring and oversight of liquidity risk. The GRC, PRC and/or the ALCO review liquidity reporting and policies prior to review by the Board or its committees.
 
 
The Board, the Risk Committee of the Board, the GRC and the ALCO regularly review information on our consolidated liquidity position;
 
 
The PRC approves the Liquidity Risk Policy, which establishes minimum risk control elements in accordance with the Board-approved risk appetite and the LRMF, and the Pledging Policy, which outlines the requirements and authorities for the management of our pledging activities;
 
 
The ALCO annually approves the Enterprise Liquidity Contingency Plan (ELCP) and provides strategic direction and oversight to Corporate Treasury, other functions, and business segments on the management of liquidity and funding.
In addition to our committee oversight framework, liquidity risk management activities are subject to the three lines of defence governance model. Corporate Treasury, the first line of defence for the management of liquidity risk, is subject to independent second line challenge and oversight by GRM. RBC Internal Audit is the third line of defence. The three lines of defence are independent of the business whose activities generate liquidity risks.
Liquidity risk mitigation strategies and techniques
Our liquidity management policies and practices are designed to ensure the soundness of our liquidity position. Our liquidity profile is structured to ensure that we have sufficient liquidity to satisfy current and prospective commitments in both normal and stressed conditions. For this purpose, we employ the following liquidity risk mitigation strategies and techniques:
 
 
Maintaining a sufficient buffer of cash, central bank reserves, and unencumbered marketable securities, supported by a demonstrated capacity to monetize these securities during stress;
 
 
Access to a broad range of funding sources, including a stable base of core client deposits and a diversified wholesale funding mix;
 
 
Access to central bank funding facilities in Canada and the U.S., and select other jurisdictions in which we operate;
 
 
Timely and granular risk measurement and reporting to control and monitor liquidity sources and uses, and inform liquidity risk management decisions;
 
 
A comprehensive program for liquidity stress testing and crisis management;
 
 
Governance of pledging activity through limits and designated liquid asset buffers to address potential increased pledging activity;
 
 
Achieving an appropriate balance between the level of exposure allowed under our risk appetite and the cost of risk mitigation;
 
 
Transparent liquidity transfer pricing and cost allocation mechanisms to align risk management with business strategies; and
 
 
A
three-lines-of-defence
governance model providing effective oversight and challenge of liquidity risk strategies, metrics, assumptions, and controls.
Our dedicated liquid asset portfolios are managed and controlled in accordance with internal policies and are subject to minimum asset quality and other relevant requirements (e.g., term to maturity, diversification, and eligibility for central bank advances). These securities, along with other unencumbered liquid assets held for trading or other activities, contribute to our liquidity reserve, as reflected in the liquidity disclosures below.
Risk tolerance
Our liquidity risk appetite is reviewed at a minimum annually by ALCO, GRC, and the Risk Committee of the Board before it is recommended for approval to the Board. Risk appetite, a key element of our enterprise risk management framework, is defined as the amount and type of risk that RBC is able and willing to take in pursuit of its business objectives.
Risk measurement and internal liquidity reporting
We maintain robust liquidity risk measurement capabilities to support timely and frequent reporting of information for the management of our liquidity position and oversight of risk. This reporting, which includes internal and regulatory metrics, is used to monitor adherence with our risk appetite and limits, and position relative to regulatory minimums. Regulatory metrics used to manage and control liquidity risk include OSFI’s Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR) and Net Cumulative Cash Flow (NCCF). The specificity with which we measure and manage liquidity allows us to make ongoing informed assessments of the demands and mobility of liquidity, considering currency requirements, access to foreign exchange markets and commitments, and expectations under local regulations.
Internal assessments of liquidity risk include application of scenario-specific assumptions against our assets and liabilities, and various
off-balance
sheet commitments and obligations to project cash flows over varying time horizons and degrees of stress. For example, certain government bonds could be quickly and easily converted to cash without significant loss of value. In contrast, lower-rated securities may not be deemed appropriate sources of liquidity in times of stress, or may incur higher potential monetization costs. While relationship-based deposits contractually can be withdrawn immediately, in practice, these balances can be relatively stable sources of funding depending on several factors, such as the nature of the client and their intended use. Assumptions and methodologies informing our assessment of liquidity risk are periodically reviewed and validated to ensure alignment with our operating environment, expected economic and market conditions, rating agency preferences, regulatory requirements and generally accepted industry practices.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            87

To manage liquidity risk within our liquidity risk appetite, we set limits on various metrics over a range of time horizons, jurisdictions and currencies. We also consider various levels of stress conditions in our development of appropriate contingency, recovery and resolution plans. Our liquidity risk measurement and control activities cover multiple areas:
Structural (longer-term) liquidity risk
We use both internal and regulatory metrics to manage and control the structural alignment between long-term illiquid assets, the availability of core relationship deposits and longer-term funding. Conversely, we aim to align the use of shorter-term wholesale funding with assets of equivalent liquidity-generating potential.
Tactical (shorter-term) liquidity risk
To address potential immediate cash flow risks during periods of stress, we use short-term net cash flow limits to control risk at the material unit, subsidiary and currency levels. Net cash flow positions are determined by applying internally-derived risk assumptions and parameters to known and anticipated cash flows for all material unencumbered assets, liabilities and
off-balance
sheet activities. Additional product-level controls and limits are employed to manage concentration risk and perceived market capacity limitations for more sensitive liquidity sources and uses. We also control tactical liquidity by adhering to relevant regulatory standards, such as LCR.
Stress testing
Our comprehensive stress testing program informs internal assessments of the sufficiency of liquid assets, and whether they are adequately
pre-positioned
and accessible to meet stressed liquidity needs. Our stress tests, which include elements of scenario and sensitivity analyses, measure our prospective exposure to systemic and
RBC-specific
events over period
s
 of time. Different degrees of severity are considered for each type of crisis with some scenarios reflecting multiple downgrades to our credit ratings.
Contingency liquidity risk management and funding plans
Contingency liquidity risk planning assesses the impact of sudden stress on our liquidity risk position and identifies a range of potential mitigating actions and plans. Corporate Treasury maintains the Enterprise Liquidity Contingency Plan (ELCP) and regional liquidity contingency plans (LCPs) that identify potential sources of stress and guide our responses to liquidity crises. Potential sources of stress are calibrated based on relevant historical experience and resulting contingent funding needs, including those from draws on committed credit and liquidity lines, demands for increased collateral and deposit
run-offs.
The ELCP also identifies alternative liquidity sources and considerations for their use.
Additionally, under the leadership of Corporate Treasury, enterprise and regional Liquidity Crisis Teams (LCTs) each meet regularly to assess our liquidity status, review, and approve the LCPs and during times of stress, provide linkages to the front line and other functions to support effective and coordinated crisis management and oversight. Enterprise and local LCTs
incl
ude members from key business segments, GRM, Finance, Operations, and Communications. The liquidity status assessment and monitoring process informs management, the Board and regulatory agencies of our assessment of internal and external events and their potential implications on liquidity risk.
Liquidity reserve and asset encumbrance
The following tables provide summaries of our liquidity reserve and asset encumbrance. To varying degrees, unencumbered assets represent a ready source of funding. Unencumbered assets are the difference between total and encumbered assets from both
on-
and
off-balance
sheet sources. Encumbered assets include: (i) bank-owned liquid assets that are either pledged as collateral (e.g., repo financing and derivative pledging) or not freely available due to regulatory or internal policy requirements (e.g., earmarked to satisfy mandatory reserve or regional capital adequacy requirements and to maintain continuous access to payment and settlement systems); (ii) securities received as collateral from securities financing and derivative transactions which have either been
re-hypothecated
where permissible (e.g., to obtain financing through repos or to cover securities sold short) or have no liquidity value since
re-hypothecation
is prohibited; and (iii) illiquid assets that have been securitized and sold into the market or that have been pledged as collateral in support of structured term funding vehicles. As per our liquidity management framework and practice, encumbered assets are not considered a source of liquidity.
Liquidity reserve
Our liquidity reserve consists only of available unencumbered liquid assets. Although unused wholesale funding capacity could be another potential source of liquidity, it is excluded in the determination of the liquidity reserve.
 
88            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

 
Liquidity reserve
 
 
 
Table 54  
 
 
 
 
  As at October 31, 2023
 
(Millions of Canadian dollars)
 
Bank-owned
liquid assets
 
 
Securities
received as
collateral from
securities
financing and
derivative
transactions
 
 
Total liquid
assets
 
 
Encumbered
liquid assets
 
 
Unencumbered
liquid assets
 
Cash and deposits with banks
(1)
 
$
135,353
 
 
$
 
 
$
135,353
 
 
$
3,329
 
 
$
132,024
 
Securities issued or guaranteed by sovereigns, central banks or multilateral development banks
(2)
 
 
325,002
 
 
 
363,377
 
 
 
688,379
 
 
 
425,109
 
 
 
263,270
 
Other securities
 
 
130,209
 
 
 
118,651
 
 
 
248,860
 
 
 
153,700
 
 
 
95,160
 
Other liquid assets
(3)
 
 
31,706
 
 
 
 
 
 
31,706
 
 
 
28,953
 
 
 
2,753
 
Total liquid assets
 
$
622,270
 
 
$
482,028
 
 
$
1,104,298
 
 
$
611,091
 
 
$
493,207
 
 
 
  
 
 
 
 
As at October 31, 2022
 
(Millions of Canadian dollars)
 
Bank-owned

liquid assets
 
 
Securities
received as
collateral from
securities
financing and
derivative
transactions
 
 
Total liquid
assets
 
 
Encumbered
liquid assets
 
 
Unencumbered
liquid assets
 
Cash and deposits with banks
 
$
180,408
 
 
$
 
 
$
180,408
 
 
$
3,601
 
 
$
176,807
 
Securities issued or guaranteed by sovereigns, central banks or multilateral development banks
(2)
 
 
246,916
 
 
 
326,089
 
 
 
573,005
 
 
 
373,893
 
 
 
199,112
 
Other securities
 
 
110,057
 
 
 
119,129
 
 
 
229,186
 
 
 
135,349
 
 
 
93,837
 
Other liquid assets
(3)
 
 
42,090
 
 
 
 
 
 
42,090
 
 
 
40,318
 
 
 
1,772
 
Total liquid assets
 
$
579,471
 
 
$
445,218
 
 
$
  1,024,689
 
 
$
553,161
 
 
$
471,528
 
 
 
 
 
 
 
 
 
 
As at
 
 
 
 
 
 
 
 
 
 
(Millions of Canadian dollars)
 
October 31
2023
 
 
October 31
2022
 
 
 
 
 
 
 
 
 
 
Royal Bank of Canada
 
$
210,191
 
 
$
186,855
 
 
 
 
Foreign branches
 
 
79,947
 
 
 
90,910
 
 
 
 
Subsidiaries
 
 
203,069
 
 
 
193,763
 
 
 
 
Total unencumbered liquid assets
 
$
493,207
 
 
$
471,528
 
 
 
 
 
(1)
 
Includes balances that are classified as held for sale and presented in Other assets. For further details, refer to Note 6 of our 2023 Annual Consolidated Financial Statements.
(2)
 
Includes liquid securities issued by provincial governments and U.S. government-sponsored entities working under U.S. Federal government’s conservatorship (e.g., Federal National Mortgage Association and Federal Home Loan Mortgage Corporation).
(3)
 
Encumbered liquid assets amount represents cash collateral and margin deposit amounts pledged related to OTC and exchange-traded derivative transactions.
The liquidity reserve is typically most affected by routine flows of retail and commercial client banking activities, where liquid asset portfolios reflect changes in deposit and loan balances, as well as business strategies and client flows related to the activities in Capital Markets. Corporate Treasury also affects liquidity reserves through the management of funding issuances, which could result in timing differences between when debt is issued and funds are deployed into business activities.
2023 vs. 2022
Total unencumbered liquid assets increased $22 billion or 5% from last year, mainly due to an increase in on-balance sheet securities reflecting higher client deposit levels, partially offset by a decrease in cash and deposits with banks.

Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            89

Asset encumbrance
The table below provides a summary of our
on-
and
off-balance
sheet amounts for cash, securities and other assets, distinguishing between those that are encumbered, and those available for sale or use as collateral in secured funding transactions. Other assets, such as mortgages and credit card receivables, can also be monetized, albeit over longer timeframes than those required for marketable securities. As at October 31, 2023, our unencumbered assets available as collateral comprised 24% of total assets (October 31, 2022 – 24%).
 
 
Asset encumbrance
 
 
 
Table 55  
 
                As at               
       
   
October 31
2023
       
October 31
2022
 
                   
   
Encumbered
       
Unencumbered
              Encumbered           Unencumbered        
                           
(Millions of Canadian dollars)  
Pledged as
collateral
   
Other 
(1)
        
Available as
collateral 
(2)
   
Other 
(3)
   
Total
         Pledged as
collateral
    Other (1)            Available as
collateral (2)
    Other (3)     Total  
Cash and deposits
with banks 
(4)
 
$
 
 
$
3,329
 
     
$
132,024
 
 
$
 
 
$
135,353
 
      $     $ 3,601             $ 176,807     $     $ 180,408  
Securities
                                                                                               
Trading
 
 
99,990
 
 
 
 
     
 
100,517
 
 
 
2,252
 
 
 
202,759
 
        62,941                     91,738       3,303       157,982  
Investment, net of applicable allowance
 
 
7,752
 
 
 
 
     
 
211,827
 
 
 
 
 
 
219,579
 
        7,996                     162,022             170,018  
Assets purchased under reverse repurchase agreements and securities borrowed 
(5)
 
 
495,233
 
 
 
27,343
 
     
 
6,876
 
 
 
1,862
 
 
 
531,314
 
        456,292       21,709               9,192       3,409       490,602  
Loans
                                                                                               
Retail
                                                                                               
Mortgage securities
 
 
26,365
 
 
 
 
     
 
28,079
 
 
 
 
 
 
54,444
 
        28,208                     27,263             55,471  
Mortgage loans
 
 
69,802
 
 
 
 
     
 
37,313
 
 
 
272,942
 
 
 
380,057
 
        62,905                     26,696       273,724       363,325  
Non-mortgage
loans
 
 
6,775
 
 
 
 
     
 
 
 
 
128,675
 
 
 
135,450
 
        6,066                           124,889       130,955  
Wholesale
 
 
 
 
 
 
     
 
10,056
 
 
 
278,052
 
 
 
288,108
 
                            9,119       264,848       273,967  
Allowance for loan losses
 
 
 
 
 
 
     
 
 
 
 
(5,004
 
 
(5,004
                                  (3,753     (3,753
Segregated fund net assets
 
 
 
 
 
 
     
 
 
 
 
2,760
 
 
 
2,760
 
                                  2,638       2,638  
Other
                                                                                               
Derivatives
 
 
 
 
 
 
     
 
 
 
 
142,450
 
 
 
142,450
 
                                  154,439       154,439  
Others
(6)
 
 
28,953
 
 
 
 
 
 
 
 
2,753
 
 
 
89,747
 
 
 
121,453
 
 
 
    40,318          
 
 
 
    1,772       81,611       123,701  
Total assets
 
$
  734,870
 
 
$
  30,672
 
 
 
 
$
  529,445
 
 
$
  913,736
 
 
$
  2,208,723
 
 
 
  $   664,726     $   25,310    
 
 
 
  $ 504,609     $   905,108     $   2,099,753  
 
(1)   Includes assets restricted from use to generate secured funding due to legal or other constraints.
(2)   Represents assets that are immediately available for use as collateral, including NHA MBS, our unencumbered mortgage loans that qualify as eligible collateral at FHLB, as well as loans that qualify as eligible collateral for discount window facility available to us and lodged at the FRBNY.
(3)
 
Other unencumbered assets are not subject to any restrictions on their use to secure funding or as collateral but would not be considered immediately available.
(4)   Includes balances that were classified as held for sale and presented in Other assets. For further details, refer to Note 6 of our 2023 Annual Consolidated Financial Statements.
(5)   Includes bank-owned liquid assets and securities received as collateral from
off-balance
sheet securities financing, derivative transactions, and margin lending. Includes $27 billion (October 31, 2022 – $22 billion) of collateral received through reverse repurchase transactions that cannot be rehypothecated in its current legal form.
(6)   The Pledged as collateral amount represents cash collateral and margin deposit amounts pledged related to OTC and exchange-traded derivative transactions.
2023 vs. 2022
Total unencumbered assets available as collateral have increased $25 billion from last year, mainly due to an increase in
on-balance
sheet securities as well as higher available loan balances eligible as collateral at FHLB. These factors were partially offset by a decrease in cash and deposits with banks.
Funding
 
Funding strategy
Maintaining a diversified funding base is a key strategy for managing our liquidity risk profile.
Core funding, comprising capital, longer-term wholesale liabilities and a diversified pool of personal as well as
the
stable portion of our commercial and institutional deposits, is the foundation of our structural liquidity position.
Wholesale funding activities are well-diversified by geography, investor segment, instrument, currency, structure, and maturity. We maintain an ongoing presence in different funding markets, which allows us to continuously monitor market developments and trends, identify opportunities and risks, and take appropriate and timely actions.
We continuously evaluate opportunities to expand into new markets and untapped investor segments since diversification expands our wholesale funding flexibility, minimizes funding concentration and dependency, and generally reduces financing costs.
We regularly assess our funding concentration and have implemented limits on certain funding sources to support diversification of our funding base.
Deposit and funding profile
As at October 31, 2023, relationship-based deposits, which are the primary source of funding for retail and commercial lending, were $844 billion or 52% of our total funding (October 31, 2022 – $819 billion or 54%). The remaining portion is comprised of short- and long-term wholesale funding.
Funding for highly liquid assets consists primarily of short-term wholesale funding that reflects the monetization period of those assets. Long-term wholesale funding is used mostly to fund less liquid wholesale assets and to support liquid asset buffers.
Senior long-term debt issued by the bank on or after September 23, 2018, that has an original term greater than 400 days and is marketable, subject to certain exceptions, is subject to the Canadian Bank Recapitalization
(Bail-in)
regime. Under the
Bail-in
regime, in circumstances when the Superintendent of Financial Institutions has determined that a bank may no longer be viable,
 
90            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

the Governor in Council may, upon a recommendation of the Minister of Finance that he or she is of the opinion that it is in the public interest to do so, grant an order directing the Canada Deposit Insurance Corporation (CDIC) to convert all or a portion of certain shares and liabilities of that bank into common shares. As at October 31, 2023, the notional value of issued and outstanding long-term debt subject to conversion under the
Bail-in
regime was $106 billion (October 31, 2022 – $85 billion).
For further details on our wholesale funding, refer to the Composition of wholesale funding tables below.
Long-term debt issuance
During 2023, we continued to experience favourable unsecured wholesale funding access and pricing. We issued, either directly or through our subsidiaries, unsecured long-term funding of $44 billion in various currencies and markets.
 
We use residential mortgage and credit card securitization programs as a source of funding and for liquidity and asset/liability management purposes. Our total secured long-term funding includes outstanding MBS sold, covered bonds that are collateralized with residential mortgages and securities backed by credit card receivables.
 
For further details, refer to the
Off-balance
sheet arrangements section.
 
 
Long-term funding sources*
(1)
 
 
 
Table 56  
 
    As at             
(Millions of Canadian dollars)
 
October 31
2023
          
October 31
2022
 
Unsecured long-term funding
 
$
139,882
 
          $ 119,241  
Secured long-term funding
 
 
74,720
 
            68,953  
Subordinated debentures
 
 
12,038
 
 
 
 
 
    10,639  
 
 
$
  226,640
 
 
 
 
 
  $   198,833  
 
  *   This table represents an integral part of our 2023 Annual Consolidated Financial Statements.
  (1)   Based on original term to maturity greater than 1 year.
The following table summarizes our registered programs and their authorized limits by geography.
 
 
Programs by geography
 
 
 
Table 57  
 
 
Canada
  
U.S.
 
Europe/Asia
•  Canadian Shelf Program – $25 billion
  
•  U.S. Shelf Program – US$50 billion
 
•  European Debt Issuance Program – US$75 billion
     
        
•  Global Covered Bond Program – 
75 billion
     
 
  
 
 
•  Japanese Issuance Programs – ¥1 trillion
We also raise long-term funding using Canadian Senior Notes, 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).
As presented in the following charts, our current long-term debt profile is well-diversified by both currency and product.
 
  
(1)   Includes unsecured and secured long-term funding and subordinated debentures with an original term to maturity greater than 1 year
  
(1)   Includes unsecured and secured long-term funding and subordinated debentures with an original term to maturity greater than 1 year
(2)  Mortgage-backed securities and Canada Mortgage Bonds
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            91

The following table shows the composition of our wholesale funding based on remaining term to maturity:
 
 
Composition of wholesale funding
(1)
 
 
 
Table 58  
 
   
 
As at October 31, 2023
 
                 
(Millions of Canadian dollars)  
Less than
1 month
   
1 to 3
months
   
3 to 6
months
   
6 to 12
months
   
Less than
1 year
sub-total
   
1 year to
2 years
   
2 years and
greater
   
Total
 
Deposits from banks
(2)
 
$
4,606
 
 
$
460
 
 
$
319
 
 
$
355
 
 
$
5,740
 
 
$
 
 
$
 
 
$
5,740
 
Certificates of deposit and commercial paper
 
 
10,130
 
 
 
7,020
 
 
 
11,858
 
 
 
27,029
 
 
 
56,037
 
 
 
69
 
 
 
 
 
 
56,106
 
Asset-backed commercial paper
(3)
 
 
4,533
 
 
 
3,829
 
 
 
6,354
 
 
 
2,155
 
 
 
16,871
 
 
 
 
 
 
 
 
 
16,871
 
Senior unsecured medium-term notes
(4)
 
 
43
 
 
 
6,311
 
 
 
133
 
 
 
18,828
 
 
 
25,315
 
 
 
22,790
 
 
 
54,070
 
 
 
102,175
 
Senior unsecured structured notes
(5)
 
 
1,343
 
 
 
1,898
 
 
 
2,081
 
 
 
3,343
 
 
 
8,665
 
 
 
5,495
 
 
 
15,744
 
 
 
29,904
 
Mortgage securitization
 
 
 
 
 
530
 
 
 
375
 
 
 
1,484
 
 
 
2,389
 
 
 
2,225
 
 
 
9,607
 
 
 
14,221
 
Covered bonds/asset-backed securities
(6)
 
 
 
 
 
3,236
 
 
 
 
 
 
1,685
 
 
 
4,921
 
 
 
10,844
 
 
 
44,733
 
 
 
60,498
 
Subordinated liabilities
 
 
 
 
 
 
 
 
 
 
 
1,500
 
 
 
1,500
 
 
 
2,748
 
 
 
7,791
 
 
 
12,039
 
Other
(7)
 
 
8,918
 
 
 
5,098
 
 
 
2,293
 
 
 
2,462
 
 
 
18,771
 
 
 
14,058
 
 
 
90
 
 
 
32,919
 
Total
 
$
29,573
 
 
$
28,382
 
 
$
23,413
 
 
$
58,841
 
 
$
140,209
 
 
$
58,229
 
 
$
132,035
 
 
$
330,473
 
Of which:
                                                               
– Secured
 
$
10,861
 
 
$
10,124
 
 
$
7,483
 
 
$
5,324
 
 
$
33,792
 
 
$
13,069
 
 
$
54,340
 
 
$
101,201
 
– Unsecured
 
 
18,712
 
 
 
18,258
 
 
 
15,930
 
 
 
53,517
 
 
 
106,417
 
 
 
45,160
 
 
 
77,695
 
 
 
229,272
 
 
   
   
As at October 31, 2022
 
                 
(Millions of Canadian dollars)   Less than
1 month
    1 to 3
months
    3 to 6
months
    6 to 12
months
    Less than
1 year
sub-total
    1 year to
2 years
    2 years and
greater
    Total  
Deposits from banks
(2)
  $ 5,758     $ 34     $ 311     $ 1,766     $ 7,869     $     $     $ 7,869  
Certificates of deposit and commercial paper
    9,482       16,575       23,676       39,674       89,407                   89,407  
Asset-backed commercial paper
(3)
    3,488       2,373       6,646       722       13,229             323       13,552  
Senior unsecured medium-term notes
(4)
    375       5,968       2,846       13,189       22,378       19,108       48,556       90,042  
Senior unsecured structured notes
(5)
    404       721       2,136       4,091       7,352       2,363       9,898       19,613  
Mortgage securitization
          1,238       421       2,614       4,273       2,402       9,697       16,372  
Covered bonds/asset-backed securities
(6)
          1,016       1,960       2,838       5,814       4,575       42,194       52,583  
Subordinated liabilities
    60                   110       170       1,483       8,986       10,639  
Other
(7)
    7,241       2,934       8,673       4,387       23,235       10,219       409       33,863  
Total
  $   26,808     $   30,859     $ 46,669     $ 69,391     $ 173,727     $ 40,150     $ 120,063     $ 333,940  
Of which:
                                                               
– Secured
  $ 9,030     $ 6,641     $ 15,367     $ 7,536     $ 38,574     $ 6,977     $ 52,605     $ 98,156  
– Unsecured
    17,778       24,218       31,302       61,855       135,153       33,173       67,458       235,784  
 
(1)   Excludes bankers’ acceptances and repos.
(2)   Excludes deposits associated with services we provide to banks (e.g., custody, cash management).
(3)   Only includes consolidated liabilities, including our collateralized commercial paper program.
(4)   Includes deposit notes.
(5)   Includes notes where the payout is tied to movements in foreign exchange, commodities and equities.
(6)   Includes credit card and mortgage loans.
(7)   Includes tender option bonds (secured) of $5,104 million (October 31, 2022 – $6,038 million), bearer deposit notes (unsecured) of $4,529 million (October 31, 2022 – $3,478 million), floating rate notes (unsecured) of $1,675 million (October 31, 2022 – $2,145 million), other long-term structured deposits (unsecured) of $16,896 million (October 31, 2022 – $12,411 million), and FHLB advances (secured) of $4,507 million (October 31, 2022 – $9,609 million), and wholesale guaranteed interest certificates of $208 million (October 31, 2022 – $182 million). Bearer deposit notes (unsecured), floating rate notes (unsecured) and wholesale guaranteed interest certificates amounts have been revised from those previously presented.
 
92            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Credit ratings
Our ability to access unsecured funding markets and to engage in certain collateralized business activities on a cost-effective basis are largely dependent on maintaining competitive credit ratings. Credit ratings and outlooks provided by rating agencies reflect their views and methodologies. Ratings are subject to change, based on a number of factors including, but not limited to, our financial strength, competitive position, liquidity and other factors not completely within our control.
The following table presents our major credit ratings:
 
 
Credit ratings
(1)
 
 
 
Table 59  
 
   
 
As at November 29, 2023
 
         
    
Short-term debt
 
Legacy senior long-term debt 
(2)
 
Senior long-term debt 
(3)
 
Outlook
 
Moody’s
(4)
 
P-1
 
Aa1
 
A1
 
 
stable
 
Standard & Poor’s
(5)
 
A-1+
 
AA-
 
A
 
 
stable
 
Fitch Ratings
(6)
 
F1+
 
AA
 
AA-
 
 
stable
 
DBRS
(7)
 
R-1 (high)
 
AA (high)
 
AA
 
 
stable
 
 
  (1)   Credit ratings are not recommendations to purchase, sell or hold a financial obligation in as much as they do not comment on market price or suitability for a particular investor. Ratings are determined by the rating agencies based on criteria established from time to time by them, and are subject to revision or withdrawal at any time by the rating organization.  
  (2)   Includes senior long-term debt issued prior to September 23, 2018 and senior long-term debt issued on or after September 23, 2018 which is excluded from the
Bail-in
regime.
 
  (3)   Includes senior long-term debt issued on or after September 23, 2018 which is subject to conversion under the
Bail-in
regime.
 
  (4)   On November 6, 2023, Moody’s affirmed our ratings with stable outlook.  
  (5)   On May 25, 2023, Standard & Poor’s affirmed our ratings with a stable outlook.  
  (6)   On June 20, 2023, Fitch Ratings affirmed our ratings with a stable outlook.  
  (7)   On May 12, 2023, DBRS affirmed our ratings with a stable outlook.  
Additional contractual obligations for rating downgrades
We are required to deliver collateral to certain counterparties in the event of a downgrade from our current credit rating. The following table shows the additional collateral obligations required at the reporting date in the event of a
one-,
two-
or three-notch downgrade. These additional collateral obligations are incremental requirements for each successive downgrade and do not represent the cumulative impact of multiple downgrades. The amounts reported change periodically due to several factors, including the transfer of trading activity to centrally cleared financial market infrastructures and exchanges, the expiration of transactions with downgrade triggers, the imposition of internal limitations on new agreements to exclude downgrade triggers, as well as normal course
mark-to-market.
There is no outstanding senior debt issued in the market that contains rating triggers that would lead to early prepayment of principal.
 
 
Additional contractual obligations for rating downgrades
 
 
 
 
 
 
Table 60  
 
 
 
 
    As at         
   
October 31
2023
         
October 31
2022
 
               
(Millions of Canadian dollars)  
One-notch

downgrade
   
Two-notch

downgrade
   
Three-notch

downgrade
           One-notch
downgrade
    Two-notch
downgrade
   
Three-notch

downgrade
 
Contractual derivatives funding or margin requirements
 
$
217
 
 
$
138
 
 
$
199
 
          $ 236     $ 146     $ 304  
Other contractual funding or margin requirements
(1)
 
 
41
 
 
 
57
 
 
 
42
 
 
 
 
 
    38       21       25  
 
(1)   Includes GICs issued by our municipal markets business out of New York.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            93

Liquidity Coverage Ratio (LCR)
The LCR is a Basel III metric that measures the sufficiency of high-quality liquid assets (HQLA) available to meet liquidity needs over a
30-day
period in an acute stress scenario. The BCBS and OSFI regulatory minimum coverage level for LCR is 100%.
OSFI requires Canadian banks to disclose the LCR using the standard Basel disclosure template and calculated using the average of daily LCR positions during the quarter.
 
 
Liquidity coverage ratio common disclosure template
(1)
 
 
 
Table 61  
 
    For the three months ended  
   
October 31

2023
 
(Millions of Canadian dollars, except percentage amounts)  
Total unweighted
value (average) 
(2)
   
Total weighted
value (average)
 
High-quality liquid assets
   
Total high-quality liquid assets (HQLA)
 
 
 
 
 
$
384,290
 
Cash outflows
   
Retail deposits and deposits from small business customers, of which:
 
$
360,167
 
 
$
34,667
 
Stable deposits
(3)
 
 
121,924
 
 
 
3,658
 
Less stable deposits
 
 
238,243
 
 
 
31,009
 
Unsecured wholesale funding, of which:
 
 
407,280
 
 
 
198,854
 
Operational deposits (all counterparties) and deposits in networks of cooperative banks 
(4)
 
 
150,032
 
 
 
35,505
 
Non-operational
deposits
 
 
221,760
 
 
 
127,861
 
Unsecured debt
 
 
35,488
 
 
 
35,488
 
Secured wholesale funding
   
 
39,561
 
Additional requirements, of which:
 
 
349,440
 
 
 
79,711
 
Outflows related to derivative exposures and other collateral requirements
 
 
70,080
 
 
 
20,190
 
Outflows related to loss of funding on debt products
 
 
10,736
 
 
 
10,736
 
Credit and liquidity facilities
 
 
268,624
 
 
 
48,785
 
Other contractual funding obligations
(5)
 
 
26,747
 
 
 
26,747
 
Other contingent funding obligations
(6)
 
 
760,747
 
 
 
12,569
 
Total cash outflows
 
 
 
 
 
$
392,109
 
Cash inflows
   
Secured lending (e.g., reverse repos)
 
$
312,357
 
 
$
53,592
 
Inflows from fully performing exposures
 
 
16,102
 
 
 
9,851
 
Other cash inflows
 
 
35,338
 
 
 
35,338
 
Total cash inflows
 
 
 
 
 
$
98,781
 
         
Total adjusted
value
 
Total HQLA
   
$
384,290
 
Total net cash outflows
 
 
 
 
 
 
293,328
 
Liquidity coverage ratio
 
 
 
 
 
 
131%
   
July 31
2023
 
(Millions of Canadian dollars, except percentage amounts)          Total adjusted
value
 
Total HQLA
    $ 382,789  
Total net cash outflows
 
 
 
 
    285,527  
Liquidity coverage ratio
 
 
 
 
    134%
 
(1)   The LCR is calculated in accordance with OSFI’s LAR guideline, which, in turn, reflects liquidity-related requirements issued by the BCBS. The LCR for the quarter ended October 31, 2023 is calculated as an average of 62 daily positions.
(2)   With the exception of other contingent funding obligations, unweighted inflow and outflow amounts are items maturing or callable in 30 days or less. Other contingent funding obligations also include debt securities with remaining maturity greater than 30 days.
(3)   As defined by the BCBS, stable deposits from retail and small business customers are deposits that are insured and are either held in transactional accounts or the bank has an established relationship with the client making the withdrawal unlikely.
(4)   Operational deposits from customers other than retail and small and
medium-sized
enterprises, are deposits which clients need to keep with the bank in order to facilitate their access and ability to use payment and settlement systems primarily for clearing, custody and cash management activities.
(5)   Other contractual funding obligations primarily include outflows from unsettled securities trades and outflows from obligations related to securities sold short.
(6)   Other contingent funding obligations include outflows related to other
off-balance
sheet facilities that carry low LCR runoff factors (0% – 5%).
 
94            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

We manage our LCR position within a target range that reflects our liquidity risk tolerance, business mix, asset composition and funding capabilities. The range is subject to periodic review, considering changes to internal requirements and external developments.
We maintain HQLAs in major currencies with dependable market depth and breadth. Our treasury management practices are designed to ensure that the levels of HQLA are actively managed to meet target LCR objectives. Our Level 1 assets, as calculated according to OSFI LAR and the BCBS LCR requirements, represent 88% of total HQLA. These assets consist of cash, placements with central banks and highly rated securities issued or guaranteed by governments, central banks and supranational entities.
LCR captures cash flows from
on-
and
off-balance
sheet activities that are either expected or could potentially occur within 30 days in an acute stress scenario. Cash outflows result from the application of withdrawal and
non-renewal
factors to demand and term deposits, differentiated by client type (wholesale, retail and small- and
medium-sized
enterprises). Cash outflows also arise from business activities that create contingent funding and collateral requirements, such as repo funding, derivatives, short sales of securities and the extension of credit and liquidity commitments to clients. Cash inflows arise primarily from maturing secured loans, interbank loans and
non-HQLA
securities.
LCR does not reflect any market funding capacity that we believe would be available in a stress situation. All maturing wholesale debt is assigned 100% outflow in the LCR calculation.
Q4 2023 vs. Q3 2023
The average LCR for the quarter ended October 31, 2023 was 131%, which translates into a surplus of approximately $91 billion, compared to 134% and a surplus of approximately $97 billion in the prior quarter. Average LCR levels decreased from prior quarter primarily due to lower wholesale funding levels and loan growth, partially offset by an increase in client deposits.
Net Stable Funding Ratio (NSFR)
NSFR is a Basel III metric that measures the sufficiency of available stable funding relative to the amount of required stable funding. The BCBS and OSFI regulatory minimum coverage level for NSFR is 100%.
Available stable funding is defined as the portion of capital and liabilities expected to be reliable over the
one-year
time horizon considered by the NSFR. Required stable funding is a function of the liquidity characteristics and residual maturities of various bank assets and
off-balance
sheet exposures.
OSFI requires Canadian
D-SIBs
to disclose the NSFR using the standard Basel disclosure template. Amounts presented in this disclosure template are determined in accordance with the requirements of OSFI’s LAR guideline and are not necessarily aligned with the classification requirements prescribed under IFRS.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            95

 
Net Stable Funding Ratio common disclosure template
(1)
 
 
 
Table 62  
 
   
As at October 31, 2023
 
   
Unweighted value by residual maturity
(2)
   
Weighted
value
 
(Millions of Canadian dollars, except percentage amounts)  
No maturity
   
< 6 months
   
6 months to
< 1 year
   
 1 year
 
Available Stable Funding (ASF) Item
 
 
            
 
 
 
            
 
 
 
            
 
 
 
            
 
 
 
            
 
Capital:
 
$
117,650
 
 
$
 
 
$
 
 
$
11,047
 
 
$
128,697
 
Regulatory Capital
 
 
117,650
 
 
 
 
 
 
 
 
 
11,047
 
 
 
128,697
 
Other Capital Instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail deposits and deposits from small business customers:
 
 
301,314
 
 
 
104,626
 
 
 
46,055
 
 
 
55,553
 
 
 
470,509
 
Stable deposits
(3)
 
 
97,270
 
 
 
44,770
 
 
 
24,000
 
 
 
26,429
 
 
 
184,167
 
Less stable deposits
 
 
204,044
 
 
 
59,856
 
 
 
22,055
 
 
 
29,124
 
 
 
286,342
 
Wholesale funding:
 
 
285,377
 
 
 
510,037
 
 
 
64,539
 
 
 
148,995
 
 
 
358,921
 
Operational deposits
(4)
 
 
163,133
 
 
 
 
 
 
 
 
 
 
 
 
81,567
 
Other wholesale funding
 
 
122,244
 
 
 
510,037
 
 
 
64,539
 
 
 
148,995
 
 
 
277,354
 
Liabilities with matching interdependent assets
(5)
 
 
68
 
 
 
1,800
 
 
 
2,964
 
 
 
20,378
 
 
 
 
Other liabilities:
 
 
45,718
 
   
 
235,759
 
   
 
14,112
 
NSFR derivative liabilities
   
 
24,683
 
 
All other liabilities and equity not included in the above categories
 
 
45,718
 
 
 
196,349
 
 
 
1,230
 
 
 
13,497
 
 
 
14,112
 
Total ASF
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
972,239
 
Required Stable Funding (RSF) Item
         
Total NSFR high-quality liquid assets (HQLA)
         
$
44,012
 
Deposits held at other financial institutions for operational purposes
 
 
 
 
 
664
 
 
 
 
 
 
 
 
 
332
 
Performing loans and securities:
 
 
211,825
 
 
 
312,964
 
 
 
115,838
 
 
 
536,388
 
 
 
706,996
 
Performing loans to financial institutions secured by Level 1 HQLA
 
 
 
 
 
110,421
 
 
 
20,430
 
 
 
275
 
 
 
16,133
 
Performing loans to financial institutions secured by
non-Level
1 HQLA and unsecured performing loans to financial institutions
 
 
4,886
 
 
 
118,014
 
 
 
26,780
 
 
 
29,873
 
 
 
60,715
 
Performing loans to
non-financial
corporate clients, loans to retail and small business customers, and loans to sovereigns, central banks and PSEs, of which:
 
 
135,078
 
 
 
59,852
 
 
 
32,108
 
 
 
170,886
 
 
 
305,884
 
With a risk weight of less than or equal to 35% under the Basel II standardized approach for credit risk
 
 
 
 
 
744
 
 
 
710
 
 
 
2,666
 
 
 
2,460
 
Performing residential mortgages, of which:
 
 
36,953
 
 
 
21,769
 
 
 
34,707
 
 
 
315,334
 
 
 
275,215
 
With a risk weight of less than or equal to 35% under the Basel II standardized approach for credit risk
 
 
36,953
 
 
 
21,751
 
 
 
34,689
 
 
 
314,368
 
 
 
274,376
 
Securities that are not in default and do not qualify as HQLA, including exchange-traded equities
 
 
34,908
 
 
 
2,908
 
 
 
1,813
 
 
 
20,020
 
 
 
49,049
 
Assets with matching interdependent liabilities
(5)
 
 
68
 
 
 
1,800
 
 
 
2,964
 
 
 
20,378
 
 
 
 
Other assets:
 
 
2,662
 
   
 
311,650
 
   
 
82,617
 
Physical traded commodities, including gold
 
 
2,662
 
       
 
2,262
 
Assets posted as initial margin for derivative contracts and contributions to default funds of CCPs
   
 
18,788
 
 
 
15,970
 
NSFR derivative assets
   
 
25,787
 
 
 
1,103
 
NSFR derivative liabilities before deduction of variation margin posted
   
 
54,824
 
 
 
2,741
 
All other assets not included in the above categories
 
 
 
 
 
154,335
 
 
 
19
 
 
 
57,897
 
 
 
60,541
 
Off-balance
sheet items
 
 
 
 
 
 
791,176
 
 
 
29,674
 
Total RSF
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
863,631
 
Net Stable Funding Ratio (%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
113%
 
     As at July 31, 2023         
(Millions of Canadian dollars, except percentage amounts)                              
Weighted
value
 
Total ASF
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  $ 938,870  
Total RSF
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    834,782  
Net Stable Funding Ratio (%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    112%
 
(1)   The NSFR is calculated in accordance with OSFI’s Liquidity Adequacy Requirements (LAR) guideline, which, in turn, reflects liquidity-related requirements issued by the BCBS.
(2)   Totals for the following rows encompass the residual maturity categories of less than 6 months, 6 months to less than 1 year, and greater than or equal to 1 year in accordance with the requirements of the common disclosure template prescribed by OSFI: Other liabilities, NSFR derivative liabilities, Other assets, Assets posted as initial margin for derivative contracts and contributions to default funds of CCPs, NSFR derivative assets, NSFR derivative liabilities before deduction of variation margin posted, and
Off-balance
sheet items.
(3)   As defined by the BCBS, stable deposits from retail and small business customers are deposits that are insured and are either held in transactional accounts or the bank has an established relationship with the client making the withdrawal unlikely.
(4)   Operational deposits from customers other than retail and small and
medium-sized
enterprises, are deposits which clients need to keep with the bank in order to facilitate their access and ability to use payment and settlement systems primarily for clearing, custody and cash management activities.
(5)   Interdependent assets and liabilities represent National Housing Act Mortgage-Backed Securities (NHA MBS) liabilities, including liabilities arising from transactions involving the Canada Mortgage Bond program and their corresponding encumbered mortgages.
 
96            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Available stable funding is comprised primarily of a diversified pool of personal and commercial deposits, capital, and long-term wholesale liabilities. Required stable funding is driven mainly by the bank’s mortgage and loan portfolio, secured loans to financial institutions and to a lesser extent by other less liquid assets. NSFR does not reflect any unused market funding capacity that we believe would be available.
Volume and composition of available stable funding is actively managed to optimize our structural funding position and meet NSFR objectives. Our NSFR is managed in accordance with our comprehensive LRMF.
Q4 2023 vs. Q3 2023
The NSFR as at October 31, 2023 was 113%, which translates into a surplus of approximately $109 billion, compared to 112% and a surplus of approximately $104 billion in the prior quarter. NSFR increased compared to the prior quarter mainly due to an increase in deposits and stable funding, partially offset by loan growth.
Contractual maturities of financial assets, financial liabilities and
off-balance
sheet items
The following tables provide remaining contractual maturity profiles of all our assets, liabilities, and
off-balance
sheet items at their carrying value (e.g., amortized cost or fair value) at the balance sheet date.
Off-balance
sheet items are allocated based on the expiry date of the contract.
Details of contractual maturities and commitments to extend funds are a source of information for the management of liquidity risk. Among other purposes, these details form a basis for modelling a behavioural balance sheet with effective maturities to calculate liquidity risk measures. For further details, refer to the Risk measurement and internal liquidity reporting section.
 
 
Contractual maturities of financial assets, financial liabilities and
off-balance
sheet items
 
 
 
Table 63  
 
   
 
As at October 31, 2023
 
(Millions of Canadian dollars)  
Less than
1 month
   
1 to 3
months
   
3 to 6
months
   
6 to 9
months
   
9 to 12
months
   
1 year
to 2 years
   
2 years
to 5 years
   
5 years
and greater
   
With no
specific
maturity
   
Total
 
Assets
                   
Cash and deposits with banks
 
$
130,121
 
 
$
8
 
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
 
$
2,946
 
 
$
133,075
 
Securities
                   
Trading (1)
 
 
117,373
 
 
 
56
 
 
 
103
 
 
 
26
 
 
 
46
 
 
 
99
 
 
 
127
 
 
 
8,997
 
 
 
63,324
 
 
 
190,151
 
Investment, net of applicable allowance
 
 
5,090
 
 
 
6,436
 
 
 
3,890
 
 
 
5,547
 
 
 
8,678
 
 
 
41,734
 
 
 
66,047
 
 
 
81,337
 
 
 
820
 
 
 
219,579
 
Assets purchased under reverse repurchase agreements and
securities borrowed (2)
 
 
146,722
 
 
 
71,346
 
 
 
60,468
 
 
 
20,475
 
 
 
16,889
 
 
 
3,754
 
 
 
 
 
 
 
 
 
20,537
 
 
 
340,191
 
Loans, net of applicable allowance
 
 
30,889
 
 
 
23,026
 
 
 
31,442
 
 
 
37,978
 
 
 
41,285
 
 
 
201,479
 
 
 
320,082
 
 
 
77,460
 
 
 
89,132
 
 
 
852,773
 
Other
                   
Customers’ liability under acceptances
 
 
16,493
 
 
 
5,247
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5
 
 
 
 
 
 
(50
 
 
21,695
 
Derivatives
 
 
10,074
 
 
 
13,655
 
 
 
9,292
 
 
 
6,955
 
 
 
6,173
 
 
 
18,905
 
 
 
33,260
 
 
 
44,136
 
 
 
 
 
 
142,450
 
Other financial assets
 
 
41,116
 
 
 
2,836
 
 
 
3,205
 
 
 
212
 
 
 
587
 
 
 
191
 
 
 
279
 
 
 
2,600
 
 
 
3,170
 
 
 
54,196
 
Total financial assets
 
 
497,878
 
 
 
122,610
 
 
 
108,400
 
 
 
71,193
 
 
 
73,658
 
 
 
266,162
 
 
 
419,800
 
 
 
214,530
 
 
 
179,879
 
 
 
1,954,110
 
Other non-financial assets
 
 
5,657
 
 
 
1,793
 
 
 
1,765
 
 
 
191
 
 
 
2,591
 
 
 
1,976
 
 
 
2,422
 
 
 
5,776
 
 
 
28,711
 
 
 
50,882
 
Total assets
 
$
503,535
 
 
$
124,403
 
 
$
110,165
 
 
$
71,384
 
 
$
76,249
 
 
$
268,138
 
 
$
422,222
 
 
$
220,306
 
 
$
208,590
 
 
$
2,004,992
 
Liabilities and equity
                   
Deposits (3)
                   
Unsecured borrowing
 
$
109,666
 
 
$
59,128
 
 
$
62,531
 
 
$
76,957
 
 
$
66,846
 
 
$
59,845
 
 
$
77,782
 
 
$
27,314
 
 
$
588,165
 
 
$
1,128,234
 
Secured borrowing
 
 
4,992
 
 
 
6,044
 
 
 
7,337
 
 
 
4,100
 
 
 
1,489
 
 
 
6,965
 
 
 
13,616
 
 
 
8,706
 
 
 
 
 
 
53,249
 
Covered bonds
 
 
 
 
 
2,543
 
 
 
 
 
 
 
 
 
1,687
 
 
 
9,422
 
 
 
31,847
 
 
 
4,705
 
 
 
 
 
 
50,204
 
Other
                   
Acceptances
 
 
16,493
 
 
 
5,247
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5
 
 
 
 
 
 
 
 
 
21,745
 
Obligations related to securities sold short
 
 
33,651
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
33,651
 
Obligations related to assets sold under repurchase agreements
and securities loaned (2)
 
 
254,955
 
 
 
37,121
 
 
 
19,509
 
 
 
(6
 
 
(1
 
 
279
 
 
 
 
 
 
 
 
 
23,381
 
 
 
335,238
 
Derivatives
 
 
9,716
 
 
 
16,359
 
 
 
9,311
 
 
 
6,346
 
 
 
5,974
 
 
 
19,290
 
 
 
32,400
 
 
 
43,233
 
 
 
 
 
 
142,629
 
Other financial liabilities
 
 
44,207
 
 
 
5,295
 
 
 
3,028
 
 
 
1,382
 
 
 
1,692
 
 
 
959
 
 
 
2,253
 
 
 
14,402
 
 
 
3,945
 
 
 
77,163
 
Subordinated debentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,937
 
 
 
9,449
 
 
 
 
 
 
11,386
 
Total financial liabilities
 
 
473,680
 
 
 
131,737
 
 
 
101,716
 
 
 
88,779
 
 
 
77,687
 
 
 
96,760
 
 
 
159,840
 
 
 
107,809
 
 
 
615,491
 
 
 
1,853,499
 
Other non-financial liabilities
 
 
929
 
 
 
6,613
 
 
 
221
 
 
 
216
 
 
 
150
 
 
 
1,102
 
 
 
2,009
 
 
 
12,928
 
 
 
9,565
 
 
 
33,733
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
117,760
 
 
 
117,760
 
Total liabilities and equity
 
$
474,609
 
 
$
138,350
 
 
$
101,937
 
 
$
88,995
 
 
$
77,837
 
 
$
97,862
 
 
$
161,849
 
 
$
120,737
 
 
$
742,816
 
 
$
2,004,992
 
Off-balance sheet items
                   
Financial guarantees
 
$
544
 
 
$
2,013
 
 
$
3,528
 
 
$
3,691
 
 
$
4,716
 
 
$
784
 
 
$
7,314
 
 
$
701
 
 
$
23
 
 
$
23,314
 
Commitments to extend credit
 
 
7,086
 
 
 
8,338
 
 
 
14,774
 
 
 
14,447
 
 
 
18,361
 
 
 
58,978
 
 
 
205,504
 
 
 
23,181
 
 
 
5,524
 
 
 
356,193
 
Other credit-related commitments
 
 
14,799
 
 
 
1,173
 
 
 
1,563
 
 
 
1,858
 
 
 
1,659
 
 
 
169
 
 
 
435
 
 
 
49
 
 
 
95,099
 
 
 
116,804
 
Other commitments
 
 
91
 
 
 
10
 
 
 
15
 
 
 
15
 
 
 
15
 
 
 
55
 
 
 
128
 
 
 
178
 
 
 
985
 
 
 
1,492
 
Total off-balance sheet items
 
$
22,520
 
 
$
11,534
 
 
$
19,880
 
 
$
20,011
 
 
$
24,751
 
 
$
59,986
 
 
$
213,381
 
 
$
24,109
 
 
$
101,631
 
 
$
497,803
 
 
(1)   Trading debt securities classified as FVTPL have been included in the less than 1 month category as there is no expectation to hold these assets to their contractual maturity.
(2)   Open reverse repo and repo contracts, which have no set maturity date and are typically short term, have been included in the with no specific maturity category.
(3)   A major portion of relationship-based deposits are repayable on demand or at short notice on a contractual basis while, in practice, these customer balances form a core base for our operations and liquidity needs, as explained in the preceding Deposit and funding profile section.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            97

     As at October 31, 2022  
                     
(Millions of Canadian dollars)   Less than
1 month
    1 to 3
months
    3 to 6
months
    6 to 9
months
    9 to 12
months
    1 year
to 2 years
    2 years
to 5 years
    5 years
and greater
    With no
specific
maturity
    Total  
Assets
                                                                               
Cash and deposits with banks
  $ 177,946     $ 2     $     $     $     $     $     $     $ 2,460     $ 180,408  
Securities
                                                                               
Trading (1)
    86,491       592       71       8             104       170       8,710       52,059       148,205  
Investment, net of applicable allowance
    3,250       7,490       7,390       3,537       4,873       12,303       50,979       79,387       809       170,018  
Assets purchased under reverse repurchase agreements and securities borrowed (2)
    122,836       76,590       58,750       19,246       17,212       1,131                   22,080       317,845  
Loans, net of applicable allowance
    31,203       21,795       29,253       39,919       34,658       150,826       348,411       75,091       88,809       819,965  
Other
                                                                               
Customers’ liability under acceptances
    11,632       6,235       5                                     (45     17,827  
Derivatives
    13,100       19,753       10,184       7,004       6,009       20,709       36,081       41,571       28       154,439  
Other financial assets
    48,485       1,964       1,666       199       457       246       231       2,364       3,025       58,637  
Total financial assets
    494,943       134,421       107,319       69,913       63,209       185,319       435,872       207,123       169,225       1,867,344  
Other non-financial assets
    6,744       1,609       196       (357     2,647       1,691       2,510       5,192       29,643       49,875  
Total assets
  $ 501,687     $   136,030     $   107,515     $   69,556     $   65,856     $   187,010     $ 438,382     $ 212,315     $   198,868     $   1,917,219  
Liabilities and equity
                                                                               
Deposits (3)
                                                                               
Unsecured borrowing
  $ 91,052     $ 56,920     $ 52,671     $ 64,685     $ 83,220     $ 39,327     $ 60,161     $ 18,500     $ 645,195     $ 1,111,731  
Secured borrowing
    4,343       6,271       7,365       2,007       4,626       6,059       15,400       7,824             53,895  
Covered bonds
          1,016       1,960       1,993             3,839       28,692       5,688             43,188  
Other
                                                                               
Acceptances
    11,632       6,235       5                                           17,872  
Obligations related to securities sold short
    35,511                                                       35,511  
Obligations related to assets sold under repurchase agreements and securities loaned (2)
    211,929       35,600       7,743       1,055       313       946                   16,361       273,947  
Derivatives
    13,096       22,073       10,994       7,097       5,244       20,135       34,226       40,626             153,491  
Other financial liabilities
    57,152       1,390       1,353       656       958       892       2,378       11,411       1,117       77,307  
Subordinated debentures
                      110                   1,881       8,034             10,025  
Total financial liabilities
    424,715       129,505       82,091       77,603       94,361       71,198       142,738       92,083       662,673       1,776,967  
Other non-financial liabilities
    1,021       6,585       298       156       178       1,046       1,073       12,357       9,363       32,077  
Equity
                                                    108,175       108,175  
Total liabilities and equity
  $   425,736     $ 136,090     $ 82,389     $ 77,759     $ 94,539     $ 72,244     $ 143,811     $ 104,440     $ 780,211     $ 1,917,219  
Off-balance sheet items
                                                                               
Financial guarantees
  $ 545     $ 2,211     $ 3,745     $ 3,274     $ 3,446     $ 1,415     $ 4,550     $ 1,068     $ 37     $ 20,291  
Commitments to extend credit
    7,016       6,879       14,184       21,094       17,133       49,135       193,990       19,269       4,516       333,216  
Other credit-related commitments
    1,934       1,135       1,674       1,448       1,469       541       520       85       90,821       99,627  
Other commitments
    24       11       16       16       16       60       136       187       849       1,315  
Total off-balance sheet items
  $ 9,519     $ 10,236     $ 19,619     $ 25,832     $ 22,064     $ 51,151     $ 199,196     $ 20,609     $ 96,223     $ 454,449  
 
(1)   Trading debt securities classified as FVTPL have been included in the less than 1 month category as there is no expectation to hold these assets to their contractual maturity.
(2)   Open reverse repo and repo contracts, which have no set maturity date and are typically short term, have been included in the with no specific maturity category.
(3)   A major portion of relationship-based deposits are repayable on demand or at short notice on a contractual basis while, in practice, these customer balances form a core base for our operations and liquidity needs, as explained in the preceding Deposit and funding profile section.
 
98            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Contractual maturities of financial liabilities and off-balance sheet items – undiscounted basis
The following tables provide remaining contractual maturity analysis of our financial liabilities and off-balance sheet items. Disclosed amounts are
the
contractual undiscounted cash flows of all financial liabilities (e.g., par value or amount payable upon maturity). The amounts do not reconcile directly with those in our consolidated balance sheets as the table incorporates only cash flows relating to payments on maturity and do not recognize premiums, discounts or mark-to-market adjustments recognized in the instruments’ carrying values as at the balance sheet date. Financial liabilities are based upon the earliest period in which they are required to be paid. For off-balance sheet items, the undiscounted cash flows potentially payable under financial guarantees and commitments to extend credit are classified based on the earliest date they can be called.
 
 
Contractual maturities of financial liabilities and off-balance sheet items – undiscounted basis*
 
 
 
Table 64  
 
   
As at October 31, 2023
 
(Millions of Canadian dollars)  
On
demand
   
Within
1 year
   
1 year
to 2 years
   
2 years
to 5 years
   
5 years
and greater
   
Total
 
Financial liabilities
                                               
Deposits
(1)
 
$
510,868
 
 
$
482,738
 
 
$
74,465
 
 
$
124,906
 
 
$
42,920
 
 
$
1,235,897
 
Other
                           

                 
Acceptances
 
 
 
 
 
21,740
 
 
 
 
 
 
5
 
 
 
 
 
 
21,745
 
Obligations related to securities sold short
 
 
 
 
 
33,741
 
 
 
 
 
 
 
 
 
 
 
 
33,741
 
Obligations related to assets sold under repurchase agreements and securities
loaned
 
 
23,381
 
 
 
311,154
 
 
 
279
 
 
 
 
 
 
 
 
 
334,814
 
Other liabilities
 
 
608
 
 
 
54,844
 
 
 
284
 
 
 
657
 
 
 
12,463
 
 
 
68,856
 
Lease liabilities
 
 
 
 
 
653
 
 
 
621
 
 
 
1,519
 
 
 
1,971
 
 
 
4,764
 
Subordinated debentures
 
 
 
 
 
 
 
 
 
 
 
1,939
 
 
 
9,457
 
 
 
11,396
 
 
 
 
534,857
 
 
 
904,870
 
 
 
75,649
 
 
 
129,026
 
 
 
66,811
 
 
 
1,711,213
 
Off-balance sheet items
                                               
Financial guarantees
(2)
 
$
23,308
 
 
$
2
 
 
$
4
 
 
$
 
 
$
 
 
$
23,314
 
Other commitments
(3)
 
 
 
 
 
61
 
 
 
55
 
 
 
128
 
 
 
178
 
 
 
422
 
Commitments to extend credit
(2)
 
 
5,617
 
 
 
114,495
 
 
 
48,848
 
 
 
178,048
 
 
 
9,185
 
 
 
356,193
 
 
 
 
28,925
 
 
 
114,558
 
 
 
48,907
 
 
 
178,176
 
 
 
9,363
 
 
 
379,929
 
Total financial liabilities and off-balance sheet items
 
$
563,782
 
 
$
 
 
1,019,428
 
 
$
124,556
 
 
$
307,202
 
 
$
76,174
 
 
$
2,091,142
 
         
   
As at October 31, 2022
 
(Millions of Canadian dollars)   On
demand
    Within 1
year
    1 year
to 2 years
    2 years
to 5 years
    5 years
and greater
    Total  
Financial liabilities
                                               
Deposits
(1)
  $ 562,288     $ 463,711     $ 50,169     $ 106,568     $ 37,260     $ 1,219,996  
Other
                                               
Acceptances
          17,872                         17,872  
Obligations related to securities sold short
          35,395                         35,395  
Obligations related to assets sold under repurchase agreements and securities
loaned
    16,367       256,756       948                   274,071  
Other liabilities
    508       61,420       220       709       9,191       72,048  
Lease liabilities
          654       630       1,609       2,217       5,110  
Subordinated debentures
          110             1,884       8,042       10,036  
 
    579,163       835,918       51,967       110,770       56,710       1,634,528  
Off-balance sheet items
                                               
Financial guarantees
(2)
  $ 20,289     $ 2     $     $     $     $ 20,291  
Other commitments
(3)
          73       60       136       187       456  
Commitments to extend credit
(2)
    284,606       48,573       1       36             333,216  
 
    304,895       48,648       61       172       187       353,963  
Total financial liabilities and off-balance sheet items
  $ 884,058     $ 884,566     $ 52,028     $ 110,942     $ 56,897     $   1,988,491  
 
*   This table represents an integral part of our 2023 Annual Consolidated Financial Statements.
(1)   A major portion of relationship-based deposits are repayable on demand or at short notice on a contractual basis while, in practice, these customer balances form a core base for our operations and liquidity needs, as explained in the preceding Deposit and funding profile.
(2)
 
We believe that it is highly unlikely that all or substantially all of these guarantees and commitments will be drawn or settled within one year, and contracts may expire without being drawn or settled. The management of the liquidity risk associated with potential extensions of funds is outlined in the preceding Risk measurement and internal liquidity reporting section.
(3)   Includes commitments related to short-term and low-dollar value leases, leases not yet commenced, and lease payments related to non-recoverable tax.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            99

 
Insurance risk
 
Insurance risk refers to the potential financial loss that may arise where the amount, timing and/or frequency of benefit and/or premium payments under insurance and reinsurance contracts are different than expected. Insurance risk is distinct from those risks covered by other parts of our risk management framework (e.g., credit, market and operational risk) where those risks are ancillary to, or accompany, the risk transfer. The five insurance sub-risks are: morbidity, mortality, longevity, policyholder behaviour (lapse), and travel risk.
Our Insurance Risk Management Framework provides an overview of our processes and tools for identifying, assessing, managing, mitigating and reporting on the insurance risks that face the organization. These are also supported by our robust three lines of defence governance structure, which is consistent with our Enterprise Risk Management Framework.
 
 
Operational/regulatory compliance risk drivers
 
 
 
Operational risk
 
Operational risk is the risk of loss or harm resulting from people, inadequate or failed internal processes, controls and systems or from external events. Operational risk is inherent in all of our activities and third-party activities and failure to manage operational risk can result in direct or indirect financial loss, reputational impact or regulatory scrutiny and proceedings in the various jurisdictions where we operate.
Our management of operational risk follows the three lines of defence governance model, encompassing the organizational roles and responsibilities for a coordinated enterprise-wide approach. For further details on the structure and organization of our operational risk management and control function, refer to the Risk management – Enterprise risk management section.
Operational risk framework
We have an Enterprise Operational Risk Framework which sets out the processes to identify, assess, monitor, measure, report and communicate on operational risk. The processes are established through the following:
 
Risk identification and assessment tools, including the collection and analysis of risk event data, help risk owners understand and proactively manage operational risk exposures. Risk assessments are intended to ensure alignment between risk exposures and efforts to manage them. Management uses outputs of these tools to make informed risk decisions.
 
Risk monitoring tools alert management to changes in the operational risk profile. When paired with escalation and monitoring triggers, risk monitoring tools can identify risk trends, warn management of risk levels that approach or exceed defined limits, as well as prompt actions and mitigation plans to be undertaken.
 
Risk capital measurement is designed to provide credible estimation of potential risk exposure, including surfacing risk vulnerabilities, and informs strategic and capital planning decisions, which are ultimately intended to ensure that the bank is sufficiently resilient to withstand operational risk losses both in normal times and under stress situations.
 
Risk reporting and communication processes seek to ensure that relevant operational risk information is made available to management in a timely manner to support risk-informed business decisions.
Conclusions from our operational risk programs enable learning based on what has occurred, insights into whether it could happen elsewhere in the organization, and what controls we need to amend or implement. These conclusions support the articulation of our operational risk appetite and are used to inform the overall level of operational risk exposure which thereby defines our operational risk profile. This profile includes significant operational risk exposures, potential new and emerging exposures and trends, and overall conclusions on the control environment and risk outlook.
We consider the potential risks and rewards of our decisions to strike a balance between accepting potential losses versus incurring costs of mitigation, the expression of which is in the form of our operational risk appetite. Our operational risk appetite is established at the Board level and cascaded throughout each of our business segments. We proactively identify and investigate corporate insurance opportunities to mitigate and reduce potential future impacts of operational risk.
Management reports have been implemented at various levels to support proactive management of operational risk and transparency of risk exposures. These reports are provided to senior management on a regular basis and provide detail on the main drivers of the risk status and trend for each of our business segments and the bank overall. In addition, changes to the operational risk profile that are not aligned to our business strategy or operational risk appetite are identified and discussed at the Operational Risk Committee (comprised of executives across the business and risk management) and presented to GRC and the Risk Committee of the Board.
 
100            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Our operations expose us to many different operational risks, which may adversely affect our businesses and financial results. The following list is not exhaustive, as other factors could also adversely affect our results.
 
     Operational risk
 
 
 
Management strategy
 
 
Information technology and cybersecurity risk
 
 
 
Information technology risk is the risk associated with the use, ownership, operation and adoption of information systems that can result in business interruptions, client service disruptions and loss of confidential information causing financial loss, reputational damage, and regulatory fines and penalties. We maintain a risk driven program to address the risks following our operational risk framework supported by a global team of technology risk management experts.
 
Cybersecurity risk is the risk to the business associated with cyberattacks initiated to disrupt or disable our operations or to expose or damage data. We have a dedicated team of technology and cybersecurity professionals that manage a comprehensive program to help protect the organization against breaches and other incidents by ensuring appropriate security and operational controls are in place. We continue to strengthen our cyber-control framework and to improve our resilience and cybersecurity capabilities including 24 hour monitoring, cyber intelligence analysis of internal and external threats, and alerting of potentially suspicious security events and incidents. Throughout the year, we continued to invest in our cybersecurity program, and multiple scenarios, assessments and simulations were conducted to test our resiliency strategy.
 
 
Information management and privacy risk
 
 
 
Information management risk is the risk of failing to manage information appropriately through its lifecycle due to inadequate processes, controls and technology resulting in legal and regulatory consequences, reputational damage and/or financial loss. We have made substantial investments in the Enterprise Chief Data Office (CDO) and functional and regional data management and data governance units to promote awareness of and effectively manage information management risk. Managing information management risk is fundamental to realizing our Data Vision, which is to become a data-driven organization that uses data effectively and efficiently to improve client experience and decision-making.
 
Privacy risk is defined as the risk of improper creation or collection, use, disclosure, retention or destruction of personal information (PI) that identifies an individual or can be reasonably used to identify an individual. PI includes the personal information entrusted to RBC by its Clients and Employees. Privacy Risk includes the risk of failure to safeguard PI against unauthorized access or use. The collection, use and sharing of data, as well as the management and governance of data, are increasingly important as we continue to invest in digital solutions and innovation, as well as expanding our business activities, which is also reflected through regulatory developments relating to data privacy. The CDO and the Global Privacy Office partner with cross-functional teams to develop and implement enterprise-wide standards and practices that describe how data is used, protected, managed and governed.
 
 
Money laundering and Terrorist financing risk
 
 
 
Money laundering and Terrorist financing risk is the risk that our products, services and delivery channels are misused to facilitate the laundering of proceeds of crime, financing of terrorist activity, bribery, corruption and other activities that may violate applicable economic sanctions (collectively know as “Financial Crimes”). We maintain an enterprise-wide program designed to deter, detect and report suspected money laundering and terrorist financing or suspicious activities across our organization, while seeking to ensure compliance with the laws and regulations of the various jurisdictions in which we operate. Our Enterprise Financial Crimes program is dedicated to the continuous development and maintenance of robust policies, guidelines, training, risk-assessment tools and models to enable our employees to manage evolving money laundering and terrorist financing risks, economic sanctions and regulatory expectations. The Enterprise Financial Crimes program is regularly evaluated in an effort to ensure it remains current and aligned with industry standards, best practices and all applicable laws, regulations and guidance. Risks of non-compliance can include enforcement actions, criminal prosecutions and reputational damage.
 
 
Third-party risk
 
 
 
Third-party risk is the risk of failure to effectively manage third parties which may expose us to service disruptions, regulatory action, financial loss, litigation or reputational damage. We have a risk-based enterprise-wide program designed to provide oversight for third-party relationships, ensure compliance with global regulatory expectations, and enable effective responses to events that can cause service disruptions, financial loss or various other risks that could impact us. Our approach to third-party risk mitigation is outlined in policies and standards that establish the requirements for identifying and managing risks throughout the engagement with a third-party (including risks resultant from supplier concentration and through fourth parties across the supply chain). Third-party providers critical to our operations are actively monitored for their ability to deliver services to us, including impacts resultant from vendors of our third-party providers (i.e. fourth parties).
 
 
Business continuity risk
 
 
 
Business continuity risk is the risk of being unable to maintain, continue or restore essential business operations during and/or after an event that prevents us from conducting business in the normal course. Exposure to disruptive operational events interrupts the continuity of our business operations and could negatively impact our financial results, reputation, client outcomes and/or result in harm to our employees. These operational events could result from the impact of severe weather, outbreak of a pandemic or other health crisis, failed processes, technology failures or cyber threats. Our risk-based enterprise-wide business continuity management program considers multiple scenarios to address the consequences of a disruption and its effects on the availability of our people, processes, facilities, technology and third-party arrangements. Our approach to business continuity management is outlined in policies and standards embedded across the organization and the related risks are regularly measured, monitored, reported and integrated into our operational risk management and control framework.
 
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            101

Operational risk capital
Requirements for operational risk capital are determined in accordance with OSFI issued guidelines. Upon implementation of the Basel III reforms in Q2 2023, we adopted a new Standardized Approach (SA) for the measurement of operational risk capital. This SA methodology is a formula-based calculation where a Business Indicator Component (BIC) is multiplied by an Internal Loss Multiplier (ILM) to determine operational risk capital. The BIC is a financial statement-based proxy for operational risk that reflects a 3-year average of specified components of net income multiplied by a set of supervisory provided coefficients. The ILM is a scaling factor that is based on our 10-year historical operational loss average relative to the BIC. Operational Risk losses are recorded in our operational risk management system, and robust processes exist to support high quality internal loss data. For further details on operational risk capital, refer to the Capital management section.
Operational risk loss events
As at October 31, 2023, our operational risk losses remain within our risk appetite. For further details on our contingencies, including litigation, refer to Notes 24 and 25 of our 2023 Annual Consolidated Financial Statements.
Culture and conduct risk
Our values set the tone of our organizational culture and translate into desired behaviours as articulated in our Code of Conduct and leadership model. We define conduct as the manifestation of culture through the behaviours, judgment, decisions and actions of the organization and its employees. Our organizational direction establishes the expectation of good conduct outcomes as the operating norm for the organization, all employees, and third-party service providers operating on our behalf to drive positive outcomes for our clients, employees, other stakeholders, financial markets and our reputation. We hold ourselves to the highest standards of conduct to build the trust of our clients, colleagues and communities. The desired outcomes from effective culture and conduct practices align with our purpose and values and support our risk appetite statements.
Risk culture is a subset of our overall culture that influences how, individually and collectively, we take and manage risks. Our risk culture helps us identify and understand risks, openly discuss risks and act on the organization’s current and perceived future risks. Our risk culture practices are grounded in our existing risk management and human resource disciplines and protocols. When combined with the elements of effective leadership and values, these practices provide a base from which the resulting risk culture and conduct can be assessed, monitored, sustained and subjected to ongoing enhancement.
Our Board-approved Enterprise Culture and Conduct Risks Framework provides organizational direction and describes our approach to a set of related topics applicable to all risk categories such as fair outcomes for clients and other stakeholders, and our culture, including accountability and risk culture, conduct risk, sales conduct and client practices, and misconduct.
On a regular basis, management communicates behavioural expectations to our employees with an emphasis on conduct and values. Our leadership model also supports and encourages effective challenge between the businesses and control functions. These behavioural expectations are supported by tools and resources which are designed to help employees live our values, report misconduct and raise concerns, including those that might have ethical implications. We are committed to fostering an environment where employees feel safe to speak up without retaliation. Employees have the ability to report matters through a global anonymous Conduct Hotline. In addition, our Code of Conduct outlines an employee’s responsibility to be truthful, respect others and comply with laws, regulations and our policies. Anyone who breaches or fails to report an actual or possible breach of the Code of Conduct is subject to corrective or disciplinary action. This can range from reprimands and impacts on performance ratings and compensation, to termination of employment relationships with the organization. As well, Internal Audit conducts select behavioural science reviews to better understand and enhance employee attitudes and behaviours as they relate to risk management.
 
 

 
 
Regulatory compliance risk
 
Regulatory compliance risk is the risk of potential non-conformance with laws, rules, regulations and prescribed practices in any jurisdiction in which we operate. Issues regarding compliance with laws and regulations can arise in a number of areas in large complex financial institutions, such as ourselves, and are often the result of inadequate or failed internal processes, controls, people or systems. We currently are, and may be at any given time, subject to a number of legal and regulatory proceedings and subject to numerous governmental and regulatory examinations, investigations and other inquiries.
 
102            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Laws and regulations are in place to protect the financial and other interests of our clients, shareholders and the public. As a large-scale global financial institution, we are subject to numerous laws and extensive and evolving regulation by governmental agencies, supervisory authorities and self-regulatory organizations in Canada, the U.S., the U.K., Europe and other jurisdictions in which we operate. Such regulation continues to become increasingly extensive and complex. In addition, regulatory scrutiny and expectations in Canada, the U.S., the U.K., Europe and other jurisdictions for large financial institutions with respect to, among other things, governance, risk management practices and controls, and conduct, as well as the enforcement of regulatory compliance matters, has intensified. Failure to comply with these regulatory requirements and expectations or to resolve any identified deficiencies could result in increased regulatory oversight and restrictions. Resolution of such matters can also result in the payment of substantial penalties, agreements with respect to future operation of our business, actions with respect to relevant personnel, admission of wrongdoing, and guilty pleas with respect to criminal charges, which may in turn prohibit us from conducting certain types of business absent regulatory relief.
Operating in this increasingly complex regulatory environment and intense regulatory enforcement environment, we are and have been subject to a variety of legal proceedings, including civil claims and lawsuits, criminal charges, regulatory scrutiny, examinations and proceedings, investigations, audits and requests for information by various governmental regulatory agencies and law enforcement authorities in various jurisdictions, and we anticipate that our ongoing business activities will give rise to such matters in the future. The global scope of our operations also means that a single issue may give rise to overlapping regulatory investigations, regulatory proceedings and or civil litigation claims in different jurisdictions. RBC can be subject to such proceedings due to alleged violations of law or, if determined by regulators, allegedly inadequate policies, procedures, controls or remediation of deficiencies. Changes to laws, including tax laws, regulations or regulatory policies, as well as the changes in how they are interpreted, implemented or enforced, could adversely affect us, for example, by lowering barriers to entry in the businesses in which we operate, increasing our costs of compliance, or limiting our activities and ability to execute our strategic plans. In addition, the severity of the remedies sought in legal and regulatory proceedings to which RBC is subject have increased. Further, there is no assurance that we always will be, or be deemed to be, in compliance with laws, regulations or regulatory policies or expectations. Accordingly, it is possible that we could receive a judicial or regulatory enforcement judgment or decision that results in significant fines, damages, penalties, and other costs or injunctions, criminal convictions, or loss of licenses or registrations that would damage our reputation, and negatively impact our earnings and ability to conduct some of our businesses. We are also subject to litigation arising in the ordinary course of our business and the adverse resolution of any litigation could have a significant adverse effect on our results or could give rise to significant reputational damage, which in turn could impact our future business prospects.
Our Regulatory Compliance Management Framework outlines how we manage and mitigate the regulatory compliance risks associated with failing to comply with, or adapt to, current and changing laws and regulations in the jurisdictions in which we operate.
Regulatory compliance risk includes the regulatory risks associated with financial crimes (which include, but are not limited to, money laundering, terrorist financing, bribery, corruption, and violations of economic sanctions), privacy, market conduct, consumer protection and business conduct, as well as prudential and other generally applicable non-financial requirements. Specific compliance policies, procedures and supporting frameworks have been developed to seek to manage regulatory compliance risk.
 
 
Strategic risk drivers
 
 
 
Strategic risk
 
Strategic risk is the risk that the enterprise or particular business areas will make inappropriate strategic choices, or will be unable to successfully implement selected strategies or achieve the expected benefits. Business strategy is a major driver of our risk appetite and consequently the strategic choices we make in terms of business mix determine how our risk profile changes.
Responsibility for selecting and successfully implementing business strategies is mandated to the individual heads of each business segment. Oversight of strategic risk is the responsibility of the heads of the business segments and their operating committees, the Enterprise Strategy & Transformation group, the GE and the Board. The Enterprise Strategy & Transformation group supports the management of strategic risk through the strategic planning process, articulated within our Enterprise Strategic Planning Policy, ensuring alignment across our business, financial, capital and risk planning.
Our annual business portfolio review and project approval request processes help to identify and mitigate strategic risk by seeking to ensure that strategies for new initiatives, lines of business, and the enterprise as a whole align with our risk appetite and risk posture. GRM provides oversight of strategic risk by providing independent reviews of these processes, establishing enterprise risk frameworks, and independently monitoring and reporting on the level of risk established against our risk appetite metrics in accordance with the three lines of defence governance model.
For details on the key strategic priorities for our business segments, refer to the Business segment results section.
 
 
Reputation risk
 
Reputation risk is the risk of an adverse impact on stakeholders’ perception of RBC due to i) perceived or actual misalignment between stakeholder perceptions of RBC and the actions or inactions of the bank, its employees, or individuals or groups affiliated with RBC (e.g. stakeholder perceptions of our role as a good corporate citizen), ii) negative or shifting public sentiment on existing, evolving, or emerging industry or global issues, or iii) negative outcomes relating to any risk inherent to the financial services industry, including ineffective management of these risks, or situations beyond our control such as external events or systemic risks. A strong and trustworthy reputation will generally strengthen our market position, reduce the cost of capital, increase shareholder value, strengthen our resiliency, and help attract and retain top talent. Conversely, damage to our reputation can result in reduced share price and market capitalization, increased cost of capital, loss of strategic flexibility, inability to enter or expand into markets, loss of client loyalty and business, regulatory fines and penalties, restrictive agreements with regulators or prosecutors, or criminal prosecutions. The sources of reputation risk are widespread. Reputation risk is a transverse risk which can manifest as an outcome of other risk types including but not limited to credit, regulatory, legal, operational, and environmental and social risks. We can also experience reputation risk from a failure to maintain an effective control environment, exhibit good conduct and maintain appropriate cultural practices.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            103

Managing our reputation risk is an integral part of our organizational culture and our overall enterprise risk management approach, as well as a priority for employees and our Board. Our Board-approved Reputation Risk Management Framework provides an overview of our approach to identify, assess, manage, monitor and report on reputation risk. This framework outlines governance authorities, roles and responsibilities, and controls and mechanisms to manage our reputation risk, including our culture of integrity, compliance with our Code of Conduct and operating within our risk appetite.
Our governance of reputation risk aims to be holistic and provides an integrated view of potential reputation issues across the organization. This governance structure is designed to ensure that ownership and accountability for reputation risk are understood across the enterprise, both proactive and reactive reputation risk decisions are escalated to senior management for review and evaluation, and reporting on reputation risk is comprehensive and integrated.
 
 
Legal and regulatory environment risk
 
Legal and regulatory environment risk is the risk that new or modified laws and regulations, and the interpretation or application of laws and regulations, will negatively impact the way in which we operate, both in Canada and in the other jurisdictions in which we conduct business. The full impact of some of these changes on our business will not be known until final rules are implemented and market practices have developed in response. We continue to respond to these and other developments and are working to minimize any potential adverse business or economic impact. The following provides a high-level summary of some of the key regulatory changes that have potential to increase or decrease our costs, impact our profitability and increase the complexity of our operations.
Global uncertainty
Significant uncertainty about inflationary pressures and geopolitical tensions continues to pose risks to the global economic outlook. In October 2023, the International Monetary Fund (IMF) projected global growth of 3.0% in calendar 2023 which remains unchanged from its July 2023 forecast and is up from 2.7% in October 2022. The IMF projected global growth in 2024 of 2.9%. The global growth recovery from the COVID-19 pandemic and the Russia-Ukraine conflict remains slow and uneven, as economic activity in certain geographies has not yet returned to pre-pandemic levels, resulting in regional divergences. The resolution of the U.S. debt ceiling standoff, and decisive actions taken by global authorities to contain instability in the U.S. regional banking sector have reduced the immediate risks of financial turmoil. However, uncertainty remains regarding: interest rates being sustained at higher levels for longer; the severity and impact of central banks’ monetary policy tightening as they attempt to reduce persistent levels of elevated inflation; ongoing geopolitical tensions, including those between Russia and Ukraine and the conflict in the Middle East; extreme weather-related events; and the potential re-emergence of financial sector instability as banks face regulatory reform in the U.S. Our diversified business model, as well as our product and geographic diversification, continue to help mitigate the risks posed by global uncertainty.
Environment and social-related legal and regulatory activity
Environmental and social-related regulations, frameworks, and guidance that apply to banks, insurers and asset managers continue to rapidly evolve. As such, new or heightened requirements could result in increased regulatory, compliance or other costs or higher capital requirements, and may subject us to different and potentially conflicting requirements in the various jurisdictions in which we operate. We continue to monitor the development of applicable laws in this area, including but not limited to the evolution of disclosure requirements for public issuers and climate risk management requirements for financial institutions.
In Canada, OSFI released its final Guideline B-15 – Climate Risk Management on March 7, 2023, which sets out expectations for the management and disclosure of climate-related risks for federally regulated financial institutions (FRFIs) and aims to support FRFIs in developing greater resilience to, and management of, these risks. The first set of guidelines will be effective fiscal
year-end
2024, with annual disclosures required to be made publicly available no later than 180 days after fiscal year-end. OSFI intends to review and amend the guideline as practices and standards evolve. We are currently assessing the impact of the guideline and have initiated work to meet the requirements by the effective date.
In the U.S., the SEC issued proposed rule changes on March 21, 2022, which would require many registrants to include certain climate-related disclosures in their regulatory filings, including the financial statements. We continue to monitor developments in this area. In addition, various states in the United States have enacted or proposed statutes or regulations addressing environmental and/or social matters. As environmental and social issues become more politicized, statutes or regulations in certain states may be interpreted to prohibit governmental entities, such as public pension funds and issuers of municipal bonds, from doing business with certain financial institutions, and political pressure may be placed upon governmental entities to not do business with certain financial institutions, based on the financial institutions’ perceived positions on certain environmental and/or social matters. We continue to monitor developments in this area and assess their impacts on our businesses.
Internationally, the International Sustainability Standards Board (ISSB) issued its inaugural standards on June 26, 2023, being IFRS S1 General Requirements for Disclosures of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures (collectively, the ISSB Standards). IFRS S1 sets out general reporting requirements for disclosing sustainability-related financial information. IFRS S2 requires an entity to disclose information about climate-related risks and opportunities and the impact on an entity’s financial position, performance, cash flows, strategy and business model. The applicability of the standards and the effective date for Canadian reporting issuers is subject to adoption by Canadian regulators, and we continue to monitor communication from the Canadian Securities Administrators.
In addition, the European Union’s Corporate Sustainability Reporting Directive (CSRD) requires reporting under the European Sustainability Reporting Standards (ESRS). The ESRS, which were adopted by the European Commission on July 31, 2023, set out the requirements for companies to report on sustainability-related impacts, opportunities and risks. We are currently assessing the impact of the CSRD.
We continue to monitor trends in climate-related litigation and regulatory enforcement actions, including those involving claims of “greenwashing”, which generally refer to claims that false or misleading information about an organization’s products or services or operations has been conveyed to suggest that the organization is doing more to protect the environment than it is, and to assess the impact on our litigation and regulatory compliance risks.
 
104            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Government of Canada 2023 Budget
On March 28, 2023, the Government of Canada presented its 2023 budget (“Budget 2023”), which introduced a number of proposed measures including a proposal to deny the dividend received deduction in respect of dividends received by financial institutions after December 31, 2023 on shares of corporations resident in Canada where such shares are mark-to-market property for tax purposes, and a new 2% tax on net share buybacks for publicly listed corporations occurring on or after January 1, 2024. Budget 2023 also reinforced the Government of Canada’s commitment to the Organization for Economic
Co-operation
and Development’s two-pillar plan for international tax reform, including a global 15% minimum tax on multinational enterprises, and associated draft legislation for a Global Minimum Tax Act was published on August 4, 2023 and the period for public comment was closed on September 29, 2023. Timing of enactment of these changes remains uncertain, and legislation remains subject to amendment prior to enactment. The ultimate impact of the proposed measures will depend on the final legislation.
Budget 2023 also introduced harmonized sales tax (HST) on payment card clearing services, to be applied prospectively in all cases and retroactively under certain circumstances. A bill with this legislation received royal assent and became law on June 22, 2023.
Third-party risk management
On April 24, 2023, OSFI released its final Guideline B-10 – Third-Party Risk Management, which sets out expectations for managing risks associated with third-party arrangements for FRFIs.
This guideline will be effective on May 1, 2024. We have assessed the requirements and do not anticipate any issues in complying with the requirements by the effective date.
Interest Rate Benchmark Reform
As part of the interest rate benchmark reform, the publication of all remaining USD London Interbank Offered Rate (LIBOR) settings ceased on June 30, 2023. As at October 31, 2023, and consistent with our transition plan, our exposure to financial instruments referencing USD LIBOR is no longer material. For further details, refer to Note 2 of our 2023 Annual Consolidated Financial Statements.
Additionally, on July 27, 2023 the Canadian Alternative Reference Rate Working Group published a market notice confirming that effective November 1, 2023, no new CDOR or Bankers’ Acceptance (BA) based lending will be permitted. This announcement does not impact the ability to draw on existing CDOR or BA loan facilities entered into prior to November 1, 2023 and is in line with OSFI’s expectations. Our transition plan has been updated to reflect this announcement.
Federal Deposit Insurance Corporation (FDIC) special assessment
On November 16, 2023, the FDIC Board of Directors approved the imposition of a special assessment on certain U.S. depository institutions to recover the cost associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank. The special assessment will be assessed at an annual rate of approximately 13.4 basis points of a U.S. depository institution’s uninsured deposits over a specified threshold, to be collected over an anticipated eight quarterly assessment periods with the first quarterly assessment period beginning January 1, 2024. The cost of the special assessment for us is expected to be approximately US$120 million.
For further details on regulatory capital and related requirements, refer to the risk and Capital management sections of this 2023 Annual Report.
 
 
Competitive risk
 
Competitive risk is the risk of an inability to build or maintain a sustainable competitive advantage in a given market or markets and includes the potential for loss of market share due to competitors offering superior products and services. Competitive risk can arise from within or outside the financial sector, from traditional or non-traditional competitors, domestically or globally. There is intense competition for clients among financial services companies. Client loyalty and retention can be influenced by several factors, including new technology used or services offered by our competitors, relative service levels and prices, product and service attributes, reputation, actions taken by our competitors, and adherence with competition and anti-trust laws. Other companies, such as insurance companies and non-financial companies, as well as new technological applications, are increasingly offering services traditionally provided by banks. This competition could also reduce our revenue which could adversely affect our results.
We identify and assess competitive risks as part of our overall risk management process. Our products and services are regularly benchmarked against existing and potential competitors. In addition, we regularly conduct risk reviews of our products, services, mergers and acquisitions strategy, and we seek to ensure adherence to competition and anti-trust laws. Our annual strategy-setting process also plays an integral role in managing competitive risk.
 
 
Macroeconomic risk drivers
 
 
 
Systemic risk
 
Systemic risk is the risk that the financial system as a whole, or a major part of it – either in an individual country, a region or globally – is put in real and immediate danger of collapse or serious damage due to an unforeseen event causing a substantive shock to the financial system with the likelihood of material damage to the economy, and which would result in financial, reputation, legal or other risks for us.
Systemic risk is considered to be the least controllable risk, leading to increased vulnerabilities as experienced during the 2008 global financial crisis and the COVID-19 pandemic. In 2023, U.S. regional bank failures highlighted the potential vulnerability of the financial system to systemic risks, particularly given tightening financial regulations and technology-driven increases in transaction velocity. Our ability to mitigate systemic risk when undertaking business activities is limited, other than through collaborative mechanisms between key industry participants, and, as appropriate, the public sector and regulators to reduce the frequency and impact of these risks. The two most significant measures in mitigating the impact of systemic risk are diversification and stress testing.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            105

Our diversified business model, portfolios, products, activities and funding sources help mitigate the potential impacts from systemic risk. Our established risk limits also seek to ensure our portfolio is diversified, and concentration risk is reduced and remains within our risk appetite.
Stress testing involves consideration of the simultaneous movements in several risk factors. Stress testing seeks to ensure our business strategies and capital planning are robust by measuring the potential impacts of credit, market, liquidity and operational risks, under adverse economic conditions. Our enterprise-wide stress testing program evaluates the potential effects of a set of specified changes in risk factors, corresponding to exceptional but plausible adverse economic and financial market events. These stress scenarios are evaluated across the organization, and results are integrated to develop an enterprise-wide view of the impacts on our financial results and capital requirements. For further details on our stress testing, refer to the Enterprise risk management section.
Our financial results are affected by the business and economic conditions in the geographic regions in which we operate. These conditions include consumer saving and spending habits as well as consumer borrowing and repayment patterns, business investment, government spending, exchange rates, sovereign debt risks, the level of activity and volatility of the capital markets, strength of the economy and inflation. Given the importance of our Canadian and U.S. operations, an economic downturn may largely affect our personal and business lending activities and may result in higher provisions for credit losses. Deterioration and uncertainty in global capital markets could result in continued high volatility that would impact results in Capital Markets. In Wealth Management, weaker market conditions could lead to lower average fee-based client assets and transaction volumes. In addition, worsening financial and credit market conditions may adversely affect our ability to access capital markets on favourable terms and could negatively affect our liquidity, resulting in increased funding costs and lower transaction volumes in Capital Markets and Wealth Management.
Our financial results are also sensitive to changes in interest rates. To address persistent inflationary pressures, major central banks continued increasing benchmark interest rates during fiscal 2023 and the future path of monetary policy is uncertain. While there may be a potential benefit to our NIM, elevated interest rates generally result in higher funding costs. If elevated interest rates are coupled with persistent inflation, it could increase market volatility and reduce asset values, and adversely impact household and corporate balance sheets. This could lead to credit deterioration and impact our financial results, particularly in our Personal & Commercial Banking, Wealth Management and Capital Markets businesses.
 
 
Overview of other risks
 
In addition to the risks described in the risk sections, there are other risk factors, described below, which may affect our businesses and financial results. The following discussion is not exhaustive as other factors could also adversely affect our results.
 
 
Government fiscal, monetary and other policies
 
Our businesses and earnings are affected by monetary policies that are adopted by the BoC, the Fed in the U.S., the ECB in the European Union (EU), the BoE in the U.K. and monetary authorities in other jurisdictions in which we operate, as well as the fiscal policies of the governments of Canada, the U.S., the U.K., Europe and such other jurisdictions. Such policies can also adversely affect our clients and counterparties in Canada, the U.S. and internationally, which may increase the risk of default by such clients and counterparties.
 
 
Tax risk and transparency
 
Tax risk refers to the risk of loss related to unexpected tax liabilities. The tax laws and systems that are applicable to us are complex and wide-ranging. As a result, we seek to ensure that any decisions or actions related to tax always reflect our assessment of the long-term costs and risks involved, including their impact on our reputation and our relationship with clients, shareholders and regulators.
Our approach to taxation is grounded in principles which are reflected in our Code of Conduct, is governed by our Enterprise Tax Risk Management Policy, and incorporates the fundamentals of our risk drivers. Oversight of our tax policy and the management of tax risk is the responsibility of the GE, the CFO and the Senior Vice President, Taxation. We discuss our tax strategy with the Audit Committee annually and provide updates on our tax position on a regular basis.
Our tax strategy is designed to provide transparency and support our business strategy, and is aligned with our corporate vision and values. We seek to maximize shareholder value by structuring our businesses in a tax-efficient manner while considering reputation risk by being in compliance with all laws and regulations. Our policy requires that we:
   
Act with integrity and in a straightforward, open and honest manner in all tax matters;
   
Ensure tax strategy is aligned with our business strategy supporting only bona fide transactions with a business purpose and economic substance;
   
Ensure all intercompany transactions are conducted in accordance with applicable transfer pricing requirements;
   
Ensure our full compliance and full disclosure to tax authorities of our statutory obligations; and
   
Endeavour to work with the tax authorities to build positive long-term relationships and where disputes occur, address them constructively.
With respect to assessing the needs of our clients, we consider a number of factors including the purpose of the transactions. We seek to ensure that we only support bona fide client transactions with a business purpose and economic substance. Should we become aware of client transactions that are aimed at evading their tax obligations, we will not proceed with the transactions.
We operate in 29 countries worldwide. Our activities in these countries are subject to both Canadian and international tax legislation and other regulations, and are fully disclosed to the relevant tax authorities. The Taxation group and GRM both regularly review the activities of all entities in an effort to ensure compliance with tax requirements and other regulations.
Given that we operate globally, complex tax legislation and accounting principles have resulted in differing legal interpretations between the respective tax authorities we deal with and ourselves, and we are at risk of tax authorities disagreeing with prior positions we have taken for tax purposes. When this occurs, we are committed to an open and transparent dialogue with the tax authorities to facilitate a quick assessment and prompt resolution of the issues where possible. Failure to
 
106            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

adequately manage tax risk and resolve issues with tax authorities in a satisfactory manner could adversely impact our results, potentially to a material extent in a particular period, and/or significantly impact our reputation.
Tax contribution
In 2023, total income and other tax expense, including income taxes in the Consolidated Statements of Comprehensive Income and Changes in Equity, to various levels of governments globally totalled $5 billion (2022 – $6 billion). In Canada, total income and other tax expense for the year ended October 31, 2023 to various levels of government totalled $4 billion (2022 – $5 billion).
 
 
   
For further details on income and other tax expense, refer to the Financial performance section.
 
 
Environmental and social risk
 
Environmental and social (E&S) risk is the potential for an E&S issue associated with us, a client, transaction, product, supplier or activity, to have a negative impact on us, including our financial position, operations, legal and regulatory compliance, or reputation. It refers to the risk that we face as a result of the manner in which we, a supplier or a client manages E&S issues or relationships with stakeholders and communities.
E&S issues include, but are not limited to, site contamination, waste management, land and resource use, biodiversity, water quality and availability, climate change, environmental regulation, human rights (including, but not limited to social and racial inequality and Indigenous Peoples’ rights), and community engagement.
E&S risks, including climate risk, are each unique and transverse risks and impact all our principal risk types in different ways and to varying degrees, including but not limited to strategic, operational, credit, reputation, legal and regulatory environment, and regulatory compliance risks. See the Climate risk section below for additional information specific to climate risk.
Governance
The Board oversees how we manage our E&S risks, our enterprise approach to E&S risks, and how we conduct our business to meet high standards of E&S responsibility. The Board approved our updated climate strategy, the RBC Climate Blueprint, which was published in February 2022. The Committees of the Board have oversight of E&S risks that are specific to their respective responsibilities, with the Governance Committee playing a specific oversight and coordination role over ESG matters, including over certain of our ESG-related disclosures. For further details on risk governance, refer to the Enterprise risk management – Risk governance section.
Roles and responsibilities related to E&S risk management are governed by the Enterprise Risk Management Framework and the three lines of defence governance model. Business segments and functional areas are responsible for incorporating E&S risk management requirements within their own operations, while GRM is responsible for developing and maintaining an integrated enterprise view of E&S risk, including establishing policies and procedures, and performing effective challenge and oversight in relation to E&S risk.
Risk management
We seek to integrate E&S risk considerations into our risk management processes. We continue to evolve our approach to E&S risk by leveraging existing risk management capabilities, and where new capability builds are required, we incorporate regulatory guidance, industry best practices and improved data analytics to identify and assess, measure, manage, mitigate, monitor and report on potential impacts to clients, portfolios, and our operations.
Our Enterprise Policy on Environmental (including climate) and Social Risk (E&S Risk Policy)
1
serves as the foundation for our approach to managing E&S risks arising from our activities. It outlines our principles for E&S risk management, and sets out standards for how E&S risks arising from our activities are identified, assessed, measured, managed, mitigated, monitored and reported.
The E&S Risk Policy is supported by additional policies and procedures on E&S risk management for business segments, which includes an enhanced due diligence process which we undertake for certain corporate and commercial clients, to identify E&S issues that may drive E&S risk for RBC. As a signatory to the Equator Principles (EP) framework, we also have a procedure that outlines our governance for managing E&S risks related to certain project finance-related transactions. We also have policy guidelines
2
in place for sensitive sectors and activities, which address our financing activities to clients and projects operating in the coal-fired power generation and coal mining sectors, the Arctic ecosystem, the Arctic National Wildlife Refuge, and United Nations Educational, Scientific and Cultural Organization (UNESCO) World Heritage Sites.
 
1
 
  The E&S Risk Policy is not inclusive of the activities of, and assets under management by, RBC Global Asset Management (RBC GAM). RBC GAM has developed its own policy with respect to these matters. RBC GAM includes, but is not limited to, the following wholly owned indirect subsidiaries of the Bank: RBC Global Asset Management Inc. (including Phillips, Hager & North Investment Management), RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, RBC Global Asset Management (Asia) Limited and BlueBay Asset Management LLP.
2
 
  See RBC’s Policy Guidelines for Sensitive Sectors and Activities which address our lending activities.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            107

Climate risk
Climate risk is the risk related to the global transition to a net-zero economy (transition risk) and the physical impacts of climate change (physical risk), which includes both chronic (longer-term) risks (e.g., rising sea levels and increases in average temperatures) and acute (event driven) risks (e.g., wildfires and floods). Both we and our clients may be exposed to climate-related transition risk, including through emerging regulatory and legal requirements, changing business and consumer sentiment towards products and services, technological developments, and changes in stakeholder expectations. Additionally, we and our clients may be vulnerable to climate-related physical risk through disruptions to operations and services.
We continue to advance our climate risk measurement, management, monitoring and reporting capabilities and our understanding of the impact climate-related risks may have on our business and our clients’ businesses.
We maintain a diversified lending portfolio, which improves our resilience to geographic or sectoral downturns and limits concentrations of credit exposure to climate risk. We continue to build our capability to assess the potential impact of both transition and physical risk on our portfolio. In particular, we conduct portfolio, client and scenario analyses to assess our exposure to, and the impact of, climate-related risks. As part of our annual stress testing and analysis, we continue to integrate components of climate risk through transition and physical risk stresses and to assess its impact on our key portfolios. We seek to improve data quality to further identify those sectors within our wholesale portfolio that are most affected by physical and transition risk. We are continuing to expand our climate data inventory and enhance our climate data governance processes, to improve our climate risk analytical capabilities.
We classify critical environment sites based on our business risk tolerance for site-specific downtime and, among other things, site location, power supply, exposure to flooding, geological stability, and other hazards. We also take steps to mitigate and adapt to climate change through our building design and our purchasing decisions.
Our continued development of our climate risk measurement capabilities will inform the enhancements to our climate risk management practices and advance the integration of climate risks into our policies and procedures.
Human rights and codes of conduct
Our approach to identifying, assessing, managing and mitigating social issues such as human rights issues, is set out in our E&S Risk Policy, and is supported by additional policies and position statements that reflect our approach to managing our businesses in a responsible manner.
RBC is committed to respecting human rights, including those of any clients, employees, third parties with whom we conduct business or who may be affected by our business activities – either directly or indirectly – and to taking the actions set out in RBC’s Human Rights Position Statement (Statement) in order to meet the responsibility of businesses like ours to respect human rights as set out in the United Nations Guiding Principles on Business and Human Rights. Our Statement is adopted at the highest levels of our organization and is published on our website.
Our Modern Slavery Act Statement is published annually and sets out our commitment to preventing slavery and human trafficking from taking place in our businesses and in our supply chains.
Our Code of Conduct establishes standards of desired behaviour that apply to all directors, employees, and contract workers of the bank and its subsidiaries. In addition, our principles-based Supplier Code of Conduct articulates our expectations with respect to a supplier’s business integrity, responsible business practices and responsible treatment of individuals and the environment.
Framework and commitments
We are a participant or signatory to various industry principles and initiatives that are designed to help mitigate E&S risk within our business activities or advance responsible business practices, including but not limited to the following:
 
RBC is a member of the Net-Zero Banking Alliance (NZBA), which is a global industry-led initiative to accelerate and support efforts to address climate change by aligning member banks’ lending and investment portfolios with net-zero emissions by 2050
3
. As a member of the NZBA, we made a commitment to setting and disclosing interim emissions reduction targets for our key high-emitting sectors.
 
RBC is a member of the Partnership for Carbon Accounting Financials (PCAF), which is an industry-led partnership to facilitate transparency and enable financial institutions to assess and disclose greenhouse gas emissions of loans and investments. In October 2022, in accordance with our NZBA commitment, we published our initial interim emissions reduction targets in our lending activities for the oil and gas, power generation and automotive sectors
3
.
 
RBC is a signatory to the Equator Principles (EP), which is a benchmark for determining, assessing and managing E&S risks for project finance. We report annually on projects assessed according to the EP framework.
 
RBC GAM and Brewin Dolphin Holdings Limited are signatories to the United Nations Principles for Responsible Investment (UN PRI) and report on their responsible investment activities to the UN PRI.
In addition, we are committed to providing $500 billion in sustainable finance by 2025
4
. In October 2022, we published our approach and methodology for classifying, tracking, and disclosing progress towards our sustainable finance commitment and to support the identification of new growth opportunities for our clients and our business.
We may be exposed to legal, regulatory or reputation risk in the event that we do not fully implement these frameworks or meet these commitments, goals or targets, either as a result of our own actions or due to external factors. More specifically, our ability to achieve our climate and sustainable finance-related commitments, goals and targets, including those discussed above, will depend on the collective efforts and actions across a wide range of stakeholders outside of our control, and there can be no assurance that they will be achieved
5
.
 
3
 
  Our NZBA commitments to achieving net-zero emissions in our lending by 2050 and to our initial 2030 interim emissions reduction targets for lending in three key sectors (oil & gas, power generation and automotive) are not inclusive of the activities of, and the assets under management by, RBC GAM and RBC Wealth Management (RBC WM). RBC WM includes, but is not limited to, the following affiliates: (a) RBC Dominion Securities Inc. (Member–Canadian Investor Protection Fund), RBC Direct Investing Inc. (Member–Canadian Investor Protection Fund), Royal Mutual Funds Inc., RBC Wealth Management Financial Services Inc., Royal Trust Corporation of Canada and The Royal Trust Company, which are separate but affiliated subsidiaries of us; and (b) Brewin Dolphin Holdings PLC and its subsidiaries.
4
 
  Sustainable finance refers to financial activities that take into account environmental, social and governance factors.
5
 
  External factors that could cause our actual results to differ materially from our expectations expressed in such commitments, goals and targets include the need for more and better climate data and standardization of climate-related measurement methodologies, our ability to gather and verify data, our ability to successfully implement various initiatives throughout our enterprise under expected time frames, difficulty in identifying transactions, products and services that meet the sustainable finance classification criteria, the risk that eligible transactions or related initiatives will not be completed within any specified period or at all or with the results or outcome as originally expected or anticipated by us, our ability to track transactions and report on them as performance against our climate or sustainable finance commitment, the compliance of various third parties with our policies and procedures and their commitment to us, the need for active and continuing participation and action of various stakeholders, technological advancements, the evolution of consumer behaviour, varying decarbonization efforts across economies, the need for thoughtful climate policies around the world, the challenges of balancing emission reduction targets with an orderly, just and inclusive transition and geopolitical factors that impact global energy needs, the legal and regulatory environment, and regulatory compliance considerations. Our climate- or sustainable finance-related commitments, goals and targets are aspirational and may need to be changed or recalibrated as data improve and as climate science, transition pathways and market practices regarding standards, methodologies, metrics and measurements evolve.
 
108            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Legal and regulatory developments
Environmental and social-related regulations, frameworks, and guidance that apply to banks, insurers and asset managers continue to rapidly evolve. As such, new or heightened requirements could result in increased regulatory, compliance or other costs or higher capital requirements, and may subject us to different and potentially conflicting requirements in the various jurisdictions in which we operate. As regulatory requirements evolve, we will continue to monitor such developments and update our risk management practices and disclosures as necessary. See the Legal and regulatory environment risk section for further details.
 
 
Capital management
 
We actively manage our capital to maintain strong capital ratios and high ratings while providing strong returns to our shareholders. In addition to the regulatory requirements, we consider the expectations of credit rating agencies, depositors and shareholders, as well as our business plans, stress tests, peer comparisons and our internal capital ratio targets. Our goal is to optimize our capital usage and structure, and to provide support for our business segments and clients. We also aim to generate optimal returns for our shareholders, while protecting depositors and creditors.
Capital management framework
Our capital management framework establishes policies and processes for defining, measuring, raising and investing all forms of capital in a coordinated and consistent manner. It sets our overall approach to capital management, including guiding principles and roles and responsibilities relating to capital adequacy and transactions, dividends, solo capital, and management of RWA, leverage ratio exposures, TLAC capital and TLAC leverage ratios. We manage and monitor capital from several perspectives, including regulatory capital, solo capital and TLAC.
Our capital planning process is dynamic and involves various teams including Finance, Corporate Treasury, GRM, Economics and our businesses, and covers internal capital ratio targets, potential capital transactions as well as projected dividend payouts and share repurchases. This process considers our business operating plans, enterprise-wide stress testing and ICAAP, regulatory capital changes and supervisory requirements, accounting changes, internal capital requirements, rating agency metrics and solo capital.
Our capital plan is established on an annual basis and is aligned with the management actions included in the annual business operating plan, which includes forecast growth in assets and earnings taking into account our business strategies, the projected market and economic environment, and peer positioning. This includes incorporating potential capital transactions based on our projected internal capital generation, business forecasts, market conditions and other developments, such as accounting and regulatory changes that may impact capital requirements. All of the components in the capital plan are monitored throughout the year and are revised as deemed appropriate.
 
 
Our enterprise-wide stress testing and annual ICAAP processes provide key inputs for capital planning, including setting internal capital ratio targets. The stress scenarios are evaluated across the organization, and results are integrated to develop an enterprise-wide view of financial impacts and capital requirements, which in turn facilitate the planning of mitigating actions to absorb adverse events. ICAAP assesses capital adequacy and requirements covering all material risks, with a cushion for plausible contingencies. In accordance with OSFI guidelines, major components of our ICAAP process include comprehensive risk assessment, stress testing, capital assessment and planning, Board and senior management oversight, monitoring and reporting and internal control review.
Our internal capital targets are established to maintain robust capital positions in excess of OSFI’s Basel III regulatory targets. The results of our enterprise-wide stress testing and ICAAP processes are incorporated into the OSFI Capital Buffers, Domestic Systemically Important Banks (D-SIB)/Globally Systemically Important Banks (G-SIB) surcharge, and Domestic Stability Buffer (DSB), with a view to ensure that the bank has adequate capital to underpin risks and absorb losses under all plausible stress scenarios given our risk profile and appetite. In addition, we include a discretionary cushion on top of OSFI’s regulatory targets to reflect our risk appetite, our forecasts of potential negative downturns and to maintain our capital strength for forthcoming regulatory and accounting changes, peer comparatives, rating agencies sensitivities, future acquisitions and solo capital level.
The Board is responsible for the ultimate oversight of capital management, including the annual review and approval of the capital plan. ALCO and GE share responsibility for capital management and receive regular reports detailing our compliance with approved limits and guidelines. The Audit and Risk Committees jointly approve the ICAAP process.
Basel III
Our consolidated regulatory capital requirements are determined by OSFI’s Capital Adequacy Requirements (CAR) guidelines, which are based on the minimum Basel III capital ratio requirements adopted by the BCBS.
Under Basel III, banks select from two main approaches, the Standardized Approach (SA) or the IRB Approach, to calculate their minimum regulatory capital required to support credit, market and operational risks. We adopted the Basel III IRB approach to calculate credit risk capital for consolidated regulatory reporting purposes. While the majority of our credit risk exposures are reported under the Basel III IRB Approach for regulatory capital purposes, certain portfolios continue to use the Basel III SA for credit risk, primarily in Wealth Management, including our City National wholesale portfolio, and our Caribbean Banking operations. For consolidated regulatory reporting of market risk capital, we currently use both the Internal Models-based and Standardized Approaches. For consolidated regulatory reporting of operational risk capital we use the SA, as implemented under Basel III. We determine our regulatory leverage ratio based on OSFI’s LR Guideline, which reflects the BCBS Basel III leverage ratio requirements.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            109

All federally regulated banks with a Basel III leverage ratio total exposure exceeding
200 billion at their financial year-end are required, at a minimum, to publicly disclose in the first quarter following their year-end, the thirteen indicators used in the annual G-SIB assessment methodology, with the goal of enhancing the transparency of the relative scale of banks’ potential global systemic importance and data quality. The FSB publishes an updated list of G-SIBs annually. On November 27, 2023, we were re-designated as a G-SIB by the FSB. This designation requires us to maintain a higher loss absorbency requirement (common equity as a percentage of RWA) of 1% consistent with the D-SIB requirement.
OSFI’s TLAC guideline establishes two minimum standards: the risk-based TLAC ratio, which builds on the risk-based capital ratios described in the CAR guideline, and the TLAC leverage ratio, which builds on the leverage ratio described in OSFI’s LR guideline. The TLAC requirement is intended to address the sufficiency of a D-SIB’s loss absorbing capacity in supporting its recapitalization in the event of its failure. TLAC is defined as the aggregate of Tier 1 capital, Tier 2 capital and external TLAC instruments which allow conversion in whole or in part into common shares under the CDIC Act and meet all of the eligibility criteria under the TLAC guideline.
OSFI requires all D-SIBs to publicly disclose their Pillar 2 DSB requirement as part of their quarterly disclosures, similar to other current capital-related disclosure requirements. The level of the Pillar 2 buffer ranges between 0% and 4% of the entity’s total RWA for each of the six systemically important banks in Canada. The DSB requirements must be met at the CET1 capital level. OSFI undertakes a review of the DSB on a semi-annual basis, in June and December, and will publicly announce any changes at that time.
On December 8, 2022, OSFI announced an increase in the DSB upper limit to 4% of total RWA from the upper limit of 2.5% of total RWA, and an increase to the DSB level of 50 bps to 3%, effective February 1, 2023. On June 20, 2023, OSFI announced an increase in the DSB level from the current 3% to 3.5% of total RWA effective November 1, 2023.
The following table provides a summary of OSFI’s current regulatory target ratios under Basel III and Pillar 2 requirements. We are in compliance with all current capital, leverage and TLAC requirements imposed by OSFI:
 
Basel III – OSFI regulatory targets
 
Table 65  
           
Basel III
capital,
leverage and TLAC
ratios
 
OSFI regulatory target requirements
for large banks under Basel III
   
RBC capital,  
leverage
and TLAC
ratios as at
October 31,  
2023  
   
Domestic  
Stability  
Buffer 
(3)
  
   
 
Minimum
including
Capital
Buffers,
D-SIB/G-SIB
surcharge and
Domestic
Stability
Buffer as at  
October 31,  
2023  
   
 
Minimum
including
Capital
Buffers,
D-SIB/G-SIB
surcharge and
Domestic
Stability
Buffer effective  
November 1,  
2023 
(4)
 
 
Minimum
   
Capital
Buffers
   
Minimum
including
Capital
Buffers
   
D-SIB/G-SIB
surcharge 
(1)
   
Minimum
including
Capital
Buffers and
D-SIB/G-SIB
 surcharge 
(1), (2)
 
 
Common Equity Tier 1
    4.5%       2.6%       7.1%       1.0%       8.1%       14.5%       3.0%       11.1%       11.6%  
Tier 1 capital
    6.0%       2.6%       8.6%       1.0%       9.6%       15.7%       3.0%       12.6%       13.1%  
Total capital
    8.0%       2.6%       10.6%       1.0%       11.6%       17.6%       3.0%       14.6%       15.1%  
Leverage ratio
    3.5%       n.a.       3.5%       n.a.       3.5%       4.3%       n.a.       3.5%       3.5%  
TLAC ratio
    21.6%       n.a.       21.6%       n.a.       21.6%       31.0%       3.0%       24.6%       25.1%  
TLAC leverage ratio
    7.25%       n.a.       7.25%       n.a.       7.25%       8.5%       n.a.       7.25%       7.25%  
 
(1)   A capital surcharge, equal to the higher of our D-SIB surcharge and the BCBS’s G-SIB surcharge, is applicable to risk-weighted capital.
(2)   The capital buffers include the capital conservation buffer of 2.5% and the countercyclical capital buffer (CCyB) as prescribed by OSFI. The CCyB, calculated in accordance with OSFI’s CAR guidelines, was 0.06% as at October 31, 2023 (October 31, 2022 – 0.01%).
(3)   The DSB can range from 0% to 4% of total RWA and as at October 31, 2023 was set at 3% by OSFI.
(4)   Effective November 1, 2023, the DSB level increased by 50 bps. Minimum target requirements reflect CCyB requirements as at October 31, 2023 which are subject to change based on exposures held at the reporting date.
n.a.   not applicable
 
110            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Regulatory capital, TLAC available, RWA, capital and TLAC ratios
Under Basel III, capital consists of CET1, Additional Tier 1, Tier 2 capital and external TLAC instruments.
CET1 capital comprises the highest quality of capital. Regulatory adjustments under Basel III include full deductions of certain items and additional capital components that are subject to threshold deductions as prescribed in the CAR guidelines.
Tier 1 capital comprises predominantly CET1 and Additional Tier 1 items including non-cumulative preferred shares and limited recourse capital notes (LRCNs) that meet certain criteria. Tier 2 capital primarily includes subordinated debentures that meet certain criteria and certain loan loss allowances. Total capital is defined as the sum of Tier 1 and Tier 2 capital. Preferred shares, LRCNs, and subordinated debentures issued after January 1, 2013 require Non-viability contingent capital (NVCC) features to be included into regulatory capital. NVCC requirements ensure that non-common regulatory capital instruments bear losses before banks seek government funding.
TLAC available is defined as the sum of Total capital and external TLAC instruments. External TLAC instruments comprise predominantly senior bail-in debt, which includes eligible senior unsecured debt with an original term to maturity of greater than 400 days and remaining term to maturity of greater than 365 days.
Capital ratios are calculated by dividing CET1, Tier 1, Total capital and TLAC available by total RWA.
The following chart provides a summary of the major components of CET1, Additional Tier 1, Tier 2 capital and external TLAC instruments.
 
 
 

 
  (1)   In accordance with OSFI’s regulatory adjustments announced in Q2 2020, our 2022 figures include capital modifications associated with Stage 1 and 2 allowances which were subject to a 25%
after-tax
exclusion rate in fiscal 2022. This guidance ceased to apply at the beginning of fiscal 2023.
 
  (2)   First level: The amount by which each of the items exceeds a 10% threshold of CET1 capital (after all deductions but before threshold deductions) will be deducted from CET1 capital. Second level: The aggregate amount of the three items not deducted from the first level above and in excess of 15% of CET1 capital after regulatory adjustments will be deducted from capital, and the remaining balance not deducted will be risk-weighted at 250%.  
  (3)  
Non-significant
investments are subject to certain CAR criteria that drive the amount eligible for deduction.
 
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            111

The following tables provide details on our regulatory capital, TLAC available, RWA, and on ratios for capital, leverage and TLAC. Our capital position remains strong and our capital, leverage and TLAC ratios remain well above OSFI regulatory targets:
 
Regulatory capital, TLAC available, RWA and capital, leverage and TLAC ratios
 
 
Table 66  
 
    As at  
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
 
October 31
2023
   
October 31
2022
 
Capital
(1)
   
CET1 capital
 
$
86,611
 
  $ 76,945  
Tier 1 capital
 
 
93,904
 
    84,242  
Total capital
 
 
104,952
 
    93,850  
Risk-weighted assets (RWA) used in calculation of capital ratios
(1)
   
Credit risk
 
$
475,842
 
  $ 496,898  
Market risk
 
 
40,498
 
    35,342  
Operational risk
 
 
79,883
 
    77,639  
Total RWA
 
$
596,223
 
  $   609,879  
Capital ratios and Leverage ratio
(1)
   
CET1 ratio
 
 
14.5%
 
    12.6%
Tier 1 capital ratio
 
 
15.7%
 
    13.8%
Total capital ratio
 
 
17.6%
 
    15.4%
Leverage ratio
 
 
4.3%
 
    4.4%
Leverage ratio exposure (billions)
 
$
2,180
 
  $ 1,898  
TLAC available and ratios
(2)
   
TLAC available
 
$
  184,916
 
  $ 160,961  
TLAC ratio
 
 
31.0%
 
    26.4%
TLAC leverage ratio
 
 
8.5%
 
    8.5%
 
  (1)   Capital, RWA, and capital ratios are calculated using OSFI’s CAR guideline and the Leverage ratio is calculated using OSFI’s LR guideline. Both the CAR guideline and LR guideline are based on the Basel III framework. The results for the year ended October 31, 2023 reflect our adoption of the revised CAR and LR guidelines that came into effect in Q2 2023 as part of OSFI’s implementation of the Basel III reforms.  
  (2)   TLAC available and TLAC ratios are calculated using OSFI’s TLAC guideline. The TLAC standard is applied at the resolution entity level which for us is deemed to be Royal Bank of Canada and its subsidiaries. A resolution entity and its subsidiaries are collectively called a resolution group. The TLAC ratio and TLAC leverage ratio are calculated using the TLAC available as a percentage of total RWA and leverage exposure, respectively.  
 
 
Regulatory capital and TLAC available
 
 
 
Table 67  
 
    As at  
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
 
CET1 capital: instruments and reserves and regulatory adjustments
   
Directly issued qualifying common share capital (and equivalent for
non-joint
stock companies) plus related stock surplus
 
$
19,365
 
  $ 17,162  
Retained earnings
 
 
84,130
 
    77,859  
Accumulated other comprehensive income (and other reserves)
 
 
6,852
 
    5,725  
Directly issued capital subject to phase out from CET1 (only applicable to
non-joint
stock companies)
 
 
 
     
Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1)
 
 
11
 
    11  
 
Regulatory adjustments applied to CET1 under Basel III
 
 
(23,747
    (23,812
Common Equity Tier 1 capital (CET1)
 
$
86,611
 
 
$
76,945
 
Additional Tier 1 capital: instruments and regulatory adjustments
   
Directly issued qualifying Additional Tier 1 instruments plus related stock surplus
 
$
7,291
 
  $ 7,294  
Directly issued capital instruments to phase out from Additional Tier 1
 
 
 
     
Additional Tier 1 instruments issued by subsidiaries and held by third parties (amount allowed in group AT1)
 
 
2
 
    3  
 
Regulatory adjustments applied to Additional Tier 1 under Basel III
 
 
 
     
Additional Tier 1 capital (AT1)
 
$
7,293
 
 
$
7,297
 
Tier 1 capital (T1 = CET1 + AT1)
 
$
93,904
 
 
$
84,242
 
Tier 2 capital: instruments and provisions and regulatory adjustments
   
Directly issued qualifying Tier 2 instruments plus related stock surplus
 
$
9,683
 
  $ 8,587  
Directly issued capital instruments subject to phase out from Tier 2
 
 
 
     
Tier 2 instruments issued by subsidiaries and held by third parties (amount allowed in group Tier 2)
 
 
3
 
    3  
Collective allowance
 
 
1,362
 
    1,018  
 
Regulatory adjustments applied to Tier 2 under Basel III
 
 
 
     
Tier 2 capital (T2)
 
$
11,048
 
 
$
9,608
 
    
               
Total capital (T1 + T2)
 
$
104,952
 
 
$
93,850
 
External TLAC: instruments and regulatory adjustments
   
External TLAC instruments
 
$
78,952
 
  $ 66,528  
Amortised portion of T2 instruments where remaining maturity > 1 year
 
 
1,248
 
    818  
Regulatory adjustments applied to TLAC under Basel III
 
 
 
 
(236
 
 
   
 
(235
 
 
TLAC available (Total capital + External TLAC)
 
$
184,916
 
  $ 160,961  
 
112            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

2023 vs. 2022
 

 
  (1)   Represents rounded figures.  
  (2)   Represents net internal capital generation of $8 billion or 132 bps consisting of Net income available to shareholders excluding the impact of specified items and the partial sale of RBC Investor Services operations, less common and preferred share dividends and distributions on other equity instruments.  
  (3)   Excludes specified items for the impact of the CRD and other tax related adjustments, certain deferred tax adjustments, transaction and integration costs relating to our planned acquisition of HSBC Canada and the impact of impairment losses on our interest in an associated company.  
  (4)   For further details about the Dividend reinvestment plan (DRIP), refer to Note 20 of our 2023 Annual Consolidated Financial Statements.  
  (5)   Includes the impact of the specified item for the impact of the CRD and other tax related adjustments.  
  (6)   Includes the impact of specified items for certain deferred tax adjustments, transaction and integration costs relating to our planned acquisition of HSBC Canada and the impact of impairment losses on our interest in an associated company, as well as the impact of the partial sale of RBC Investor Services operations.  
Our CET1 ratio was 14.5%, up 190 bps from last year, mainly reflecting net internal capital generation, the favourable impact of the Basel III reforms and share issuances under the DRIP. These factors were partially offset by RWA growth (excluding FX) and the impact of the CRD and other tax related adjustments.
Our Tier 1 capital ratio of 15.7% was up 190 bps, mainly reflecting the factors noted above under the CET1 ratio.
Our Total capital ratio of 17.6% was up 220 bps, mainly reflecting the factors noted above under the Tier 1 capital ratio and a favourable impact from the net issuance of subordinated debentures.
Our Leverage ratio of 4.3% was down 10 bps, mainly due to the reversal of the regulatory modification for central bank reserves qualifying as HQLA, business-driven growth in leverage exposures and the impact of the CRD and other tax related adjustments. These factors were partially offset by net internal capital generation and the impacts of share issuances under the DRIP, the partial sale of RBC Investor Services operations and the Basel III reforms.
Leverage exposures increased by $282 billion, mainly driven by the reversal of the regulatory modification noted above, business growth primarily in securities, personal and commercial lending in Canada, repo-style transactions and undrawn commitments, partially offset by lower interest-bearing deposits with banks and cash. The impact of foreign exchange translation also contributed to the increase. These factors were partially offset by the impact of the partial sale of RBC Investor Services operations and the Basel III reforms.
Our TLAC ratio of 31.0% was up 460 bps, reflecting the factors noted above under the Total capital ratio, as well as a favourable impact from a net increase in eligible external TLAC instruments.
Our TLAC leverage ratio of 8.5% was unchanged, reflecting the factors noted above under the Leverage ratio offset by a favourable impact from a net increase in eligible external TLAC instruments.
External TLAC instruments include long-term senior debt subject to conversion into common shares under the
Bail-in
regime. For further details, refer to Deposit and funding profile in the Liquidity and funding risk section.
Basel III RWA
OSFI requires banks to meet minimum risk-based capital requirements for exposures to credit risk, operational risk, and where they have significant trading activity, market risk. RWA is calculated for each of these risk types and added together to determine total RWA. In addition, a minimum capital floor requirement must be maintained as prescribed under OSFI’s CAR guidelines which is currently set to 65% of RWA as calculated under current Basel III standardized credit risk and market risk approaches as defined in the CAR guidelines. If the capital requirement is less than the required threshold, a floor adjustment to RWA must be applied to the reported RWA as prescribed by OSFI’s CAR guidelines.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            113

 
Total capital risk-weighted assets
 
 
 
Table 68  
 
   
 
2023
         2022  
   
Exposure 
(2)
   
Average
of risk-
weights 
(3)
   
 
Risk-weighted assets All-in Basis 
(1)
           
As at October 31 (Millions of Canadian dollars,
except percentage amounts)
 
 
Standardized
approach
   
 
Advanced
approach
(A-IRB)
   
Foundation
approach
(F-IRB)
   
Other
   
Total
         Total  
Credit risk
                 
Lending-related and other
                 
Residential mortgages
 
$
566,257
 
 
 
8%
 
 
$
3,817
 
 
$
41,047
 
 
$
 
 
$
 
 
$
44,864
 
    $ 41,662  
Other retail (personal, credit cards and small business treated as retail)
 
 
215,682
 
 
 
29%
 
 
 
5,369
 
 
 
56,345
 
 
 
 
 
 
 
 
 
61,714
 
      65,506  
Business (corporate, commercial,
medium-sized
enterprises and
non-bank
financial institutions)
 
 
493,178
 
 
 
48%
 
 
 
70,130
 
 
 
93,208
 
 
 
75,227
 
 
 
 
 
 
238,565
 
      238,823  
Sovereign (government)
 
 
348,790
 
 
 
4%
 
 
 
2,767
 
 
 
11,251
 
 
 
 
 
 
 
 
 
14,018
 
      15,910  
Bank
 
 
35,751
 
 
 
40%
 
 
 
5,713
 
 
 
 
 
 
8,626
 
 
 
 
 
 
14,339
 
 
 
    5,483  
Total lending-related and other
 
$
1,659,658
 
 
 
23%
 
 
$
87,796
 
 
$
201,851
 
 
$
83,853
 
 
$
 
 
$
373,500
 
 
 
  $ 367,384  
Trading-related
                 
Repo-style transactions
 
$
1,153,730
 
 
 
1%
 
 
$
107
 
 
$
222
 
 
$
7,367
 
 
$
96
 
 
$
7,792
 
    $ 8,668  
Derivatives – including CVA
 
 
129,288
 
 
 
26%
 
 
 
568
 
 
 
3,040
 
 
 
15,730
 
 
 
13,657
 
 
 
32,995
 
 
 
    40,138  
Total trading-related
 
$
1,283,018
 
 
 
3%
 
 
$
675
 
 
$
3,262
 
 
$
23,097
 
 
$
13,753
 
 
$
40,787
 
 
 
  $ 48,806  
Total lending-related and other and trading-related
 
$
2,942,676
 
 
 
14%
 
 
$
88,471
 
 
$
205,113
 
 
$
106,950
 
 
$
13,753
 
 
$
414,287
 
    $ 416,190  
Bank book equities
 
 
4,896
 
 
 
206%
 
 
 
10,074
 
 
 
 
 
 
 
 
 
 
 
 
10,074
 
      5,682  
Securitization exposures
 
 
69,736
 
 
 
17%
 
 
 
5,332
 
 
 
6,178
 
 
 
 
 
 
 
 
 
11,510
 
      12,543  
Regulatory scaling factor
 
 
n.a.
 
 
n.a.
 
 
n.a.
 
 
 
 
 
 
 
 
n.a.
 
 
 
 
      18,267  
Other assets
 
 
32,681
 
 
 
122%
 
 
 
n.a.
 
 
n.a.
 
 
n.a.
 
 
39,971
 
 
 
39,971
 
 
 
    44,216  
Total credit risk
 
$
3,049,989
 
 
 
16%
 
 
$
103,877
 
 
$
211,291
 
 
$
106,950
 
 
$
53,724
 
 
$
475,842
 
 
 
  $ 496,898  
Market risk
                 
Interest rate
     
$
3,575
 
 
$
12,831
 
 
$
 
 
$
 
 
$
16,406
 
    $ 13,256  
Equity
     
 
2,534
 
 
 
1,125
 
 
 
 
 
 
 
 
 
3,659
 
      4,001  
Foreign exchange
     
 
2,641
 
 
 
1,024
 
 
 
 
 
 
 
 
 
3,665
 
      3,735  
Commodities
     
 
1,055
 
 
 
102
 
 
 
 
 
 
 
 
 
1,157
 
      1,750  
Specific risk
     
 
8,276
 
 
 
1,583
 
 
 
 
 
 
 
 
 
9,859
 
      8,411  
Incremental risk charge
 
 
 
 
 
 
 
 
 
 
 
 
 
5,752
 
 
 
 
 
 
 
 
 
5,752
 
 
 
    4,189  
Total market risk
 
 
 
 
 
 
 
 
 
$
18,081
 
 
$
22,417
 
 
$
 
 
$
 
 
$
40,498
 
 
 
  $ 35,342  
Operational risk
 
 
 
 
 
 
 
 
 
$
79,883
 
 
$
 
 
$
 
 
$
 
 
$
79,883
 
 
 
  $ 77,639  
Total risk-weighted assets
 
$
 3,049,989
 
 
 
 
 
 
$
 201,841
 
 
$
 233,708
 
 
$
 106,950
 
 
$
 53,724
 
 
$
 596,223
 
 
 
  $ 609,879  
 
(1)   Balances as at October 31, 2023 reflect our adoption of the revised CAR guidelines that came into effect in Q2 2023 as part of OSFI’s implementation of the Basel III reforms.
(2)   Total exposure represents exposure at default (EAD) which is the expected gross exposure upon the default of an obligor. This amount excludes any allowance against impaired loans or partial write-offs and does not reflect the impact of credit risk mitigation.
(3)   Represents the average of counterparty risk weights within a particular category.
n.a.   not applicable
2023 vs. 2022
Total RWA was down $14 billion from last year, mainly reflecting the favourable impact of the Basel III reforms. This was partially offset by the net impact of business growth, primarily in personal and commercial lending in Canada that was partly offset by lower corporate lending and trading related activities. The impact of foreign exchange translation and net credit migration, primarily in our wholesale portfolios, also partially offset the impact from the Basel III reforms. In our CET1 ratio, the impact of foreign exchange translation on RWA is largely mitigated with economic hedges.
 
114            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Selected capital management activity
 
 
Selected capital management activity
 
 
 
Table 69  
 
    
 
For the year ended October 31, 2023
 
(Millions of Canadian dollars, except number of shares)
  
 
Issuance or
redemption date
    
Number of
shares 
(000s)
    
Amount
 
Tier 1 capital
        
Common shares activity
        
Issued in connection with share-based compensation plans
(1)
     
 
740
 
  
$
68
 
Issued under the DRIP
(2)
     
 
16,042
 
  
 
2,012
 
Tier 2 capital
        
Issuance of February 1, 2033 subordinated debentures 
(3), (4)
  
 
January 31, 2023
 
  
 
 
 
  
$
  1,500
 
 
  (1)   Amounts include cash received for stock options exercised during the period and fair value adjustments to stock options.  
  (2)   During the three months ended October 31, 2023, July 31, 2023 and April 30, 2023, the requirements of the DRIP were satisfied through shares issued from treasury. For further details, refer to Note 20 of our 2023 Annual Consolidated Financial Statements.  
  (3)   For further details, refer to Note 19 of our 2023 Annual Consolidated Financial Statements.  
  (4)  
Non-Viability
Contingent Capital (NVCC) instruments.
 
On January 31, 2023, we issued $1,500 million of NVCC subordinated debentures. The notes bear interest at a fixed rate of 5.01% per annum until February 1, 2028, and at the Daily Compounded Canadian Overnight Repo Rate Average plus 2.12% thereafter until their maturity on February 1, 2033.
As at October 31, 2023, we did not have an active normal course issuer bid (NCIB).
On November 7, 2023, we redeemed all 15 thousand of our issued and outstanding Non-Cumulative First Preferred Shares Series C-2 at a redemption price of US$ 1,000 per share. Concurrently, we redeemed all 615 thousand Series C-2 depositary shares, each of which represents a one-fortieth interest in a Series C-2 share.
Dividends
Our common share dividend policy reflects our earnings outlook, payout ratio objective and the need to maintain adequate levels of capital to support business plans. In 2023, our dividend payout ratio was 51%. Common share dividends paid during the year were $7 billion.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            115

Selected share data
(1)
 
Table 70  
   
 
2023
          2022  
               
(Millions of Canadian dollars, except number of shares
and as otherwise noted)
 
Number of
shares
 (000s)
   
Amount
   
 
Dividends
declared
per share
           Number of
shares (000s)
    Amount     Dividends
declared
per share
 
Common shares issued
 
 
1,402,373
 
 
$
19,398
 
 
     $
5.34
 
            1,385,591     $ 17,318          $ 4.96  
Treasury shares – common shares 
(2)
 
 
(1,862
 
 
(231
 
 
 
 
 
 
 
 
    (2,680     (334  
 
 
 
Common shares outstanding
 
 
1,400,511
 
 
$
  19,167
 
 
 
 
 
 
 
 
 
    1,382,911     $   16,984    
 
 
 
Stock options and awards
                                                       
Outstanding
 
 
7,793
 
                            7,535                  
Exercisable
 
 
3,830
 
                            3,502                  
Available for grant
 
 
3,693
 
 
 
 
 
 
 
 
 
 
 
 
 
    4,696    
 
 
 
 
 
 
 
First preferred shares issued
                                                       
Non-cumulative
Series AZ 
(3), (4)
 
 
20,000
 
 
$
500
 
 
     $
0.93
 
            20,000     $ 500          $ 0.93  
Non-cumulative
Series BB 
(3), (4)
 
 
20,000
 
 
 
500
 
 
 
0.91
 
            20,000       500       0.91  
Non-cumulative
Series BD 
(3), (4)
 
 
24,000
 
 
 
600
 
 
 
0.80
 
            24,000       600       0.80  
Non-cumulative
Series BF 
(3), (4)
 
 
12,000
 
 
 
300
 
 
 
0.75
 
            12,000       300       0.75  
Non-cumulative
Series BH 
(4)
 
 
6,000
 
 
 
150
 
 
 
1.23
 
            6,000       150       1.23  
Non-cumulative
Series BI
(4)
 
 
6,000
 
 
 
150
 
 
 
1.23
 
            6,000       150       1.23  
Non-cumulative
Series BO 
(3), (4)
 
 
14,000
 
 
 
350
 
 
 
1.20
 
            14,000       350       1.20  
Non-cumulative
Series BT 
(3), (4), (5)
 
 
750
 
 
 
750
 
 
 
4.20%
 
            750       750       4.20%  
Non-cumulative
Series
C-2
(6)
 
 
15
 
 
 
23
 
 
US$
  67.50
 
            15       23     US$   67.50  
Other equity instruments issued
                                                       
Limited recourse capital notes Series 1 
(3), (4), (7), (8)
 
 
1,750
 
 
 
1,750
 
 
 
4.50%
 
            1,750       1,750       4.50%  
Limited recourse capital notes Series 2 
(3), (4), (7), (8)
 
 
1,250
 
 
 
1,250
 
 
 
4.00%
 
            1,250       1,250       4.00%  
Limited recourse capital notes Series 3 
(3), (4), (7), (8)
 
 
1,000
 
 
 
1,000
 
 
 
3.65%
 
 
 
 
 
    1,000       1,000       3.65%  
Preferred shares and other equity instruments issued
 
 
106,765
 
 
$
7,323
 
                    106,765     $ 7,323          
Treasury instruments – preferred shares and other equity instruments
(2)
 
 
(9
 
 
(9
 
 
 
 
 
 
 
 
    (12     (5  
 
 
 
Preferred shares and other equity instruments outstanding
 
 
106,756
 
 
$
7,314
 
 
 
 
 
 
 
 
 
    106,753     $ 7,318    
 
 
 
Dividends on common shares
         
$
  7,443
 
                          $ 6,946          
Dividends on preferred shares and distributions on other equity instruments 
(9)
 
 
 
 
 
 
236
 
 
 
 
 
 
 
 
 
 
 
 
 
    247    
 
 
 
 
(1)   For further details about our capital management activity, refer to Note 20 of our 2023 Annual Consolidated Financial Statements.
(2)   Positive amounts represent a short position and negative amounts represent a long position.
(3)   Dividend rate will reset every five years.
(4)   NVCC instruments.
(5)   The dividends declared per share represent per annum dividend rate applicable to the shares issued as at the reporting date.
(6)   Represents 615,400 depositary shares relating to preferred shares Series
C-2.
Each depositary share represents
one-fortieth
interest in a share of Series
C-2.
On November 7, 2023, we redeemed all 15 thousand of our issued and outstanding Non-Cumulative First Preferred Shares Series C-2 at a redemption price of US$ 1,000 per share. Concurrently, we redeemed all 615 thousand Series C-2 depositary shares, each of which represents a one-fortieth interest in a Series C-2 share.
(7)   For Limited Recourse Capital Notes (LRCN) Series, the number of shares represent the number of notes issued and the dividends declared per share represent the annual interest rate percentage applicable to the notes issued as at the reporting date.
(8)   In connection with the issuance of LRCN Series 1, on July 28, 2020, we issued $1,750 million of First Preferred Shares Series BQ (Series BQ); in connection with the issuance of LRCN Series 2, on November 2, 2020, we issued $1,250 million of First Preferred Shares Series BR (Series BR); and in connection with the issuance of LRCN Series 3, on June 8, 2021, we issued $1,000 million of First Preferred Shares Series BS (Series BS). The Series BQ, BR and BS preferred shares were issued at a price of $1,000 per share and were issued to a consolidated trust to be held as trust assets in connection with the LRCN structure. For further details, refer to Note 20 of our 2023 Annual Consolidated Financial Statements.
(9)   Excludes distributions to
non-controlling
interests.
As at November 24, 2023, the number of outstanding common shares was 1,406,516,221, net of treasury shares held of 2,008,939, and the number of stock options and awards was 7,776,117.
NVCC provisions require the conversion of the capital instrument into a variable number of common shares in the event that OSFI deems a bank to be
non-viable
or a federal or provincial government in Canada publicly announces that a bank has accepted or agreed to accept a capital injection. If a NVCC trigger event were to occur, our NVCC capital instruments as at October 31, 2023, which were the preferred shares Series AZ, BB, BD, BF, BH, BI, BO, BT, LRCN Series 1, LRCN Series 2, LRCN Series 3 and subordinated debentures due on January 27, 2026, July 25, 2029, December 23, 2029, June 30, 2030, January 28, 2033, November 3, 2031, May 3, 2032 and February 1, 2033 would be converted into common shares pursuant to an automatic conversion formula with a conversion price based on the greater of: (i) a contractual floor price of $5.00, and (ii) the current market price of our common shares at the time of the trigger event
(10-day
weighted average). Based on a floor price of $5.00 and including an estimate for accrued dividends and interest, these NVCC capital instruments would convert into a maximum of 5,013 million common shares, in aggregate, which would represent a dilution impact of 78.16% based on the number of common shares outstanding as at October 31, 2023.
 
116            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Attributed capital
Our methodology for allocating capital to our business segments is based on the Basel III regulatory capital requirements, with the exception of Insurance. For Insurance, the allocation of capital is based on fully diversified economic capital. Risk-based capital attribution provides a uniform base for performance measurement among business segments, which compares to our overall corporate return objective and facilitates management decisions in resource allocation in conjunction with other factors.
The calculation and attribution of capital involves a number of assumptions and judgments by management which are monitored to ensure that the regulatory capital framework remains comprehensive and consistent. The models are benchmarked to leading industry practices via participation in surveys, reviews of methodologies and ongoing interaction with external risk management industry professionals.
For additional information on the risks highlighted below, refer to the Risk management section.
 
 

 
(1)   RWA amount represents
period-end
spot balances. Attributed Capital represents average balances.
(2)   Other includes
(a) non-Insurance
segments: equity required to underpin Basel III regulatory capital deductions other than Goodwill and other intangibles as well as capital modifications for expected loss provisioning and (b) Insurance segment: equity required to underpin risks associated with business, fixed assets and insurance risks.
(3)   Insurance RWA represents our investments in the insurance subsidiaries capitalized at the regulatory prescribed rate as required under the OSFI CAR guideline.
Other considerations affecting capital
Capital treatment for equity investments in other entities is determined by a combination of accounting and regulatory guidelines based on the size or nature of the investment. Three broad approaches apply as follows:
 
Consolidation: entities which we control are consolidated on our Consolidated Balance Sheets.
 
Deduction: certain holdings are deducted from our regulatory capital. These include all unconsolidated “substantial investments”, as defined by the
Bank Act
(Canada) in the capital of financial institutions, as well as all investments in insurance subsidiaries and certain equity investments in funds.
 
Risk-weighting: equity investments that are not deducted from capital are risk-weighted at a prescribed rate for determination of capital charges.
Regulatory capital approach for securitization exposures
Our securitization regulatory capital approach reflects Chapter 6 of OSFI’s CAR guidelines. For our securitization exposures, we use an internal assessment approach (IAA) for exposures related to our ABCP business, and as per regulatory guidelines for other securitization exposures we use a combination of approaches including an external ratings-based approach, an IRB approach and a standardized approach.
While our IAA rating methodologies are based in large part on criteria that are published by External Credit Assessment Institutions (ECAIs) such as S&P and therefore are similar to the methodologies used by these institutions, they are not identical. Our ratings process includes a comparison of the available credit enhancement in a securitization structure to a stressed level of projected losses. The stress level used is determined by the desired risk profile of the transaction. As a result, we stress the cash flows of a given transaction at a higher level in order to achieve a higher rating. Conversely, transactions that only pass lower stress levels achieve lower ratings.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            117

Many of the other securitization exposures
(non-ABCP)
carry external ratings and we use the external ratings-based approach, otherwise will follow the SA, for determining the proper capital allocation for these positions. We periodically compare our own ratings to ECAIs ratings to ensure that the ratings provided by ECAIs are reasonable.
GRM is responsible for providing risk assessments for capital purposes in respect of all our banking book exposures. GRM is independent of the business originating the securitization exposures and performs its own analysis, sometimes in conjunction with but always independent of the applicable business. GRM has developed asset class specific criteria guidelines which provide the rating methodologies for each asset class. The guidelines are reviewed periodically and are subject to the ratings replication process mandated by Pillar I of the Basel rules.
Regulatory developments
Basel III reforms
On January 31, 2022, OSFI announced revised capital, leverage, liquidity and disclosure guidelines that incorporate the final BCBS Basel III reforms. OSFI’s first phase of the adoption of the final BCBS Basel III reforms came into effect in Q2 2023 and included the following notable changes:
 
For IRB portfolios, elimination of a 6% regulatory scaling factor applied to RWA generated by internal models and introduction of prescribed supervisory parameters applicable to certain asset classes within our wholesale portfolio.
 
Adoption of a new operational risk SA framework based on 3 years of average income and 10 years of historical losses.
 
Adoption of a new SA framework enhancing risk sensitivity.
 
Prescribed revisions to the existing regulatory capital floor from 70% to 65% requiring a transition to a new regulatory capital floor of 72.5% of RWA under the SA by 2026. This new regulatory floor will be transitioned over three years, reflecting a regulatory capital floor requirement of 67.5%, 70% and 72.5% in fiscal 2024, 2025 and 2026, respectively.
 
Application of a 50 bps leverage ratio buffer to all D-SIBs.
The revised Pillar 3 disclosure requirements that were effective upon adoption of the Basel III reforms are reflected in our Q2 2023 standalone Pillar 3 Report with further additional updated disclosure requirements reflected in our Q4 2023 Pillar 3 Report.
On November 14, 2023, OSFI released Pillar 3 disclosure requirements related to the second phase of the implementation of the final BCBS Basel III reforms relating to the revised credit valuation adjustment (CVA) and market risk chapters of the CAR guideline. The guideline on the revised CVA and market risk chapters of the CAR was effective for us November 1, 2023, and the impact is not expected to be material.
Revisions to CAR guidelines
On October 20, 2023, OSFI released further revisions to the CAR guidelines which established changes to capital requirements for variable rate fixed-payment residential mortgages where payments are insufficient to cover the interest component. This guideline is effective November 1, 2023, and we expect no impact on our capital requirements as we do not originate mortgage products with a structure that would result in negative amortization.
 
Accounting and control matters
 
Critical accounting policies and estimates
Application of critical accounting policies, judgments, estimates and assumptions
Our significant accounting policies are described in Note 2 of our 2023 Annual Consolidated Financial Statements. Certain of these policies and related estimates are recognized as critical because they require us to make particularly subjective or complex judgments about matters that are inherently uncertain and significantly different amounts could be reported under different conditions or using different assumptions. Our critical accounting judgments, estimates and assumptions relate to the fair value of financial instruments, ACL, goodwill and other intangible assets, employee benefits, consolidation of structured entities, derecognition of financial assets, application of the effective interest method, provisions, insurance claims and policy benefit liabilities, and income taxes. Our critical accounting policies and estimates have been reviewed and approved by our Audit Committee, in consultation with management, as part of their review and approval of our significant accounting policies, judgments, estimates and assumptions.
Fair value of financial instruments
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We determine fair value by incorporating factors that market participants would consider in setting a price, including commonly accepted valuation approaches.
We give priority to third-party pricing services and valuation techniques with the highest and most consistent accuracy. The level of accuracy is determined over time by comparing third-party price values to traders’ or system values, other pricing service values and, when available, actual trade data. Other valuation techniques are used when a price or quote is not available. Some valuation processes use models to determine fair value. We have a systematic and consistent approach to control the use of models.
In determining fair value, a hierarchy is used which prioritizes the inputs to valuation techniques. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Determination of fair value based on this hierarchy requires the use of observable market data whenever available. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model inputs that are either observable, or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 inputs include one or more inputs that are unobservable and significant to the fair value of the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available at the measurement date. The availability of inputs for valuation may affect the selection of valuation techniques. The classification of a financial instrument in the fair value hierarchy for disclosure purposes is based upon the lowest level of input that is significant to the measurement of fair value.
 
118            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Where observable prices or inputs are not available, management judgment is required in the determination of fair values by assessing other relevant sources of information such as historical data, proxy information from similar transactions, and through extrapolation and interpolation techniques. For more complex or illiquid instruments, significant judgment is required to determine the model used, the selection of model inputs, and in some cases, the application of valuation adjustments to the model value or quoted price for inactively traded financial instruments. The selection of model inputs may be subjective and the inputs may be unobservable. Unobservable inputs are inherently uncertain as there is little or no market data available from which to determine the level at which the transaction would occur under normal business circumstances. Appropriate parameter uncertainty and market risk valuation adjustments for such inputs and other model risk valuation adjustments are assessed in all such instances.
Valuation adjustments may be subjective as they require significant judgment in the input selection, such as implied PD and recovery rate, and are intended to arrive at a fair value that is determined based on assumptions that market participants would use in pricing the financial instrument. The ultimate realized price for a transaction may differ from its recorded fair value estimated using management judgment.
For further information on the fair value of financial instruments, refer to Notes 2 and 3 of our 2023 Annual Consolidated Financial Statements.
Allowance for credit losses
An allowance for credit losses (ACL) is established for all financial assets, except for financial assets classified or designated as FVTPL and equity securities designated as FVOCI, which are not subject to impairment assessment. Assets subject to impairment assessment include loans, debt securities, interest-bearing deposits with banks, customers’ liability under acceptances, accounts and accrued interest receivable, and finance and operating lease receivables.
Off-balance
sheet items subject to impairment assessment include financial guarantees and undrawn loan commitments.
We measure the ACL on each balance sheet date according to a three-stage expected credit loss impairment model:
   
Performing financial assets
   
Stage 1 – From initial recognition of a financial asset to the date on which the asset has experienced a significant increase in credit risk relative to its initial recognition, a loss allowance is recognized equal to the credit losses expected to result from defaults occurring over the 12 months following the reporting date.
   
Stage 2 – Following a significant increase in credit risk relative to the initial recognition of the financial asset, a loss allowance is recognized equal to the credit losses expected over the remaining lifetime of the asset.
   
Impaired financial assets
   
Stage 3 – When a financial asset is considered to be credit-impaired, a loss allowance is recognized equal to credit losses expected over the remaining lifetime of the asset. Interest income is calculated based on the carrying amount of the asset, net of the loss allowance, rather than on its gross carrying amount.
The ACL is a discounted probability-weighted estimate of the cash shortfalls expected to result from defaults over the relevant time horizon. For loan commitments, credit loss estimates consider the portion of the commitment that is expected to be drawn over the relevant time period. For financial guarantees, credit loss estimates are based on the expected payments required under the guarantee contract. For finance lease receivables, credit loss estimates are based on cash flows consistent with the cash flows used in measuring the lease receivable.
The ACL represents an unbiased estimate of expected credit losses on our financial assets as at the balance sheet date. Judgment is required in making assumptions and estimations when calculating the ACL, including movements between the three stages, the inclusion of forward looking information and the application of expert credit judgment. The underlying assumptions and estimates may result in changes to the provisions from period to period that significantly affect our results of operations.
For further information on ACL, refer to Notes 2, 4 and 5 of our 2023 Annual Consolidated Financial Statements.
Goodwill and other intangible assets
We allocate goodwill to groups of cash-generating units (CGU). Goodwill is not amortized and is tested for impairment on an annual basis, or more frequently if there are objective indications of impairment. We test for impairment by comparing the recoverable amount of a CGU with its carrying amount.
We estimate the value in use and fair value less costs of disposal of our CGUs primarily using a discounted cash flow method which incorporates each CGU’s internal forecasts of revenues and expenses. Significant management judgment is applied in the determination of expected future cash flows (uncertainty in timing and amount), discount rates (based on
CGU-specific
risks) and terminal growth rates.
CGU-specific
risks include country risk, business/operational risk, geographic risk (including political risk, devaluation risk and government regulation), currency risk and price risk (including product pricing risk and inflation). If the future cash flows and other assumptions in future periods deviate significantly from the current amounts used in our impairment testing, the value of our goodwill could become impaired.
We assess for indicators of impairment of our other intangible assets at each reporting period. If there is an indication that an asset may be impaired, an impairment test is performed by comparing the carrying amount of the intangible asset to its recoverable amount. Where it is not possible to estimate the recoverable amount of an individual asset, we estimate the recoverable amount of the CGU to which the asset belongs. Significant judgment is applied in estimating the useful lives and recoverable amounts of our intangible assets and assessing whether certain events or circumstances constitute objective evidence of impairment. We do not have any intangible assets with indefinite lives.
For further details, refer to Notes 2 and 11 of our 2023 Annual Consolidated Financial Statements.
Employee benefits
We sponsor a number of benefit programs for eligible employees, including registered pension plans, supplemental pension plans, health, dental, disability and life insurance plans.
The calculation of defined benefit expenses and obligations depends on various assumptions such as discount rates, healthcare cost trend rates, projected salary increases, retirement age, and mortality and termination rates. Discount rates are determined using a yield curve based on spot rates from high quality corporate bonds. All other assumptions are determined by us and are reviewed by the actuaries. Actual experience that differs from the actuarial assumptions will affect the amounts of benefit obligations and remeasurements that we recognize. The weighted average assumptions used and the sensitivity of key assumptions are presented in Note 17 of our 2023 Annual Consolidated Financial Statements.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            119

Consolidation of structured entities
Subsidiaries are those entities, including structured entities, over which we have control. We control an entity when we are exposed, or have rights, to variable returns from our involvement with the entity and have the ability to affect those returns through our power over the investee. We have power over an entity when we have existing rights that give us the current ability to direct the activities that most significantly affect the entity’s returns (relevant activities). Power may be determined on the basis of voting rights or, in the case of structured entities, other contractual arrangements.
We are not deemed to control an entity when we exercise power over an entity as the agent of a third party or parties. In determining whether we are acting as an agent, we consider the overall relationship between us, the investee and other parties to the arrangement with respect to the following factors: (i) the scope of our decision-making power; (ii) the rights held by other parties; (iii) the remuneration to which we are entitled; and (iv) our exposure to variability of returns.
The determination of control is based on the current facts and circumstances and is continuously assessed. In some circumstances, different factors and conditions may indicate that various parties control an entity depending on whether those factors and conditions are assessed in isolation or in totality. Significant judgment is applied in determining whether we control an entity, specifically, assessing whether we have substantive decision-making rights over the relevant activities and whether we are exercising our power as a principal or an agent.
We consolidate all subsidiaries from the date we obtain control, and cease consolidation when an entity is no longer controlled by us. Our consolidation conclusions affect the classification and amount of assets, liabilities, revenues and expenses reported in our Consolidated Financial Statements.
For further details, refer to Note 8 of our 2023 Annual Consolidated Financial Statements.
Derecognition of financial assets
We periodically enter into transactions in which we transfer financial assets such as loans or MBS to structured entities or trusts that issue securities to investors. We derecognize the assets when our contractual rights to the cash flows from the assets have expired; when we retain the rights to receive the cash flows of the assets but assume an obligation to pay those cash flows to a third party subject to certain pass-through requirements; or when we transfer our contractual rights to receive the cash flows and substantially all of the risks and rewards of the assets have been transferred. When we retain substantially all of the risks and rewards of the transferred assets, the transferred assets are not derecognized from our Consolidated Balance Sheets and are accounted for as secured financing transactions. When we neither retain nor transfer substantially all risks and rewards of ownership of the assets, we derecognize the assets if control over the assets is relinquished. If we retain control over the transferred assets, we continue to recognize the transferred assets to the extent of our continuing involvement. Management judgment is applied in determining whether we have transferred or retained substantially all risk and rewards of ownership of the transferred financial asset.
The majority of assets transferred under repurchase agreements, securities lending agreements, and in our Canadian residential mortgage securitization transactions do not qualify for derecognition. As a result, we continue to record the associated transferred assets on our Consolidated Balance Sheets and no gains or losses are recognized for those securitization activities. Otherwise, a gain or loss is recognized on securitization by comparing the carrying amount of the transferred asset with its fair value at the date of the transfer. For further information on derecognition of financial assets, refer to Notes 2 and 7 of our 2023 Annual Consolidated Financial Statements.
Application of the effective interest method
Interest is recognized in Interest income and Interest expense in the Consolidated Statements of Income generally for all interest bearing financial instruments using the effective interest method. The effective interest rate is the rate that discounts estimated future cash flows over the expected life of the financial asset or liability to the net carrying amount upon initial recognition. Significant judgment is applied in determining the effective interest rate due to uncertainty in the timing and amounts of future cash flows.
Provisions
Provisions are liabilities of uncertain timing or amount and are recognized when we have a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are measured as the best estimate of the consideration required to settle the present obligation at the reporting date. Significant judgment is required in determining whether a present obligation exists and in estimating the probability, timing and amount of any outflows. We record provisions related to litigation, asset retirement obligations and other items.
The forward-looking nature of these estimates requires us to use a significant amount of judgment in projecting the timing and amount of future cash flows. We record our provisions on the basis of all available information at the end of the reporting period and make adjustments on a quarterly basis to reflect current expectations. Should actual results differ from our expectations, we may incur expenses in excess of the provisions recognized.
Insurance claims and policy benefit liabilities
Insurance claims and policy benefit liabilities represent current claims and estimates for future insurance policy benefits. Liabilities for life insurance contracts are determined using the Canadian Asset Liability Method, which incorporates assumptions for mortality, morbidity, policy lapses and surrenders, investment yields, policy dividends, operating and policy maintenance expenses, and provisions for adverse deviation. These assumptions are reviewed at least annually and updated in response to actual experience and market conditions. Liabilities for property and casualty insurance represent estimated provisions for reported and unreported claims. Liabilities for life and property and casualty insurance are included in Insurance claims and policy benefit liabilities. Changes in Insurance claims and policy benefit liabilities are included in the Insurance policyholder benefits, claims and acquisition expense in our Consolidated Statements of Income in the period in which the estimates change. Refer to Note 15 of our 2023 Annual Consolidated Financial Statements for further information.
Income taxes
We are subject to income tax laws in various jurisdictions where we operate, and the complex tax laws are potentially subject to different interpretations by us and the relevant taxation authority. Management judgment is applied in interpreting the relevant tax laws, in assessing the probability of acceptance of our tax positions by the relevant tax authorities and in estimating the
 
120            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

expected timing and amount of the provision for current and deferred income taxes. A deferred tax asset or liability is determined for each temporary difference based on the tax rates that are expected to be in effect in the period that the asset is realized or the liability is settled, except for earnings related to our subsidiaries, branches, associates and interests in joint ventures where the temporary differences will not reverse in the foreseeable future and we have the ability to control the timing of reversal.
On a quarterly basis, we review whether it is probable that the benefits associated with our deferred tax assets will be realized, using both positive and negative evidence. Refer to Note 22 of our 2023 Annual Consolidated Financial Statements for further information.
Future changes in accounting policy and disclosure
IFRS 17
Insurance Contracts
(IFRS 17)
In May 2017, the IASB issued IFRS 17 to establish a comprehensive insurance standard which provides guidance on the recognition, measurement, presentation and disclosure of insurance contracts issued and reinsurance contracts held and will replace the existing IFRS 4
Insurance Contracts
(IFRS 4). In June 2020, the IASB issued amendments to IFRS 17, including deferral of the effective date by two years. This new standard is effective for us on November 1, 2023 and is to be applied retrospectively with comparatives restated beginning November 1, 2022.
Under IFRS 17, insurance contracts are contracts under which we accept significant insurance risk from a policyholder by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. Embedded derivatives, investment components and promises to provide
non-insurance
services, provided specific criteria are met, are separated from the measurement of insurance and reinsurance contracts. Insurance and reinsurance contracts are aggregated into portfolios that are subject to similar risks and are managed together, and then divided into groups based on the period of issuance and expected profitability. Groups are separately recognized and measured using one of three measurement models depending on the characteristics of the contracts:
 
For insurance contracts with direct participating features, the contracts are measured using the variable fee approach (VFA).
 
For insurance contracts and reinsurance contracts held with a short duration of one year or less, the premium allocation approach (PAA) is elected.
 
The general measurement method (GMM) is applied to all remaining contracts.
Under the GMM and VFA, the liabilities for remaining coverage and incurred claims for groups of contracts are measured as the sum of the fulfilment cash flows and the contractual service margin (CSM), which are recalculated at the end of each reporting period. The fulfilment cash flows consist of the present value of future cash flows and a risk adjustment for
non-financial
risk. For insurance contracts, the CSM represents the unearned profit for providing insurance coverage. For reinsurance contracts held, the CSM represents the net cost or net gain of purchasing reinsurance. Under the PAA, the liability for remaining coverage for each group is measured as the premiums received less insurance revenue recognized for services provided, while the liability for incurred claims is measured as the fulfillment cash flows for incurred claims plus adjustment on any financing components. Losses from the recognition of onerous groups of insurance contracts, regardless of the measurement model applied, are recognized in the Consolidated Statements of Income immediately.
The following are key differences between IFRS 17 and IFRS 4:
 
New business profits are deferred and measured as the CSM of the insurance contract liabilities and amortized into income as insurance contract services are provided, while losses are recognized into income immediately. Under IFRS 4, gains and losses are recognized in income immediately. On July 18, 2023, OSFI released regulatory guidance to allow the inclusion of the CSM in calculating CET1 capital and related ratios, therefore, there will be no impact on the capital metrics from such reduction in retained earnings resulting from the CSM.
 
Discount rates used in calculating the present value of insurance contract liabilities are based on the characteristics of the insurance contracts unlike IFRS 4 which is based on the assets supporting the liabilities.
 
Presentation and disclosure changes are expected due to the new requirements.
While IFRS 17 impacts the timing of profit recognition of insurance contracts, it will have no impact on total profit recognized over the lifetime of these contracts.
Governance
We are in the final stage of implementation for IFRS 17. As part of the implementation process, a comprehensive program and governance structure led by Finance and the Insurance business was established to focus on the evaluation of the impacts of the standard and implementation of policies, systems and processes required for the adoption. Regular updates are provided to senior management as well as the Audit Committee and Board of Directors to ensure escalation of key issues and risks. We have enhanced existing controls, and designed and operationalized new controls and governance procedures to support the implementation of IFRS 17, including controls over data and systems, key assumptions and measurement approaches.
Impact of IFRS 17 transition excluding the impact of reclassifications of financial assets
Upon the adoption of IFRS 17, we will apply IFRS 17 retrospectively by adjusting our Consolidated Balance Sheets as at November 1, 2022 and restating comparative information. The full retrospective approach will be applied for all insurance and reinsurance contracts unless it is impracticable to do so. The full retrospective approach is applied to all contracts measured using the PAA and all new contracts issued on and after November 1, 2022 measured using the GMM and VFA as if IFRS 17 had always been applied. Due to data availability and the inability to use hindsight, the fair value approach is applied to contracts issued before November 1, 2022 that are measured under the GMM and VFA. Under the fair value approach, the CSM of the liability for remaining coverage is calculated as the difference between the fair value of a group of contracts and the fulfillment cash flows measured at the date of transition.
Based on current estimates, the adoption of IFRS 17 is expected to result in a reduction in retained earnings of approximately $2.4 billion, net of taxes, as at November 1, 2022. This is attributable to the establishment of the CSM and other remeasurement changes to insurance and reinsurance contracts and related tax effects. The estimated CSM of all insurance contracts net of reinsurance contracts held as at November 1, 2022 was approximately $1.8 billion. The net impact to our CET1 ratio is not expected to be material. These estimates are subject to change as we finalize the quantitative impacts of the adoption in the first quarter of 2024.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            121

Impact of reclassifications of financial assets
As permitted by IFRS 17, we will change the classification and measurement of certain eligible financial assets held in respect of an activity that relates to insurance contracts upon the adoption of IFRS 17. We will apply these changes retrospectively by adjusting our Consolidated Balance Sheets as at November 1, 2023 with no restatement of comparative information. We expect to reclassify financial assets between fair value classification categories, which is not expected to have a net impact to total equity nor the carrying amounts of those assets. Similarly, no net impact to our CET1 ratio is expected. This is subject to change as we finalize the quantitative impacts of these changes and the quantitative impacts of adopting IFRS 17 in the first quarter of 2024.
 
Controls and procedures
Disclosure controls and procedures
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports filed or submitted under Canadian and U.S. securities laws is recorded, processed, summarized and reported within the time periods specified under those laws and include controls and procedures that are designed to ensure that information is accumulated and communicated to management, including the President and Chief Executive Officer, and the Chief Financial Officer, to allow timely decisions regarding required disclosure.
As of October 31, 2023, management evaluated, under the supervision of and with the participation of the President and Chief Executive Officer and the Chief Financial Officer, the effectiveness of our disclosure controls and procedures as defined under rules adopted by the Canadian securities regulatory authorities and the U.S. SEC. Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 31, 2023.
Internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. See Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm.
There were no changes in our internal control over financial reporting during the year ended October 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Related party transactions
In the ordinary course of business, we provide normal banking services and operational services, and enter into other transactions with associated and other related corporations, including our joint venture entities, on terms similar to those offered to
non-related
parties. We grant loans to directors, officers and other employees at rates normally accorded to preferred clients. In addition, we offer deferred share and other plans to
non-employee
directors, executives and certain other key employees. For further information, refer to Notes 12 and 26 of our 2023 Annual Consolidated Financial Statements.
 
Supplementary information
 
Selected annual information
 
 Table 71  
(Millions of Canadian dollars, except per share amounts)
 
 
2023
    2022     2021  
Total revenue
 
$
56,129
 
  $ 48,985     $ 49,693  
Net income attributable to:
     
Shareholders
 
 
14,859
 
    15,794       16,038  
Non-controlling
interest
 
 
7
 
    13       12  
 
 
$
14,866
 
  $ 15,807     $ 16,050  
Basic earnings per share
 
$
10.51
 
  $ 11.08     $ 11.08  
Diluted earnings per share
 
 
10.50
 
    11.06       11.06  
Dividends declared per common shares
 
 
5.34
 
    4.96       4.32  
Total assets
 
$
  2,004,992
 
  $   1,917,219     $   1,706,323  
Deposits
 
 
1,231,687
 
    1,208,814       1,100,831  
 
122            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Net interest income on average assets and liabilities
 
Table 72  
    Average balances           Interest           Average rate  
(Millions of Canadian dollars, except for percentage amounts) (1)
 
2023
    2022           
2023
    2022           
2023
    2022  
Assets
               
Deposits with other banks
               
Canada
 
$
13,607
 
  $ 13,119      
$
1,698
 
  $ 582      
 
12.48%
 
    4.44%
U.S.
 
 
88,774
 
    81,962      
 
3,963
 
    911      
 
4.46
 
    1.11  
Other International
 
 
15,402
 
    22,819    
 
 
 
 
 
1,191
 
    204    
 
 
 
 
 
7.73
 
    0.89  
 
 
 
117,783
 
    117,900    
 
 
 
 
 
6,852
 
    1,697    
 
 
 
 
 
5.82
 
    1.44  
Securities
               
Trading
 
 
154,741
 
    135,117      
 
7,465
 
    4,754      
 
4.82
 
    3.52  
Investment, net of applicable allowance
 
 
180,174
 
    150,384    
 
 
 
 
 
7,047
 
    2,308    
 
 
 
 
 
3.91
 
    1.53  
 
 
 
334,915
 
    285,501    
 
 
 
 
 
14,512
 
    7,062    
 
 
 
 
 
4.33
 
    2.47  
Asset purchased under reverse repurchase agreements and securities borrowed
 
 
383,246
 
    360,068      
 
22,164
 
    5,447      
 
5.78
 
    1.51  
Loans
(2)
               
Canada
               
Retail
 
 
502,459
 
    478,696      
 
23,862
 
    15,146      
 
4.75
 
    3.16  
Wholesale
 
 
120,047
 
    103,034    
 
 
 
 
 
8,878
 
    5,344    
 
 
 
 
 
7.40
 
    5.19  
 
 
622,506
 
    581,730      
 
32,740
 
    20,490      
 
5.26
 
    3.52  
U.S.
 
 
158,443
 
    136,937      
 
6,891
 
    4,037      
 
4.35
 
    2.95  
Other International
 
 
50,782
 
    49,630    
 
 
 
 
 
3,832
 
    2,038    
 
 
 
 
 
7.55
 
    4.11  
 
 
 
831,731
 
    768,297    
 
 
 
 
 
43,463
 
    26,565    
 
 
 
 
 
5.23
 
    3.46  
Total interest-earning assets
 
 
1,667,675
 
    1,531,766      
 
86,991
 
    40,771      
 
5.22
 
    2.66  
Non-interest-bearing
deposits with other banks
 
 
71,959
 
    99,564      
 
 
         
 
 
     
Customers’ liability under acceptances
 
 
19,912
 
    18,354      
 
 
         
 
 
     
Other assets
 
 
243,328
 
    237,167    
 
 
 
 
 
 
       
 
 
 
 
 
 
     
Total assets
 
$
  2,002,874
 
  $   1,886,851    
 
 
 
 
$
  86,991
 
  $   40,771    
 
 
 
 
 
4.34%
 
    2.16%
Liabilities and shareholders’ equity
               
Deposits
(3)
               
Canada
 
$
770,309
 
  $ 684,452      
$
27,627
 
  $ 8,660      
 
3.59%
 
    1.27%
U.S.
 
 
153,838
 
    153,039      
 
5,383
 
    1,044      
 
3.50
 
    0.68  
Other International
 
 
93,658
 
    101,058    
 
 
 
 
 
3,669
 
    1,047    
 
 
 
 
 
3.92
 
    1.04  
 
 
 
1,017,805
 
    938,549    
 
 
 
 
 
36,679
 
    10,751    
 
 
 
 
 
3.60
 
    1.15  
Obligations related to securities sold short
 
 
36,365
 
    39,079      
 
2,933
 
    2,409      
 
8.07
 
    6.16  
Obligations related to assets sold under repurchase agreements and securities loaned
 
 
352,282
 
    315,871      
 
20,433
 
    4,351      
 
5.80
 
    1.38  
Subordinated debentures
 
 
11,036
 
    10,133      
 
666
 
    288      
 
6.03
 
    2.84  
Other interest-bearing liabilities
 
 
37,639
 
    26,000    
 
 
 
 
 
1,151
 
    255    
 
 
 
 
 
3.06
 
    0.98  
Total interest-bearing liabilities
 
 
1,455,127
 
    1,329,632      
 
61,862
 
    18,054      
 
4.25
 
    1.36  
Non-interest-bearing
deposits
 
 
193,815
 
    226,376      
 
 
         
 
 
     
Acceptances
 
 
19,954
 
    18,409      
 
 
         
 
 
     
Other liabilities
 
 
223,121
 
    209,890    
 
 
 
 
 
 
       
 
 
 
 
 
 
     
Total liabilities
 
$
1,892,017
 
  $ 1,784,307    
 
 
 
 
$
61,862
 
  $ 18,054    
 
 
 
 
 
3.27%
 
    1.01%
Equity
 
$
110,857
 
  $ 102,544    
 
 
 
 
 
n.a.
    n.a.  
 
 
 
 
 
n.a.
 
    n.a.
Total liabilities and shareholders’ equity
 
$
2,002,874
 
  $ 1,886,851    
 
 
 
 
$
61,862
 
  $ 18,054    
 
 
 
 
 
3.09%
 
    0.96%
Net interest income and margin
 
$
2,002,874
 
  $ 1,886,851    
 
 
 
 
$
25,129
 
  $ 22,717    
 
 
 
 
 
1.25%
 
    1.20%
Net interest income and margin (average earning assets, net)
(4)
               
Canada
 
$
970,243
 
  $ 870,147      
$
18,752
 
  $ 15,761      
 
1.93%
 
    1.81%
U.S.
 
 
497,556
 
    437,357      
 
5,065
 
    5,423      
 
1.02
 
    1.24  
Other International
 
 
208,221
 
    224,261    
 
 
 
 
 
1,312
 
    1,533    
 
 
 
 
 
0.63
 
    0.68  
Total
 
$
1,676,020
 
  $ 1,531,765    
 
 
 
 
$
25,129
 
  $ 22,717    
 
 
 
 
 
1.50%
 
    1.48%
 
(1)   Insurance segment assets and liabilities are included in Other assets and Other liabilities, respectively.
(2)   Interest income includes loan fees of $1,149 million (2022 – $1,033 million; 2021 – $888 million).
(3)   Deposits include personal chequing and savings deposits with average balances of $250 billion (2022 – $279 billion; 2021 – $258 billion), interest expense of $2,840 million (2022 – $712 million; 2021 – $175 million) and average rates of 1.14% (2022 – 0.26%; 2021 – 0.07%). Deposits also include term deposits with average balances of $624 billion (2022 – $500 billion; 2021 – $437 billion), interest expense of $24,260 million (2022 – $7,323 million; 2021 – $4,487 million) and average rates of 3.89% (2022 – 1.46%; 2021 – 1.03%).
(4)   Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
n.a.   not applicable
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            123

Change in net interest income
 
Table 73  
   
 
2023 vs. 2022
                2022 vs. 2021        
   
Increase (decrease) due to
changes in
                Increase (decrease) due to
changes in
 
(Millions of Canadian dollars) (1)  
Average
volume 
(2)
   
Average
rate 
(2)
   
Net change
           Average
volume (2)
    Average
rate (2)
        Net change  
Assets
             
Deposits with other banks
             
Canada
(3)
 
$
22
 
 
$
1,094
 
 
$
1,116
 
    $ 25     $ 451     $ 476  
U.S.
(3)
 
 
76
 
 
 
2,976
 
 
 
3,052
 
      28       820       848  
Other international
(3)
 
 
(66
 
 
1,053
 
 
 
987
 
      4       64       68  
Securities
             
Trading
 
 
690
 
 
 
2,021
 
 
 
2,711
 
      178       840       1,018  
Investment, net of applicable allowance
 
 
457
 
 
 
4,282
 
 
 
4,739
 
      163       1,004       1,167  
Asset purchased under reverse repurchase agreements and securities borrowed
 
 
351
 
 
 
16,366
 
 
 
16,717
 
      173       3,965       4,138  
Loans
             
Canada
(3)
             
Retail
(3)
 
 
752
 
 
 
7,964
 
 
 
8,716
 
      1,155       333       1,488  
Wholesale
(3)
 
 
882
 
 
 
2,652
 
 
 
3,534
 
      657       1,130       1,787  
U.S.
(3)
 
 
634
 
 
 
2,220
 
 
 
2,854
 
      695       462       1,157  
Other international
(3)
 
 
47
 
 
 
1,747
 
 
 
1,794
 
 
 
 
 
    346       133       479  
Total interest income
 
$
3,845
 
 
$
42,375
 
 
$
46,220
 
 
 
 
 
  $ 3,424     $ 9,202     $ 12,626  
Liabilities
             
Deposits
             
Canada
(3)
 
 
1,086
 
 
 
17,881
 
 
 
18,967
 
      434       3,526       3,960  
U.S.
(3)
 
 
5
 
 
 
4,334
 
 
 
4,339
 
      35       778       813  
Other international
(3)
 
 
(77
 
 
2,699
 
 
 
2,622
 
      20       510       530  
Obligations related to securities sold short
 
 
(167
 
 
691
 
 
 
524
 
      297       303       600  
Obligations related to assets sold under repurchase agreements and securities loaned
 
 
502
 
 
 
15,580
 
 
 
16,082
 
      83       3,694       3,777  
Subordinated debentures
 
 
26
 
 
 
352
 
 
 
378
 
      19       90       109  
Other interest-bearing liabilities
 
 
114
 
 
 
782
 
 
 
896
 
 
 
 
 
    14       108       122  
Total interest expense
 
$
1,489
 
 
$
42,319
 
 
$
43,808
 
 
 
 
 
  $ 902     $ 9,009     $ 9,911  
Net interest income
 
$
2,356
 
 
$
56
 
 
$
2,412
 
 
 
 
 
  $ 2,522     $ 193     $ 2,715  
 
(1)   Insurance segment assets and liabilities are included in Other assets and Other liabilities, respectively.
(2)   Volume/rate variance is allocated on the percentage relationships of changes in balances and changes in rates to the total net change in net interest income.
(3)   Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
 
Loans and acceptances by geography
 
Table 74  
As at October 31 (Millions of Canadian dollars)
 
 
2023
    2022  
Canada
(1)
   
Residential mortgages
 
$
397,605
 
  $ 383,797  
Personal
 
 
79,705
 
    79,422  
Credit cards
 
 
22,140
 
    19,778  
Small business
 
 
13,681
 
    12,669  
Retail
 
 
513,131
 
    495,666  
Wholesale
 
 
143,475
 
    126,751  
 
 
$
656,606
 
  $ 622,417  
U.S.
(1)
   
Retail
 
 
50,058
 
    47,402  
Wholesale
 
 
119,068
 
    114,799  
 
 
 
169,126
 
    162,201  
Other International
(1)
   
Retail
 
 
6,762
 
    6,683  
Wholesale
 
 
47,028
 
    50,289  
 
 
 
53,790
 
    56,972  
Total loans and acceptances
 
$
879,522
 
  $ 841,590  
Total allowance for credit losses
 
 
(5,054
    (3,798
Total loans and acceptances, net of allowance for credit losses
 
$
  874,468
 
  $   837,792  
 
(1)   Geographic information is based on residence of borrower.
 
124            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Loans and acceptances by portfolio and sector
 
Table 75  
As at October 31 (Millions of Canadian dollars)
 
2023
    2022  
Residential mortgages
 
$
434,501
 
  $ 418,796  
Personal
 
 
98,734
 
    97,709  
Credit cards
 
 
23,035
 
    20,577  
Small business
 
 
13,681
 
    12,669  
Retail
 
$
569,951
 
  $   549,751  
Agriculture
 
 
11,026
 
    10,105  
Automotive
 
 
11,503
 
    8,770  
Banking
 
 
7,146
 
    7,016  
Consumer discretionary
 
 
17,546
 
    19,405  
Consumer staples
 
 
8,463
 
    6,940  
Oil and gas
 
 
6,421
 
    5,959  
Financial services
 
 
38,029
 
    41,353  
Financing products
 
 
13,683
 
    13,781  
Forest products
 
 
1,428
 
    1,094  
Governments
 
 
5,767
 
    5,632  
Industrial products
 
 
11,057
 
    10,537  
Information technology
 
 
5,096
 
    5,232  
Investments
 
 
18,212
 
    19,952  
Mining and metals
 
 
1,858
 
    2,223  
Public works and infrastructure
 
 
2,970
 
    3,006  
Real estate and related
 
 
90,981
 
    79,506  
Other services
 
 
27,048
 
    24,393  
Telecommunication and media
 
 
8,507
 
    7,176  
Transportation
 
 
8,038
 
    6,542  
Utilities
 
 
13,978
 
    11,847  
Other sectors
 
 
814
 
    1,370  
Wholesale
 
$
  309,571
 
  $ 291,839  
Total loans and acceptances
 
$
879,522
 
  $ 841,590  
Total allowance for credit losses
 
 
(5,054
    (3,798
Total loans and acceptances, net of allowance for credit losses
 
$
874,468
 
  $ 837,792  
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            125

Gross impaired loans by portfolio and geography
 
Table 76  
As at October 31 (Millions of Canadian dollars, except for percentage amounts)
 
 
2023
           2022  
Residential mortgages
 
$
682
 
    $ 560  
Personal
 
 
280
 
      200  
Small business
 
 
244
 
 
 
 
 
    138  
Retail
 
 
1,206
 
 
 
 
 
    898  
Agriculture
 
$
36
 
    $ 18  
Automotive
 
 
26
 
      9  
Banking
 
 
3
 
      1  
Consumer discretionary
 
 
315
 
      254  
Consumer staples
 
 
148
 
      122  
Oil and gas
 
 
17
 
      57  
Financial services
 
 
85
 
      96  
Financing products
 
 
 
       
Forest products
 
 
9
 
      7  
Governments
 
 
16
 
      3  
Industrial products
 
 
147
 
      77  
Information technology
 
 
26
 
      5  
Investments
 
 
96
 
      9  
Mining and metals
 
 
1
 
      12  
Public works and infrastructure
 
 
15
 
      16  
Real estate and related
 
 
1,104
 
      322  
Other services
 
 
180
 
      246  
Telecommunication and media
 
 
186
 
      8  
Transportation
 
 
59
 
      6  
Utilities
 
 
 
       
Other sectors
 
 
24
 
 
 
 
 
    27  
Wholesale
 
 
2,493
 
 
 
 
 
    1,295  
Acquired credit-impaired loans
 
 
5
 
 
 
 
 
    6  
Total GIL
(1)
 
$
3,704
 
 
 
 
 
  $ 2,199  
Canada
(2)
     
Residential mortgages
 
$
481
 
    $ 352  
Personal
 
 
247
 
      174  
Small business
 
 
244
 
 
 
 
 
    138  
Retail
 
 
972
 
 
 
 
 
    664  
Agriculture
 
 
16
 
      17  
Automotive
 
 
24
 
      6  
Banking
 
 
3
 
      1  
Consumer discretionary
 
 
195
 
      69  
Consumer staples
 
 
55
 
      40  
Oil and gas
 
 
17
 
      10  
Financial services
 
 
 
      4  
Financing products
 
 
 
       
Forest products
 
 
9
 
      7  
Governments
 
 
13
 
      3  
Industrial products
 
 
42
 
      28  
Information technology
 
 
8
 
      3  
Investments
 
 
20
 
      2  
Mining and metals
 
 
1
 
      4  
Public works and infrastructure
 
 
10
 
      7  
Real estate and related
 
 
168
 
      88  
Other services
 
 
72
 
      56  
Telecommunication and media
 
 
4
 
      5  
Transportation
 
 
27
 
      6  
Utilities
 
 
 
       
Other sectors
 
 
1
 
 
 
 
 
     
Wholesale
 
 
685
 
 
 
 
 
    356  
Total
 
$
1,657
 
 
 
 
 
  $ 1,020  
U.S.
(2)
     
Retail
 
$
53
 
    $ 34  
Wholesale
 
 
1,469
 
 
 
 
 
    674  
Total
 
$
1,522
 
 
 
 
 
  $ 708  
Other International
(2)
     
Retail
 
$
181
 
    $ 200  
Wholesale
 
 
344
 
 
 
 
 
    271  
Total
 
$
525
 
 
 
 
 
  $ 471  
Total GIL
 
$
3,704
 
 
 
 
 
  $ 2,199  
Allowance on impaired loans
 
 
(1,148
 
 
 
 
    (669
Net impaired loans
 
$
2,556
 
 
 
 
 
  $ 1,530  
GIL as a % of loans and acceptances
     
Residential mortgages
 
 
0.16%
 
      0.13%  
Personal
 
 
0.28%
 
      0.20%  
Small business
 
 
1.78%
 
      1.09%  
Retail
 
 
0.21%
 
 
 
 
 
    0.16%  
Wholesale
 
 
0.81%
 
 
 
 
 
    0.45%  
Total
 
 
0.42%
 
 
 
 
 
    0.26%  
Allowance on impaired loans as a % of GIL
 
 
31.00%
 
 
 
 
 
    30.41%  
 
(1)   Past due loans greater than 90 days not included in impaired loans were $257 million in 2023
(2022 – $170 million). For further details, refer to Note 5 of our 2023 Annual Consolidated Financial Statements.
(2)   Geographic information is based on residence of borrower.
 
126            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Provision for credit losses by portfolio and geography
 
Table 77  
For the year ended October 31 (Millions of Canadian dollars, except for percentage amounts)
 
 
2023
           2022  
Residential mortgages
 
$
63
 
    $ 13  
Personal
 
 
467
 
      259  
Credit cards
 
 
460
 
      333  
Small business
 
 
61
 
 
 
 
 
    43  
Retail
 
 
1,051
 
 
 
 
 
    648  
Agriculture
 
$
20
 
    $ 1  
Automotive
 
 
8
 
      3  
Banking
 
 
 
      (3
Consumer discretionary
 
 
143
 
      47  
Consumer staples
 
 
51
 
      35  
Oil and gas
 
 
11
 
      (2
Financial services
 
 
10
 
      3  
Financing products
 
 
 
       
Forest products
 
 
5
 
      1  
Governments
 
 
(1
      (1
Industrial products
 
 
56
 
      (6
Information technology
 
 
12
 
      (8
Investments
 
 
15
 
      3  
Mining and metals
 
 
(1
      9  
Public works and infrastructure
 
 
(3
      5  
Real estate and related
 
 
222
 
      32  
Other services
 
 
72
 
      25  
Telecommunication and media
 
 
85
 
      (1
Transportation
 
 
74
 
      (16
Utilities
 
 
 
      1  
Other sectors
 
 
6
 
 
 
 
 
    3  
Wholesale
 
 
785
 
 
 
 
 
    131  
Acquired credit-impaired loans
 
 
 
 
 
 
 
    (1
Total PCL on impaired loans
 
$
1,836
 
 
 
 
 
  $ 778  
Canada
(1)
     
Residential mortgages
 
$
61
 
    $ 15  
Personal
 
 
463
 
      271  
Credit cards
 
 
449
 
      326  
Small business
 
 
61
 
 
 
 
 
    43  
Retail
 
 
1,034
 
 
 
 
 
    655  
Agriculture
 
 
4
 
      1  
Automotive
 
 
7
 
      3  
Banking
 
 
 
      1  
Consumer discretionary
 
 
101
 
      36  
Consumer staples
 
 
34
 
      9  
Oil and gas
 
 
(2
      (21
Financial services
 
 
1
 
      1  
Financing products
 
 
 
       
Forest products
 
 
5
 
      1  
Governments
 
 
(1
      (1
Industrial products
 
 
16
 
      9  
Information technology
 
 
2
 
      1  
Investments
 
 
8
 
      2  
Mining and metals
 
 
 
      2  
Public works and infrastructure
 
 
2
 
       
Real estate and related
 
 
41
 
      23  
Other services
 
 
12
 
      9  
Telecommunication and media
 
 
1
 
      1  
Transportation
 
 
9
 
      1  
Utilities
 
 
 
       
Other sectors
 
 
(1
 
 
 
 
     
Wholesale
 
 
239
 
 
 
 
 
    78  
Total
 
$
1,273
 
 
 
 
 
  $ 733  
U.S.
(1)
     
Retail
 
$
17
 
    $ 2  
Wholesale
 
 
509
 
 
 
 
 
    68  
Total
 
$
526
 
 
 
 
 
  $ 70  
Other International
(1)
     
Retail
 
$
 
    $ (9
Wholesale
 
 
37
 
 
 
 
 
    (16
Total
 
$
37
 
 
 
 
 
  $ (25
Total PCL on impaired loans
 
$
1,836
 
 
 
 
 
  $ 778  
Total PCL on performing loans
 
 
660
 
 
 
 
 
    (281
Total PCL on other financial assets
 
 
(28
 
 
 
 
    (13
Total PCL
 
$
2,468
 
 
 
 
 
  $ 484  
PCL on loans as a % of average net loans and acceptances
 
 
0.29%
 
 
 
 
 
    0.06%
PCL on impaired loans as a % of average net loans and acceptances
(1)
 
 
0.21%
 
 
 
 
 
    0.10%
 
(1)   Geographic information is based on residence of borrower.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            127

Allowance on loans by portfolio and geography
(1)
 
Table 78  
As at and for the year ended October 31 (Millions of Canadian dollars, except percentage amounts)
 
2023
           2022  
Allowance against impaired loans
     
Canada
(2)
     
Residential mortgages
 
$
86
 
    $ 44  
Personal
 
 
138
 
      85  
Small business
 
 
58
 
 
 
 
 
    48  
Retail
 
$
282
 
 
 
 
 
  $ 177  
Agriculture
 
$
4
 
    $ 2  
Automotive
 
 
5
 
      4  
Banking
 
 
1
 
       
Consumer discretionary
 
 
85
 
      27  
Consumer staples
 
 
30
 
      10  
Oil and gas
 
 
4
 
      7  
Financial services
 
 
1
 
      1  
Financing products
 
 
 
       
Forest products
 
 
3
 
      1  
Governments
 
 
 
      1  
Industrial products
 
 
18
 
      12  
Information technology
 
 
2
 
      2  
Investments
 
 
7
 
      1  
Mining and metals
 
 
1
 
      2  
Public works and infrastructure
 
 
5
 
      4  
Real estate and related
 
 
41
 
      25  
Other services
 
 
5
 
      12  
Telecommunication and media
 
 
1
 
      1  
Transportation
 
 
8
 
      3  
Utilities
 
 
 
       
Other sectors
 
 
 
 
 
 
 
     
Wholesale
 
$
221
 
 
 
 
 
  $ 115  
Total
 
$
503
 
 
 
 
 
  $ 292  
U.S.
(2)
     
Retail
 
$
7
 
    $ 2  
Wholesale
 
 
445
 
 
 
 
 
    175  
Total
 
$
452
 
 
 
 
 
  $ 177  
Other International
(2)
     
Retail
 
$
92
 
    $ 98  
Wholesale
 
 
101
 
 
 
 
 
    102  
Total
 
$
193
 
 
 
 
 
  $ 200  
Total allowance on impaired loans
 
$
1,148
 
 
 
 
 
  $ 669  
Allowance on performing loans
     
Residential mortgages
 
$
313
 
    $ 300  
Personal
 
 
1,073
 
      946  
Credit cards
 
 
1,069
 
      893  
Small business
 
 
136
 
 
 
 
 
    146  
Retail
 
$
2,591
 
 
 
 
 
  $ 2,285  
Wholesale
 
$
1,609
 
 
 
 
 
  $ 1,227  
Total allowance on performing loans
 
$
4,200
 
 
 
 
 
  $ 3,512  
Total allowance on loans
 
$
5,348
 
 
 
 
 
  $ 4,181  
Key ratios
     
Allowance on loans as a % of loans and acceptances
 
 
0.61%
 
      0.50%
Net write-offs as a % of average net loans and acceptances
 
 
0.14%
 
 
 
 
 
    0.10%
 
(1)   Includes loans, acceptances, and commitments.
(2)   Geographic information is based on residence of borrower.
 
128            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Credit quality information by Canadian province
(1)
 
Table 79  
As at and for the year ended October 31 (Millions of Canadian dollars)
 
2023
           2022  
Loans and acceptances
     
Atlantic provinces
(2)
 
$
32,513
 
    $ 30,709  
Quebec
 
 
76,204
 
      73,743  
Ontario
 
 
321,139
 
      300,477  
Alberta
 
 
76,018
 
      73,638  
Other Prairie provinces
(3)
 
 
36,076
 
      35,699  
B.C. and territories
(4)
 
 
114,656
 
 
 
 
 
    108,151  
Total loans and acceptances in Canada
 
$
656,606
 
 
 
 
 
  $ 622,417  
Gross impaired loans
     
Atlantic provinces
(2)
 
$
122
 
    $ 65  
Quebec
 
 
275
 
      172  
Ontario
 
 
689
 
      323  
Alberta
 
 
260
 
      233  
Other Prairie provinces
(3)
 
 
137
 
      121  
B.C. and territories
(4)
 
 
174
 
 
 
 
 
    106  
Total GIL in Canada
 
$
1,657
 
 
 
 
 
  $ 1,020  
PCL on impaired loans
     
Atlantic provinces
(2)
 
$
52
 
    $ 20  
Quebec
 
 
81
 
      47  
Ontario
 
 
901
 
      529  
Alberta
 
 
99
 
      48  
Other Prairie provinces
(3)
 
 
55
 
      39  
B.C. and territories
(4)
 
 
85
 
 
 
 
 
    50  
Total PCL on impaired loans in Canada
 
$
1,273
 
 
 
 
 
  $ 733  
 
(1)   Geographic information is based on residence of borrower.
(2)   Comprises Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick.
(3)   Comprises Manitoba and Saskatchewan.
(4)   Comprises British Columbia, Nunavut, Northwest Territories and Yukon.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            129

Glossary
 
Acceptances
A bill of exchange or negotiable instrument drawn by the borrower for payment at maturity and accepted by a bank. The acceptance constitutes a guarantee of payment by the bank and can be traded in the money market. The bank earns a “stamping fee” for providing this guarantee.
Allowance for credit losses (ACL)
The amount deemed adequate by management to absorb expected credit losses as at the balance sheet date. The allowance is established for all financial assets subject to impairment assessment, including certain loans, debt securities, customers’ liability under acceptances, financial guarantees, and undrawn loan commitments. The allowance is changed by the amount of provision for credit losses recorded, which is charged to income, and decreased by the amount of write-offs net of recoveries in the period.
ACL on loans ratio
ACL on loans ratio is calculated as ACL on loans as a percentage of total loans and acceptances.
Asset-backed securities (ABS)
Securities created through the securitization of a pool of assets, for example auto loans or credit card loans.
Assets under administration (AUA)
Assets administered by us, which are beneficially owned by clients, unless otherwise noted. Services provided in respect of assets under administration are of an administrative nature, including safekeeping, collecting investment income, settling purchase and sale transactions, and record keeping.
Assets under management (AUM)
Assets managed by us, which are beneficially owned by clients, unless otherwise noted. Services provided in respect of assets under management include the selection of investments and the provision of investment advice. We have assets under management that are also administered by us and included in assets under administration.
Attributed capital
Attributed capital is based on the Basel III regulatory capital requirements for all our business segments other than insurance for which we attribute capital based on economic capital.
Auction rate securities (ARS)
Debt securities whose interest rates are regularly reset through an auction process.
Average earning assets, net
Average earning assets include interest-bearing deposits with other banks, securities, net of applicable allowance, assets purchased under reverse repurchase agreements and securities borrowed, loans, net of allowance, cash collateral and margin deposits. Insurance assets, and all other assets not specified are excluded. The averages are based on the daily balances for the period.
Basis point (bp)
One
one-hundredth
of a percentage point (.01%).
Collateral
Assets pledged as security for a loan or other obligation. Collateral can take many forms, such as cash, highly rated securities, property, inventory, equipment and receivables.
Collateralized debt obligation (CDO)
Securities with multiple tranches that are issued by structured entities and collateralized by debt obligations including bonds and loans. Each tranche offers a varying degree of risk and return so as to meet investor demand.
Commercial mortgage-backed securities (CMBS)
Securities created through the securitization of commercial mortgages.
Commitments to extend credit
Unutilized amount of credit facilities available to clients either in the form of loans, bankers’ acceptances and other
on-balance
sheet financing, or through
off-balance
sheet products such as guarantees and letters of credit.
Common Equity Tier 1 (CET1) capital
A regulatory Basel III capital measure comprised mainly of common shareholders’ equity less regulatory deductions and adjustments for goodwill and intangibles, defined benefit pension fund assets, shortfall in allowances and other specified items.
Common Equity Tier 1 capital ratio
A risk-based capital measure calculated as CET1 capital divided by risk-weighted assets.
Covered bonds
Full recourse
on-balance
sheet obligations issued by banks and credit institutions that are fully collateralized by assets over which investors enjoy a priority claim in the event of an issuer’s insolvency.
Credit default swaps (CDS)
A derivative contract that provides the purchaser with a
one-time
payment should the referenced entity/entities default (or a similar triggering event occur).
Derivative
A contract between two parties, which requires little or no initial investment and where payments between the parties are dependent upon the movements in price of an underlying instrument, index or financial rate. Examples of derivatives include swaps, options, forward rate agreements and futures. The notional amount of the derivative is the contract amount used as a reference point to calculate the payments to be exchanged between the two parties, and the notional amount itself is generally not exchanged by the parties.
Dividend payout ratio
Common dividends as a percentage of net income available to common shareholders.
Dividend yield
Dividends per common share divided by the average of the high and low share price in the relevant period.
Earnings per share (EPS), basic
Calculated as net income available to common shareholders divided by the average number of shares outstanding.
Earnings per share (EPS), diluted
Calculated as net income available to common shareholders divided by the average number of shares outstanding adjusted for the dilutive effects of stock options and other convertible securities.
Efficiency ratio
Non-interest
expense as a percentage of total revenue.
Expected credit losses
The difference between the contractual cash flows due to us in accordance with the relevant contractual terms and the cash flows that we expect to receive, discounted to the balance sheet date.
Fair value
Fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Funding valuation adjustment
Funding valuation adjustments are calculated to incorporate cost and benefit of funding in the valuation of uncollateralized and under-collateralized OTC derivatives. Future expected cash flows of these derivatives are discounted to reflect the cost and benefit of funding the derivatives by using a funding curve, implied volatilities and correlations as inputs.
Guarantees and standby letters of credit
These primarily represent irrevocable assurances that a bank will make payments in the event that its client cannot meet its financial obligations to third parties. Certain other guarantees, such as bid and performance bonds, represent
non-financial
undertakings.
Hedge
A risk management technique used to mitigate exposure from market, interest rate or foreign currency exchange risk arising from normal banking operations. The elimination or reduction of such exposure is accomplished by establishing offsetting positions. For example, assets denominated in foreign currencies can be offset with liabilities in the same currencies or through the use of foreign exchange hedging instruments such as futures, options or foreign exchange contracts.
Hedge funds
A type of investment fund, marketed to accredited high net worth investors, that is subject to limited regulation and restrictions on its investments compared to retail mutual funds, and that often utilize aggressive strategies such as selling short, leverage, program trading, swaps, arbitrage and derivatives.
High-quality liquid assets (HQLA)
HQLA are cash or assets that can be converted into cash quickly through sales (or by being pledged as collateral) with no significant loss of value.
Impaired loans
Loans are classified as impaired when there has been a deterioration of credit quality to the extent that management no longer has reasonable assurance of timely collection of the full amount of principal and interest in accordance with the contractual terms of the loan agreement. Credit card balances are not classified as impaired as they are directly written off after payments are 180 days past due.
International Financial Reporting Standards (IFRS)
IFRS are principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board.
Leverage ratio
A Basel III regulatory measure, the ratio divides Tier 1 capital by the sum of total assets plus specified
off-balance
sheet items. The leverage ratio is a non-risk based measure.
Liquidity Coverage Ratio (LCR)
The Liquidity Coverage Ratio is a Basel III metric designed to ensure banks hold a sufficient reserve of high-quality liquidity assets (HQLA) to allow them to service a period of significant liquidity stress lasting 30 calendar days.
 
130            Royal Bank of Canada: Annual Report 2023            Management’s Discussion and Analysis

Loan-to-value
(LTV) ratio
Calculated based on the total facility amount for the residential mortgage and RBC Homeline Plan product divided by the value of the related residential property.
Master netting agreement
An agreement between us and a counterparty designed to reduce the credit risk of multiple derivative transactions through the creation of a legal right of offset of exposure in the event of a default.
Net interest income
The difference between what is earned on assets such as loans and securities and what is paid on liabilities such as deposits and subordinated debentures.
Net interest margin (NIM) on average earning assets, net
Calculated as net interest income divided by average earning assets, net.
Net Stable Funding Ratio (NSFR)
The Net Stable Funding Ratio is a Basel III metric defined as the amount of available stable funding (ASF) relative to the amount of requested stable funding (RSF). The ratio should be at least equal to 100% on an ongoing basis.
Normal course issuer bid (NCIB)
A program for the repurchase of our own shares for cancellation through a stock exchange that is subject to the various rules of the relevant stock exchange and securities commission.
Notional amount
The contract amount used as a reference point to calculate payments for derivatives.
Off-balance
sheet financial instruments
A variety of arrangements offered to clients, which include credit derivatives, written put options, backstop liquidity facilities, stable value products, financial standby letters of credit, performance guarantees, credit enhancements, mortgage loans sold with recourse, commitments to extend credit, securities lending, documentary and commercial letters of credit, sponsor member guarantees, securities lending indemnifications and indemnifications.
Office of the Superintendent of Financial Institutions Canada (OSFI)
The primary regulator of federally chartered financial institutions and federally administered pension plans in Canada. OSFI’s mission is to safeguard policyholders, depositors and pension plan members from undue loss.
Operating leverage
The difference between our revenue growth rate and
non-interest
expense growth rate.
Options
A contract or a provision of a contract that gives one party (the option holder) the right, but not the obligation, to perform a specified transaction with another party (the option issuer or option writer) according to specified terms.
Provision for credit losses (PCL)
The amount charged to income necessary to bring the allowance for credit losses to a level determined appropriate by management. This includes provisions on performing and impaired financial assets.
PCL on loans ratio
PCL on loans ratio is calculated using PCL on loans as a percentage of average net loans and acceptances.
RBC Homeline Plan products
This is comprised of residential mortgages and secured personal loans whereby the borrower pledges real estate as collateral.
Repurchase agreements
These involve the sale of securities for cash and the simultaneous repurchase of the securities for value at a later date. These transactions normally do not constitute economic sales and therefore are treated as collateralized financing transactions.
Return on common equity (ROE)
Net income available to common shareholders, expressed as a percentage of average common equity.
Reverse repurchase agreements
These involve the purchase of securities for cash and the simultaneous sale of the securities for value at a later date. These transactions normally do not constitute economic sales and therefore are treated as collateralized financing transactions.
Risk-weighted assets (RWA)
Assets adjusted by a regulatory risk-weight factor to reflect the riskiness of on and
off-balance
sheet exposures. Certain assets are not risk-weighted, but deducted from capital. The calculation is defined by OSFI’s Capital Adequacy Requirements guidelines. For more details, refer to the Capital management section.
Securities lending
Transactions in which the owner of securities agrees to lend it under the terms of a prearranged contract to a borrower for a fee. Collateral for the loan consists of either high quality securities or cash and collateral value must be at least equal to the market value of the loaned securities. Borrowers pay a negotiated fee for loans collateralized by securities, whereas for cash collateral lenders pay borrowers interest at a negotiated rate and reinvest the cash collateral to earn a return. An intermediary such as a bank often acts as agent lender for the owner of the security in return for a share of the revenue earned by the owner from lending securities. Most often, agent lenders indemnify the owner against the risk of the borrower’s failure to redeliver the loaned securities – counterparty credit risk if a borrower defaults and market risk if the value of the
non-cash
collateral declines. The agent lender does not indemnify against the investment risk of
re-investing
cash collateral which is borne by the owner.
Securities sold short
A transaction in which the seller sells securities and then borrows the securities in order to deliver them to the purchaser upon settlement. At a later date, the seller buys identical securities in the market to replace the borrowed securities.
Securitization
The process by which various financial assets are packaged into newly issued securities backed by these assets.
Standardized Approach (SA)
Risk weights prescribed by OSFI are used to calculate RWA for the credit risk exposures. Credit assessments by OSFI-recognized external credit rating agencies of S&P, Moody’s, Fitch, and DBRS are used to risk-weight our Sovereign and Bank exposures based on the standards and guidelines issued by OSFI. For our Business and Retail exposures, we use the standard risk weights prescribed by OSFI.
Structured entities
A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding who controls the entity, such as when the activities that significantly affect the entity’s returns are directed by means of contractual arrangements. Structured entities often have restricted activities, narrow and well defined objectives, insufficient equity to finance their activities, and financing in the form of multiple contractually-linked instruments.
Taxable equivalent basis (teb)
Income from certain specified tax advantaged sources (eligible Canadian taxable corporate dividends) is increased to a level that would make it comparable to income from taxable sources. There is an offsetting adjustment in the tax provision, thereby generating the same
after-tax
net income.
Tier 1 capital
Tier 1 capital comprises predominantly of CET1 capital, with additional Tier 1 items such as preferred shares, limited recourse capital notes and
non-controlling
interests in subsidiaries Tier 1 instruments.
Tier 2 capital
Tier 2 capital consists mainly of subordinated debentures that meet certain criteria, certain loan loss allowances and
non-controlling
interests in subsidiaries’ Tier 2 instruments.
Total loss absorbing capacity (TLAC)
The aggregate of Tier 1 capital, Tier 2 capital, and external TLAC instruments which allow conversion in whole or in part into common shares under the Canada Deposit Insurance Corporation Act and meet all of the eligibility criteria under the guideline.
TLAC ratio
The risk-based TLAC ratio is defined as TLAC divided by total risk-weighted assets.
TLAC leverage ratio
The TLAC leverage ratio is defined as TLAC divided by the Leverage ratio exposure.
Total capital and total capital ratio
Total capital is defined as the total of Tier 1 and Tier 2 capital. The total capital ratio is calculated by dividing total capital by risk-weighted assets.
Tranche
A security class created whereby the risks and returns associated with a pool of assets are packaged into several classes of securities offering different risk and return profiles from those of the underlying asset pool. Tranches are typically rated by ratings agencies, and reflect both the credit quality of underlying collateral as well as the level of protection based on the tranches’ relative subordination.
Unattributed capital
Unattributed capital represents common equity in excess of common equity attributed to our business segments and is reported in the Corporate Support segment.
Value-at-Risk
(VaR)
A generally accepted risk-measurement concept that uses statistical models based on historical information to estimate within a given level of confidence the maximum loss in market value we would experience in our financial portfolio from an adverse
one-day
movement in market rates and prices.
 
Management’s Discussion and Analysis            Royal Bank of Canada: Annual Report 2023            131

EDTF recommendations index
We aim to present transparent, high-quality risk disclosures by providing disclosures in this 2023 Annual Report and Supplementary Financial Information package (SFI), and Pillar 3 Report, in accordance with recommendations from the FSB’s Enhanced Disclosure Task Force (EDTF). Information within the SFI and Pillar 3 Report is not and should not be considered incorporated by reference into this 2023 Annual Report.
The following index summarizes our disclosure by EDTF recommendation:
 
 
 
 
 
 
 
 
Location of disclosure
Type of Risk
 
 
Recommendation
 
 
Disclosure
 
 
 
Annual Report page
 
  
 
SFI page
 
General
 
1
 
Table of contents for EDTF risk disclosure
 
132
  
1
 
2
 
Define risk terminology and measures
 
65-70,
130-131
  
 
3
 
Top and emerging risks
 
63-65
  
 
4
 
 
New regulatory ratios
 
 
109-114
 
  
 
Risk governance, risk management and business model
 
 
5
 
 
Risk management organization
 
 
65-70
  
 
 
6
 
Culture and conduct risk
 
65-70
  
 
7
 
Risk in the context of our business activities
 
117
  
 
8
 
 
Stress testing
 
 
68-69,
81
 
  
 
Capital adequacy and risk-weighted assets (RWA)
 
 
9
 
 
Minimum Basel III capital ratios and Domestic systemically important bank surcharge
 
 
109-114
  
 
 
10
 
Composition of capital and reconciliation of the accounting balance sheet to the regulatory balance sheet
 
  
*
 
11
 
Flow statement of the movements in regulatory capital
 
  
19
 
12
 
Capital strategic planning
 
109-114
  
 
13
 
RWA by business segments
 
  
20
 
14
 
Analysis of capital requirement, and related measurement model information
 
71-75
  
*
 
15
 
RWA credit risk and related risk measurements
 
  
*
 
16
 
Movement of risk-weighted assets by risk type
 
  
20
 
17
 
 
Basel back-testing
 
 
68,
71-73
 
  
31
 
Liquidity
 
 
18
 
 
Quantitative and qualitative analysis of our liquidity reserve
 
 
 
88-89, 94-95
  
 
Funding
 
 
19
 
 
Encumbered and unencumbered assets by balance sheet category, and contractual obligations for rating downgrades
 
 
90, 93
  
 
 
20
 
Maturity analysis of consolidated total assets, liabilities and
off-balance
sheet commitments analyzed by remaining contractual maturity at the balance sheet date
 
97-98
  
 
21
 
 
Sources of funding and funding strategy
 
 
90-92
 
  
 
Market risk
 
 
22
 
 
Relationship between the market risk measures for trading and
non-trading
portfolios and the balance sheet
 
 
85-86
  
 
 
23
 
Decomposition of market risk factors
 
81-86
  
 
24
 
Market risk validation and back-testing
 
81
  
 
25
 
 
Primary risk management techniques beyond reported risk measures and parameters
 
 
81-84
  
Credit risk
 
 
26
 
 
Bank’s credit risk profile
 
 
71-81, 178-185
  
 
21-31,*
 
 
Quantitative summary of aggregate credit risk exposures that reconciles to the balance sheet
 
124-129
  
*
 
27
 
Policies for identifying impaired loans
 
73-75, 119, 149-151
  
 
28
 
Reconciliation of the opening and closing balances of impaired loans and impairment allowances during the year
 
  
23, 28
 
29
 
Quantification of gross notional exposure for OTC derivatives or exchange-traded derivatives
 
76
  
32
 
30
 
 
Credit risk mitigation, including collateral held for all sources of credit risk
 
 
74-75
  
*
Other
 
 
31
 
 
Other risk types
 
 
100-109
  
 
 
32
 
 
Publicly known risk events
 
 
104-105, 223-224
 
  
 
 
*
 
These disclosure requirements are satisfied or partially satisfied by disclosures provided in our Pillar 3 Report for the quarter ended October 31, 2023 and for the year ended October 31, 2022.
 
132            Royal Bank of Canada: Annual Report 2023            Index for Enhanced Disclosure Task Force recommendations

 
REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS
 
 
   
Reports
 
   
134
 
 
   
134
 
 
   
138
 
 
   
   
Consolidated Financial Statements
 
   
140
 
 
   
141
 
 
   
142
 
 
   
143
 
 
   
144
 
 
     
Notes to Consolidated Financial Statements
 
        145   Note 1  
 
        145   Note 2  
 
        161   Note 3  
 
        174   Note 4  
 
        178   Note 5  
 
        185   Note 6  
 
        185   Note 7  
 
        186   Note 8  
 
        190   Note 9  
 
        200   Note 10  
 
        201   Note 11  
 
        203   Note 12  
 
        204   Note 13  
 
        204   Note 14  
 
        205   Note 15  
 
        207   Note 16  
 
        208   Note 17  
 
        213   Note 18  
 
        213   Note 19  
 
        214   Note 20  
 
        216   Note 21  
 
        218   Note 22  
 
        220   Note 23  
 
        221   Note 24  
 
        223   Note 25  
 
        224   Note 26  
 
        226   Note 27  
 
        227   Note 28  
 
        228   Note 29  
 
        229   Note 30  
 
        231   Note 31  
 
        232   Note 32  
 
        234   Note 33  
 
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            133

 
Management’s Responsibility for Financial Reporting
 
The accompanying consolidated financial statements of Royal Bank of Canada were prepared by management, which is responsible for the integrity and fairness of the information presented, including the many amounts that must of necessity be based on estimates and judgments. These consolidated financial statements were prepared in accordance with the
Bank Act
(Canada) and International Financial Reporting Standards as issued by the International Accounting Standards Board. Financial information appearing throughout our Management’s Discussion and Analysis is consistent with these consolidated financial statements.
Our internal controls are designed to provide reasonable assurance that transactions are authorized, assets are safeguarded and proper records are maintained. These controls include quality standards in hiring and training of employees, policies and procedures manuals, a corporate code of conduct and accountability for performance within appropriate and well-defined areas of responsibility.
The system of internal controls is further supported by a compliance function, which is designed to ensure that we and our employees comply with securities legislation and conflict of interest rules, and by an internal audit staff, which conducts periodic audits of all aspects of our operations.
The Board of Directors oversees management’s responsibilities for financial reporting through an Audit Committee, which is composed entirely of independent directors. This Committee reviews our consolidated financial statements and recommends them to the Board for approval. Other key responsibilities of the Audit Committee include reviewing our existing internal control procedures and planned revisions to those procedures, and advising the directors on auditing matters and financial reporting issues. Our Chief Compliance Officer and Chief Internal Auditor have full and unrestricted access to the Audit Committee.
The Office of the Superintendent of Financial Institutions Canada (OSFI) examines and inquires into our business and affairs as deemed necessary to determine whether the provisions of the
Bank Act
are being complied with, and that we are in sound financial condition. In carrying out its mandate, OSFI strives to protect the rights and interests of our depositors and creditors.
PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm appointed by our shareholders upon the recommendation of the Audit Committee and Board, has performed an independent audit of the consolidated financial statements in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States) as stated in their Independent Auditor’s Report and Report of Independent Registered Public Accounting Firm, respectively. The auditors have full and unrestricted access to the Audit Committee to discuss their audit and related findings.
David I. McKay
President and Chief Executive Officer
Nadine Ahn
Chief Financial Officer
Toronto, November 29, 2023
 
 
Management’s Report on Internal Control over Financial Reporting
 
Management of Royal Bank of Canada is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the President and Chief Executive Officer and Chief Financial Officer and effected by the Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. It includes those policies and procedures that:
 
 
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions related to and dispositions of our assets;
 
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and our receipts and expenditures are made only in accordance with authorizations of our management and directors; and
 
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management evaluated, under the supervision of and with the participation of the President and Chief Executive Officer and Chief Financial Officer, the effectiveness of our internal control over financial reporting as of October 31, 2023, based on the criteria set forth in
Internal Control – Integrated Framework (2013)
 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management concluded that, as of October 31, 2023, internal control over financial reporting was effective based on the criteria established in the
Internal Control – Integrated Framework (2013).
The effectiveness of our internal control over financial reporting as of October 31, 2023, has been audited by PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, as stated in their Report of Independent
Registered Public Accounting Firm, which appears herein.
David I. McKay
President and Chief Executive Officer
Nadine Ahn
Chief Financial Officer
Toronto, November 29, 2023
 
134            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

 
 
INTENTIONALLY LEFT BLANK
 
 
 
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            135

 
 
INTENTIONALLY LEFT BLANK
 
 
 
 
136            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

 
 
INTENTIONALLY LEFT BLANK
 
 
 
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            137

 
Report of Independent Registered Public Accounting Firm
 
To the Shareholders and Board of Directors of Royal Bank of Canada
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Royal Bank of Canada and its subsidiaries (together, the Bank) as of October 31, 2023 and 2022, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for the years then ended, including the related notes (collectively referred to as the consolidated financial statements). We also have audited the Bank’s internal control over financial reporting as of October 31, 2023, based on criteria established in
Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Bank as of October 31, 2023 and 2022, and its financial performance and its cash flows for the years then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of October 31, 2023, based on criteria established in
Internal Control – Integrated Framework
(2013) issued by the COSO.
Basis for Opinions
The Bank’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Bank’s consolidated financial statements and on the Bank’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Bank in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. An entity’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Credit Losses for Financial Assets Categorized as Stage 1 and Stage 2 (Stage 1 and Stage 2 ACL)
As described in Notes 2, 4 and 5 to the consolidated financial statements, the Bank’s allowance for credit losses for financial assets was $5,366 million as of October 31, 2023 and represents management’s estimate of expected credit losses on financial assets as of the balance sheet date, of which a significant portion relates to financial assets categorized as Stage 1 and Stage 2. Performing financial assets are categorized as Stage 1 from initial recognition to the date on which the asset has experienced a significant increase in credit risk relative to its initial recognition. Performing financial assets transfer into Stage 2 following a significant increase in credit risk relative to the initial recognition. Financial assets are categorized as Stage 3 when considered
 
138            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

to be credit-impaired. As disclosed by management, the measurement of expected credit losses is a complex calculation that involves a significant number of interrelated inputs and assumptions such as borrower risk ratings, forward-looking macroeconomic conditions, scenario design and the weight assigned to each scenario. The probability of default, loss given default and exposure at default inputs are modelled based on the macroeconomic variables that are most closely correlated with credit losses. Management’s estimation of expected credit losses in Stage 1 and Stage 2 considers five distinct future macroeconomic scenarios, each of which includes a forecast of relevant macroeconomic variables, designed to capture a wide range of possible outcomes and which are probability-weighted according to management’s expectation of the relative likelihood of the range of outcomes that each scenario represents at the reporting date. Significant management judgment is required in making assumptions and estimations when calculating the Stage 1 and Stage 2 ACL.
The principal considerations for our determination that performing procedures relating to the Stage 1 and Stage 2 ACL is a critical audit matter are (i) the significant judgment required by management when estimating the Stage 1 and Stage 2 ACL; (ii) a high degree of auditor judgment and subjectivity in performing procedures related to management’s assumptions for (a) designing future macroeconomic scenarios, (b) forecasting certain macroeconomic variables, (c) probability-weighting scenarios, and (d) assigning borrower risk ratings; (iii) the significant audit effort necessary to evaluate audit evidence as the estimation of the Stage 1 and Stage 2 ACL is a complex calculation that involves a large volume of data, interrelated inputs and assumptions, some of which are model-based; and (iv) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the estimation of the Stage 1 and Stage 2 ACL, including controls over (i) the probability of default, loss given default and exposure at default models; (ii) the design of future macroeconomic scenarios, the forecasting of certain macroeconomic variables, and the probability-weighting of these scenarios; (iii) the assignment of borrower risk ratings; and (iv) the completeness and accuracy of certain data inputs underlying the Stage 1 and Stage 2 ACL calculation. These procedures also included, among others, testing management’s process for estimating the Stage 1 and Stage 2 ACL. This consisted of (i) testing the completeness and accuracy of certain underlying data used in the estimation of the Stage 1 and Stage 2 ACL; and (ii) with the assistance of professionals with specialized skill and knowledge, evaluating (a) the appropriateness of the probability of default, loss given default and exposure at default models used in the estimation of the Stage 1 and Stage 2 ACL, and (b) the reasonableness of significant inputs and assumptions used in the estimation of the Stage 1 and Stage 2 ACL related to (1) the design of future macroeconomic scenarios, (2) certain forecasted macroeconomic variables, (3) the probability-weights assigned to these scenarios, and (4) the assignment of borrower risk ratings for samples of loans.
Uncertain Tax Positions
As described in Note 2 to the consolidated financial statements, the Bank is subject to income tax laws in various jurisdictions where it operates and the complex tax laws are potentially subject to different interpretations by management and the relevant taxation authorities. As disclosed by management, significant judgment is required in the interpretation of the relevant tax laws, and in assessing the probability of acceptance of the Bank’s tax positions to determine tax provisions, which includes management’s best estimate of uncertain tax positions that are under audit or appeal by the relevant taxation authorities. Management performs a review on a quarterly basis to incorporate its best assessment based on information available, but additional liability and income tax expense could result based on the acceptance of the Bank’s tax positions by the relevant tax authorities. In some cases, as described in Note 22 to the consolidated financial statements, the Bank has received reassessments denying the tax deductibility of dividends from transactions including those with Tax Indifferent Investors.
The principal considerations for our determination that performing procedures relating to uncertain tax positions is a critical audit matter are (i) the significant judgment required by management, including a high degree of estimation uncertainty, when (a) interpreting the relevant tax laws, and (b) assessing the probability of acceptance of the Bank’s tax positions, which includes management’s best estimate of uncertain tax positions that are under audit or appeal by relevant taxation authorities; (ii) a high degree of auditor judgment and subjectivity in performing procedures and evaluating the uncertain tax positions; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the evaluation of uncertain tax positions and the impact on tax provisions. These procedures also included, among others, testing management’s process for (i) assessing the probability of acceptance of the Bank’s tax positions; and (ii) estimating provisions relating to uncertain tax positions, if applicable, which reflects management’s best estimate of uncertain tax positions that are under audit or appeal by relevant taxation authorities. This consisted of (i) evaluating the appropriateness of the methods used; (ii) testing the completeness and accuracy of underlying data used in the estimate; (iii) reviewing correspondence with relevant taxation authorities; (iv) making inquiries of the Bank’s internal and external legal counsel; and (v) evaluating, with the assistance of professionals with specialized skill and knowledge, the application of relevant tax laws, the reasonableness of management’s assessment of whether it is probable that the relevant tax authorities will accept the Bank’s tax positions, and evidence used by management.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
November 29, 2023
We have served as the Bank’s auditor since 2016.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            139

 
Consolidated Balance Sheets
 
     As at   
(Millions of Canadian dollars)
  
October 31
2023
    
October 31
2022
 
Assets
                 
Cash and due from banks
  
$
61,989
 
   $ 72,397  
     
Interest-bearing deposits with banks
  
 
71,086
 
     108,011  
     
Securities
(Note 4)
                 
Trading
  
 
190,151
 
     148,205  
Investment, net of applicable allowance
  
 
219,579
 
     170,018  
 
  
 
409,730
 
     318,223  
     
Assets purchased under reverse repurchase agreements and securities borrowed
  
 
340,191
 
     317,845  
     
Loans
(Note 5)
                 
Retail
  
 
569,951
 
     549,751  
Wholesale
  
 
287,826
 
     273,967  
    
 
857,777
 
     823,718  
Allowance for loan losses
(Note 5)
  
 
(5,004
     (3,753
 
  
 
852,773
 
     819,965  
     
Segregated fund net assets
(Note 16)
  
 
2,760
 
     2,638  
Other
                 
Customers’ liability under acceptances
  
 
21,695
 
     17,827  
Derivatives
(Note 9)
  
 
142,450
 
     154,439  
Premises and equipment
(Note 10)
  
 
6,749
 
     7,214  
Goodwill
(Note 11)
  
 
12,594
 
     12,277  
Other intangibles
(Note 11)
  
 
5,907
 
     6,083  
Other assets
(Note 13)
  
 
77,068
 
     80,300  
 
  
 
266,463
 
     278,140  
Total assets
  
$
2,004,992
 
   $ 1,917,219  
     
Liabilities and equity
                 
Deposits
(Note 14)
                 
Personal
  
$
441,946
 
   $ 404,932  
Business and government
  
 
745,075
 
     759,870  
Bank
  
 
44,666
 
     44,012  
 
  
 
1,231,687
 
     1,208,814  
     
Segregated fund net liabilities
(Note 16)
  
 
2,760
 
     2,638  
Other
                 
Acceptances
  
 
21,745
 
     17,872  
Obligations related to securities sold short
  
 
33,651
 
     35,511  
Obligations related to assets sold under repurchase agreements and securities loaned
  
 
335,238
 
     273,947  
Derivatives
(Note 9)
  
 
142,629
 
     153,491  
Insurance claims and policy benefit liabilities
(Note 15)
  
 
11,966
 
     11,511  
Other liabilities
(Note 18)
  
 
96,170
 
     95,235  
 
  
 
641,399
 
     587,567  
     
Subordinated debentures
(Note 19)
  
 
11,386
 
     10,025  
Total liabilities
  
 
1,887,232
 
     1,809,044  
     
Equity attributable to shareholders
                 
Preferred shares and other equity instruments
(Note 20)
  
 
7,314
 
     7,318  
Common shares
(Note 20)
  
 
19,167
 
     16,984  
Retained earnings
  
 
84,328
 
     78,037  
Other components of equity
  
 
6,852
 
     5,725  
    
 
117,661
 
     108,064  
Non-controlling interests
  
 
99
 
     111  
Total equity
  
 
117,760
 
     108,175  
Total liabilities and equity
  
$
2,004,992
 
   $   1,917,219  
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
David I. McKay
  Frank Vettese    
President and Chief Executive Officer
  Director    
 
140            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

 
Consolidated Statements of Income
 
    
 
For the year ended
 
(Millions of Canadian dollars, except per share amounts)
  
 
October 31
2023
    
 
October 31
2022
 
     
Interest and dividend income
(Note 3)
                 
Loans
  
$
        43,463
 
   $         26,565  
Securities
  
 
14,512
 
     7,062  
Assets purchased under reverse repurchase agreements and securities borrowed
  
 
22,164
 
     5,447  
Deposits and other
  
 
6,852
 
     1,697  
     
86,991
     40,771  
     
Interest expense
(Note 3)
                 
Deposits and other
  
 
36,679
 
     10,751  
Other liabilities
  
 
24,517
 
     7,015  
Subordinated debentures
  
 
666
 
     288  
 
  
 
61,862
 
     18,054  
Net interest income
  
 
25,129
 
     22,717  
     
Non-interest income
                 
Insurance premiums, investment and fee income
(Note 15)
  
 
5,675
 
     3,510  
Trading revenue
  
 
2,392
 
     926  
Investment management and custodial fees
  
 
8,344
 
     7,610  
Mutual fund revenue
  
 
4,063
 
     4,289  
Securities brokerage commissions
  
 
1,463
 
     1,481  
Service charges
  
 
2,099
 
     1,976  
Underwriting and other advisory fees
  
 
2,005
 
     2,058  
Foreign exchange revenue, other than trading
  
 
1,292
 
     1,038  
Card service revenue
  
 
1,240
 
     1,203  
Credit fees
  
 
1,489
 
     1,512  
Net gains on investment securities
  
 
193
 
     43  
Income (loss) from joint ventures and associates
(Note 12)
  
 
(219
     110  
Other
  
 
964
 
     512  
 
  
 
31,000
 
     26,268  
Total revenue
  
 
56,129
 
     48,985  
Provision for credit losses
(Notes 4 and 5)
  
 
2,468
 
     484  
Insurance policyholder benefits, claims and acquisition expense
(Note 15)
  
 
4,022
 
     1,783  
     
Non-interest expense
                 
Human resources
(Notes 17 and 21)
  
 
18,971
 
     16,528  
Equipment
  
 
2,381
 
     2,099  
Occupancy
  
 
1,634
 
     1,554  
Communications
  
 
1,271
 
     1,082  
Professional fees
  
 
2,223
 
     1,511  
Amortization of other intangibles
(Note 11)
  
 
1,487
 
     1,369  
Other
  
 
3,206
 
     2,466  
 
  
 
31,173
 
     26,609  
Income before income taxes
  
 
18,466
 
     20,109  
Income taxes
(Note 22)
  
 
3,600
 
     4,302  
Net income
  
$
14,866
 
   $ 15,807  
Net income attributable to:
                 
Shareholders
  
$
14,859
 
   $ 15,794  
Non-controlling interests
  
 
7
 
     13  
 
  
$
14,866
 
   $ 15,807  
Basic earnings per share
(in dollars) (Note 23)
  
$
10.51
 
   $ 11.08  
Diluted earnings per share
(in dollars) (Note 23)
  
 
10.50
 
     11.06  
Dividends per common share
(in dollars)
  
 
5.34
 
     4.96  
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            141

 
Consolidated Statements of Comprehensive Income
 
   
 
For the year ended
 
(Millions of Canadian dollars)
 
 
October 31
2023
   
 
October 31
2022
 
 
Net income
 
$
14,866
 
  $     15,807  
     
Other comprehensive income (loss), net of taxes
(Note 22)
               
Items that will be reclassified subsequently to income:
               
Net change in unrealized gains (losses) on debt securities and loans at fair value through other comprehensive income
               
Net unrealized gains (losses) on debt securities and loans at fair value through other comprehensive income
 
 
(14
    (2,241
Provision for credit losses recognized in income
 
 
(14
    (16
Reclassification of net losses (gains) on debt securities and loans at fair value through other comprehensive income to income
 
 
(131
    (12
 
 
 
(159
    (2,269
Foreign currency translation adjustments
               
Unrealized foreign currency translation gains (losses)
 
 
2,148
 
    5,091  
Net foreign currency translation gains (losses) from hedging activities
 
 
(1,208
    (1,449
Reclassification of losses (gains) on foreign currency translation to income
 
 
(160
    (18
Reclassification of losses (gains) on net investment hedging activities to income
 
 
146
 
    17  
 
 
 
926
 
    3,641  
Net change in cash flow hedges
               
Net gains (losses) on derivatives designated as cash flow hedges
 
 
216
 
    1,634  
Reclassification of losses (gains) on derivatives designated as cash flow hedges to income
 
 
146
 
    194  
 
 
 
362
 
    1,828  
Items that will not be reclassified subsequently to income:
               
Remeasurement gains (losses) on employee benefit plans
(1), (Note 17)
 
 
(344
    821  
Net gains (losses) from fair value changes due to credit risk on financial liabilities designated at fair value through profit or loss
 
 
(576
    1,747  
Net gains (losses) on equity securities designated at fair value through other comprehensive income
 
 
44
 
    50  
 
 
 
(876
    2,618  
Total other comprehensive income (loss), net of taxes
 
 
253
 
    5,818  
Total comprehensive income (loss)
 
$
15,119
 
  $ 21,625  
Total comprehensive income attributable to:
               
Shareholders
 
$
15,110
 
  $ 21,604  
Non-controlling interests
 
 
9
 
    21  
 
 
$
15,119
 
  $ 21,625  
 
(1)   Includes $(9) million that was reclassified from other comprehensive income to retained earnings.
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
142            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

 
Consolidated Statements of Changes in Equity
 
 
    
For the year ended October 31, 2023
 
                                 
 
Other components of equity
                   
(Millions of Canadian dollars)  
Preferred
shares and
other equity
instruments
   
Common
shares
   
Treasury –
preferred
shares and
other equity
instruments
   
Treasury –
common
shares
   
Retained
earnings
   
FVOCI
securities
and loans
   
Foreign
currency
translation
   
Cash flow
hedges
   
Total other
components
of equity
   
Equity
attributable to
shareholders
   
Non-controlling

interests
   
Total
equity
 
Balance at beginning of period
 
$
7,323
 
 
$
17,318
 
 
$
(5
 
$
(334
 
$
78,037
 
 
$
(2,357
 
$
5,688
 
 
$
2,394
 
 
$
5,725
 
 
$
108,064
 
 
$
111
 
 
$
108,175
 
Changes in equity
                                                                                               
Issues of share capital and other equity instruments
 
 
 
 
 
2,080
 
 
 
 
 
 
 
 
 
1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2,081
 
 
 
 
 
 
2,081
 
Common shares purchased for cancellation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Redemption of preferred shares and other equity instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of treasury shares and other equity instruments
 
 
 
 
 
 
 
 
515
 
 
 
3,659
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4,174
 
 
 
 
 
 
4,174
 
Purchases of treasury shares and other equity instruments
 
 
 
 
 
 
 
 
(519
 
 
(3,556
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(4,075
 
 
 
 
 
(4,075
Share-based compensation awards
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
 
 
 
 
 
 
4
 
Dividends on common shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(7,443
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(7,443
 
 
 
 
 
(7,443
Dividends on preferred shares and distributions on other equity instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(236
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(236
 
 
(21
 
 
(257
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(18
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(18
 
 
 
 
 
(18
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14,859
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14,859
 
 
 
7
 
 
 
14,866
 
Total other comprehensive income (loss), net of taxes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(876
 
 
(159
 
 
924
 
 
 
362
 
 
 
1,127
 
 
 
251
 
 
 
2
 
 
 
253
 
Balance at end of period
 
$
7,323
 
 
$
19,398
 
 
$
(9
 
$
(231
 
$
84,328
 
 
$
(2,516
 
$
6,612
 
 
$
2,756
 
 
$
6,852
 
 
$
117,661
 
 
$
99
 
 
$
  117,760
 
 
   
     For the year ended October 31, 2022  
                                 
 
Other components of equity
                   
(Millions of Canadian dollars)   Preferred
shares and
other equity
instruments
    Common
shares
    Treasury –
preferred
shares and
other equity
instruments
    Treasury –
common
shares
    Retained
earnings
    FVOCI
securities
and loans
    Foreign
currency
translation
    Cash flow
hedges
    Total other
components
of equity
    Equity
attributable to
shareholders
    Non-controlling
interests
    Total
equity
 
Balance at beginning of period
  $ 6,723     $ 17,728     $ (39   $ (73   $ 71,795     $ (88   $ 2,055     $ 566     $ 2,533     $ 98,667     $ 95     $ 98,762  
Changes in equity
                                                                                               
Issues of share capital and other equity instruments
    750       99                   (1                             848             848  
Common shares purchased for cancellation
          (509                 (4,917                             (5,426           (5,426
Redemption of preferred shares and other equity instruments
    (150                       (5                             (155           (155
Sales of treasury shares and other equity instruments
                552       4,922                                     5,474             5,474  
Purchases of treasury shares and other equity instruments
                (518     (5,183                                   (5,701           (5,701
Share-based compensation awards
                            2                               2             2  
Dividends on common shares
                            (6,946                             (6,946           (6,946
Dividends on preferred shares and distributions on other equity instruments
                            (247                             (247     (5     (252
Other
                            (56                             (56           (56
Net income
                            15,794                               15,794       13       15,807  
Total other comprehensive income (loss), net of taxes
                            2,618       (2,269     3,633       1,828       3,192       5,810       8       5,818  
Balance at end of period
  $ 7,323     $ 17,318     $ (5   $ (334   $ 78,037     $ (2,357   $ 5,688     $ 2,394     $ 5,725     $ 108,064     $ 111     $   108,175  
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            143

 
Consolidated Statements of Cash Flows
 
    
 
For the year ended
 
(Millions of Canadian dollars)
  
 
October 31
2023
    
 
October 31
2022
 
     
Cash flows from operating activities
                 
Net income
  
$
        14,866
 
   $         15,807  
Adjustments for non-cash items and others
                 
Provision for credit losses
  
 
2,468
 
     484  
Depreciation
  
 
1,275
 
     1,265  
Deferred income taxes
  
 
(995
     569  
Amortization and impairment of other intangibles
  
 
1,595
 
     1,387  
Net changes in investments in joint ventures and associates
  
 
221
 
     (108
Losses (Gains) on investment securities
  
 
(193
     (43
Losses (Gains) on disposition of business
  
 
(92
     (100
Adjustments for net changes in operating assets and liabilities
                 
Insurance claims and policy benefit liabilities
  
 
455
 
     (1,305
Net change in accrued interest receivable and payable
  
 
2,837
 
     333  
Current income taxes
  
 
(986
     (3,336
Derivative assets
  
 
11,826
 
     (58,898
Derivative liabilities
  
 
(10,452
     62,052  
Trading securities
  
 
(41,946
     (8,931
Loans, net of securitizations
  
 
(34,688
     (102,653
Assets purchased under reverse repurchase agreements and securities borrowed
  
 
(22,346
     (9,942
Obligations related to assets sold under repurchase agreements and securities loaned
  
 
61,291
 
     11,746  
Obligations related to securities sold short
  
 
(1,860
     (2,330
Deposits, net of securitizations
  
 
43,990
 
     108,533  
Brokers and dealers receivable and payable
  
 
(2,444
     4,612  
Other
  
 
1,257
 
     2,800  
Net cash from (used in) operating activities
  
 
26,079
 
     21,942  
Cash flows from investing activities
                 
Change in interest-bearing deposits with banks
  
 
18,743
 
     (28,373
Proceeds from sales and maturities of investment securities
  
 
156,466
 
     99,143  
Purchases of investment securities
  
 
(202,456
     (122,964
Net acquisitions of premises and equipment and other intangibles
  
 
(2,730
     (2,500
Net proceeds from (cash transferred for) dispositions
  
 
1,712
 
     (313
Cash used in acquisitions, net of cash acquired
  
 
 
     (2,047
Net cash from (used in) investing activities
  
 
(28,265
     (57,054
Cash flows from financing activities
                 
Issuance of subordinated debentures
  
 
1,500
 
     1,000  
Repayment of subordinated debentures
  
 
(170
     (192
Issue of common shares, net of issuance costs
  
 
65
 
     51  
Common shares purchased for cancellation
  
 
 
     (5,426
Issue of preferred shares and other equity instruments, net of issuance costs
  
 
 
     749  
Redemption of preferred shares and other equity instruments
  
 
 
     (155
Sales of treasury shares and other equity instruments
  
 
4,174
 
     5,474  
Purchases of treasury shares and other equity instruments
  
 
(4,075
     (5,701
Dividends paid on shares and distributions paid on other equity instruments
  
 
(5,549
     (6,960
Dividends/distributions paid to non-controlling interests
  
 
(21
     (5
Change in short-term borrowings of subsidiaries
  
 
(5,102
     9,609  
Repayment of lease liabilities
  
 
(655
     (629
Net cash from (used in) financing activities
  
 
(9,833
     (2,185
Effect of exchange rate changes on cash and due from banks
  
 
1,611
 
     (4,152
Net change in cash and due from banks
  
 
(10,408
     (41,449
Cash and due from banks at beginning of period
(1)
  
 
72,397
 
     113,846  
Cash and due from banks at end of period
(1)
  
$
61,989
 
   $ 72,397  
Cash flows from operating activities include:
                 
Amount of interest paid
  
$
54,698
 
   $ 13,677  
Amount of interest received
  
 
81,095
 
     35,817  
Amount of dividends received
  
 
3,362
 
     3,144  
Amount of income taxes paid
  
 
4,964
 
     7,326  
 
(1)   We are required to maintain balances due to regulatory requirements or contractual restrictions from central banks, other regulatory authorities, and other counterparties. The total balances were $3 billion as at October 31, 2023 (October 31, 2022 – $2 billion; October 31, 2021 – $2 billion).
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
144            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Note 1    General information
Royal Bank of Canada and its subsidiaries (the Bank) provide diversified financial services including Personal & Commercial Banking, Wealth Management, Insurance and Capital Markets products and services on a global basis. Refer to Note 27 for further details on our business segments.
The parent bank, Royal Bank of Canada, is a Schedule I Bank under the
Bank Act
(Canada) incorporated and domiciled in Canada. Our corporate headquarters are located at Royal Bank Plaza, 200 Bay Street, Toronto, Ontario, Canada and our head office is located at 1 Place Ville-Marie, Montreal, Quebec, Canada. Our common shares are listed on the Toronto Stock Exchange and New York Stock Exchange with the ticker symbol RY.
These Consolidated Financial Statements are prepared in compliance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Unless otherwise stated, monetary amounts are stated in Canadian dollars. Tabular information is stated in millions of dollars, except as noted. These Consolidated Financial Statements also comply with Subsection 308 of the
Bank Act
(Canada), which states that, except as otherwise specified by the Office of the Superintendent of Financial Institutions Canada (OSFI), our Consolidated Financial Statements are to be prepared in accordance with IFRS. The accounting policies outlined in Note 2 have been consistently applied to all periods presented.
On November 29, 2023, the Board of Directors authorized the Consolidated Financial Statements for issue.
 
Note 2    Summary of significant accounting policies, estimates and judgments
The significant accounting policies used in the preparation of these Consolidated Financial Statements, including the accounting requirements prescribed by OSFI, are summarized below. These accounting policies conform, in all material respects, to IFRS. The same accounting policies have been applied to all periods presented.
General
Use of estimates and assumptions
In preparing our Consolidated Financial Statements, management is required to make subjective estimates and assumptions that affect the reported amount of assets, liabilities, net income and related disclosures. Estimates made by management are based on historical experience and other assumptions that are believed to be reasonable. Key sources of estimation uncertainty include: determination of fair value of financial instruments, allowance for credit losses, insurance claims and policy benefit liabilities, pensions and other post-employment benefits, income taxes, goodwill and other intangible assets, and provisions. Accordingly, actual results may differ from these and other estimates thereby impacting our future Consolidated Financial Statements. Refer to the relevant accounting policies in this Note for details on our use of estimates and assumptions.
Significant judgments
In preparation of these Consolidated Financial Statements, management is required to make significant judgments that affect the carrying amounts of certain assets and liabilities, and the reported amounts of revenues and expenses recorded during the period. Significant judgments have been made in the following areas and discussed as noted in the Consolidated Financial Statements:
 
Consolidation of structured entities   
Note 2
Note 8
   Application of the effective interest method    Note 2
       
Fair value of financial instruments   
Note 2
Note 3
   Derecognition of financial assets   
Note 2
Note 7
       
Allowance for credit losses   
Note 2
Note 4
Note 5
   Income taxes   
Note 2
Note 22
       
Employee benefits   
Note 2
Note 17
   Provisions   
Note 2
Note 24
Note 25
       
Goodwill and other intangibles   
Note 2
Note 11
         
Basis of consolidation
Our Consolidated Financial Statements include the assets and liabilities and results of operations of the parent company, Royal Bank of Canada, and its subsidiaries including certain structured entities, after elimination of intercompany transactions, balances, revenues and expenses.
Consolidation
Subsidiaries are those entities, including structured entities, over which we have control. We control an entity when we are exposed, or have rights, to variable returns from our involvement with the entity and have the ability to affect those returns through our power over the investee. We have power over an entity when we have existing rights that give us the current ability to direct the activities that most significantly affect the entity’s returns (relevant activities). Power may be determined on the basis of voting rights or, in the case of structured entities, other contractual arrangements.
We are not deemed to control an entity when we exercise power over an entity as the agent of a third party or parties. In determining whether we are acting as an agent, we consider the overall relationship between us, the investee and other parties to the arrangement with respect to the following factors: (i) the scope of our decision-making power; (ii) the rights held by other parties; (iii) the remuneration to which we are entitled; and (iv) our exposure to variability of returns.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            145

Note 2    Summary of significant accounting policies, estimates and judgments
(continued)
 
The determination of control is based on the current facts and circumstances and is continuously assessed. In some circumstances, different factors and conditions may indicate that various parties control an entity depending on whether those factors and conditions are assessed in isolation or in totality. Significant judgment is applied in determining whether we control an entity, specifically, assessing whether we have substantive decision-making rights over the relevant activities and whether we are exercising our power as a principal or an agent.
We consolidate all subsidiaries from the date we obtain control and cease consolidation when an entity is no longer controlled by us. Our consolidation conclusions affect the classification and amount of assets, liabilities, revenues and expenses reported in our Consolidated Financial Statements.
Non-controlling interests in subsidiaries that we consolidate are shown on our Consolidated Balance Sheets as a separate component of equity which is distinct from equity attributable to our shareholders. The net income attributable to
non-controlling
interests is separately disclosed in our Consolidated Statements of Income.
Investments in joint ventures and associates
Our investments in associated corporations and limited partnerships over which we have significant influence are accounted for using the equity method. The equity method is also applied to our interests in joint ventures over which we have joint control. Under the equity method of accounting, investments are initially recorded at cost, and the carrying amount is increased or decreased to recognize our share of the investee’s net profit or loss, including our proportionate share of the investee’s Other comprehensive income (OCI), subsequent to the date of acquisition.
Non-current assets held for sale and discontinued operations
Non-current assets (and disposal groups) are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is satisfied when the asset is available for immediate sale in its present condition, management is committed to the sale, and it is highly probable to occur within one year. Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell and if significant, are presented separately from other assets on our Consolidated Balance Sheets.
A disposal group is classified as a discontinued operation if it meets the following conditions: (i) it is a component that can be distinguished operationally and financially from the rest of our operations and (ii) it represents either a separate major line of business or is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations. Disposal groups classified as discontinued operations are presented separately from our continuing operations in our Consolidated Statements of Income.
Financial Instruments
Classification of financial assets
Financial assets are measured at initial recognition at fair value, and are classified and subsequently measured at fair value through profit or loss (FVTPL), fair value through other comprehensive income (FVOCI) or amortized cost based on our business model for managing the financial instruments and the contractual cash flow characteristics of the instrument.
Debt instruments are measured at amortized cost if both of the following conditions are met and the asset is not designated as FVTPL: (a) the asset is held within a business model that is Held-to-Collect (HTC) as described below, and (b) the contractual terms of the instrument give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI).
Debt instruments are measured at FVOCI if both of the following conditions are met and the asset is not designated as FVTPL: (a) the asset is held within a business model that is Held-to-Collect-and-Sell (HTC&S) as described below, and (b) the contractual terms of the instrument give rise, on specified dates, to cash flows that are SPPI.
All other debt instruments are measured at FVTPL.
Equity instruments are measured at FVTPL, unless the asset is not held for trading purposes and we make an irrevocable election to designate the asset as FVOCI. This election is made on an instrument-by-instrument basis.
Business model assessment
We determine our business models at the level that best reflects how we manage portfolios of financial assets to achieve our business objectives. Judgment is used in determining our business models, which is supported by relevant, objective evidence including:
   
How the economic activities of our businesses generate benefits, for example through trading revenue, enhancing yields or hedging funding or other costs and how such economic activities are evaluated and reported to key management personnel;
   
The significant risks affecting the performance of our businesses, for example, market risk, credit risk, or other risks as described in the Risk Management section of the MD&A, and the activities undertaken to manage those risks;
   
Historical and future expectations of sales of the loans or securities portfolios managed as part of a business model; and
   
The compensation structures for managers of our businesses, to the extent that these are directly linked to the economic performance of the business model.
Our business models fall into three categories, which are indicative of the key strategies used to generate returns:
   
HTC: The objective of this business model is to hold loans and securities to collect contractual principal and interest cash flows. Sales are incidental to this objective and are expected to be insignificant or infrequent.
   
HTC&S: Both collecting contractual cash flows and sales are integral to achieving the objective of the business model.
   
Other fair value business models: These business models are neither HTC nor HTC&S, and primarily represent business models where assets are held-for-trading or managed on a fair value basis.
 
146            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements


SPPI assessment
Instruments held within a HTC or HTC&S business model are assessed to evaluate if their contractual cash flows are comprised of solely payments of principal and interest. SPPI payments are those which would typically be expected from basic lending arrangements. Principal amounts include par repayments from lending and financing arrangements, and interest primarily relates to basic lending returns, including compensation for credit risk and the time value of money associated with the principal amount outstanding over a period of time. Interest can also include other basic lending risks and costs (for example, liquidity risk, servicing or administrative costs) associated with holding the financial asset for a period of time, and a profit margin.
Where the contractual terms introduce exposure to risk or variability of cash flows that are inconsistent with a basic lending arrangement, the related financial asset is classified and measured at FVTPL.
Securities
Trading securities include all securities that are classified as FVTPL by nature and securities designated as FVTPL. Obligations to deliver trading securities sold but not yet purchased are recorded as liabilities and carried at fair value. Realized and unrealized gains and losses on these securities are generally recorded in Non-interest income – Trading revenue or Non-interest income – Other. Dividends and interest income accruing on Trading securities are recorded in Interest and dividend income. Interest and dividends accrued on securities sold short are recorded in Interest expense.
Investment securities include all securities classified as FVOCI and amortized cost. All investment securities are initially recorded at fair value and subsequently measured according to the respective classification.
Investment securities carried at amortized cost are measured using the effective interest method, and are presented net of any allowance for credit losses, calculated in accordance with our policy for Allowance for credit losses, as described below. Interest income, including the amortization of premiums and discounts on securities measured at amortized cost are recorded in Interest and dividend income. Impairment gains or losses recognized on amortized cost securities are recorded in Provision for credit losses (PCL). When a debt instrument measured at amortized cost is sold, the difference between the sale proceeds and the amortized cost of the security at the time of the sale is recorded as Net gains on investment securities in Non-interest income.
Debt securities carried at FVOCI are measured at fair value with unrealized gains and losses arising from changes in fair value included in Other components of equity. Impairment gains and losses are included in PCL and correspondingly reduce the accumulated changes in fair value included in Other components of equity. When a debt instrument measured at FVOCI is sold, the cumulative gain or loss is reclassified from Other components of equity to Net gains on investment securities in Non-interest income.
Equity securities carried at FVOCI are measured at fair value. Unrealized gains and losses arising from changes in fair value are recorded in Other components of equity and not subsequently reclassified to profit or loss when realized. Dividends from FVOCI equity securities are recognized in Interest and dividend income.
We account for all of our securities using settlement date accounting and changes in fair value between the trade date and settlement date are reflected in income for securities measured at FVTPL, and changes in the fair value of securities measured at FVOCI between the trade and settlement dates are recorded in OCI except for changes in foreign exchange rates on debt securities, which are recorded in Non-interest income.
Fair value option
A financial instrument with a reliably measurable fair value can be designated as FVTPL (the fair value option) on its initial recognition even if the financial instrument was not acquired or incurred principally for the purpose of selling or repurchasing. The fair value option can be used for financial assets if it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities, or recognizing related gains and losses on a different basis (an accounting mismatch). The fair value option can be elected for financial liabilities if: (i) the election eliminates an accounting mismatch; (ii) the financial liability is part of a portfolio that is managed on a fair value basis, in accordance with a documented risk management or investment strategy; or (iii) there is an embedded derivative in the financial or non-financial host contract and the derivative is not closely related to the host contract. These instruments cannot be reclassified out of the FVTPL category while they are held or issued.
Financial assets designated as FVTPL are recorded at fair value and any unrealized gain or loss arising due to changes in fair value is included in Non-interest income – Trading revenue or Non-interest income – Other, depending on our business purpose for holding the financial asset.
Financial liabilities designated as FVTPL are recorded at fair value and fair value changes attributable to changes in our own credit risk are recorded in OCI. Own credit risk amounts recognized in OCI will not be reclassified subsequently to net income. The remaining fair value changes not attributable to changes in our own credit risk are recorded in Non-interest income – Trading revenue or
Non-interest
income – Other, depending on our business purpose for holding the financial liability. Upon initial recognition, if we determine that presenting the effects of own credit risk changes in OCI would create or enlarge an accounting mismatch in net income, the full fair value change in our debt designated as FVTPL is recognized in net income. To make that determination, we assess whether we expect that the effects of changes in the liability’s credit risk will be offset in profit or loss by a change in the fair value of another financial instrument measured at FVTPL. Such an expectation is based on an economic relationship between the characteristics of the liability and the characteristics of the other financial instrument. The determination is made at initial recognition and is not reassessed. To determine the fair value adjustments on our debt instruments designated as FVTPL, we calculate the present value of the instruments based on the contractual cash flows over the term of the arrangement by using our effective funding rate at the beginning and end of the period.
Determination of fair value
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We determine fair value by incorporating factors that market participants would consider in setting a price, including commonly accepted valuation approaches.
The Board of Directors provides oversight on valuation of financial instruments, primarily through the Audit Committee and Risk Committee. The Audit Committee reviews the presentation and disclosure of financial instruments that are measured at fair value, while the Risk Committee assesses the adequacy of governance structures and control processes for the valuation of these instruments.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            147

Note 2    Summary of significant accounting policies, estimates and judgments
(continued)
 
We have established policies, procedures and controls for valuation methodologies and techniques to ensure that fair value is reasonably estimated. Major valuation processes and controls include, but are not limited to, profit and loss decomposition, independent price verification (IPV) and model validation standards. These control processes are managed by either Finance or Group Risk Management and are independent of the relevant businesses and their trading functions. Profit and loss decomposition is a process to explain the fair value changes of certain positions and is performed daily for trading portfolios. All fair value instruments are subject to IPV, a process whereby trading function valuations are verified against external market prices and other relevant market data. Market data sources include traded prices, brokers and price vendors. We give priority to those third-party pricing services and prices having the highest and most consistent accuracy. The level of accuracy is determined over time by comparing third-party price values to traders’ or system values, other pricing service values and, when available, actual trade data. Quoted prices for identical instruments from pricing services or brokers are generally not adjusted unless there are issues such as stale prices. If multiple quotes for identical instruments are received, fair value is based on an average of the prices received or the quote from the most reliable vendor, after the outlier prices that fall outside of the pricing range are removed. Other valuation techniques are used when a price or quote is not available. Some valuation processes use models to determine fair value. We have a systematic and consistent approach to control the use of models. Valuation models are approved for use within our model risk management framework. The framework addresses, among other things, model development standards, validation processes and procedures and approval authorities. Model validation ensures that a model is suitable for its intended use and sets parameters for its use. All models are revalidated regularly by qualified personnel who are independent of the model design and development. Annually, our model risk profile is reported to the Board of Directors.
IFRS 13
Fair Value Measurement
permits an exception, through an accounting policy choice, to measure the fair value of a portfolio of financial instruments on a net open risk position basis when certain criteria are met. We have elected to use this policy choice to determine the fair value of certain portfolios of financial instruments, primarily derivatives, based on a net exposure to market or credit risk.
We record valuation adjustments to appropriately reflect counterparty credit quality of our derivative portfolio, differences between the actual counterparty collateral discount curve and standard overnight index swap (OIS) discounting for collateralized derivatives, funding valuation adjustments (FVA) for uncollateralized and under-collateralized over-the-counter (OTC) derivatives, unrealized gains or losses at inception of the transaction, bid-offer spreads, unobservable parameters and model limitations. These adjustments may be subjective as they require significant judgment in the input selection, such as implied probability of default (PD) and recovery rate, and are intended to arrive at a fair value that is determined based on assumptions that market participants would use in pricing the financial instrument. The ultimate realized price for a transaction may differ from its fair recorded value previously estimated using management judgment.
Valuation adjustments are recorded for the credit risk of our derivative portfolios in order to arrive at their fair values. Credit valuation adjustments (CVA) take into account our counterparties’ creditworthiness, the current and potential future
mark-to-market
of transactions and the effects of credit mitigants such as master netting and collateral agreements. CVA amounts are derived from estimates of exposure at default (EAD), PD, recovery rates on a counterparty basis and market and credit factor correlations. EAD is the value of expected derivative related assets and liabilities at the time of default, estimated through modelling using underlying risk factors. PD is implied from the market prices for credit protection and the credit ratings of the counterparty. When market data is unavailable, it is estimated by incorporating assumptions and adjustments that market participants would use for determining fair value using these inputs. Correlation is the statistical measure of how credit and market factors may move in relation to one another. Correlation is estimated using historical data. CVA is calculated daily and changes are recorded in Non-interest income – Trading revenue.
FVA is also calculated to incorporate the cost and benefit of funding in the valuation of uncollateralized and under-collateralized OTC derivatives. Future expected cash flows of these derivatives are discounted to reflect the cost and benefit of funding the derivatives by using a funding curve, implied volatilities and correlations as inputs.
Where required, a valuation adjustment is made to reflect the unrealized gain or loss at inception of a financial instrument contract where the fair value of that financial instrument is not obtained from a quoted market price or cannot be evidenced by other observable market transactions based on a valuation technique incorporating observable market data.
A bid-offer valuation adjustment is required when a financial instrument is valued at the mid-market price, instead of the bid or offer price for asset or liability positions, respectively. The valuation adjustment takes into account the spread from the
mid-market
price to either the bid or offer price.
Some valuation models require parameter calibration from such factors as market observable option prices. The calibration of parameters may be sensitive to factors such as the choice of instruments or optimization methodology. A valuation adjustment is also estimated to mitigate the uncertainties of parameter calibration and model limitations.
In determining fair value, a hierarchy is used which prioritizes the inputs to valuation techniques. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Determination of fair value based on this hierarchy requires the use of observable market data whenever available. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model inputs that are either observable, or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 inputs include one or more inputs that are unobservable and significant to the fair value of the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available at the measurement date. The availability of inputs for valuation may affect the selection of valuation techniques. The classification of a financial instrument in the fair value hierarchy for disclosure purposes is based upon the lowest level of input that is significant to the measurement of fair value.
Where observable prices or inputs are not available, management judgment is required to determine fair values by assessing other relevant sources of information such as historical data, proxy information from similar transactions, and through extrapolation and interpolation techniques. For more complex or illiquid instruments, significant judgment is required in the determination of the model used, the selection of model inputs, and in some cases, the application of valuation adjustments to the model value or quoted price for inactively traded financial instruments. The selection of model inputs may be subjective and the inputs may be unobservable. Unobservable inputs are inherently uncertain as there is little or no market data available from
 
148            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

which to determine the level at which the transaction would occur under normal business circumstances. Appropriate parameter uncertainty and market risk valuation adjustments for such inputs and other model risk valuation adjustments are assessed in all such instances.
Loans
Loans are debt instruments recognized initially at fair value and are subsequently measured in accordance with the Classification of financial assets policy provided above. The majority of our loans are carried at amortized cost using the effective interest method, which represents the gross carrying amount less allowance for credit losses.
Interest on loans is recognized in Interest income using the effective interest method. The estimated future cash flows used in this calculation include those determined by the contractual term of the asset and all fees that are considered to be integral to the effective interest rate. Also included in this amount are transaction costs and all other premiums or discounts. Fees that relate to activities such as originating, restructuring or renegotiating loans are deferred and recognized as Interest income over the expected term of such loans using the effective interest method. Where there is a reasonable expectation that a loan will be originated, commitment and standby fees are also recognized as interest income over the expected term of the resulting loans using the effective interest method. Otherwise, such fees are recorded as other liabilities and amortized into Non-interest income over the commitment or standby period. Future prepayment fees on mortgage loans are not included as part of the effective interest rate at origination. If prepayment fees are received on a renewal of a mortgage loan before maturity, the fee is included as part of the effective interest rate, and if not renewed, the prepayment fee is recognized in interest income at the prepayment date.
For loans carried at amortized cost or FVOCI, impairment losses are recognized at each balance sheet date in accordance with the three-stage impairment model outlined below.
Allowance for credit losses
An allowance for credit losses (ACL) is established for all financial assets, except for financial assets classified or designated as FVTPL and equity securities designated as FVOCI, which are not subject to impairment assessment. Assets subject to impairment assessment include loans, debt securities, interest-bearing deposits with banks, customers’ liability under acceptances, accounts and accrued interest receivable, and finance and operating lease receivables. ACL on loans measured at amortized cost is presented in Allowance for loan losses. ACL on debt securities measured at FVOCI is presented in Other components of equity. Other financial assets carried at amortized cost are presented net of ACL on our Consolidated Balance Sheets.
Off-balance sheet items subject to impairment assessment include financial guarantees and undrawn loan commitments. ACL on off-balance sheet items is separately calculated and included in Other Liabilities – Provisions.
We measure the ACL on each balance sheet date according to a three-stage expected credit loss impairment model:
   
Performing financial assets
   
Stage 1 – From initial recognition of a financial asset to the date on which the asset has experienced a significant increase in credit risk relative to its initial recognition, a loss allowance is recognized equal to the credit losses expected to result from defaults occurring over the 12 months following the reporting date.
   
Stage 2 – Following a significant increase in credit risk relative to the initial recognition of the financial asset, a loss allowance is recognized equal to the credit losses expected over the remaining lifetime of the asset.
   
Impaired financial assets
   
Stage 3 – When a financial asset is considered to be credit-impaired, a loss allowance is recognized equal to credit losses expected over the remaining lifetime of the asset. Interest income is calculated based on the carrying amount of the asset, net of the loss allowance, rather than on its gross carrying amount.
The ACL is a discounted probability-weighted estimate of the cash shortfalls expected to result from defaults over the relevant time horizon. For loan commitments, credit loss estimates consider the portion of the commitment that is expected to be drawn over the relevant time period. For financial guarantees, credit loss estimates are based on the expected payments required under the guarantee contract. For finance lease receivables, credit loss estimates are based on cash flows consistent with the cash flows used in measuring the lease receivable.
Increases or decreases in the required ACL attributable to model changes and new originations, sales or maturities, and changes in risk, parameters and exposures due to changes in loss expectations or stage transfers are recorded in PCL. Write-offs and recoveries of amounts previously written off are recorded against ACL.
The ACL represents an unbiased estimate of expected credit losses on our financial assets as at the balance sheet date. Judgment is required in making assumptions and estimations when calculating the ACL, including movements between the three stages and the application of forward-looking information. The underlying assumptions and estimates may result in changes to the provisions from period to period that significantly affect our results of operations.
Measurement of expected credit losses
Expected credit losses are based on a range of possible outcomes and consider all available reasonable and supportable information, including internal and external ratings, historical credit loss experience and expectations about future cash flows. The measurement of expected credit losses is based primarily on the product of the instrument’s PD, loss given default (LGD), and EAD discounted to the reporting date. The main difference between Stage 1 and Stage 2 expected credit losses for performing financial assets is the respective calculation horizon. Stage 1 estimates project PD, LGD and EAD over a maximum period of 12 months while Stage 2 estimates project PD, LGD and EAD over the remaining lifetime of the instrument.
An expected credit loss estimate is produced for each individual exposure. Relevant parameters are modelled on a collective basis using portfolio segmentation that allows for appropriate incorporation of forward-looking information. To reflect other characteristics that are not already considered through modelling, expert credit judgment is exercised in determining the final expected credit losses.
For a small percentage of our portfolios which lack detailed historical information and/or loss experience, we apply simplified measurement approaches that may differ from what is described above. These approaches have been designed to maximize the available information that is reliable and supportable for each portfolio and may be collective in nature.
Expected credit losses are discounted to the reporting period date using the effective interest rate.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            149


Note 2    Summary of significant accounting policies, estimates and judgments
(continued)
 
Expected life
For instruments in Stage 2 or Stage 3, loss allowances reflect expected credit losses over the expected remaining lifetime of the instrument. For most instruments, the expected life is limited to the remaining contractual life.
An exemption is provided for certain instruments with the following characteristics: (a) the instrument includes both a loan and undrawn commitment component; (b) we have the contractual ability to demand repayment and cancel the undrawn commitment; and (c) our exposure to credit losses is not limited to the contractual notice period. For products in scope of this exemption, the expected life may exceed the remaining contractual life and is the period over which our exposure to credit losses is not mitigated by our normal credit risk management actions. This period varies by product and risk category and is estimated based on our historical experience with similar exposures and consideration of credit risk management actions taken as part of our regular credit review cycle. Products in scope of this exemption include credit cards, overdraft balances and certain revolving lines of credit. Judgment is required in determining the instruments in scope for this exemption and estimating the appropriate remaining life based on our historical experience and credit risk mitigation practices.
Assessment of significant increase in credit risk
The assessment of significant increase in credit risk requires significant judgment. Movements between Stage 1 and Stage 2 are based on whether an instrument’s credit risk as at the reporting date has increased significantly relative to the date it was initially recognized. For the purposes of this assessment, credit risk is based on an instrument’s lifetime PD, not the losses we expect to incur. The assessment is generally performed at the instrument level.
Our assessment of significant increases in credit risk is performed at least quarterly based on three factors. If any of the following factors indicates that a significant increase in credit risk has occurred, the instrument is moved from Stage 1 to Stage 2:
  (1)   We have established thresholds for significant increases in credit risk based on both a percentage and absolute change in lifetime PD relative to initial recognition. For our wholesale portfolio, a decrease in the borrower’s risk rating is also required to determine that credit risk has increased significantly.
  (2)   Additional qualitative reviews may be performed, as necessary, to assess the staging results, which may lead to adjustments to better reflect the positions whose credit risk has increased significantly. These reviews are completed at both the individual borrower levels and the portfolio level and may result in an instrument, a portfolio or a portion of a portfolio moving from Stage 1 to Stage 2.
  (3)   Instruments which are 30 days past due are generally considered to have experienced a significant increase in credit risk, even if our other metrics do not indicate that a significant increase in credit risk has occurred.
The thresholds for movement between Stage 1 and Stage 2 are symmetrical. After a financial asset has transferred to Stage 2, if its credit risk is no longer considered to have significantly increased relative to its initial recognition, the financial asset will move back to Stage 1.
For certain instruments with low credit risk as at the reporting date, it is presumed that credit risk has not increased significantly relative to initial recognition. Credit risk is considered to be low if the instrument has a low risk of default, and the borrower has the ability to fulfill their contractual obligations both in the near term and in the longer term, including periods of adverse changes in the economic or business environment. Certain interest-bearing deposits with banks, assets purchased under reverse repurchase agreements, insurance policy loans, and liquidity facilities extended to our multi-seller conduits have been identified as having low credit risk.
Use of forward-looking information
The measurement of expected credit losses for each stage and the assessment of significant increase in credit risk considers information about past events and current conditions as well as reasonable and supportable projections of future events and economic conditions. The estimation and application of forward-looking information requires significant judgment.
The PD, LGD and EAD inputs used to estimate Stage 1 and Stage 2 credit loss allowances are modelled based on the macroeconomic variables (or changes in macroeconomic variables) that are most closely correlated with credit losses in the relevant portfolio. Each macroeconomic scenario used in our expected credit loss calculation includes a projection of all relevant macroeconomic variables used in our models for a five-year period, subsequently reverting to long-run averages. Macroeconomic variables used in our expected credit loss models include, but are not limited to, unemployment rates, gross domestic product growth rates, equity return indices, commodity prices, and Canadian housing prices. Depending on their usage in the models, macroeconomic variables may be projected at a country, province/state or more granular level.
Our estimation of expected credit losses in Stage 1 and Stage 2 is a discounted probability-weighted estimate that considers a minimum of three future macroeconomic scenarios. Our base case scenario is based on macroeconomic forecasts published by our internal economics group. The published forecasts are developed from models based on historical macroeconomic data, derived from public sources and financial markets. Upside and downside scenarios vary relative to our base case scenario based on reasonably possible alternative macroeconomic conditions. Additional and more severe downside scenarios are designed to capture a broader range of potential credit losses in certain sectors. Scenario design, including the identification of additional downside scenarios, occurs at least on an annual basis and more frequently if conditions warrant.
Scenarios are designed to capture a wide range of possible outcomes and weighted according to our best estimate of the relative likelihood of the range of outcomes that each scenario represents. Scenario weights take into account historical frequency, current trends, and forward-looking conditions and are updated on a quarterly basis. All scenarios considered are applied to all portfolios subject to expected credit losses with the same probabilities.
Our assessment of significant increases in credit risk is based on changes in probability-weighted forward-looking lifetime PDs as at the reporting date, using the same macroeconomic scenarios as the calculation of expected credit losses.
Definition of default
The definition of default used in the measurement of expected credit losses is consistent with the definition of default used for our internal credit risk management purposes. Our definition of default may differ across products and consider both quantitative and qualitative factors, such as the terms of financial covenants and days past due. For retail and wholesale borrowers, except as detailed below, default occurs when the borrower is more than 90 days past due on any material obligation
 
150            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements


to us, and/or we consider the borrower unlikely to make their payments in full without recourse action on our part, such as taking formal possession of any collateral held. For certain credit card balances, default occurs when payments are 180 days past due. For these balances, the use of a period in excess of 90 days past due is reasonable and supported by observable data on write-off and recovery rates experienced on historical credit card portfolios. The definition of default used is applied consistently from period to period and to all financial instruments unless it can be demonstrated that circumstances have changed such that another definition of default is more appropriate.
Credit-impaired financial assets (Stage 3)
Financial assets are assessed for credit-impairment at each balance sheet date and more frequently when circumstances warrant further assessment. Evidence of credit-impairment may include indications that the borrower is experiencing significant financial difficulty, probability of bankruptcy or other financial reorganization, as well as a measurable decrease in the estimated future cash flows evidenced by the adverse changes in the payments status of the borrower or economic conditions that correlate with defaults. An asset that is in Stage 3 will move back to Stage 2 when, as at the reporting date, it is no longer considered to be credit-impaired. The asset will transfer back to Stage 1 when its credit risk at the reporting date is no longer considered to have increased significantly from initial recognition, which could occur during the same reporting period as the transfer from Stage 3 to Stage 2.
When a financial asset has been identified as credit-impaired, expected credit losses are measured as the difference between the asset’s gross carrying amount and the present value of estimated future cash flows discounted at the instrument’s original effective interest rate. For impaired financial assets with drawn and undrawn components, expected credit losses also reflect any credit losses related to the portion of the loan commitment that is expected to be drawn down over the remaining life of the instrument.
When a financial asset is credit-impaired, interest ceases to be recognized on the regular accrual basis, which accrues income based on the gross carrying amount of the asset. Rather, interest income is calculated by applying the original effective interest rate to the amortized cost of the asset, which is the gross carrying amount less the related ACL.
ACL for credit-impaired loans in Stage 3 are established at the borrower level, where losses related to impaired loans are identified on individually significant loans, or collectively assessed and determined through the use of portfolio-based rates, without reference to particular loans.
Individually assessed loans (Stage 3)
When individually significant loans are identified as impaired, we reduce the carrying value of the loans to their estimated realizable value by recording an individually assessed ACL to cover identified credit losses. The individually assessed ACL reflects the expected amount of principal and interest calculated under the terms of the original loan agreement that will not be recovered, and the impact of time delays in collecting principal and/or interest (time value of money). The estimated realizable value for each individually significant loan is the present value of expected future cash flows discounted using the original effective interest rate for each loan. When the amounts and timing of future cash flows cannot be estimated with reasonable reliability, the estimated realizable amount may be determined using observable market prices for comparable loans, the fair value of collateral underlying the loans, and other reasonable and supported methods based on management judgment.
Individually-assessed allowances are established in consideration of a range of possible outcomes, which may include macroeconomic or non-macroeconomic scenarios, to the extent relevant to the circumstances of the specific borrower being assessed. Assumptions used in estimating expected future cash flows reflect current and expected future economic conditions and are generally consistent with those used in Stage 1 and Stage 2 measurement.
Significant judgment is required in assessing evidence of credit-impairment and estimation of the amount and timing of future cash flows when determining expected credit losses. Changes in the amount expected to be recovered would have a direct impact on PCL and may result in a change in the ACL.
Collectively assessed loans (Stage 3)
Loans that are collectively assessed are grouped on the basis of similar risk characteristics, taking into account loan type, industry, geographic location, collateral type, past due status and other relevant factors.
The collectively-assessed ACL reflects: (i) the expected amount of principal and interest calculated under the terms of the original loan agreement that will not be recovered, and (ii) the impact of time delays in collecting principal and/or interest (time value of money).
The expected principal and interest collection is estimated on a portfolio basis and references historical loss experience of comparable portfolios with similar credit risk characteristics, adjusted for the current environment and expected future conditions. A portfolio specific coverage ratio is applied against the impaired loan balance in determining the collectively-assessed ACL. The time value of money component is calculated by using the discount factors applied to groups of loans sharing common characteristics. The discount factors represent the expected recovery pattern of the comparable group of loans, and reflect the historical experience of these groups adjusted for current and expected future economic conditions and/or industry factors. Significant judgment is required in assessing evidence of impairment and estimation of the amount and timing of future cash flows when determining expected credit losses. Changes in the amount expected to be recovered would have a direct impact on PCL and may result in a change in the ACL.
Write-off of loans
Loans and the related ACL are written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, they are generally written off after receipt of any proceeds from the realization of collateral. In circumstances where the net realizable value of any collateral has been determined and there is no reasonable expectation of further recovery, write off may be earlier. For credit cards, the balances and related ACL are generally written off when payment is 180 days past due. Personal loans are generally written off at 150 days past due.
Modifications
The original terms of a financial asset may be renegotiated or otherwise modified, resulting in changes to the contractual terms of the financial asset that affect the contractual cash flows. The treatment of such modifications is primarily based on the process undertaken to execute the renegotiation and the nature and extent of the expected changes. In the normal course of business, modifications which are performed for credit reasons, primarily related to troubled debt restructurings, are generally
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            151

Note 2    Summary of significant accounting policies, estimates and judgments
(continued)
 
treated as modifications of the original financial asset. Modifications which are performed for other than credit reasons are generally considered to be an expiry of the original cash flows; accordingly, such renegotiations are treated as a derecognition of the original financial asset and recognition of a new financial asset.
If a modification of terms does not result in derecognition of the financial asset, the carrying amount of the financial asset is recalculated as the present value of the renegotiated or modified contractual cash flows, discounted at the original effective interest rate and a gain or loss is recognized. The financial asset continues to be subject to the same assessments for significant increase in credit risk relative to initial recognition and credit-impairment, as described above. A modified financial asset will transfer out of Stage 3 if the conditions that led to it being identified as credit-impaired are no longer present and relate objectively to an event occurring after the original credit-impairment was recognized. A modified financial asset will transfer out of Stage 2 when it no longer satisfies the relative thresholds set to identify significant increases in credit risk, which are based on changes in its lifetime PD, days past due and other qualitative considerations. The financial asset continues to be monitored for significant increases in credit risk and credit-impairment.
If a modification of terms results in derecognition of the original financial asset and recognition of the new financial asset, the new financial asset will generally be recorded in Stage 1, unless it is determined to be credit-impaired at the time of the renegotiation. For the purposes of assessing for significant increases in credit risk, the date of initial recognition for the new financial asset is the date of the modification.
Derivatives
When derivatives are embedded in other financial instruments or host contracts, such combinations are known as hybrid instruments. Some of the cash flows of a hybrid instrument vary in a way similar to a stand-alone derivative. If the host contract is a financial asset within the scope of IFRS 9
Financial Instruments
(IFRS 9), the classification and measurement criteria are applied to the entire hybrid instrument as described in the Classification of financial assets section of Note 2. If the host contract is a financial liability or an asset that is not within the scope of IFRS 9, embedded derivatives are separately recognized if the economic characteristics and risks of the embedded derivative are not clearly and closely related to the host contract, unless an election has been made to elect the fair value option, as described above. The host contract is accounted for in accordance with the relevant standards.
Derivatives are primarily used in trading activities. Derivatives are also used to manage our exposure to interest, currency, credit and other market risks. The most frequently used derivative products are interest rate and foreign exchange swaps, options, futures and forward rate agreements, equity swaps and credit derivatives. All derivative instruments are recorded on our Consolidated Balance Sheets at fair value.
When derivatives are used in trading activities, the realized and unrealized gains and losses on these derivatives are recognized in Trading revenue in Non-interest income. Derivatives with positive fair values are reported as Derivative assets and derivatives with negative fair values are reported as Derivative liabilities. In accordance with our policy for offsetting financial assets and financial liabilities, the net fair value of certain derivative assets and liabilities are reported as an asset or liability, as appropriate. Valuation adjustments are included in the fair value of Derivative assets and Derivative liabilities. Premiums paid and premiums received are shown in Derivative assets and Derivative liabilities, respectively.
When derivatives are used to manage our own exposures, we determine for each derivative whether hedge accounting can be applied, as discussed in the Hedge accounting section below.
Derecognition of financial assets
Financial assets are derecognized from our Consolidated Balance Sheets when our contractual rights to the cash flows from the assets have expired, when we retain the rights to receive the cash flows of the assets but assume an obligation to pay those cash flows to a third party subject to certain pass-through requirements or when we transfer our contractual rights to receive the cash flows and substantially all of the risks and rewards of the assets have been transferred. When we retain substantially all of the risks and rewards of the transferred assets, the transferred assets are not derecognized from our Consolidated Balance Sheets and are accounted for as secured financing transactions. When we neither retain nor transfer substantially all risks and rewards of ownership of the assets, we derecognize the assets if control over the assets is relinquished. If we retain control over the transferred assets, we continue to recognize the transferred assets to the extent of our continuing involvement.
Management judgment is applied in determining whether the contractual rights to the cash flows from the transferred assets have expired or whether we retain the rights to receive cash flows on the assets but assume an obligation to pay for those cash flows. We derecognize transferred financial assets if we transfer substantially all the risks and rewards of the ownership in the assets. When assessing whether we have transferred substantially all of the risk and rewards of the transferred assets, management considers the Bank’s exposure before and after the transfer with the variability in the amount and timing of the net cash flows of the transferred assets. In transfers in which we retain the servicing rights, management has applied judgment in assessing the benefits of servicing against market expectations. When the benefits of servicing are greater than fair value, a servicing asset is recognized in Other assets in our Consolidated Balance Sheets. When the benefits of servicing are less than fair value, a servicing liability is recognized in Other liabilities in our Consolidated Balance Sheets.
Derecognition of financial liabilities
We derecognize a financial liability from our Consolidated Balance Sheets when our obligation specified in the contract expires, or is discharged or cancelled. We recognize the difference between the carrying amount of a financial liability transferred and the consideration paid in our Consolidated Statements of Income.
Interest
Interest is recognized in Interest income and Interest expense in the Consolidated Statements of Income for all interest-bearing financial instruments. The effective interest rate is the rate that discounts estimated future cash flows over the expected life of the financial asset or liability to the net carrying amount upon initial recognition. Significant judgment is applied in determining the effective interest rate due to uncertainty in the timing and amounts of future cash flows.
 
152            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Dividend income
Dividend income is recognized when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and usually the date when shareholders have approved the dividend for unlisted equity securities.
Transaction costs
Transaction costs are expensed as incurred for financial instruments classified or designated as FVTPL. For other financial instruments, transaction costs are capitalized on initial recognition. For financial assets and financial liabilities measured at amortized cost and debt financial assets measured at FVOCI, capitalized transaction costs are amortized through net income over the estimated life of the instrument using the effective interest method.
Offsetting financial assets and financial liabilities
Financial assets and financial liabilities are offset on the Consolidated Balance Sheets when there exists both a legally enforceable right to offset the recognized amounts and an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
Assets purchased under reverse repurchase agreements and sold under repurchase agreements
We purchase securities under agreements to resell (reverse repurchase agreements) and take possession of these securities. We monitor the market value of the securities purchased and additional collateral is obtained when appropriate. We have the right to liquidate the collateral held in the event of counterparty default. Reverse repurchase agreements are treated as collateralized lending transactions. We also sell securities under agreements to repurchase (repurchase agreements), which are treated as collateralized borrowing transactions. The securities received under reverse repurchase agreements and securities delivered under repurchase agreements are not recognized on, or derecognized from, our Consolidated Balance Sheets, respectively, unless the risks and rewards of ownership are obtained or relinquished.
Reverse repurchase agreements and repurchase agreements are carried on our Consolidated Balance Sheets at the amounts at which the securities were initially acquired or sold, except when they are classified or designated as FVTPL and are recorded at fair value. Interest earned on reverse repurchase agreements is included in Interest income, and interest incurred on repurchase agreements is included in Interest expense in our Consolidated Statements of Income. Changes in fair value for reverse repurchase agreements and repurchase agreements classified or designated as FVTPL are included in Trading revenue or Other in Non-interest income.
Hedge accounting
We have elected to continue to apply the hedge accounting principles under IAS 39 instead of those under IFRS 9.
We use derivatives and non-derivatives in our hedging strategies to manage our exposure to interest rate, currency, credit and other market risks. Where hedge accounting can be applied, a hedge relationship is designated and documented at inception to detail the particular risk management objective and strategy for undertaking the hedge transaction. The documentation identifies the specific asset, liability or anticipated cash flows being hedged, the risk that is being hedged, the type of hedging instrument used and how effectiveness will be assessed. We assess, both at the inception of the hedge and on an ongoing basis, whether the hedging instruments are ‘highly effective’ in offsetting changes in the fair value or cash flows of the hedged items. A hedge is regarded as highly effective only if the following criteria are met: (i) at inception of the hedge and throughout its life, the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk, and (ii) actual results of the hedge are within a pre-determined range. We perform effectiveness testing to demonstrate that the relationship has been and is expected to be effective over the remaining term of the hedge. In the case of hedging a forecast transaction, the transaction must have a high probability of occurring and must present an exposure to variations in cash flows that could ultimately affect the reported net profit or loss. Hedge accounting is discontinued when it is determined that the hedging instrument is no longer effective as a hedge, the hedging instrument or hedged item is terminated or sold, or the forecast transaction is no longer deemed highly probable. Refer to Note 9 for the fair value of derivatives and non-derivative instruments categorized by their hedging relationships, as well as derivatives that are not designated in hedging relationships.
Until the hedging relationships impacted by the Interest rate benchmark reform (the Reform) fully transition to alternative benchmark rates (ABRs), our prospective effectiveness testing is based on existing hedged cash flows or hedged risks and any ineffectiveness arising from retrospective testing does not result in a discontinuation of the hedge. Additionally, effectiveness testing is applied separately to hedged items referencing ABRs and hedged items referencing interbank offered rates (IBORs), which include USD London Interbank Offered Rate (USD LIBOR) and Canadian Dollar Offered Rate (CDOR), in accordance with the Phase 2 amendments to IFRS 9
Financial Instruments
, IAS 39
Financial Instruments: Recognition and Measurement
, IFRS 7
Financial Instruments: Disclosures
, IFRS 4
Insurance contracts
, and IFRS 16
Leases
(the Amendments). Subsequently, when these relationships fully transition to ABRs, and provided qualifying criteria are met, we will amend the related hedge documentation for the ABR risk, including consequential changes to the description of the hedging instrument(s), the hedged item(s), and the method for assessing hedge effectiveness, without discontinuing the existing hedging relationships.
Fair value hedges
In a fair value hedging relationship, the carrying value of the hedged item is adjusted for changes in fair value attributable to the hedged risk and recognized in Non-interest income. Changes in fair value of the hedged item, to the extent that the hedging relationship is effective, are offset by changes in the fair value of the hedging derivative, which are also recognized in
Non-interest
income. When hedge accounting is discontinued, the carrying value of the hedged item is no longer adjusted and the cumulative fair value adjustments to the carrying value of the hedged items are amortized to Net income over the expected remaining life of the hedged items.
We predominantly use interest rate swaps to hedge our exposure to changes in a fixed interest rate instrument’s fair value caused by changes in interest rates. Until the hedging relationships impacted by the Reform fully transition to ABRs, we apply hedge accounting to IBOR rates which may not be contractually specified when that rate is separately identifiable and reliably measurable at inception of the hedge relationship.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            153

Note 2    Summary of significant accounting policies, estimates and judgments
(continued)
 
Cash flow hedges
In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging derivative, net of taxes, is recognized in OCI and reclassified to profit or loss as the associated hedged forecast transaction occurs, while the ineffective portion is recognized in Non-interest income. When hedge accounting is discontinued, the cumulative amounts previously recognized in OCI are reclassified to Net interest income during the periods when the variability in the cash flows of the hedged item affects Net interest income. Unrealized gains and losses on derivatives are reclassified immediately to Net income when the hedged item is sold or terminated early, or when the forecast transaction is no longer expected to occur.
We predominantly use interest rate swaps to hedge the variability in cash flows related to a variable-rate asset or liability. Until the hedging relationships impacted by the Reform fully transition to ABRs, we treat the highly probable hedged IBORs based cash flows of groups of similar assets or liabilities with similar risk characteristics as unchanged as a result of the Reform. In addition, associated cash flow hedge reserves are not recycled into net income solely due to changes related to the transition from IBORs to ABRs. Subsequently, when some items in the group transition to ABRs before other items, the individual hedged items are allocated to subgroups based on the benchmark interest rate being hedged. We test hedge effectiveness based on the defined subgroups, in accordance with the Amendments, if eligibility requirements are met. If a subgroup fails the eligibility requirements, we would discontinue hedge accounting prospectively for the hedging relationship in its entirety.
Net investment hedges
In hedging our foreign currency exposure to a net investment in a foreign operation, the effective portion of foreign exchange gains and losses on the hedging instruments, net of applicable taxes, is recognized in OCI and the ineffective portion is recognized in Non-interest income. The amounts, or a portion thereof, previously recognized in Other components of equity are recognized in Net income on the disposal, or partial disposal, of the foreign operation.
We use foreign exchange contracts and foreign currency-denominated liabilities to manage our foreign currency exposures to net investments in foreign operations having a functional currency other than the Canadian dollar.
Guarantees
Financial guarantee contracts are contracts that contingently require us to make specified payments (in cash, other assets, our own shares or provision of services) to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. Liabilities are recognized on our Consolidated Balance Sheets at the inception of a guarantee for the fair value of the obligation undertaken in issuing the guarantee. Financial guarantees are subsequently remeasured at the higher of (i) the amount of expected credit losses and (ii) the amount initially recognized less, when appropriate, the cumulative amount of income recognized.
If the financial guarantee contract meets the definition of a derivative, it is measured at fair value at each balance sheet date and reported under Derivatives on our Consolidated Balance Sheets.
Insurance and segregated funds
Premiums from long-duration contracts, primarily life, health and annuity insurance (life insurance), are recognized when due in Non-interest income – Insurance premiums, investment and fee income. Premiums from short-duration contracts, primarily property and casualty, and fees for administrative services are recognized in Insurance premiums, investment and fee income over the related contract period. Unearned premiums of the short-duration contracts, representing the unexpired portion of premiums, are reported in Other liabilities. Investments made by our insurance operations are classified as FVOCI instruments and amortized cost instruments, except for investments supporting the policy benefit liabilities on life insurance contracts and a portion of property and casualty contracts. These are designated as FVTPL with changes in fair value reported in Insurance premiums, investment and fee income.
Insurance claims and policy benefit liabilities represent current claims and estimates for future insurance policy benefits. Liabilities for life insurance contracts are determined using the Canadian Asset Liability Method (CALM), which incorporates assumptions for mortality, morbidity, policy lapses and surrenders, investment yields, policy dividends, operating and policy maintenance expenses and provisions for adverse deviation. These assumptions are reviewed at least annually and updated in response to actual experience and market conditions. Liabilities for property and casualty insurance represent estimated provisions for reported and unreported claims. Liabilities for life and property and casualty insurance are included in Insurance claims and policy benefit liabilities. Changes in Insurance claims and policy benefit liabilities are included in the Insurance policyholder benefits, claims and acquisition expense in our Consolidated Statements of Income in the period in which the estimates change.
Premiums ceded for reinsurance and reinsurance recoveries on policyholder benefits and claims incurred are reported in income and expense as appropriate. Reinsurance recoverables, which relate to paid benefits and unpaid claims, are included in Other assets.
Acquisition costs for new insurance contracts consist of commissions, premium taxes, certain underwriting costs and other costs that vary with the acquisition of new contracts. Deferred acquisition costs for life insurance products are implicitly recognized in Insurance claims and policy benefit liabilities by CALM. For property and casualty insurance, these costs are classified as Other assets and amortized over the policy term.
Segregated funds are lines of business in which we issue an insurance contract where the benefit amount is directly linked to the market value of the investments held in the underlying fund. The contractual arrangement is such that the underlying segregated fund assets are registered in our name but the segregated fund policyholders bear the risks and rewards of the funds’ investment performance. Liabilities for these contracts are calculated based on contractual obligations using actuarial assumptions and are at least equivalent to the surrender or transfer value calculated by reference to the value of the relevant underlying funds or indices. Segregated funds’ assets and liabilities are separately presented on our Consolidated Balance Sheets. As the segregated fund policyholders bear the risks and rewards of the funds’ performance, investment income earned by the segregated funds and expenses incurred by the segregated funds are offset and are not separately presented in our Consolidated Statements of Income. Fee income we earn from segregated funds includes management fees, mortality, policy administration and surrender charges, and these fees are recorded in Non-interest income – Insurance premiums, investment
 
154            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

and fee income. We provide minimum death benefit and maturity value guarantees on segregated funds. The liability associated with these minimum guarantees is recorded in Insurance claims and policy benefit liabilities.
Liability adequacy tests are performed for all insurance contract portfolios at each balance sheet date to ensure the adequacy of insurance contract liabilities. Current best estimates of future contractual cash flows, claims handling and administration costs, and investment returns from the assets backing the liabilities are taken into account in the tests. When the test results indicate that there is a deficiency in liabilities, the deficiency is charged immediately to our Consolidated Statements of Income by writing down the deferred acquisition costs in Other assets and/or increasing Insurance claims and policy benefit liabilities.
Employee benefits – Pensions and other post-employment benefits
Our defined benefit pension expense, which is included in Non-interest expense – Human resources, consists of the cost of employee pension benefits for the current year’s service, net interest on the net defined benefit liability (asset), past service cost and gains or losses on settlement. Remeasurements of the net defined benefit obligation, which comprise actuarial gains and losses and return on plan assets (excluding amounts included in net interest on the net defined benefit liability), are recognized immediately in OCI in the period in which they occur. Actuarial gains and losses comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred), as well as the effects of changes in actuarial assumptions. Amounts recognized in OCI will not be reclassified subsequently to net income. Past service cost is the change in the present value of the defined benefit obligation resulting from a plan amendment or curtailment and is charged immediately to income.
For each defined benefit pension plan, we recognize the present value of our defined benefit obligations less the fair value of the plan assets as a defined benefit liability reported in Other liabilities – Employee benefit liabilities on our Consolidated Balance Sheets. For plans where there is a net defined benefit asset, the amount is reported as an asset in Other assets – Employee benefit assets on our Consolidated Balance sheets.
The calculation of defined benefit expenses and obligations requires significant judgment as the recognition is dependent on discount rates and various actuarial assumptions such as healthcare cost trend rates, projected salary increases, retirement age and mortality and termination rates. Due to the long-term nature of these plans, such estimates and assumptions are subject to inherent risks and uncertainties. For our pension and other post-employment benefit plans, the discount rate is determined by reference to market yields on high quality corporate bonds. Since the discount rate is based on currently available yields, and involves management’s assessment of market liquidity, it is only a proxy for future yields. Actuarial assumptions, set in accordance with current practices in the respective countries of our plans, may differ from actual experience as country specific statistics are only estimates of future employee behaviour. These assumptions are determined by management and are reviewed by actuaries at least annually. Changes to any of the above assumptions may affect the amounts of benefits obligations, expenses and remeasurements that we recognize.
Our contributions to defined contribution pension plans are expensed when employees have rendered services in exchange for such contributions. Defined contribution pension expense is included in Non-interest expense – Human resources.
Share-based compensation
We offer share-based compensation plans to certain key employees and to our non-employee directors.
To account for stock options granted to employees, compensation expense is recognized over the applicable vesting period with a corresponding increase in equity. Fair value is determined by using option valuation models, which take into account the exercise price of the option, the current share price, the risk free interest rate, the expected volatility of the share price over the life of the option and other relevant factors. When the options are exercised, the exercise price proceeds together with the amount initially recorded in equity are credited to common shares. Our other share-based compensation plans include performance deferred share plans and deferred share unit plans for key employees (the Plans). The obligations for the Plans are accrued over their vesting periods. The Plans are settled in cash.
For cash-settled awards, our accrued obligations are adjusted to their fair value at each balance sheet date. For share-settled awards, our expected obligations recognized in equity are based on the fair value of our common shares at the date of grant. Changes in our obligations, net of related hedges, are recorded as Non-interest expense – Human resources in our Consolidated Statements of Income with a corresponding increase in Other liabilities for cash-settled awards and in Retained earnings for share-settled awards. Compensation expense is recognized in the year the awards are earned by plan participants based on the vesting schedule of the relevant plans, net of estimated forfeitures.
The compensation cost attributable to options and awards granted to employees who are eligible to retire or will become eligible to retire during the vesting period, is recognized immediately if the employee is eligible to retire on the grant date or over the period between the grant date and the date the employee becomes eligible to retire.
Our contributions to the employee savings and share ownership plans are expensed as incurred.
Income taxes
Income tax comprises current tax and deferred tax and is recognized in our Consolidated Statements of Income except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current income tax payable on profits is recognized as an expense based on the applicable tax laws in each jurisdiction in the period in which profits arise, calculated using tax rates enacted or substantively enacted by the balance sheet date. Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities for accounting and tax purposes. A deferred income tax asset or liability is determined for each temporary difference, except for earnings related to our subsidiaries, branches, associates and interests in joint ventures where the temporary differences will not reverse in the foreseeable future and we have the ability to control the timing of reversal. Deferred tax assets and liabilities are determined based on the tax rates that are expected to be in effect in the period that the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date. Current tax assets and liabilities are offset when they are levied by the same taxation authority on either the same taxable entity or different taxable entities within the same tax reporting group (which intends to settle on a net basis), and when there is a legal right to offset. Deferred tax assets and liabilities are offset when the same conditions are satisfied. Our Consolidated Statements of Income include items that are non-taxable or non-deductible for income tax purposes and, accordingly, this causes the income tax provision to be different from what it would be if based on statutory rates.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            155

Note 2    Summary of significant accounting policies, estimates and judgments
(continued)
 
Deferred income taxes accumulated as a result of temporary differences and tax loss carryforwards are included in Other assets and Other liabilities. On a quarterly basis, we review our deferred income tax assets to determine whether it is probable that the benefits associated with these assets will be realized; this review involves evaluating both positive and negative evidence.
We are subject to income tax laws in various jurisdictions where we operate, and the complex tax laws are potentially subject to different interpretations by us and the relevant taxation authorities. Significant judgment is required in the interpretation of the relevant tax laws and in assessing the probability of acceptance of our tax positions to determine our tax provision, which includes our best estimate of uncertain tax positions that are under audit or appeal by the relevant tax authorities. We perform a review on a quarterly basis to incorporate our best assessment based on information available, but additional liability and income tax expense could result based on the acceptance of our tax positions by the relevant tax authorities.
The determination of our deferred tax asset or liability also requires significant management judgment as the recognition is dependent on our projection of future taxable profits and tax rates that are expected to be in effect in the period the asset is realized or the liability is settled. Any changes in our projection will result in changes in deferred tax assets or liabilities on our Consolidated Balance Sheets, and also deferred tax expense on our Consolidated Statements of Income.
The IASB issued amendments to IAS 12
Income Taxes (IAS 12)
in May 2023 to address the
Pillar Two Model Rules
for
International Tax Reform
, including a global 15% minimum tax. The amendments introduce, with immediate effect, a temporary recognition exception in relation to accounting and disclosure for deferred taxes arising from the implementation of the international tax reform.
Business combinations, goodwill and other intangibles
All business combinations are accounted for using the acquisition method. Non-controlling interests, if any, are recognized at their proportionate share of the fair value of identifiable assets and liabilities, unless otherwise indicated. Identifiable intangible assets are recognized separately from goodwill and included in Other intangibles. Goodwill represents the excess of the price paid for the business acquired over the fair value of the net identifiable assets acquired on the date of acquisition.
Goodwill
Goodwill is allocated to cash-generating units or groups of cash-generating units for the purpose of impairment testing, which is undertaken at the lowest level at which goodwill is monitored for internal management purposes. Impairment testing is performed annually as at August 1, or more frequently if there are objective indicators of impairment, by comparing the recoverable amount of a cash-generating unit (CGU) with its carrying amount. The recoverable amount of a CGU is the higher of its value in use (VIU) and its fair value less costs of disposal (FVLCD). VIU is the present value of the expected future cash flows from a CGU. FVLCD is the amount obtainable from the sale of a CGU in an orderly transaction between market participants, less disposal costs. The fair value of a CGU is estimated using valuation techniques such as a discounted cash flow method, adjusted to reflect the considerations of a prospective third-party buyer. External evidence such as binding sale agreements or recent transactions for similar businesses within the same industry is considered to the extent that it is available.
Significant judgment is involved in estimating the model inputs used to determine the recoverable amount of our CGUs, in particular future cash flows, discount rates and terminal growth rates, due to the uncertainty in the timing and amount of cash flows and the forward-looking nature of these inputs. Future cash flows are based on financial plans agreed by management which are estimated based on forecast results, business initiatives, planned capital investments and returns to shareholders. Discount rates are based on the bank-wide cost of capital, adjusted for CGU-specific risks and currency exposure as reflected by differences in expected inflation. Bank-wide cost of capital is based on the Capital Asset Pricing Model, the Dividend Growth Model and peer analysis. CGU-specific risks include country risk, business/operational risk, geographic risk (including political risk, devaluation risk and government regulation), currency risk and price risk (including product pricing risk and inflation). Terminal growth rates are based on the long-term steady state growth expectations in the countries within which the CGU operates. If the future cash flows and other assumptions in future periods deviate significantly from the current amounts used in our impairment testing, the value of our goodwill could become impaired, with any such impairment loss recognized in
Non-interest
expense.
The carrying amount of a CGU includes the carrying amount of assets, liabilities and goodwill allocated to the CGU. If the recoverable amount is less than the carrying value, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the other non-financial assets of the CGU proportionately based on the carrying amount of each asset. Any impairment loss is charged to income in the period in which the impairment is identified. Goodwill is stated at cost less accumulated impairment losses. Subsequent reversals of goodwill impairment are prohibited.
Upon disposal of a portion of a CGU, the carrying amount of goodwill related to the portion of the CGU sold is included in the determination of gains or losses on disposal. The carrying amount is determined based on the relative fair value of the disposed portion to the total CGU.
Other intangibles
Intangible assets represent identifiable non-monetary assets and are acquired either separately or through a business combination, or generated internally. Intangible assets acquired through a business combination are recognized separately from goodwill when they are separable or arise from contractual or other legal rights, and their fair value can be measured reliably. The cost of a separately acquired intangible asset includes its purchase price and directly attributable costs of preparing the asset for its intended use. In respect of internally generated intangible assets, cost includes all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in the manner intended by management. Research and development costs that are not eligible for capitalization are expensed. After initial recognition, an intangible asset is carried at its cost less any accumulated amortization and accumulated impairment losses, if any. Intangible assets with a finite-life are amortized on a straight-line basis over their estimated useful lives as follows: computer software
 
3 to 10 years
; and customer list and relationships
10 to 20 years
. We do not have any intangible assets with indefinite lives.
Intangible assets are assessed for indicators of impairment at each reporting period. If there is an indication that an intangible asset may be impaired, an impairment test is performed by comparing the carrying amount of the intangible asset to its recoverable amount. Where it is not possible to estimate the recoverable amount of an individual asset, we estimate the recoverable amount of the CGU to which the asset belongs. If the recoverable amount of the asset (or CGU) is less than its carrying amount, the carrying amount of the intangible asset is written down to its recoverable amount as an impairment loss.
 

156            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

An impairment loss recognized previously is reversed if there is a change in the estimates used to determine the recoverable amount of the asset (or CGU) since the last impairment loss was recognized. If an impairment loss is subsequently reversed, the carrying amount of the asset (or CGU) is revised to the lower of its recoverable amount and the carrying amount that would have been determined (net of amortization) had there been no prior impairment.
Due to the subjective nature of these estimates, significant judgment is required in determining the useful lives and recoverable amounts of our intangible assets, and assessing whether certain events or circumstances constitute objective evidence of impairment. Estimates of the recoverable amounts of our intangible assets rely on certain key inputs, including future cash flows and discount rates. Future cash flows are based on sales projections and allocated costs which are estimated based on forecast results and business initiatives. Discount rates are based on the bank-wide cost of capital, adjusted for asset-specific risks. Changes in these assumptions may impact the amount of impairment loss recognized in Non-interest expense.
Other
Translation of foreign currencies
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at rates prevailing at the balance sheet date. Foreign exchange gains and losses resulting from the translation and settlement of these items are recognized in Non-interest income in the Consolidated Statements of Income.
Non-monetary assets and liabilities that are measured at historical cost are translated into Canadian dollars at historical rates.
Assets and liabilities of our foreign operations with functional currencies other than Canadian dollars are translated into Canadian dollars at rates prevailing at the balance sheet date, and income and expenses of these foreign operations are translated at average rates of exchange for the reporting period.
Unrealized gains or losses arising as a result of the translation of our foreign operations along with the effective portion of related hedges are reported in Other components of equity on an after-tax basis. Upon disposal or partial disposal of a foreign operation, an appropriate portion of the accumulated net translation gains or losses is included in Non-interest income.
Premises and equipment
Premises and equipment includes land, buildings, leasehold improvements, computer equipment, furniture, fixtures and other equipment, and are stated at cost less accumulated depreciation, except for land which is not depreciated, and accumulated impairment losses. Cost comprises the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use, and the initial estimate of any disposal costs. Depreciation is recorded principally on a straight–line basis over the estimated useful lives of the assets, which are 25 to 50 years for buildings, 3 to 10 years for computer equipment, and 5 to 10 years for furniture, fixtures and other equipment. The amortization period for leasehold improvements is the lesser of the useful life of the leasehold improvements or the lease term plus the first renewal period, if reasonably assured of renewal. Depreciation methods, useful lives, and residual values are reassessed at each reporting period and adjusted as appropriate. Gains and losses on disposal are recorded in Non–interest income.
Premises and equipment are assessed for indicators of impairment at each reporting period. If there is an indication that an asset may be impaired, an impairment test is performed by comparing the asset’s carrying amount to its recoverable amount.
After the recognition of impairment, the depreciation charge is adjusted in future periods to reflect the asset’s revised carrying amount. If an impairment is later reversed, the carrying amount of the asset is revised to the lower of the asset’s recoverable amount and the carrying amount that would have been determined (net of depreciation) had there been no prior impairment loss. The depreciation charge in future periods is adjusted to reflect the revised carrying amount.
Right-of-use assets are also included in premises and equipment.
Leasing
At inception of a contract, we assess whether a contract is or contains a lease. A contract is, or contains, a lease if the contract conveys the right to obtain substantially all of the economic benefits from, and direct the use of, an identified asset for a period of time in return for consideration.
When we are the lessee in a lease arrangement, we initially record a right-of-use asset and corresponding lease liability, except for short-term leases and leases of low-value assets. Short-term leases are leases with a lease term of 12 months or less. Low-value assets are unspecialized, common, technologically unsophisticated, widely available and widely used
non-infrastructure
assets. For short-term leases and leases of low-value assets, we record the lease payments as an operating expense on a straight-line basis over the lease term.
Where we are reasonably certain to exercise extension and termination options, they are included in the lease term.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted at our incremental borrowing rate. The lease liability is subsequently measured at amortized cost using the effective interest method, recorded in Interest expense.
The right-of-use asset is initially measured based on the initial amount of the lease liability, adjusted for lease payments made on or before the commencement date, initial direct costs incurred, and an estimate of costs to dismantle, remove, or restore the asset, less any lease incentives received. Costs related to dismantling and removing leasehold improvements are capitalized as part of the leasehold improvement asset (rather than the right-of-use asset of the lease) when the leasehold improvements are separately capitalized.
The right-of-use asset is depreciated to the earlier of the lease term and the useful life, unless ownership will transfer to RBC or we are reasonably certain to exercise a purchase option, in which case the useful life of the right-of-use asset is used. We apply IAS 36
Impairment of assets
to determine whether a right-of-use asset is impaired and account for any identified impairment loss as described in the premises and equipment accounting policies above.
Provisions
Provisions are liabilities of uncertain timing or amount and are recognized when we have a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are measured as the best estimate of the consideration required to settle the present obligation at the reporting date. Significant judgment is required in determining whether a present obligation exists and in estimating the probability, timing and amount of any outflows. We record provisions related to litigation, asset retirement obligations and other items.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            157

Note 2    Summary of significant accounting policies, estimates and judgments
(continued)
 
We are required to estimate the results of ongoing legal proceedings, and expenses to be incurred to dispose of capital assets. The forward-looking nature of these estimates requires us to use a significant amount of judgment in projecting the timing and amount of future cash flows. We record our provisions on the basis of all available information at the end of the reporting period and make adjustments on a quarterly basis to reflect current expectations. It may not be possible to predict the resolution of these matters or the timing of their ultimate resolution. Should actual results differ from our expectations, we may incur expenses in excess of the provisions recognized. Where appropriate, we apply judgment in limiting the extent of our provisions-related disclosures as not to prejudice our positions in matters of dispute.
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, such as an insurer, a separate asset is recognized if it is virtually certain that reimbursement will be received.
Commissions and fees
Commissions and fees primarily relate to Investment management and custodial fees, Mutual fund revenue, Securities brokerage commissions, Services charges, Underwriting and other advisory fees, Card service revenue and Credit fees, and are recognized based on the applicable service contracts with clients.
Investment management and custodial fees and Mutual fund revenue are generally calculated as a percentage of daily or period-end net asset values (NAV) based on the terms of the contract with clients and are received monthly, quarterly, semiannually or annually, depending on the terms of the contract. Investment management and custodial fees are generally derived from assets under management (AUM) when our clients solicit the investment capabilities of an investment manager or from assets under administration (AUA) where the investment strategy is directed by the client or a designated third-party manager. Mutual fund revenue is generally derived from the daily NAV of the mutual funds. Investment management and custodial fees and Mutual fund revenue are recognized over time when the service is provided to the client, provided that it is highly probable that a significant reversal in the amount of revenue recognized will not occur.
Commissions earned on Securities brokerage services and Service charges that are related to the provision of specific transaction-type services are recognized when the service is fulfilled. Where services are provided over time, revenue is recognized as the services are provided.
Underwriting and other advisory fees primarily relate to underwriting of new issuances of debt or equity and various advisory services. Underwriting fees are generally expressed as a percentage of the funds raised through issuance and are recognized when the service has been completed. Advisory fees vary depending on the scope and type of engagement and can be fixed in nature or contingent on a future event. Advisory fees are recognized over the period in which the service is provided and are recognized only to the extent that it is highly probable that a significant reversal in the amount of revenue will not occur.
Card service revenue primarily includes interchange revenue and annual card fees. Interchange revenue is calculated as a fixed percentage of the transaction amount and recognized when the card transaction is settled. Annual card fees are fixed fees and are recognized over a 12 month period.
Credit fees are primarily earned for arranging syndicated loans and making credit available on undrawn facilities. The timing of the recognition of credit fees varies based on the nature of the services provided.
When service fees and other costs are incurred in relation to commissions and fees earned, we record these costs on a gross basis in either Non-interest expense – Other or Non-interest expense – Human resources based on our assessment of whether we have primary responsibility to fulfill the contract with the client and have discretion in establishing the price for the commissions and fees earned, which may require judgment.
Earnings per share
Earnings per share is computed by dividing Net income available to common shareholders by the weighted average number of common shares outstanding for the period. Net income available to common shareholders is determined after deducting dividend entitlements of preferred shareholders and distributions on other equity instruments, any gains (losses) on redemption of preferred shares and other equity instruments net of related income taxes and the net income attributable to non-controlling interests.
Diluted earnings per share reflects the potential dilution that could occur if additional common shares are assumed to be issued under securities or contracts that entitle their holders to obtain common shares in the future, to the extent such entitlement is not subject to unresolved contingencies. For contracts that may be settled in cash or in common shares at our option, diluted earnings per share is calculated based on the assumption that such contracts will be settled in shares. Income and expenses associated with these types of contracts are excluded from the Net income available to common shareholders, and the additional number of shares that would be issued is included in the diluted earnings per share calculation. For stock options whose exercise price is less than the average market price of our common shares, using the treasury stock method, they are assumed to be exercised and the proceeds are used to repurchase common shares at the average market price for the period. The incremental number of common shares issued under stock options and repurchased from proceeds is included in the calculation of diluted earnings per share.
Share capital and other equity instruments
We classify a financial instrument that we issue as a financial asset, financial liability or an equity instrument in accordance with the substance of the contractual arrangement.
Our common shares held by us are classified as treasury shares in equity and accounted for at weighted average cost. Upon the sale of treasury shares, the difference between the sale proceeds and the cost of the shares is recognized in Retained earnings. Financial instruments issued by us are classified as equity instruments when there is no contractual obligation to transfer cash or other financial assets. Incremental costs directly attributable to the issue of equity instruments are included in equity as a deduction from the proceeds, net of tax. Financial instruments that will be settled by a variable number of our common shares upon their conversion by the holders as well as the related accrued distributions are classified as liabilities on our Consolidated Balance Sheets. Dividends and yield distributions on these instruments are classified as Interest expense in our Consolidated Statements of Income. For compound instruments comprised of both liability and equity components, the liability component is initially measured at fair value with any residual amount assigned to the equity component.
 
158            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Future changes in accounting policy and disclosure
IFRS 17
Insurance Contracts
(IFRS 17)

In May 2017, the IASB issued IFRS 17 to establish a comprehensive insurance standard which provides guidance on the recognition, measurement, presentation and disclosure of insurance contracts issued and reinsurance contracts held and will replace the existing IFRS 4
Insurance Contracts
(IFRS 4). In June 2020, the IASB issued amendments to IFRS 17, including deferral of the effective date by two years. This new standard is effective for us on November 1, 2023 and is to be applied retrospectively with comparatives restated beginning November 1, 2022.
Under IFRS 17, insurance contracts are contracts under which we accept significant insurance risk from a policyholder by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. Embedded derivatives, investment components and promises to provide non-insurance services, provided specific criteria are met, are separated from the measurement of insurance and reinsurance contracts. Insurance and reinsurance contracts are aggregated into portfolios that are subject to similar risks and are managed together, and then divided into groups based on the period of issuance and expected profitability. Groups are separately recognized and measured using one of three measurement models depending on the characteristics of the contracts:
 
For insurance contracts with direct participating features, the contracts are measured using the variable fee approach (VFA).
 
For insurance contracts and reinsurance contracts held with a short duration of one year or less, the premium allocation approach (PAA) is elected.
 
The general measurement method (GMM) is applied to all remaining contracts.
Under the GMM and VFA, the liabilities for remaining coverage and incurred claims for groups of contracts are measured as the sum of the fulfilment cash flows and the contractual service margin (CSM), which are recalculated at the end of each reporting period. The fulfilment cash flows consist of the present value of future cash flows and a risk adjustment for
non-financial
risk. For insurance contracts, the CSM represents the unearned profit for providing insurance coverage. For reinsurance contracts held, the CSM represents the net cost or net gain of purchasing reinsurance. Under the PAA, the liability for remaining coverage for each group is measured as the premiums received less insurance revenue recognized for services provided, while the liability for incurred claims is measured as the fulfillment cash flows for incurred claims plus adjustment on any financing components. Losses from the recognition of onerous groups of insurance contracts, regardless of the measurement model applied, are recognized in the Consolidated Statements of Income immediately.
The following are key differences between IFRS 17 and IFRS 4:
 
New business profits are deferred and measured as the CSM of the insurance contract liabilities and amortized into income as insurance contract services are provided, while losses are recognized into income immediately. Under IFRS 4, gains and losses are recognized in income immediately. On July 18, 2023, OSFI released regulatory guidance to allow the inclusion of the CSM in calculating CET1 capital and related ratios, therefore, there will be no impact on the capital metrics from such reduction in retained earnings resulting from the CSM.
 
Discount rates used in calculating the present value of insurance contract liabilities are based on the characteristics of the insurance contracts unlike IFRS 4 which is based on the assets supporting the liabilities.
 
Presentation and disclosure changes are expected due to the new requirements.
While IFRS 17 impacts the timing of profit recognition of insurance contracts, it will have no impact on total profit recognized over the lifetime of these contracts.
Impact of IFRS 17 transition excluding the impact of reclassifications of financial assets
Upon the adoption of IFRS 17, we will apply IFRS 17 retrospectively by adjusting our Consolidated Balance Sheets as at November 1, 2022 and restating comparative information. The full retrospective approach will be applied for all insurance and reinsurance contracts unless it is impracticable to do so. The full retrospective approach is applied to all contracts measured using the PAA and all new contracts issued on and after November 1, 2022 measured using the GMM and VFA as if IFRS 17 had always been applied. Due to data availability and the inability to use hindsight, the fair value approach is applied to contracts issued before November 1, 2022 that are measured under the GMM and VFA. Under the fair value approach, the CSM of the liability for remaining coverage is calculated as the difference between the fair value of a group of contracts and the fulfillment cash flows measured at the date of transition.
Based on current estimates, the adoption of IFRS 17 is expected to result in a reduction in retained earnings of approximately $
2.4
 billion, net of taxes, as at November 1, 2022. This is attributable to the establishment of the CSM and other remeasurement changes to insurance and reinsurance contracts and related tax effects. The estimated CSM of all insurance contracts net of reinsurance contracts held as at November 1, 2022 was approximately $1.8 billion. These estimates are subject to change as we finalize the quantitative impacts of the adoption in the first quarter of 2024.
Impact of reclassifications of financial assets
As permitted by IFRS 17, we will change the classification and measurement of certain eligible financial assets held in respect of an activity that relates to insurance contracts upon the adoption of IFRS 17. We will apply these changes retrospectively by adjusting our Consolidated Balance Sheets as at November 1, 2023 with no restatement of comparative information. We expect to reclassify financial assets between fair value classification categories, which is not expected to have a net impact to total equity nor the carrying amounts of those assets. This is subject to change as we finalize the quantitative impacts of these changes and the quantitative impacts of adopting IFRS 17 in the first quarter of 2024.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            159

Note 2    Summary of significant accounting policies, estimates and judgments
(continued)
 
Updates related to interest rate benchmark reform
Progress in and risks arising from the transition to ABRs
To manage our transition to ABRs, we have implemented a comprehensive enterprise-wide program and governance structure that addresses the key areas of impact including contract remediation, funding and liquidity planning, risk management, financial reporting and valuation, systems, processes and client education and communication. Transition activities are focused on two broad streams of work: (i) developing new ABR linked products, and (ii) conversion of existing CDOR based contracts to ABRs. Our program timelines are ultimately dependent on broader market acceptance of products that reference the new ABRs and our clients’ readiness and ability to adopt the replacement products. Significant matters that we continue to evaluate include client product offerings, short and long-term funding strategies, and our hedging programs. We continue to work towards the recommended target date for the cessation of CDOR based products provided by our regulators and are on track with our transition activities to move to ABRs.
The following tables show the Bank’s significant exposures to financial instruments referencing benchmark interest rates subject to the Reform that have yet to transition to ABRs. As at October 31, 2023, this represents our financial instruments referencing CDOR and maturing after June 28, 2024. In the normal course of business, our derivative notional amounts may fluctuate with minimal impact to our IBOR conversion plans.
 
        As at  
   
October 31, 2023
    October 31, 2022  
             
(Millions of Canadian dollars)  
Non-derivative

financial assets 
(1)
   
Non-derivative

financial liabilities 
(2)
   
Derivative
notional
   
Non-derivative

financial assets 
(1)
   
Non-derivative

financial liabilities 
(2)
    Derivative
notional 
(3)
 
CDOR
(4)
 
$
29,496
 
 
$
24,735
 
 
$
  2,154,345
 
  $ 18,493     $ 18,572     $   2,226,700  
 
(1)   Non-derivative assets represent the drawn outstanding balance of Loans and Customers’ liability under acceptances and the fair value of Securities.
(2)   Non-derivative liabilities represent Subordinated debentures, Deposits and Acceptances.
(3)   Amounts have been updated from those previously presented to reflect the cessation of USD LIBOR.
(4)   Includes our exposure to financial instruments referencing interest rates substantially similar to CDOR.
The following table presents the undrawn balances of loan commitments referencing benchmark interest rates subject to the Reform.
 
         As at   
     
(Millions of Canadian dollars)  
October 31, 2023
    October 31, 2022  
Authorized and committed undrawn commitments
               
CDOR
(1), (2)
 
$
40,010
 
  $ 26,913  
 
(1)   Includes our exposure to financial instruments referencing interest rates substantially similar to CDOR.
(2)   Undrawn commitments exclude amounts related to drawn outstanding balances, which in certain cases may exclude extension options.
As part of the interest rate benchmark reform, the publication of all remaining USD LIBOR settings ceased on June 30, 2023 and consistent with our transition plan, our exposure to non-derivative financial assets, non-derivative financial liabilities, derivative notional and undrawn balances of loan commitments referencing USD LIBOR interest rates is no longer material to our financial statements (October 31, 2022 – $57.5 billion, $1.5 billion, $5,772.4 billion and $59.3 billion, respectively). We continue to manage significant exposures to benchmarks that have no announced plans for cessation or further reform, including the EURO Interbank Offered Rate (EURIBOR) and Australian Bank Bill Swap Rate (BBSW), which are excluded from the tables above.
 
160            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Note 3    Fair value of financial instruments
Carrying value and fair value of financial instruments
The following tables provide a comparison of the carrying and fair values for each classification of financial instruments. Embedded derivatives are presented on a combined basis with the host contracts. For measurement purposes, they are carried at fair value when conditions requiring separation are met.
 

  
 
As at October 31, 2023
 
 
 
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
 
$
 
 
$
60,856
 
 
$
 
 
$
 
 
 
 
$
10,230
 
 
 
 
 
$
10,230
 
 
$
71,086
 
 
$
71,086
 
Securities
                                                                       
Trading
 
 
180,651
 
 
 
9,500
 
 
 
 
 
 
 
     
 
 
     
 
 
 
 
190,151
 
 
 
190,151
 
Investment, net of applicable allowance
 
 
 
 
 
 
 
 
127,624
 
 
 
842
 
 
 
 
 
91,113
 
 
 
 
 
83,667
 
 
 
219,579
 
 
 
212,133
 
 
 
 
180,651
 
 
 
9,500
 
 
 
127,624
 
 
 
842
 
 
 
 
 
91,113
 
 
 
 
 
83,667
 
 
 
409,730
 
 
 
402,284
 
Assets purchased under reverse repurchase agreements and
securities borrowed
 
 
285,869
 
 
 
 
 
 
 
 
 
 
 
 
 
 
54,322
 
 
 
 
 
54,322
 
 
 
340,191
 
 
 
340,191
 
Loans, net of applicable allowance
                                                                       
Retail
 
 
114
 
 
 
362
 
 
 
280
 
 
 
 
     
 
566,376
 
     
 
542,480
 
 
 
567,132
 
 
 
543,236
 
Wholesale
 
 
5,629
 
 
 
3,619
 
 
 
597
 
 
 
 
 
 
 
 
275,796
 
 
 
 
 
268,843
 
 
 
285,641
 
 
 
278,688
 
 
 
 
5,743
 
 
 
3,981
 
 
 
877
 
 
 
 
 
 
 
 
842,172
 
 
 
 
 
811,323
 
 
 
852,773
 
 
 
821,924
 
Other
                                                                       
Derivatives
 
 
142,450
 
 
 
 
 
 
 
 
 
 
     
 
 
     
 
 
 
 
142,450
 
 
 
142,450
 
Other assets
(1)
 
 
4,819
 
 
 
5
 
 
 
 
 
 
 
 
 
 
 
68,537
 
 
 
 
 
68,537
 
 
 
73,361
 
 
 
73,361
 
Financial liabilities
                                                                       
Deposits
                                                                       
Personal
 
$
109
 
 
$
26,702
 
                     
$
415,135
 
     
$
412,886
 
 
$
441,946
 
 
$
439,697
 
Business and government
(2)
 
 
174
 
 
 
137,454
 
                     
 
607,447
 
     
 
605,260
 
 
 
745,075
 
 
 
742,888
 
Bank
(3)
 
 
 
 
 
11,462
 
 
 
 
 
 
 
 
 
 
 
 
 
33,204
 
 
 
 
 
33,160
 
 
 
44,666
 
 
 
44,622
 
 
 
 
283
 
 
 
175,618
 
 
 
 
 
 
 
 
 
 
 
 
 
1,055,786
 
 
 
 
 
1,051,306
 
 
 
1,231,687
 
 
 
1,227,207
 
Other
                                                                       
Obligations related to securities sold short
 
 
33,651
 
 
 
 
                     
 
 
     
 
 
 
 
33,651
 
 
 
33,651
 
Obligations related to assets sold under repurchase agreements
and securities loaned
 
 
 
 
 
298,679
 
                     
 
36,559
 
     
 
36,559
 
 
 
335,238
 
 
 
335,238
 
Derivatives
 
 
142,629
 
 
 
 
                     
 
 
     
 
 
 
 
142,629
 
 
 
142,629
 
Other liabilities
(4)
 
 
(937
 
 
11
 
                     
 
92,500
 
     
 
92,402
 
 
 
91,574
 
 
 
91,476
 
Subordinated debentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11,386
 
 
 
 
 
11,213
 
 
 
11,386
 
 
 
11,213
 
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            161

Note 3    Fair value of financial instruments
(continued)
 
     As at October 31, 2022  
    Carrying value and fair value         Carrying value         Fair value              
                     
(Millions of Canadian dollars)   Financial
instruments
classified as
FVTPL
    Financial
instruments
designated as
FVTPL
    Financial
instruments
classified as
FVOCI
    Financial
instruments
designated as
FVOCI
         Financial
instruments
measured at
amortized cost
         Financial
instruments
measured at
amortized cost
    Total
carrying
amount
    Total
fair value
 
Financial assets
                                                                       
Interest-bearing deposits with banks
  $     $ 84,468     $     $    
 
  $ 23,543    
 
  $ 23,543     $ 108,011     $ 108,011  
Securities
                                                                       
Trading
    138,507       9,698                                       148,205       148,205  
Investment, net of applicable allowance
                92,063       828    
 
    77,127    
 
    70,073       170,018       162,964  
 
    138,507       9,698       92,063       828    
 
    77,127    
 
    70,073       318,223       311,169  
Assets purchased under reverse repurchase agreements and securities borrowed
    264,665                      
 
    53,180    
 
    53,180       317,845       317,845  
Loans, net of applicable allowance
                                                                       
Retail
    73       375       218                 546,767           521,428       547,433       522,094  
Wholesale
    6,914       3,222       563          
 
    261,833    
 
    253,816       272,532       264,515  
 
    6,987       3,597       781          
 
    808,600    
 
    775,244       819,965       786,609  
Other
                                                                       
Derivatives
    154,439                                             154,439       154,439  
Other assets
(1)
    3,377                      
 
    73,084    
 
    73,084       76,461       76,461  
Financial liabilities
                                                                       
Deposits
                                                                       
Personal
  $ 298     $ 21,959                         $ 382,675         $ 380,396     $ 404,932     $ 402,653  
Business and government
(2)
    447       152,119                           607,304           605,102       759,870       757,668  
Bank
(3)
          7,196    
 
 
 
 
 
 
 
 
 
    36,816    
 
    36,758       44,012       43,954  
 
    745       181,274    
 
 
 
 
 
 
 
 
 
    1,026,795    
 
    1,022,256       1,208,814       1,204,275  
Other
                                                                       
Obligations related to securities sold short
    35,511                                                 35,511       35,511  
Obligations related to assets sold under repurchase agreements and securities loaned
          248,835                           25,112           25,112       273,947       273,947  
Derivatives
    153,491                                                 153,491       153,491  
Other liabilities
(4)
    (360     69                           90,348           90,160       90,057       89,869  
Subordinated debentures
             
 
 
 
 
 
 
 
 
 
    10,025    
 
    9,668       10,025       9,668  
 
(1)   Includes Customers’ liability under acceptances and financial instruments recognized in Other assets.
(2)   Business and government deposits include deposits from regulated deposit-taking institutions other than banks.
(3)   Bank deposits refer to deposits from regulated banks and central banks.
(4)   Includes Acceptances and financial instruments recognized in Other liabilities.
Financial assets designated as fair value through profit or loss
For our financial assets designated as FVTPL, we measure the change in fair value attributable to changes in credit risk as the difference between the total change in the fair value of the instrument during the period and the change in fair value calculated using the appropriate risk-free yield curves. For the year ended October 31, 2023, the change in fair value during the period attributable to changes in credit risk for positions still held was a gain of $360 million and the cumulative change in fair value attributable to changes in credit risk for positions still held was a loss of $102 million. For the year ended October 31, 2022, the change in fair value during the period attributable to changes in credit risk for positions still held was a loss of $662 million and the cumulative change in fair value attributable to changes in credit risk for positions still held was a loss of $490 million. As at October 31, 2023, the extent to which credit derivatives or similar instruments mitigate the maximum exposure to credit risk was $692 million (October 31, 2022 – $589 million).
Financial liabilities designated as fair value through profit or loss
For our financial liabilities designated as FVTPL, we take into account changes in our own credit spread and the expected duration of the instrument to measure the change in fair value attributable to changes in credit risk.
 
 
 
 
 
As at or for the year ended October 31, 2023
(1)
 
 
 
Contractual
maturity
amount
 
 
Carrying value
 
 
Difference
between
carrying value
and contractual
maturity amount
 
 
Changes in fair value attributable
to changes in credit risk included
in OCI for positions still held
 
(Millions of Canadian dollars)
 
During the period
 
 
Cumulative
(2)
 
Term deposits
                                       
Personal
 
$
27,131
 
 
$
26,702
 
 
$
(429
 
$
112
 
 
$
(57
Business and government
(3)
 
 
147,844
 
 
 
137,454
 
 
 
(10,390
 
 
683
 
 
 
(1,030
Bank
(4)
 
 
11,485
 
 
 
11,462
 
 
 
(23
 
 
 
 
 
 
 
 
 
186,460
 
 
 
175,618
 
 
 
(10,842
 
 
795
 
 
 
(1,087
Obligations related to assets sold under repurchase agreements and securities loaned
 
 
298,734
 
 
 
298,679
 
 
 
(55
 
 
3
 
 
 
4
 
Other liabilities
 
 
11
 
 
 
11
 
 
 
 
 
 
 
 
 
 
 
 
$
485,205
 
 
$
474,308
 
 
$
  (10,897
 
$
     798
 
 
$
  (1,083
 
162            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

   
    As at or for the year ended October 31, 2022 (1)  
         
    Contractual
maturity
amount
    Carrying value     Difference
between
carrying value
and contractual
maturity amount
    Changes in fair value attributable
to changes in credit risk included
in OCI for positions still held
 
(Millions of Canadian dollars)
  During the period     Cumulative (2)  
Term deposits
                                       
Personal
  $ 22,328     $ 21,959     $ (369   $ (238   $ (166
Business and government
(3)
    160,775       152,119       (8,656     (2,135     (1,718
Bank
(4)
    7,208       7,196       (12            
 
    190,311       181,274       (9,037     (2,373     (1,884
Obligations related to assets sold under repurchase agreements and securities loaned
    248,963       248,835       (128     1       1  
Other liabilities
    69       69                    
 
  $   439,343     $     430,178     $      (9,165   $   (2,372   $    (1,883
 
(1)   $29 million in changes in fair value attributable to changes in credit risk were recognized in income for the year ended October 31, 2023, and $17 million in cumulative changes in credit risk were included in income for positions still held
life-to-date
(October 31, 2022 – $97 million and $97 million respectively).
(2)   The cumulative change is measured from the initial designation of the liabilities as FVTPL. For the year ended October 31, 2023, $2 million of fair value gains previously included in OCI relate to financial liabilities derecognized during the year (October 31, 2022 – $3 million of fair value gains).
(3)   Business and government term deposits include amounts from regulated deposit-taking institutions other than regulated banks.
(4)   Bank term deposits refer to amounts from regulated banks and central banks.
Net gains (losses) from financial instruments classified and designated as fair value through profit or loss
Financial instruments classified as FVTPL, which includes mainly trading securities, derivatives, trading liabilities, and financial assets and liabilities designated as FVTPL are measured at fair value with realized and unrealized gains and losses recognized in
Non-interest
income.
 
      For the year ended  
       
(Millions of Canadian dollars)
  
October 31
2023
          October 31
2022
 
Net gains (losses)
(1)
                     
Classified as fair value through profit or loss
(2)
  
$
1,998
 
       $ (7,382
Designated as fair value through profit or loss
(3)
  
 
1,499
 
 
 
     8,543  
 
  
$
3,497
 
 
 
   $ 1,161  
By product line
(1)
                     
Interest rate and credit
(4)
  
$
3,515
 
       $ 1,251  
Equities
  
 
(510
         (843
Foreign exchange and commodities
  
 
492
 
 
 
     753  
 
  
$
3,497
 
 
 
   $ 1,161  
 
(1)   Excludes the following amounts related to our insurance operations and included in Insurance premiums, investment and fee income in the Consolidated Statements of Income: Net losses from financial instruments designated as FVTPL of $371 million (October 31, 2022 – losses of $2,805 million).
(2)   Excludes derivatives designated in a hedging relationship. Refer to Note 9 for net gains (losses) on these derivatives.
(3)   For the year ended October 31, 2023, $1,524 million of net fair value gains on financial liabilities designated as FVTPL, other than those attributable to changes in our own credit risk, were included in
Non-interest
income (October 31, 2022 – gains of $8,536 million).
(4)   Includes gains (losses) recognized on cross currency interest rate swaps.
Net interest income from financial instruments
Interest and dividend income arising from financial assets and financial liabilities and the associated costs of funding are reported in Net interest income.
 
      For the year ended  
(Millions of Canadian dollars)
  
October 31
2023
          October 31
2022
 
Interest and dividend income
(1), (2)
                     
Financial instruments measured at fair value through profit or loss
  
$
31,464
 
       $ 10,999  
Financial instruments measured at fair value through other comprehensive income
  
 
5,127
 
         1,177  
Financial instruments measured at amortized cost
  
 
50,400
 
 
 
     28,595  
 
  
 
86,991
 
 
 
     40,771  
Interest expense
(1)
                     
Financial instruments measured at fair value through profit or loss
  
$
28,446
 
       $ 8,336  
Financial instruments measured at amortized cost
  
 
33,416
 
 
 
     9,718  
 
  
 
61,862
 
 
 
     18,054  
Net interest income
  
$
25,129
 
 
 
   $ 22,717  
 
(1)   Excludes the following amounts related to our insurance operations and included in Insurance premiums, investment and fee income in the Consolidated Statements of Income: Interest income of $451 million (October 31, 2022 – $601 million), and Interest expense of $35 million (October 31, 2022 – $6 million).
(2)   Includes dividend income for the year ended October 31, 2023 of $3,215 million (October 31, 2022 – $2,954 million), which is presented in Interest and dividend income in the Consolidated Statements of Income.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            163

Note 3    Fair value of financial instruments
(continued)
 
Fee income arising from financial instruments
For the year ended October 31, 2023, we earned $6,112 million in fees from banking services (October 31, 2022 – $6,118 million). For the year ended October 31, 2023, we also earned $15,319 million in fees from investment management, trust, custodial, underwriting, brokerage and other similar fiduciary services to retail and institutional clients (October 31, 2022 – $
14,932
million). These fees are included in
Non-interest
income.
Fair value of assets and liabilities measured at fair value on a recurring basis and classified using the fair value hierarchy
 
    
 
        As at         
 
   
 
October 31, 2023
 
       
 
October 31, 2022
 
 
   
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
 
$
 
 
$
60,856
 
 
$
 
 
$
 
 
 
$
60,856
 
 
 
  $     $ 84,468     $     $       $ 84,468  
Securities
                                                                                   
Trading
                                                                                   
Debt issued or guaranteed by:
                                                                                   
Canadian government
(1)
                                                                                   
Federal
 
 
26,675
 
 
 
2,581
 
 
 
 
         
 
29,256
 
        15,024       3,779                     18,803  
Provincial and municipal
 
 
 
 
 
16,389
 
 
 
 
         
 
16,389
 
              13,257                     13,257  
U.S. federal, state, municipal and agencies
(1), (2)
 
 
2,249
 
 
 
50,439
 
 
 
 
         
 
52,688
 
        1,254       35,570       4               36,828  
Other OECD government
(3)
 
 
2,055
 
 
 
2,577
 
 
 
 
         
 
4,632
 
        1,325       3,452                     4,777  
Mortgage-backed securities
(1)
 
 
 
 
 
2
 
 
 
 
         
 
2
 
              2                     2  
Asset-backed securities
                                                                                   
Non-CDO
securities
(4)
 
 
 
 
 
1,245
 
 
 
 
         
 
1,245
 
              1,308       2               1,310  
Corporate debt and other debt
 
 
 
 
 
22,615
 
 
 
 
         
 
22,615
 
              21,162       7               21,169  
Equities
 
 
58,826
 
 
 
2,232
 
 
 
2,266
 
 
 
 
 
 
 
63,324
 
 
 
    46,592       3,593       1,874    
 
 
 
    52,059  
 
 
 
89,805
 
 
 
98,080
 
 
 
2,266
 
 
 
 
 
 
 
190,151
 
 
 
    64,195       82,123       1,887    
 
 
 
    148,205  
Investment
                                                                                   
Debt issued or guaranteed by:
                                                                                   
Canadian government
(1)
                                                                                   
Federal
 
 
2,731
 
 
 
3,528
 
 
 
 
         
 
6,259
 
        1,226       2,555                     3,781  
Provincial and municipal
 
 
 
 
 
2,748
 
 
 
 
         
 
2,748
 
              2,124                     2,124  
U.S. federal, state, municipal and agencies
(1)
 
 
275
 
 
 
73,020
 
 
 
 
         
 
73,295
 
        440       43,918                     44,358  
Other OECD government
 
 
 
 
 
6,192
 
 
 
 
         
 
6,192
 
              5,144                     5,144  
Mortgage-backed securities
(1)
 
 
 
 
 
2,672
 
 
 
29
 
         
 
2,701
 
              2,860       28               2,888  
Asset-backed securities
                                                                                   
CDO
 
 
 
 
 
8,265
 
 
 
 
         
 
8,265
 
              7,524                     7,524  
Non-CDO
securities
 
 
 
 
 
441
 
 
 
 
         
 
441
 
              524                     524  
Corporate debt and other debt
 
 
 
 
 
27,574
 
 
 
149
 
         
 
27,723
 
              25,569       151               25,720  
Equities
 
 
38
 
 
 
338
 
 
 
466
 
 
 
 
 
 
 
842
 
 
 
    36       395       397    
 
 
 
    828  
 
 
 
3,044
 
 
 
124,778
 
 
 
644
 
 
 
 
 
 
 
128,466
 
 
 
    1,702       90,613       576    
 
 
 
    92,891  
Assets purchased under reverse repurchase agreements and securities borrowed
 
 
 
 
 
285,869
 
 
 
 
         
 
285,869
 
              264,665                     264,665  
Loans
 
 
 
 
 
8,742
 
 
 
1,859
 
         
 
10,601
 
              9,673       1,692               11,365  
Other
                                                                                   
Derivatives
                                                                                   
Interest rate contracts
 
 
 
 
 
39,243
 
 
 
290
 
         
 
39,533
 
              39,804       263               40,067  
Foreign exchange contracts
 
 
 
 
 
89,644
 
 
 
4
 
         
 
89,648
 
              99,424       13               99,437  
Credit derivatives
 
 
 
 
 
224
 
 
 
 
         
 
224
 
              388                     388  
Other contracts
 
 
2,352
 
 
 
13,927
 
 
 
111
 
         
 
16,390
 
        3,939       14,786       62               18,787  
Valuation adjustments
 
 
 
 
 
(1,805
 
 
4
 
 
 
 
 
 
 
(1,801
 
 
          (2,100     45    
 
 
 
    (2,055
Total gross derivatives
 
 
2,352
 
 
 
141,233
 
 
 
409
 
         
 
143,994
 
        3,939       152,302       383               156,624  
Netting adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,544
 
 
(1,544
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    (2,185     (2,185
Total derivatives
                                 
 
142,450
 
                                        154,439  
Other assets
 
 
1,392
 
 
 
3,421
 
 
 
11
 
 
 
 
 
 
 
4,824
 
 
 
    1,221       2,141       15    
 
 
 
    3,377  
 
 
$
96,593
 
 
$
722,979
 
 
$
5,189
 
 
$
(1,544
 
$
823,217
 
 
 
  $ 71,057     $ 685,985     $ 4,553     $ (2,185   $ 759,410  
Financial liabilities
                                                                                   
Deposits
                                                                                   
Personal
 
$
 
 
$
26,428
 
 
$
383
 
 
$
 
 
 
$
26,811
 
      $     $ 22,016     $ 241     $       $ 22,257  
Business and government
 
 
 
 
 
137,628
 
 
 
 
         
 
137,628
 
              152,566                     152,566  
Bank
 
 
 
 
 
11,462
 
 
 
 
         
 
11,462
 
              7,196                     7,196  
Other
                                                                                   
Obligations related to securities sold short
 
 
14,391
 
 
 
19,260
 
 
 
 
         
 
33,651
 
        16,383       19,128                     35,511  
Obligations related to assets sold under repurchase agreements and securities loaned
 
 
 
 
 
298,679
 
 
 
 
         
 
298,679
 
              248,835                     248,835  
Derivatives
                                                                                   
Interest rate contracts
 
 
 
 
 
41,249
 
 
 
952
 
         
 
42,201
 
              39,592       1,122               40,714  
Foreign exchange contracts
 
 
 
 
 
81,750
 
 
 
53
 
         
 
81,803
 
              94,310       145               94,455  
Credit derivatives
 
 
 
 
 
176
 
 
 
 
         
 
176
 
              125                     125  
Other contracts
 
 
3,119
 
 
 
17,306
 
 
 
549
 
         
 
20,974
 
        3,847       16,663       847               21,357  
Valuation adjustments
 
 
 
 
 
(982
 
 
1
 
 
 
 
 
 
 
(981
 
 
          (967     (8  
 
 
 
    (975
Total gross derivatives
 
 
3,119
 
 
 
139,499
 
 
 
1,555
 
         
 
144,173
 
        3,847       149,723       2,106               155,676  
Netting adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,544
 
 
(1,544
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    (2,185     (2,185
Total derivatives
                                 
 
142,629
 
                                        153,491  
Other liabilities
 
 
370
 
 
 
(1,296
 
 
 
 
 
 
 
 
 
(926
 
 
    341       (632        
 
 
 
    (291
 
 
$
17,880
 
 
$
631,660
 
 
$
1,938
 
 
$
(1,544
 
$
649,934
 
 
 
  $ 20,571     $ 598,832     $ 2,347     $ (2,185   $ 619,565  
 
(1)   As at October 31, 2023, residential and commercial
mortgage
-backed securities (MBS) included in all fair value levels of trading securities were $14,345 million and $nil (October 31, 2022 – $12,273 million and $nil), respectively, and in all fair value levels of Investment securities were $24,365 million and $2,618 million (October 31, 2022 – $23,362 million and $2,755 million),
respectively
.
(2)   United States (U.S.).
(3)   Organisation for Economic
Co-operation
and Development (OECD).
(4)   Collateralized debt obligations (CDO).
 
164            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Fair values of our significant assets and liabilities measured on a recurring basis are determined and classified in the fair value hierarchy table using the following valuation techniques and inputs.
Interest-bearing deposits with banks
The majority of our Interest-bearing deposits with banks are designated as FVTPL. These FVTPL deposits are composed of short-dated deposits placed with banks, and are included in Interest-bearing deposits with banks in the fair value hierarchy table. The fair values of these instruments are determined using the discounted cash flow method. The inputs to the valuation models include interest rate swap curves and credit spreads, where applicable. They are classified as Level 2 instruments in the hierarchy as the inputs are observable.
Government bonds (Canadian, U.S. and other OECD governments)
Government bonds are included in Canadian government debt, U.S. federal, state, municipal and agencies debt, Other OECD government debt and Obligations related to securities sold short in the fair value hierarchy table. The fair values of government issued or guaranteed debt securities in active markets are determined by reference to recent transaction prices, broker quotes, or third-party vendor prices and are classified as Level 1 in the hierarchy. The fair values of securities that are not traded in active markets are based on either security prices, or valuation techniques using implied yields and risk spreads derived from prices of actively traded and similar government securities. Securities with observable prices or rate inputs as compared to transaction prices, dealer quotes or vendor prices are classified as Level 2 in the hierarchy. Securities where inputs are unobservable are classified as Level 3 in the hierarchy.
Corporate and U.S. municipal bonds
The fair values of corporate and U.S. municipal bonds, which are included in Corporate debt and other debt, U.S. federal, state, municipal and agencies debt and Obligations related to securities sold short in the fair value hierarchy table, are determined using either recently executed transaction prices, broker quotes, pricing services, or in certain instances, the discounted cash flow method using rate inputs such as benchmark yields (CDOR, Secured Overnight Financing Rate (SOFR) and other similar reference rates) and risk spreads of comparable securities. Securities with observable prices or rate inputs are classified as Level 2 in the hierarchy. Securities where inputs are unobservable are classified as Level 3 in the hierarchy.
Asset-backed securities and Mortgage-backed securities
Asset-backed securities (ABS) and MBS are included in Asset-backed securities, Mortgage-backed securities, Canadian government debt, U.S. federal, state, municipal and agencies debt, and Obligations related to securities sold short in the fair value hierarchy table. Inputs for valuation of ABS and MBS are, when available, traded prices, dealer or lead manager quotes, broker quotes and vendor prices of the identical securities. When prices of the identical securities are not readily available, we use industry standard models with inputs such as discount margins, yields, default, prepayment and loss severity rates that are implied from transaction prices, dealer quotes or vendor prices of comparable instruments. Where security prices and inputs are observable, ABS and MBS are classified as Level 2 in the hierarchy. Otherwise, they are classified as Level 3 in the hierarchy.
Equities
Equities consist of listed and unlisted common shares, private equities, mutual funds and hedge funds with certain redemption restrictions and are included in equities and obligations for securities sold short. The fair values of common shares are based on quoted prices in active markets, where available, and are classified as Level 1 in the hierarchy. Where quoted prices in active markets are not readily available, fair value is determined based on quoted market prices for similar securities or through valuation techniques, such as multiples of earnings and the discounted cash flow method with forecasted cash flows and discount rate as inputs. Private equities are classified as Level 3 in the hierarchy as their inputs are not observable. Hedge funds are valued using Net Asset Values (NAV). If we can redeem a hedge fund at NAV prior to the next quarter end, the fund is classified as Level 2 in the hierarchy. Otherwise, it is classified as Level 3 in the hierarchy.
Loans
Loans include base metal loans, corporate loans, banker acceptances and asset-backed financing loans. Fair values are determined based on market prices, if available, or discounted cash flow method using the following inputs: market interest rates, base metal commodity prices, market based spreads of assets with similar credit ratings and terms to maturity, LGD, expected default frequency implied from credit derivative prices, if available, and relevant pricing information such as contractual rate, origination and maturity dates, redemption price, coupon payment frequency and day count convention. Loans with market prices or observable inputs are classified as Level 2 in the hierarchy and loans with unobservable inputs that have significant impacts on the fair values are classified as Level 3 in the hierarchy.
Derivatives
The fair values of exchange-traded derivatives, such as interest rate and equity options and futures, are based on quoted market prices and are typically classified as Level 1 in the hierarchy. OTC derivatives primarily consist of interest rate contracts, foreign exchange contracts, commodity derivatives, equity derivatives and credit derivatives. The exchange-traded or OTC interest rate, foreign exchange and commodity and equity derivatives are included in Interest rate contracts, Foreign exchange contracts and Other contracts, respectively, in the fair value hierarchy table. The fair values of OTC derivatives are determined using valuation models when quoted market prices or third-party consensus pricing information are not available. The valuation models, such as discounted cash flow method or Black-Scholes option model, incorporate observable or unobservable inputs for interest and foreign exchange rates, equity and commodity prices (including indices), credit spreads, corresponding market volatility levels, and other market-based pricing factors. Other adjustments to fair value include
bid-offer,
CVA, FVA, OIS, parameter and model uncertainties, and unrealized gain or loss at inception of a transaction. A derivative instrument is classified as Level 2 in the hierarchy if observable market inputs are available or the unobservable inputs are not significant to the fair value. Otherwise, it is classified as Level 3 in the hierarchy.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            165

Note 3    Fair value of financial instruments
 
(continued)

Securities borrowed or purchased under resale agreements and securities loaned or sold under repurchase agreements
In the fair value hierarchy table, these instruments are included in Assets purchased under reverse repurchase agreements and securities borrowed, and Obligations related to assets sold under repurchase agreements and securities loaned. The fair values of these contracts are determined using valuation techniques such as the discounted cash flow method using interest rate curves as inputs. They are classified as Level 2 instruments in the hierarchy as the inputs are observable.

Deposits
A majority of our deposits are measured at amortized cost but certain deposits are designated as FVTPL. These FVTPL deposits include deposits taken from clients, issuances of certificates of deposits and promissory notes, and interest rate and equity linked notes. The fair values of these instruments are determined using the discounted cash flow method and derivative option valuation models. The inputs to the valuation models include benchmark yield curves, credit spreads, interest rates, equity and interest rate volatility, dividends and correlation, where applicable. They are classified as Level 2 or 3 instruments in the hierarchy, depending on the significance of the unobservable credit spreads, volatility, dividend and correlation rates.
Quantitative information about fair value measurements using significant unobservable inputs (Level 3 Instruments)
The following table presents fair values of our significant Level 3 financial instruments, valuation techniques used to determine their fair values, ranges and weighted averages of unobservable inputs.
 
 
As at October 31, 2023 (Millions of Canadian dollars, except for prices, percentages and ratios)
 
       
Fair value
               
Range of input values
(1), (2)
 
                   
Products   Reporting line in the fair value
hierarchy table
 
Assets
   
Liabilities
    Valuation
techniques
  Significant
unobservable
inputs (3)
      
Low
   
High
   
Weighted
average /
Inputs
distribution
 
Corporate debt and related derivatives
                      Price-based   Prices      
$
9.88
 
 
$
107.13
 
 
$
87.66
 
  Corporate debt and other debt  
$
 
          Discounted cash flows   Credit spread      
 
1.89%
 
 
 
9.96%
 
 
 
5.93%
 
    Loans  
 
1,859
 
              Credit enhancement      
 
11.70%
 
 
 
15.60%
 
 
 
13.00%
 
 
 
Derivative related liabilities
 
 
 
 
 
$
2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government debt and municipal bonds
                                                       
  Corporate debt and other debt  
 
149
 
 
 
 
 
  Discounted cash flows   Yields  
 
 
 
7.73%
 
 
 
10.38%
 
 
 
8.60%
 
Private equities, hedge fund investments and related equity derivatives
                      Market comparable   EV/EBITDA multiples      
 
4.16X
 
 
 
14.90X
 
 
 
6.93X
 
  Equities  
 
2,732
 
          Price-based   P/E multiples      
 
6.60X
 
 
 
22.60X
 
 
 
8.60X
 
  Derivative related liabilities          
 
 
  Discounted cash flows   EV/Rev multiples      
 
1.00X
 
 
 
5.00X
 
 
 
3.00X
 
                            Liquidity discounts (4)      
 
10.00%
 
 
 
40.00%
 
 
 
16.91%
 
                            Discount rate      
 
8.50%
 
 
 
13.30%
 
 
 
10.70%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  NAV / prices (5)  
 
 
 
n.a.
 
 
 
n.a.
 
 
 
n.a.
 
Interest rate derivatives and interest-rate-linked structured notes (6), (7)
                      Discounted cash flows   Interest rates      
 
2.39%
 
 
 
5.18%
 
 
 
High
 
  Derivative related assets  
 
293
 
          Option pricing model   CPI swap rates      
 
1.84%
 
 
 
2.35%
 
 
 
Even
 
  Derivative related liabilities          
 
995
 
     
IR-IR
correlations
     
 
19.00%
 
 
 
67.00%
 
 
 
Even
 
                           
FX-IR
correlations
     
 
29.00%
 
 
 
56.00%
 
 
 
Even
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FX-FX
correlations
 
 
 
 
68.00%
 
 
 
68.00%
 
 
 
Even
 
Equity derivatives and equity-linked structured
notes (6), (7)
                     
Discounted cash flows
 
Dividend yields
     
 
0.14%
 
 
 
10.71%
 
 
 
Lower
 
  Derivative related assets  
 
111
 
          Option pricing model   Equity
(EQ)-EQ
correlations
     
 
32.50%
 
 
 
96.49%
 
 
 
Middle
 
    Deposits          
 
383
 
     
EQ-FX
correlations
     
 
(83.15)%
 
 
 
38.44%
 
 
 
Middle
 
 
  Derivative related liabilities  
 
 
 
 
 
485
 
 
 
  EQ volatilities  
 
 
 
6.70%
 
 
 
110.72%
 
 
 
Lower
 
Other (8)
                                                       
    Asset-backed securities  
 
 
                                           
    Derivative related assets  
 
5
 
                                           
    Other assets  
 
11
 
                                           
    Mortgage-backed securities  
 
29
 
                                           
   
U.S. state, municipal and agencies debt
 
 
 
                                           
    Derivative related liabilities          
 
73
 
                                   
Total
 
 
 
$
5,189
 
 
$
1,938
 
                                   

166            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

 
As at October 31, 2022 (Millions of Canadian dollars, except for prices, percentages and ratios)
 
        Fair value                  Range of input values (1), (2)  
Products   Reporting line in the fair value
hierarchy table
  Assets     Liabilities     Valuation
techniques
  Significant
unobservable
inputs (3)
  Low     High     Weighted
average /
Inputs
distribution
 
Corporate debt and related derivatives
                      Price-based   Prices       $ 1.00     $ 111.90     $ 85.64  
 
Corporate debt and other debt
  $ 7             Discounted cash flows   Credit spread         1.67%       10.73%       6.20%  
   
Loans
    1,692                 Credit enhancement         11.70%       15.60%       13.00%  
 
 
Derivative related liabilities
 
 
 
 
  $ 130    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government debt and municipal bonds
                                                       
 
Corporate debt and other debt
    151    
 
 
 
  Discounted cash flows   Yields  
 
    7.85%       10.72%       8.92%  
Private equities, hedge fund investments and related equity derivatives
                      Market comparable   EV/EBITDA multiples         3.97X       14.31X       8.59X  
  Equities     2,271             Price-based   P/E multiples         8.47X       24.04X       12.46X  
  Derivative related liabilities             2     Discounted cash flows   EV/Rev multiples         0.35X       5.77X       3.88X  
                            Liquidity discounts (4)         10.00%       40.00%       17.35%  
                            Discount rate         10.80%       10.80%       10.80%  
 
 
 
 
 
 
 
 
 
 
 
 
 
  NAV / prices (5)  
 
    n.a.       n.a.       n.a.  
Interest rate derivatives and interest-rate-linked structured notes (6), (7)
                      Discounted cash flows   Interest rates         1.88%       4.49%       High  
  Derivative related assets     270             Option pricing model   CPI swap rates         1.98%       2.59%       Even  
  Derivative related liabilities             1,216        
IR-IR
correlations
        19.00%       67.00%       Even  
                           
FX-IR
correlations
        29.00%       56.00%       Even  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FX-FX
correlations
 
 
    68.00%       68.00%       Even  
Equity derivatives and equity-linked structured
notes (6), (7)
                     
Discounted cash flows
 
Dividend yields
     
 
(0.63)%
 
 
 
8.28%
 
 
 
Lower
 
  Derivative related assets     62             Option pricing model  
Equity (EQ)-EQ correlations
        33.00%       94.90%       Middle  
    Deposits             241        
EQ-FX
correlations
        (83.15)%       38.44%       Middle  
 
  Derivative related liabilities  
 
 
 
    655    
 
  EQ volatilities  
 
    7.00%       129.00%       Upper  
Other (8)
                                                       
    Asset-backed securities     2                                              
    Derivative related assets     51                                              
    Other assets     15                                              
    Mortgage-backed securities     28                                              
   
U.S. state, municipal and agencies debt
    4                                              
    Derivative related liabilities             103                                      
Total
 
 
  $ 4,553     $ 2,347                                      
 
(1)   The low and high input values represent the actual highest and lowest level inputs used to value a group of financial instruments in a particular product category. These input ranges do not reflect the level of input uncertainty, but are affected by the different underlying instruments within the product category. The input ranges will therefore vary from period to period based on the characteristics of the underlying instruments held at each balance sheet date. Where provided, the weighted average of the input values is calculated based on the relative fair values of the instruments within the product category. The weighted averages for derivatives are not presented in the table as they would not provide a comparable metric; instead, distribution of significant unobservable inputs within the range for each product category is indicated in the table.
(2)   Price-based inputs are significant for certain debt securities and are based on external benchmarks, comparable proxy instruments or
pre-quarter-end
trade data. For these instruments, the price input is expressed in dollars for each $100 par value. For example, with an input price of $105, an instrument is valued at a premium over its par value.
(3)   The significant unobservable inputs include the following: (i) Enterprise Value (EV); (ii) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA); (iii) Price / Earnings (P/E); (iv) Revenue (Rev); (v) Consumer Price Index (CPI); (vi) Interest Rate (IR); (vii) Foreign Exchange (FX); and (viii) Equity (EQ).
(4)   Fair value of securities with liquidity discount inputs totalled $483 million (October 31, 2022 – $373 million).
(5)   NAV of a hedge fund is total fair value of assets less liabilities divided by the number of fund units. Private equities are valued based on NAV or valuation techniques. The range for NAV per unit or price per share has not been disclosed for the hedge funds or private equities due to the dispersion of prices given the diverse nature of the investments.
(6)   The level of aggregation and diversity within each derivative instrument category may result in certain ranges of inputs being wide and inputs being unevenly distributed across the range. In the table, we indicated whether the majority of the inputs are concentrated toward the upper, middle, or lower end of the range, or evenly distributed throughout the range.
(7)   The structured notes contain embedded equity or interest rate derivatives with unobservable inputs that are similar to those of the equity or interest rate derivatives.
(8)   Other primarily includes certain insignificant instruments such as auction rate securities, commodity derivatives, foreign exchange derivatives, contingent considerations, bank-owned life insurance and retractable shares.
n.a.   not applicable
Sensitivity to unobservable inputs and interrelationships between unobservable inputs
Yield, credit spreads/discount margins
A financial instrument’s yield is the interest rate used to discount future cash flows in a valuation model. An increase in the yield, in isolation, would result in a decrease in a fair value measurement and vice versa. A credit spread/discount margin is the difference between a debt instrument’s yield and a benchmark instrument’s yield. Benchmark instruments have high credit quality ratings, similar maturities and are often government bonds. The credit spread/discount margin therefore represents the discount rate used to determine the present value of future cash flows of an asset to reflect the market return required for uncertainty in the estimated cash flows. The credit spread/discount margin for an instrument forms part of the yield used in a discounted cash flow method.
Funding spread
Funding spreads are credit spreads specific to funding or deposit rates. A decrease in funding spreads, on its own, will increase the fair value of our liabilities, and vice versa.
Default rates
A default rate is the rate at which borrowers fail to make scheduled loan payments. A decrease in the default rate will typically increase the fair value of the loan, and vice versa. This effect will be significantly more pronounced for a
non-government
guaranteed loan than a government guaranteed loan.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            167

Note 3    Fair value of financial instruments
(continued)
 
Prepayment rates
A prepayment rate is the rate at which a loan will be repaid in advance of its expected amortization schedule. Prepayments change the future cash flows of a loan. An increase in the prepayment rate in isolation will result in an increase in fair value when the loan interest rate is lower than the current reinvestment rate, and a decrease in the prepayment rate in isolation will result in a decrease in fair value when the loan interest rate is lower than the current reinvestment rate. Prepayment rates are generally negatively correlated with interest rates.
Recovery and loss severity rates
A recovery rate is an estimation of the amount that can be collected in a loan default scenario. The recovery rate is the recovered amount divided by the loan balance due, expressed as a percentage. The inverse concept of recovery is loss severity. Loss severity rate is an estimation of the loan amount not collected when a loan defaults. The loss severity rate is the loss amount divided by the loan balance due, expressed as a percentage. Generally, an increase in the recovery rate or a decrease in the loss severity rate will increase the loan fair value, and vice versa.
Volatility rates
Volatility measures the potential variability of future prices and is often measured as the standard deviation of price movements. Volatility is an input to option pricing models used to value derivatives and issued structured notes. Volatility is used in valuing equity, interest rate, commodity and foreign exchange options. A higher volatility rate means that the underlying price or rate movements are more likely to occur. Higher volatility rates may increase or decrease an option’s fair value depending on the option’s terms. The determination of volatility rates is dependent on various factors, including but not limited to, the underlying’s market price, the strike price and maturity.
Dividend yields
A dividend yield is the underlying equity’s expected dividends expressed as an annual percentage of its price. Dividend yield is used as an input for forward equity price and option models. Higher dividend yields will decrease the forward price, and vice versa. A higher dividend yield will increase or decrease an option’s value, depending on the option’s terms.
Correlation rates
Correlation is the linear relationship between the movements in two different variables. Correlation is an input to the valuation of derivative contracts and issued structured notes when an instrument’s payout is determined by correlated variables. When variables are positively correlated, an increase in one variable will result in an increase in the other variable. When variables are negatively correlated, an increase in one variable will result in a decrease in the other variable. The referenced variables can be within a single asset class or market (equity, interest rate, commodities, credit and foreign exchange) or between variables in different asset classes (equity to foreign exchange, or interest rate to foreign exchange). Changes in correlation will either increase or decrease a financial instrument’s fair value depending on the terms of the instrument.
Interest rates
An interest rate is the percentage amount charged on a principal or notional amount. Increasing interest rates will decrease the discounted cash flow value of a financial instrument, and vice versa.
Consumer Price Index swap rates
A CPI swap rate is expressed as a percentage of an increase in the average price of a basket of consumer goods and services, such as transportation, food and medical care. An increase in the CPI swap rate will cause inflation swap payments to be larger, and vice versa.
EV/EBITDA multiples, P/E multiples, EV/Rev multiples, and liquidity discounts
Private equity valuation inputs include EV/EBITDA multiples, P/E multiples and EV/Rev multiples. These are used to calculate either enterprise value or share value of a company based on a multiple of earnings or revenue estimates. Higher multiples equate to higher fair values for all multiple types, and vice versa. A liquidity discount may be applied when few or no transactions exist to support the valuations.
Credit Enhancement
Credit enhancement is an input to the valuation of securitized transactions and is the amount of loan loss protection for a senior tranche. Credit enhancement is expressed as a percentage of the transaction sizes. An increase in credit enhancement will cause the credit spread to decrease and the tranche fair value to increase, and vice versa.
Interrelationships between unobservable inputs
Unobservable inputs, including the above discount margin, default rate, prepayment rate, and recovery and loss severity rates, may not be independent of each other. For example, the discount margin can be affected by a change in default rate, prepayment rate, or recovery and loss severity rates. Discount margins will generally decrease when default rates decline or when recovery rates increase.
 
168            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Changes in fair value measurement for instruments measured on a recurring basis and
categorized
in Level 3
 
    
For the year ended October 31, 2023
 
                   
(Millions of Canadian dollars)  
Fair value
at beginning
of period
   
Gains
(losses)
included in
earnings
   
Gains
(losses)
included
in OCI
 
(1)
   
Purchases
(issuances)
   
Settlement
(sales) and
other
(2)
   
Transfers
into
Level 3
   
Transfers
out of
Level 3
   
Fair value
at end of
period
   
Gains
(losses) included
in earnings for
positions still held
 
Assets
                                                                       
Securities
                                                                       
Trading
                                                                       
Debt issued or guaranteed by:
                                                                       
U.S. state, municipal and agencies
 
$
4
 
 
$
 
 
$
 
 
$
 
 
$
(4
 
$
 
 
$
 
 
$
 
 
$
 
Asset-backed securities
                                                                       
Non-CDO
securities
 
 
2
 
 
 
 
 
 
 
 
 
 
 
 
(2
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt and other debt
 
 
7
 
 
 
 
 
 
 
 
 
2
 
 
 
(16
 
 
17
 
 
 
(10
 
 
 
 
 
 
Equities
 
 
1,874
 
 
 
(196
 
 
21
 
 
 
586
 
 
 
(67
 
 
48
 
 
 
 
 
 
2,266
 
 
 
(154
 
 
 
1,887
 
 
 
(196
 
 
21
 
 
 
588
 
 
 
(89
 
 
65
 
 
 
(10
 
 
2,266
 
 
 
(154
Investment
                                                                       
Mortgage-backed securities
 
 
28
 
 
 
 
 
 
 
 
 
1
 
 
 
 
 
 
 
 
 
 
 
 
29
 
 
 
n.a.
 
Corporate debt and other debt
 
 
151
 
 
 
 
 
 
9
 
 
 
 
 
 
(11
 
 
 
 
 
 
 
 
149
 
 
 
n.a.
 
Equities
 
 
397
 
 
 
 
 
 
70
 
 
 
1
 
 
 
(2
 
 
 
 
 
 
 
 
466
 
 
 
n.a.
 
 
 
 
576
 
 
 
 
 
 
79
 
 
 
2
 
 
 
(13
 
 
 
 
 
 
 
 
644
 
 
 
n.a.
 
Loans
 
 
1,692
 
 
 
(95
 
 
33
 
 
 
1,443
 
 
 
(868
 
 
30
 
 
 
(376
 
 
1,859
 
 
 
(44
Other
                                                                       
Net derivative balances
(3)
                                                                       
Interest rate contracts
 
 
(859
 
 
(63
 
 
5
 
 
 
(48
 
 
235
 
 
 
42
 
 
 
26
 
 
 
(662
 
 
(43
Foreign exchange contracts
 
 
(132
 
 
10
 
 
 
10
 
 
 
(14
 
 
44
 
 
 
 
 
 
33
 
 
 
(49
 
 
8
 
Other contracts
 
 
(785
 
 
83
 
 
 
4
 
 
 
(143
 
 
78
 
 
 
(159
 
 
484
 
 
 
(438
 
 
152
 
Valuation adjustments
 
 
53
 
 
 
 
 
 
 
 
 
 
 
 
(50
 
 
 
 
 
 
 
 
3
 
 
 
 
Other assets
 
 
15
 
 
 
 
 
 
1
 
 
 
 
 
 
(5
 
 
 
 
 
 
 
 
11
 
 
 
 
 
 
$
2,447
 
 
$
(261
 
$
153
 
 
$
  1,828
 
 
$
(668
 
$
(22
 
$
157
 
 
$
3,634
 
 
$
(81
Liabilities
                                                                       
Deposits
 
$
(241
 
$
5
 
 
$
 
 
$
(260
 
$
23
 
 
$
(134
 
$
224
 
 
$
(383
 
$
24
 
Other
                                                                       
Other liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(241
 
$
5
 
 
$
 
 
$
(260
 
$
23
 
 
$
(134
 
$
224
 
 
$
(383
 
$
24
 
                                                       
     For the year ended October 31, 2022  
                   
(Millions of Canadian dollars)   Fair value
at beginning
of period
    Gains
(losses)
included in
earnings
    Gains
(losses)
included
in OCI (1)
    Purchases
(issuances)
    Settlement
(sales) and
other (2)
    Transfers
into
Level 3
    Transfers
out of
Level 3
    Fair value
at end of
period
    Gains
(losses) included
in earnings for
positions still held
 
Assets
                                                                       
Securities
                                                                       
Trading
                                                                       
Debt issued or guaranteed by:
                                                                       
U.S. state, municipal and agencies
  $ 25     $     $ 2     $     $ (23   $     $     $ 4     $  
Asset-backed securities
                                                                       
Non-CDO
securities
    2                                           2        
Corporate debt and other debt
    25       (3                 (6     9       (18     7        
Equities
    1,530       14       100       314       (82     1       (3     1,874       43  
 
    1,582       11       102       314       (111     10       (21     1,887       43  
Investment
                                                                       
Mortgage-backed securities
    20             8                               28       n.a.  
Corporate debt and other debt
    152             2                         (3     151       n.a.  
Equities
    334             51       11       (1     37       (35     397       n.a.  
 
    506             61       11       (1     37       (38     576       n.a.  
Loans
    1,077       (25     (37     407       (466     802       (66     1,692       (78
Other
                                                                       
Net derivative balances
(3)
                                                                       
Interest rate contracts
    (635     (187     (5     17       64       (13     (100     (859     (16
Foreign exchange contracts
    47       (103     (2     (22     3       5       (60     (132     (90
Other contracts
    (393     165       (34     (245     70       (406     58       (785     271  
Valuation adjustments
    20                   25       (11     19             53        
Other assets
                1       15       (1                 15        
 
  $   2,204     $ (139   $     86     $    522     $ (453   $    454     $ (227   $   2,447     $   130  
Liabilities
                                                                       
Deposits
  $ (151   $        2     $ (3   $ (120   $      26     $ (143   $    148     $ (241   $ 19  
Other
                                                                       
Other liabilities
    (7     (1                 8                          
 
  $ (158   $ 1     $ (3   $ (120   $ 34     $ (143   $ 148     $ (241   $ 19  
 
(1)   These amounts include the foreign currency translation gains or losses arising on consolidation of foreign subsidiaries relating to the Level 3 instruments, where applicable. The unrealized gains on Investment securities recognized in OCI were $65 million for the year ended October 31, 2023 (October 31, 2022 – gains of $50 million) excluding the translation gains or losses arising on consolidation.
(2)   Other includes amortization of premiums or discounts recognized in net income.
(3)   Net derivatives as at October 31, 2023 included derivative assets of $409 million (October 31, 2022 – $383 million) and derivative liabilities of $1,555 million (October 31, 2022 – $2,106 million).
n.a.   not applicable
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            169

Note 3    Fair value of financial instruments
 
(continued)

Transfers between fair value hierarchy levels for instruments carried at fair value on a recurring basis
Transfers between Level 1 and Level 2, and transfers into and out of Level 3 are assumed to occur at the end of the period. For an asset or a liability that transfers into Level 3 during the period, the entire change in fair value for the period is excluded from the Gains (losses) included in earnings for positions still held column of the above reconciliation, whereas for transfers out of Level 3 during the period, the entire change in fair value for the period is included in the same column of the above reconciliation.
Transfers between Level 1 and 2 are dependent on whether fair value is obtained on the basis of quoted market prices in active markets (Level 1).
During the year ended October 31, 2023, significant transfers out of Level 1 to Level 2 included Trading U.S. federal, state, municipal
and agencies debt of $
763
million, Investment U.S. federal, state, municipal and agencies debt of $
435
 million and Obligations related to securities sold short of $
151
 million. During the year ended October 31, 2022, there were
no
significant transfers out of Level 1 to Level 2.
During the year ended October 31, 2023 and October 31, 2022, there were no significant transfers out of Level 2 to Level 1.
Transfers between Level 2 and Level 3 are primarily due to either a change in the market observability for an input, or a change in an unobservable input’s significance to a financial instrument’s fair value.
During the year ended October 31, 2023, significant transfers out of Level 2 to Level 3 included Other contracts and Deposits due to changes in the significance of unobservable inputs and changes in the market observability of inputs. During the year ended October 31, 2022, significant transfers out of Level 2 to Level 3 included Loans and Other contracts due to changes in the market observability of inputs and changes in the significance of unobservable inputs.
During the year ended October 31, 2023, significant transfers out of Level 3 to Level 2 included Other contracts, Loans and Deposits due to changes in the market observability of inputs and changes in the significance of unobservable inputs. During the year ended October 31, 2022, there were no significant transfers out of Level 3 to Level 2.
Positive and negative fair value movements of Level 3 financial instruments from using reasonably possible alternative assumptions
A financial instrument is classified as Level 3 in the fair value hierarchy if one or more of its unobservable inputs may significantly affect the measurement of its fair value. In preparing the financial statements, appropriate levels for these unobservable input parameters are chosen so that they are consistent with prevailing market evidence or management judgment. Due to the unobservable nature of the prices or rates, there may be uncertainty about the valuation of these Level 3 financial instruments.
170            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

The following table summarizes the impacts to fair values of Level 3 financial instruments using reasonably possible alternative assumptions. This sensitivity disclosure is intended to illustrate the potential impact of the relative uncertainty in the fair value of Level 3 financial instruments. In reporting the sensitivities below, we offset balances in instances where: (i) the move in valuation factors cause an offsetting positive and negative fair value movement, (ii) both offsetting instruments are in Level 3, and (iii) exposures are managed and reported on a net basis. With respect to overall sensitivity, it is unlikely in practice that all reasonably possible alternative assumptions would simultaneously be realized.
 
       As at               
   
October 31, 2023
        October 31, 2022  
               
(Millions of Canadian dollars)  
Level 3
fair value
   
Positive fair value
movement from
using reasonably
possible
alternatives
   
Negative fair value
movement from
using reasonably
possible
alternatives
         Level 3
fair value
    Positive fair value
movement from
using reasonably
possible
alternatives
    Negative fair value
movement from
using reasonably
possible
alternatives
 
Securities
                                                   
Trading
                                                   
Debt issued or guaranteed by:
                                                   
U.S. state, municipal and agencies
 
$
 
 
$
 
 
$
 
      $ 4     $     $  
Asset-backed securities
 
 
 
 
 
 
 
 
 
        2              
Corporate debt and other debt
 
 
 
 
 
 
 
 
 
        7              
Equities
 
 
2,266
 
 
 
50
 
 
 
(43
        1,874       27       (23
Investment
                                                   
Mortgage-backed securities
 
 
29
 
 
 
4
 
 
 
(4
        28       4       (4
Corporate debt and other debt
 
 
149
 
 
 
11
 
 
 
(10
        151       12       (10
Equities
 
 
466
 
 
 
48
 
 
 
(47
        397       38       (39
Loans
 
 
1,859
 
 
 
33
 
 
 
(37
        1,692       60       (62
Derivatives
 
 
409
 
 
 
10
 
 
 
(7
        383       5       (3
Other assets
 
 
11
 
 
 
 
 
 
          –
 
 
 
    15                       –  
 
 
$
   5,189
 
 
$
      156
 
 
$
(148
 
 
  $    4,553     $       146     $ (141
Deposits
 
$
(383
 
$
26
 
 
$
(26
      $ (241   $ 9     $ (9
Derivatives
 
 
(1,555
 
 
59
 
 
 
(66
        (2,106     55       (57
Other
                                                   
Other liabilities
 
 
 
 
 
 
 
 
 
 
 
                 
 
 
$
(1,938
 
$
85
 
 
$
(92
 
 
  $ (2,347   $ 64     $ (66
Sensitivity results
As at October 31, 2023, the effects of applying other reasonably possible alternative assumptions to the Level 3 asset positions would be an increase of $156 million and a reduction of $148 million in fair value, of which $63 million and $61 million would be recorded in Other components of equity, respectively. The effects of applying these assumptions to the Level 3 liability positions would result in a decrease of $85 million and an increase of $92 million in fair value.
Level 3 valuation inputs and approaches to developing reasonably possible alternative assumptions
The following is a summary of the unobservable inputs used in the valuation of the Level 3 instruments and our approaches to developing reasonably possible alternative assumptions used to determine sensitivity.
 
Financial assets or
liabilities
  
Sensitivity methodology
Asset-backed securities, corporate debt, government debt, municipal bonds and loans    Sensitivities are determined based on adjusting, plus or minus one standard deviation, the
bid-offer
spreads or input prices if a sufficient number of prices are received, adjusting input parameters such as credit spreads or using high and low vendor prices as reasonably possible alternative assumptions.
Private equities, hedge fund investments and related equity derivatives    Sensitivity of direct private equity investments is determined by (i) adjusting the discount rate by 2% when the discounted cash flow method is used to determine fair value, (ii) adjusting the price multiples based on the range of multiples of comparable companies when price-multiples-based models are used, or (iii) using an alternative valuation approach. The private equity fund, hedge fund and related equity derivative NAVs are provided by the fund managers, and as a result, there are no other reasonably possible alternative assumptions for these investments.
Interest rate derivatives    Sensitivities of interest rate and cross currency swaps are derived using plus or minus one standard deviation of the inputs, and an amount representing model and parameter uncertainty, where applicable.
Equity derivatives    Sensitivity of the Level 3 position is determined by shifting the unobservable model inputs by plus or minus one standard deviation of the pricing service market data including volatility, dividends or correlations, as applicable.
Bank funding and deposits    Sensitivities of deposits are calculated by shifting the funding curve by plus or minus certain basis points.
Structured notes    Sensitivities for interest-rate-linked and equity-linked structured notes are derived by adjusting inputs by plus or minus one standard deviation, and for other deposits, by estimating a reasonable move in the funding curve by plus or minus certain basis points.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            171

Note 3    Fair value of financial instruments
(continued)
 
Fair value for financial instruments that are carried at amortized cost and classified using the fair value hierarchy
 
    
As at October 31, 2023
 
   
Fair value
approximates
carrying value
(1)
    
 
Fair value may not approximate carrying value
        
    
Fair value measurements using
    
Total
    
Total
fair value
 
(Millions of Canadian dollars)
  
Level 1
    
Level 2
    
Level 3
 
Interest-bearing deposits with banks
 
$
10,230
 
  
$
 
  
$
 
  
$
 
  
$
 
  
$
10,230
 
Amortized cost securities
(2)
 
 
 
  
 
34
 
  
 
83,633
 
  
 
 
  
 
83,667
 
  
 
83,667
 
Assets purchased under reverse repurchase agreements and securities borrowed
 
 
39,528
 
  
 
 
  
 
14,794
 
  
 
 
  
 
14,794
 
  
 
54,322
 
Loans
                                                    
Retail
 
 
70,606
 
  
 
 
  
 
466,962
 
  
 
4,912
 
  
 
471,874
 
  
 
542,480
 
Wholesale
 
 
8,231
 
  
 
 
  
 
254,342
 
  
 
6,270
 
  
 
260,612
 
  
 
268,843
 
 
 
 
78,837
 
  
 
 
  
 
721,304
 
  
 
11,182
 
  
 
732,486
 
  
 
811,323
 
Other assets
 
 
67,400
 
  
 
 
  
 
914
 
  
 
223
 
  
 
1,137
 
  
 
68,537
 
 
 
 
195,995
 
  
 
34
 
  
 
820,645
 
  
 
11,405
 
  
 
832,084
 
  
 
1,028,079
 
Deposits
                                                    
Personal
 
 
252,779
 
  
 
 
  
 
159,669
 
  
 
438
 
  
 
160,107
 
  
 
412,886
 
Business and government
 
 
385,727
 
  
 
 
  
 
218,761
 
  
 
772
 
  
 
219,533
 
  
 
605,260
 
Bank
 
 
16,902
 
  
 
 
  
 
16,251
 
  
 
7
 
  
 
16,258
 
  
 
33,160
 
 
 
 
655,408
 
  
 
 
  
 
394,681
 
  
 
1,217
 
  
 
395,898
 
  
 
1,051,306
 
Obligations related to assets sold under repurchase agreements and securities loaned
 
 
36,559
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
36,559
 
Other liabilities
 
 
76,982
 
  
 
 
  
 
1,856
 
  
 
13,564
 
  
 
15,420
 
  
 
92,402
 
Subordinated debentures
 
 
 
  
 
 
  
 
11,213
 
  
 
 
  
 
11,213
 
  
 
11,213
 
 
 
$
768,949
 
  
$
 
  
$
407,750
 
  
$
14,781
 
  
$
422,531
 
  
$
1,191,480
 
                                          
    
As at October 31, 2022
 
    Fair value
approximates
carrying value
(1)
     Fair value may not approximate carrying value         
     Fair value measurements using      Total      Total
fair value
 
(Millions of Canadian dollars)
   Level 1      Level 2      Level 3  
Interest-bearing deposits with banks
  $ 23,543      $      $      $      $      $ 23,543  
Amortized cost securities
(2)
                  70,073               70,073        70,073  
Assets purchased under reverse repurchase agreements and securities borrowed
    42,224               10,956               10,956        53,180  
Loans
                                                    
Retail
    70,162               446,809        4,457        451,266        521,428  
Wholesale
    17,943               230,880        4,993        235,873        253,816  
 
    88,105               677,689        9,450        687,139        775,244  
Other assets
    72,198               716        170        886        73,084  
 
    226,070               759,434        9,620        769,054        995,124  
Deposits
                                                    
Personal
    271,414               108,549        433        108,982        380,396  
Business and government
    406,045               198,265        792        199,057        605,102  
Bank
    22,638               14,120               14,120        36,758  
 
    700,097               320,934        1,225        322,159        1,022,256  
Obligations related to assets sold under repurchase agreements and securities loaned
    25,112                                    25,112  
Other liabilities
    77,801               1,554        10,805        12,359        90,160  
Subordinated debentures
                  9,608        60        9,668        9,668  
 
  $   803,010      $      $   332,096      $   12,090      $   344,186      $   1,147,196  
 
(1)   Certain financial instruments have not been assigned to a level as the carrying amount approximates their fair values.
(2)   Included in Securities – Investment, net of applicable allowance on the Consolidated Balance Sheets.
Fair values of financial assets and liabilities carried at amortized cost and disclosed in the table above are determined using the following valuation techniques and inputs.
 
172            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Amortized cost securities
Fair values of government bonds, corporate bonds, and ABS are based on quoted prices. Fair values of certain
Non-OECD
government bonds are based on vendor prices or the discounted cash flow method with yield curves of other countries’ government bonds as inputs. For ABS, where market prices are not available, the fair value is determined using the discounted cash flow method. The inputs to the valuation model generally include market interest rates, spreads and yields derived from comparable securities, prepayment, and LGD.
Assets purchased under reverse repurchase agreements and securities borrowed, and Obligations related to assets sold under repurchase agreements and securities loaned
Valuation methods used for the long-term instruments are described in the Fair value of assets and liabilities measured on a recurring basis and classified using the fair value hierarchy section of this note. The carrying values of short-term instruments generally approximate their fair values.
Loans – Retail
Retail loans include residential mortgages, personal and small business loans and credit cards. For residential mortgages, and personal and small business loans, we segregate the portfolio based on certain attributes such as product type, contractual interest rate, term to maturity and credit scores, if applicable. Fair values of these loans are determined by the discounted cash flow method using applicable inputs such as prevailing interest rates, contractual and posted client rates, client discounts, credit spreads, prepayment rates and
loan-to-value
(LTV) ratios. Fair values of credit card receivables are also calculated based on a discounted cash flow method with portfolio yields, write-offs and monthly payment rates as inputs. The carrying values of short-term and variable rate loans generally approximate their fair values.
Loans – Wholesale
Where market prices are available, wholesale loans are valued based on market prices. Otherwise, fair value is determined by the discounted cash flow method using the following inputs: market interest rates and market based spreads of assets with similar credit ratings and terms to maturity, LGD, expected default frequency implied from credit default swap prices, if available, and relevant pricing information such as contractual rate, origination and maturity dates, redemption price, coupon payment frequency and date convention.
Deposits
Deposits are comprised of demand, notice, and term deposits which include senior deposit notes we have issued to provide us with long-term funding. Fair values of term deposits are determined by one of several valuation techniques: (i) for term deposits and similar instruments, we segregate the portfolio based on term to maturity. Fair values of these instruments are determined by the discounted cash flow method using inputs such as client rates for new sales of the corresponding terms; and (ii) for senior deposit notes, we use actual traded prices, vendor prices or the discounted cash flow method using a market interest rate curve and our funding spreads as inputs. The carrying values of demand, notice, and short-term term deposits generally approximate their fair values.
Other assets and Other liabilities
Other assets and Other liabilities include receivables and payables relating to certain commodities. Fair values of the commodity receivables and payables are calculated by the discounted cash flow method using applicable inputs such as market interest rates, counterparties’ credit spreads, our funding spreads, commodity forward prices and spot prices.
Subordinated debentures
Fair values of Subordinated debentures are based on market prices, dealer quotes or vendor prices when available. Where prices cannot be observed, fair value is determined using the discounted cash flow method, with applicable inputs such as market interest rates and credit spreads.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            173

Note 4    Securities
Carrying value of securities
 
    
As at October 31, 2023
 
   
Term to maturity
(1)
               
               
(Millions of Canadian dollars)
 
Within
3 months
    
3 months
to 1 year
    
1 year to
5 years
    
5 years to
10 years
    
Over
10 years
    
With no
specific
maturity
    
Total
 
Trading
(2)
                                                             
Debt issued or guaranteed by:
                                                             
Canadian government
 
$
9,867
 
  
$
17,244
 
  
$
8,687
 
  
$
2,932
 
  
$
6,915
 
  
$
 
  
$
45,645
 
U.S. federal, state, municipal and agencies
 
 
15,507
 
  
 
8,136
 
  
 
15,864
 
  
 
4,375
 
  
 
8,806
 
  
 
 
  
 
52,688
 
Other OECD government
 
 
566
 
  
 
1,117
 
  
 
815
 
  
 
1,040
 
  
 
1,094
 
  
 
 
  
 
4,632
 
Mortgage-backed securities
 
 
 
  
 
 
  
 
 
  
 
 
  
 
2
 
  
 
 
  
 
2
 
Asset-backed securities
 
 
452
 
  
 
151
 
  
 
234
 
  
 
307
 
  
 
101
 
  
 
 
  
 
1,245
 
Corporate debt and other debt
                                                             
Bankers’ acceptances
 
 
143
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
143
 
Other
(3)
 
 
1,207
 
  
 
2,219
 
  
 
6,681
 
  
 
3,656
 
  
 
8,709
 
  
 
 
  
 
22,472
 
Equities
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
63,324
 
  
 
63,324
 
 
 
 
27,742
 
  
 
28,867
 
  
 
32,281
 
  
 
12,310
 
  
 
25,627
 
  
 
63,324
 
  
 
190,151
 
Fair value through other comprehensive income 
(2)
                                                             
Debt issued or guaranteed by:
                                                             
Canadian government
                                                             
Federal
                                                             
Amortized cost
 
 
2,479
 
  
 
1,247
 
  
 
1,726
 
  
 
640
 
  
 
517
 
  
 
 
  
 
6,609
 
Fair value
 
 
2,479
 
  
 
1,242
 
  
 
1,707
 
  
 
515
 
  
 
316
 
  
 
 
  
 
6,259
 
Yield
(4)
 
 
4.5%
 
  
 
3.2%
 
  
 
2.6%
 
  
 
1.2%
 
  
 
3.4%
 
  
 
 
  
 
3.4%
 
Provincial and municipal
                                                             
Amortized cost
 
 
469
 
  
 
8
 
  
 
1,159
 
  
 
52
 
  
 
1,708
 
  
 
 
  
 
3,396
 
Fair value
 
 
469
 
  
 
8
 
  
 
1,158
 
  
 
52
 
  
 
1,061
 
  
 
 
  
 
2,748
 
Yield
(4)
 
 
4.9%
 
  
 
3.7%
 
  
 
2.8%
 
  
 
4.5%
 
  
 
4.4%
 
  
 
 
  
 
3.8%
 
U.S. federal, state, municipal and agencies
                                                             
Amortized cost
 
 
846
 
  
 
8,595
 
  
 
33,044
 
  
 
16,355
 
  
 
16,486
 
  
 
 
  
 
75,326
 
Fair value
 
 
856
 
  
 
8,572
 
  
 
33,050
 
  
 
16,193
 
  
 
14,624
 
  
 
 
  
 
73,295
 
Yield
(4)
 
 
7.4%
 
  
 
2.1%
 
  
 
2.7%
 
  
 
4.0%
 
  
 
3.6%
 
  
 
 
  
 
3.2%
 
Other OECD government
                                                             
Amortized cost
 
 
160
 
  
 
1,009
 
  
 
5,030
 
  
 
1
 
  
 
 
  
 
 
  
 
6,200
 
Fair value
 
 
160
 
  
 
1,009
 
  
 
5,022
 
  
 
1
 
  
 
 
  
 
 
  
 
6,192
 
Yield
(4)
 
 
6.3%
 
  
 
4.0%
 
  
 
3.0%
 
  
 
4.6%
 
  
 
 
  
 
 
  
 
3.3%
 
Mortgage-backed securities
                                                             
Amortized cost
 
 
 
  
 
 
  
 
32
 
  
 
28
 
  
 
2,702
 
  
 
 
  
 
2,762
 
Fair value
 
 
 
  
 
 
  
 
31
 
  
 
25
 
  
 
2,645
 
  
 
 
  
 
2,701
 
Yield
(4)
 
 
 
  
 
 
  
 
7.5%
 
  
 
6.7%
 
  
 
6.8%
 
  
 
 
  
 
6.8%
 
Asset-backed securities
                                                             
Amortized cost
 
 
 
  
 
 
  
 
16
 
  
 
7,542
 
  
 
1,194
 
  
 
 
  
 
8,752
 
Fair value
 
 
 
  
 
 
  
 
17
 
  
 
7,503
 
  
 
1,186
 
  
 
 
  
 
8,706
 
Yield
(4)
 
 
 
  
 
 
  
 
6.4%
 
  
 
6.9%
 
  
 
7.0%
 
  
 
 
  
 
6.9%
 
Corporate debt and other debt
                                                             
Amortized cost
 
 
4,928
 
  
 
1,759
 
  
 
18,798
 
  
 
2,248
 
  
 
41
 
  
 
 
  
 
27,774
 
Fair value
 
 
4,928
 
  
 
1,755
 
  
 
18,761
 
  
 
2,243
 
  
 
36
 
  
 
 
  
 
27,723
 
Yield
(4)
 
 
3.9%
 
  
 
4.2%
 
  
 
3.9%
 
  
 
5.4%
 
  
 
4.7%
 
  
 
 
  
 
4.1%
 
Equities
                                                             
Cost
                                              
 
493
 
  
 
493
 
Fair value
(5)
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
842
 
  
 
842
 
Amortized cost
 
 
8,882
 
  
 
12,618
 
  
 
59,805
 
  
 
26,866
 
  
 
22,648
 
  
 
493
 
  
 
131,312
 
Fair value
 
 
8,892
 
  
 
12,586
 
  
 
59,746
 
  
 
26,532
 
  
 
19,868
 
  
 
842
 
  
 
128,466
 
Amortized cost
(2)
                                                             
Debt issued or guaranteed by:
                                                             
Canadian government
 
 
997
 
  
 
1,931
 
  
 
17,448
 
  
 
6,468
 
  
 
 
  
 
 
  
 
26,844
 
Yield
(4)
 
 
2.8%
 
  
 
3.0%
 
  
 
2.1%
 
  
 
2.0%
 
  
 
 
  
 
 
  
 
2.2%
 
U.S. federal, state, municipal and agencies
 
 
424
 
  
 
1,427
 
  
 
14,536
 
  
 
5,156
 
  
 
23,025
 
  
 
 
  
 
44,568
 
Yield
(4)
 
 
5.0%
    
 
4.1%
    
 
3.3%
 
  
 
2.9%
 
  
 
2.5%
 
  
 
 
  
 
2.9%
 
Other OECD government
 
 
375
 
  
 
723
 
  
 
4,362
 
  
 
66
 
  
 
 
  
 
 
  
 
5,526
 
Yield
(4)
 
 
2.0%
 
  
 
0.8%
 
  
 
2.9%
 
  
 
1.1%
 
  
 
 
  
 
 
  
 
2.5%
 
Asset-backed securities
 
 
 
  
 
 
  
 
424
 
  
 
 
  
 
1
 
  
 
 
  
 
425
 
Yield
(4)
 
 
 
  
 
 
  
 
4.9%
 
  
 
 
  
 
1.4%
 
  
 
 
  
 
4.9%
 
Corporate debt and other debt
 
 
838
 
  
 
1,443
 
  
 
11,256
 
  
 
190
 
  
 
23
 
  
 
 
  
 
13,750
 
Yield
(4)
 
 
2.3%
    
 
2.9%
    
 
3.4%
 
  
 
3.1%
 
  
 
5.6%
 
  
 
 
  
 
3.3%
 
Amortized cost, net of allowance
 
 
2,634
 
  
 
5,524
 
  
 
48,026
 
  
 
11,880
 
  
 
23,049
 
  
 
 
  
 
91,113
 
Fair value
 
 
2,627
 
  
 
5,447
 
  
 
46,258
 
  
 
10,276
 
  
 
19,059
 
  
 
 
  
 
83,667
 
Total carrying value of securities
 
$
39,268
 
  
$
46,977
 
  
$
140,053
 
  
$
50,722
 
  
$
68,544
 
  
$
64,166
 
  
$
409,730
 
 
174            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

                As at October 31, 2022  
    Term to maturity
(1)
               
               
(Millions of Canadian dollars)
  Within
3 months
     3 months
to 1 year
     1 year to
5 years
     5 years to
10 years
    
Over
10 years
     With no
specific
maturity
     Total  
Trading
(2)
                                                             
Debt issued or guaranteed by:
                                                             
Canadian government
  $ 2,255      $ 14,181      $ 6,907      $ 2,706      $ 6,011      $      $ 32,060  
U.S. federal, state, municipal and agencies
    7,151        10,107        7,043        4,507        8,020               36,828  
Other OECD government
    1,343        233        606        241        2,354               4,777  
Mortgage-backed securities
                                2               2  
Asset-backed securities
    779        49        67        207        208               1,310  
Corporate debt and other debt
                                                             
Bankers’ acceptances
    252        3                                    255  
Other
(3)
    3,055        1,837        4,813        3,037        8,172               20,914  
Equities
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
     52,059        52,059  
 
    14,835        26,410        19,436        10,698        24,767        52,059        148,205  
Fair value through other comprehensive income
(2)
                                                             
Debt issued or guaranteed by:
                                                             
Canadian government
                                                             
Federal
                                                             
Amortized cost
    780        1,010        1,024        745        522               4,081  
Fair value
    778        1,009        1,012        635        347               3,781  
Yield
(4)
    2.3%        2.3%        2.8%        1.6%        3.1%               2.4%  
Provincial and municipal
                                                             
Amortized cost
    237        215        616        56        1,561               2,685  
Fair value
    237        216        616        56        999               2,124  
Yield
(4)
    2.0%        2.7%        2.0%        3.8%        4.1%               3.0%  
U.S. federal, state, municipal and agencies
                                                             
Amortized cost
    802        2,613        13,586        9,104        19,929               46,034  
Fair value
    802        2,615        13,554        9,061        18,326               44,358  
Yield
(4)
    4.9%        0.4%        1.9%        3.4%        3.0%               2.6%  
Other OECD government
                                                             
Amortized cost
    1,105        642        3,406        1                      5,154  
Fair value
    1,105        642        3,396        1                      5,144  
Yield
(4)
    2.4%        1.2%        1.7%        4.4%                      1.8%  
Mortgage-backed securities
                                                             
Amortized cost
                         41        2,944               2,985  
Fair value
                         37        2,851               2,888  
Yield
(4)
                         4.5%        4.7%               4.7%  
Asset-backed securities
                                                             
Amortized cost
                  46        6,331        1,911               8,288  
Fair value
                  46        6,172        1,830               8,048  
Yield
(4)
                  4.6%        5.3%        5.4%               5.3%  
Corporate debt and other debt
                                                             
Amortized cost
    5,922        4,793        12,420        2,666        51               25,852  
Fair value
    5,919        4,792        12,307        2,656        46               25,720  
Yield
(4)
    3.2%        2.8%        2.6%        3.1%        5.1%               2.8%  
Equities
                                                             
Cost
                                                 551        551  
Fair value
(5)
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
     828        828  
Amortized cost
    8,846        9,273        31,098        18,944        26,918        551        95,630  
Fair value
    8,841        9,274        30,931        18,618        24,399        828        92,891  
Amortized cost
(2)
                                                             
Debt issued or guaranteed by:
                                                             
Canadian government
    929        1,734        16,655        6,101                      25,419  
Yield
(4)
    2.4%        2.8%        2.0%        2.3%                      2.1%  
U.S. federal, state, municipal and agencies
    161        784        3,885        3,784        25,518               34,132  
Yield
(4)
    4.4%        3.0%        1.7%        2.3%        2.4%               2.3%  
Other OECD government
    235        1,574        3,645        64                      5,518  
Yield
(4)
    1.3%        1.3%        1.9%        1.3%                      1.7%  
Asset-backed securities
                  573        135        3               711  
Yield
(4)
                  3.0%        3.5%        1.5%               3.1%  
Corporate debt and other debt
    574        2,434        7,574        741        24               11,347  
Yield
(4)
    0.8%        1.7%        2.6%        2.4%        4.9%               2.0%  
Amortized cost, net of allowance
    1,899        6,526        32,332        10,825        25,545               77,127  
Fair value
    1,899        6,455        30,579        9,433        21,707               70,073  
Total carrying value of securities
  $   25,575      $   42,210      $   82,699      $   40,141      $   74,711      $   52,887      $   318,223  
 
(1)   Actual maturities may differ from contractual maturities shown above as borrowers may have the right to extend or prepay obligations with or without penalties.
(2)   Trading securities and FVOCI securities are recorded at fair value. Amortized cost securities, included in Investment securities, are recorded at amortized cost and presented net of allowance for credit losses.
(3)   Primarily composed of corporate debt, supra-national debt, and commercial paper.
(4)   The weighted average yield is derived using the contractual interest rate and the carrying value at the end of the year for the respective securities.
(5)   Certain equity securities that are not held-for-trading purposes are designated as FVOCI.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            175

Note 4    Securities
(continued)
 
Unrealized gains and losses on securities at FVOCI
(1), (2)
 
          As at      
   
October 31, 2023
          October 31, 2022  
                   
(Millions of Canadian dollars)
 
Cost/
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Fair value
           Cost/
Amortized
cost
    Gross
unrealized
gains
    Gross
unrealized
losses
    Fair
value
 
Debt issued or guaranteed by:
                                                                       
Canadian government
                                                                       
Federal
 
$
6,609
 
 
$
1
 
 
$
(351
 
$
6,259
 
          $ 4,081     $ 1     $ (301   $ 3,781  
Provincial and municipal
 
 
3,396
 
 
 
2
 
 
 
(650
 
 
2,748
 
            2,685       6       (567     2,124  
U.S. federal, state, municipal and agencies
 
 
75,326
 
 
 
343
 
 
 
(2,374
 
 
73,295
 
            46,034       343       (2,019     44,358  
Other OECD government
 
 
6,200
 
 
 
1
 
 
 
(9
 
 
6,192
 
            5,154       7       (17     5,144  
Mortgage-backed securities
 
 
2,762
 
 
 
 
 
 
(61
 
 
2,701
 
            2,985       1       (98     2,888  
Asset-backed securities
                                                                       
CDO
 
 
8,308
 
 
 
3
 
 
 
(46
 
 
8,265
 
            7,741       3       (220     7,524  
Non-CDO securities
 
 
444
 
 
 
2
 
 
 
(5
 
 
441
 
            547             (23     524  
Corporate debt and other debt
 
 
27,774
 
 
 
44
 
 
 
(95
 
 
27,723
 
            25,852       51       (183     25,720  
Equities
 
 
493
 
 
 
357
 
 
 
(8
 
 
842
 
 
 
 
 
    551       284       (7     828  
 
 
$
131,312
 
 
$
753
 
 
$
(3,599
 
$
  128,466
 
 
 
 
 
  $ 95,630     $ 696     $ (3,435   $   92,891  
 
(1)   Excludes $91,113 million of held-to-collect securities as at October 31, 2023 that are carried at amortized cost, net of allowance for credit losses (October 31, 2022 – $77,127 million).
(2)   Gross unrealized gains and losses includes $(33) million of allowance for credit losses on debt securities at FVOCI as at October 31, 2023 (October 31, 2022 – $(19) million) recognized in income and Other components of equity.
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.
Allowance for credit losses – securities at FVOCI
(1)
 
    
For the year ended
 
   
October 31, 2023
         
October 31, 2022
 
   
Performing
         
Impaired
                Performing           Impaired        
                       
(Millions of Canadian dollars)  
Stage 1
   
Stage 2
          
Stage 3 
(2)
   
Total
           Stage 1     Stage 2            Stage 3 (2)     Total  
Balance at beginning of period
 
$
3
 
 
$
1
 
         
$
(23
 
$
(19
          $ 2     $ 1             $ (12   $ (9
Provision for credit losses
                                                                                       
Transfers to stage 1
 
 
1
 
 
 
(1
         
 
 
 
 
 
            1       (1                    
Transfers to stage 2
 
 
 
 
 
 
         
 
 
 
 
 
                                       
Transfers to stage 3
 
 
 
 
 
 
         
 
 
 
 
 
                                       
Purchases
 
 
7
 
 
 
 
         
 
 
 
 
7
 
            3                           3  
Sales and maturities
 
 
(2
 
 
 
         
 
 
 
 
(2
            (1                         (1
Changes in risk, parameters and exposures
 
 
(5
 
 
 
         
 
(17
 
 
(22
            (2     1               (10     (11
Exchange rate and other
 
 
 
 
 
 
 
 
 
 
 
 
3
 
 
 
3
 
 
 
 
 
             
 
 
 
    (1     (1
Balance at end of period
 
$
   4
 
 
$
 
 
 
 
 
 
$
(37
 
$
    (33
 
 
 
 
  $ 3     $ 1    
 
 
 
  $ (23   $   (19
 
(1)   Expected credit losses on debt securities at FVOCI are not separately recognized on the Consolidated Balance Sheets as the related securities are recorded at fair value. The cumulative amount of credit losses recognized in income is presented in Other components of equity.
(2)   Reflects changes in the allowance for purchased credit impaired securities.
 
176            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Allowance for credit losses – securities at amortized cost
 
     For the year ended  
   
October 31, 2023
          October 31, 2022  
   
Performing
          
Impaired
                 Performing            Impaired         
                       
(Millions of Canadian dollars)  
Stage 1
   
Stage 2
           
Stage 3
    
Total
           Stage 1     Stage 2             Stage 3      Total  
Balance at beginning of period
 
$
8
 
 
$
14
 
          
$
 
  
$
22
 
          $ 5     $ 18              $      $ 23  
Provision for credit losses
                                                                                           
Transfers to stage 1
 
 
 
 
 
 
          
 
 
  
 
 
                                         
Transfers to stage 2
 
 
 
 
 
 
          
 
 
  
 
 
                                         
Transfers to stage 3
 
 
 
 
 
 
          
 
 
  
 
 
                                         
Purchases
 
 
10
 
 
 
 
          
 
 
  
 
10
 
            11                             11  
Sales and maturities
 
 
(1
 
 
 
          
 
 
  
 
(1
            (1                           (1
Changes in risk, parameters and exposures
 
 
(9
 
 
 
          
 
 
  
 
(9
            (7     (6                     (13
Exchange rate and other
 
 
 
 
 
1
 
 
 
 
 
  
 
 
  
 
1
 
 
 
 
 
          2    
 
 
 
            2  
Balance at end of period
 
$
     8
 
 
$
    15
 
 
 
 
 
  
$
 
  
$
  23
 
 
 
 
 
  $ 8     $ 14    
 
 
 
   $      $     22  
Credit risk exposure by internal risk rating
The following table presents the fair value of debt securities at FVOCI and gross carrying amount of securities at amortized cost. Risk ratings are based on internal ratings used in the measurement of expected credit losses, as at the reporting date, as outlined in the internal ratings maps in the Credit risk section of Management’s Discussion and Analysis.
 
            As at           
   
October 31, 2023
          October 31, 2022  
   
Performing
          
Impaired
                 Performing            Impaired         
                       
(Millions of Canadian dollars)  
Stage 1
    
Stage 2
           
Stage 3 
(1)
    
Total
           Stage 1      Stage 2             Stage 3 (1)      Total  
Investment securities
                                                                                             
Securities at FVOCI
                                                                                             
Investment grade
 
$
126,732
 
  
$
1
 
          
$
 
  
$
126,733
 
          $ 91,177      $ 56              $      $ 91,233  
Non-investment grade
 
 
742
 
  
 
 
          
 
 
  
 
742
 
            680                              680  
Impaired
 
 
 
  
 
 
 
 
 
 
  
 
149
 
  
 
149
 
 
 
 
 
              
 
 
 
     150        150  
   
 
  127,474
 
  
 
1
 
          
 
149
 
  
 
127,624
 
            91,857        56                150        92,063  
Items not subject to impairment
(2)
 
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
842
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
     828  
 
 
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
$
  128,466
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
   $ 92,891  
Securities at amortized cost
                                                                                             
Investment grade
 
$
89,947
 
  
$
 
          
$
 
  
$
89,947
 
          $ 76,035      $              $      $ 76,035  
Non-investment grade
 
 
990
 
  
 
199
 
          
 
 
  
 
1,189
 
            898        216                       1,114  
Impaired
 
 
 
  
 
 
 
 
 
 
  
 
 
  
 
 
 
 
 
 
              
 
 
 
             
   
 
90,937
 
  
 
199
 
          
 
 
  
 
91,136
 
            76,933        216                       77,149  
Allowance for credit losses
 
 
8
 
  
 
15
 
 
 
 
 
  
 
 
  
 
23
 
 
 
 
 
    8        14    
 
 
 
            22  
 
 
$
90,929
 
  
$
  184
 
 
 
 
 
  
$
 
  
$
91,113
 
 
 
 
 
  $   76,925      $ 202    
 
 
 
   $      $   77,127  
 
(1)   Reflects $149 million of purchased credit impaired securities (October 31, 2022 – $150 million).
(2)   Investment securities at FVOCI not subject to impairment represent equity securities designated as FVOCI.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            177

Note 5    Loans and allowance for credit losses
Loans by geography and portfolio net of allowance
 

  
 
As at October 31, 2023
 
(Millions of Canadian dollars)
 
Canada
 
 
United
States
 
 
Other
International
 
 
Total
 
 
Allowance for
loan losses 
(1)
 
 
Total net
of allowance
 
Retail
(2)
 
 
 
 
 
 
Residential mortgages
 
$
397,605
 
 
$
33,683
 
 
$
3,213
 
 
$
434,501
 
 
$
(481
 
$
434,020
 
Personal
 
 
79,705
 
 
 
15,751
 
 
 
3,278
 
 
 
98,734
 
 
 
(1,145
 
 
97,589
 
Credit cards
(3)
 
 
22,140
 
 
 
624
 
 
 
271
 
 
 
23,035
 
 
 
(1,013
 
 
22,022
 
Small business
(4)
 
 
13,681
 
 
 
 
 
 
 
 
 
13,681
 
 
 
(180
 
 
13,501
 
Wholesale
(2), (5)
 
 
121,762
 
 
 
119,067
 
 
 
46,997
 
 
 
287,826
 
 
 
(2,185
 
 
285,641
 
Total loans
 
$
634,893
 
 
$
169,125
 
 
$
53,759
 
 
$
857,777
 
 
$
(5,004
 
$
852,773
 
Undrawn loan commitments – Retail
 
 
277,863
 
 
 
5,054
 
 
 
3,173
 
 
 
286,090
 
 
 
(152
       
Undrawn loan commitments – Wholesale
 
 
128,967
 
 
 
247,881
 
 
 
84,633
 
 
 
461,481
 
 
 
(136
 
 
 
 
                                                 
     As at October 31, 2022  
             
(Millions of Canadian dollars)
  Canada     United
States
    Other
International
    Total     Allowance for
loan losses
(1)
    Total net
of allowance
 
Retail
(2)
                                               
Residential mortgages
  $ 383,797     $ 31,956     $ 3,043     $ 418,796     $ (432   $ 418,364  
Personal
    79,422       14,888       3,399       97,709       (856     96,853  
Credit cards
(3)
    19,778       558       241       20,577       (849     19,728  
Small business
(4)
    12,669                   12,669       (181     12,488  
Wholesale
(2), (5)
    108,916       114,795       50,256       273,967       (1,435     272,532  
Total loans
  $   604,582     $   162,197     $ 56,939     $   823,718     $ (3,753   $ 819,965  
Undrawn loan commitments – Retail
    258,115       4,630       2,212       264,957       (243        
Undrawn loan commitments – Wholesale
    118,928       225,113       81,194       425,235       (135  
 
 
 
 
(1)   Excludes allowance for loans measured at FVOCI of $6 million (October 31, 2022 – $5 million).
(2)   Geographic information is based on residence of the borrower.
(3)   The credit cards business is managed as a single portfolio and includes both consumer and business cards.
(4)   Includes small business exposure managed on a pooled basis.
(5)   Includes small business exposure managed on an individual client basis.
Loans maturity and rate sensitivity
 
    
As at October 31, 2023
 
   
Maturity term
(1)
         
Rate sensitivity
       
                 
(Millions of Canadian dollars)
 
Under
1 year
(2)
   
1 to 5
years
   
Over 5
years
   
Total
   
Floating
   
Fixed
Rate
   
Non-rate-
sensitive
   
Total
 
Retail
 
$
276,720
 
 
$
249,210
 
 
$
44,021
 
 
$
569,951
 
 
$
183,604
 
 
$
378,656
 
 
$
7,691
 
 
$
569,951
 
Wholesale
 
 
236,126
 
 
 
39,358
 
 
 
12,342
 
 
 
287,826
 
 
 
53,655
 
 
 
232,024
 
 
 
2,147
 
 
 
287,826
 
Total loans
 
$
512,846
 
 
$
288,568
 
 
$
56,363
 
 
$
857,777
 
 
$
237,259
 
 
$
610,680
 
 
$
9,838
 
 
$
857,777
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 

   
 
(5,004
)
 
 
 
 
 
 
 
 
 
 
 

   
 
(5,004
)
Total loans net of allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
$
852,773
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
852,773
 
       
    
As at October 31, 2022
 
   
Maturity term
(1)
         
Rate sensitivity
       
                 
(Millions of Canadian dollars)
 
Under 1
year
(2)
   
1 to 5
years
   
Over 5
years
   
Total
   
Floating
   
Fixed
Rate
   
Non-rate-

sensitive
   
Total
 
Retail
  $ 277,302     $ 226,793     $ 45,656     $ 549,751     $ 199,414     $ 342,087     $ 8,250     $ 549,751  
Wholesale
    226,813       35,802       11,352       273,967       46,660       225,123       2,184       273,967  
Total loans
  $   504,115     $   262,595     $   57,008     $   823,718     $   246,074     $   567,210     $ 10,434     $   823,718  
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
    (3,753  
 
 
 
 
 
 
 
 
 
 
 
    (3,753
Total loans net of allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
  $ 819,965    
 
 
 
 
 
 
 
 
 
 
 
  $ 819,965  
 
(1)   Generally, based on the earlier of contractual repricing or maturity date.
(2)   Includes variable rate loans that can be repriced at the clients’ discretion without penalty.
 
178            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Allowance for credit losses
 
     For the year ended  
   
October 31, 2023
          October 31, 2022  
                       
(Millions of Canadian dollars)  
Balance at
beginning
of period
   
Provision
for credit
losses
   
Net
write-offs 
(1)
   
Exchange
rate and
other
   
Balance
at end
of period
           Balance at
beginning
of period
    Provision
for credit
losses
    Net
write-offs (1)
    Exchange
rate and
other
    Balance
at end
of period
 
Retail
                                                                                       
Residential mortgages
 
$
432
 
 
$
74
 
 
$
(17
 
$
(8
 
$
481
 
          $ 416     $ 27     $ (24   $ 13     $ 432  
Personal
 
 
1,043
 
 
 
593
 
 
 
(404
 
 
(4
 
 
1,228
 
            1,079       211       (248     1       1,043  
Credit cards
 
 
893
 
 
 
636
 
 
 
(460
 
 
 
 
 
1,069
 
            875       348       (332     2       893  
Small business
 
 
194
 
 
 
43
 
 
 
(39
 
 
(4
 
 
194
 
            177       31       (23     9       194  
Wholesale
 
 
1,574
 
 
 
1,145
 
 
 
(293
 
 
(100
 
 
2,326
 
            1,797       (90     (136     3       1,574  
Customers’ liability under
acceptances
 
 
45
 
 
 
5
 
 
 
 
 
 
 
 
 
50
 
 
 
 
 
    75       (30                 45  
 
 
$
4,181
 
 
$
  2,496
 
 
$
  (1,213
 
$
(116
 
$
  5,348
 
 
 
 
 
  $ 4,419     $ 497     $ (763   $ 28     $   4,181  
Presented as:
                                                                                       
Allowance for loan losses
 
$
3,753
 
                         
$
5,004
 
          $ 4,089                             $ 3,753  
Other liabilities – Provisions
 
 
     378
 
 
 
           
 
 
 
           
 
 
 
           
 
 
 
288
 
            241    
 
           
 
 
 
           
 
 
 
           
 
         378  
Customers’ liability under acceptances
 
 
45
 
                         
 
50
 
            75                               45  
Other components of equity
 
 
5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6
 
 
 
 
 
    14    
 
 
 
 
 
 
 
 
 
 
 
    5  
 
(1)   Loans written-off are generally subject to continued collection efforts for a period of time following write-off. The contractual amount outstanding on loans written-off during the year ended October 31, 2023 that are no longer subject to enforcement activity was $139 million (October 31, 2022 – $53 million).
The following table reconciles the opening and closing allowance for each major product of loans and commitments as determined by our modelled, scenario-weighted allowance and the application of expert credit judgment as applicable. Reconciling items include the following:
 
Model changes, which generally comprise the impact of significant changes to the quantitative models used to estimate expected credit losses and any staging impacts that may arise.
 
Transfers between stages, which are presumed to occur before any corresponding remeasurements of the allowance.
 
Originations, which reflect the allowance related to assets newly recognized during the period, including those assets that were derecognized following a modification of terms.
 
Maturities, which reflect the allowance related to assets derecognized during the period without a credit loss being incurred, including those assets that were derecognized following a modification of terms.
 
Changes in risk, parameters and exposures, which comprise the impact of changes in model inputs or assumptions, including changes in forward-looking macroeconomic conditions; partial repayments and additional draws on existing facilities; changes in the measurement following a transfer between stages; and unwinding of the time value discount due to the passage of time in Stage 1 and Stage 2.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            179

Note 5    Loans and allowance for credit losses
(continued)
 
Allowance for credit losses – Retail and wholesale loans
 
     For the year ended  
   
October 31, 2023
          October 31, 2022  
   
Performing
         
Impaired
                Performing           Impaired        
                       
(Millions of Canadian dollars)  
Stage 1
   
Stage 2
          
Stage 3
   
Total
           Stage 1     Stage 2            Stage 3     Total  
Residential mortgages
                                                                                       
Balance at beginning of period
 
$
235
 
 
$
65
 
         
$
132
 
 
$
432
 
          $ 186     $ 92             $ 138     $ 416  
Provision for credit losses
                                                                                       
Model changes
 
 
 
 
 
 
         
 
 
 
 
 
            (21     10                     (11
Transfers to stage 1
 
 
95
 
 
 
(95
         
 
 
 
 
 
            113       (98             (15      
Transfers to stage 2
 
 
(26
 
 
38
 
         
 
(12
 
 
 
            (14     23               (9      
Transfers to stage 3
 
 
(2
 
 
(13
         
 
15
 
 
 
 
            (2     (25             27        
Originations
 
 
89
 
 
 
 
         
 
 
 
 
89
 
            159                           159  
Maturities
 
 
(17
 
 
(9
         
 
 
 
 
(26
            (23     (9                   (32
Changes in risk, parameters and exposures
 
 
(152
 
 
103
 
         
 
60
 
 
 
11
 
            (167     68               10       (89
Write-offs
 
 
 
 
 
 
         
 
(30
 
 
(30
                                (38     (38
Recoveries
 
 
 
 
 
 
         
 
13
 
 
 
13
 
                                14       14  
Exchange rate and other
 
 
1
 
 
 
1
 
 
 
 
 
 
 
(10
 
 
(8
 
 
 
 
    4       4    
 
 
 
    5       13  
Balance at end of period
 
$
223
 
 
$
90
 
 
 
 
 
 
$
168
 
 
$
481
 
 
 
 
 
  $ 235     $ 65    
 
 
 
  $ 132     $ 432  
                       
Personal
                                                                                       
Balance at beginning of period
 
$
285
 
 
$
661
 
         
$
97
 
 
$
1,043
 
          $ 422     $ 569             $ 88     $ 1,079  
Provision for credit losses
                                                                                       
Model changes
 
 
 
 
 
 
         
 
 
 
 
 
            (3                         (3
Transfers to stage 1
 
 
696
 
 
 
(695
         
 
(1
 
 
 
            609       (607             (2      
Transfers to stage 2
 
 
(88
 
 
90
 
         
 
(2
 
 
 
            (120     121               (1      
Transfers to stage 3
 
 
(1
 
 
(57
         
 
58
 
 
 
 
            (2     (47             49        
Originations
 
 
103
 
 
 
 
         
 
 
 
 
103
 
            106                           106  
Maturities
 
 
(45
 
 
(112
         
 
 
 
 
(157
            (70     (99                   (169
Changes in risk, parameters and exposures
 
 
(671
 
 
906
 
         
 
412
 
 
 
647
 
            (660     724               213       277  
Write-offs
 
 
 
 
 
 
         
 
(518
 
 
(518
                                (374     (374
Recoveries
 
 
 
 
 
 
         
 
114
 
 
 
114
 
                                126       126  
Exchange rate and other
 
 
1
 
 
 
 
 
 
 
 
 
 
(5
 
 
(4
 
 
 
 
    3          
 
 
 
    (2     1  
Balance at end of period
 
$
280
 
 
$
793
 
 
 
 
 
 
$
155
 
 
$
1,228
 
 
 
 
 
  $ 285     $ 661    
 
 
 
  $ 97     $ 1,043  
                       
Credit cards
                                                                                       
Balance at beginning of period
 
$
177
 
 
$
716
 
         
$
 
 
$
893
 
          $ 233     $ 642             $     $ 875  
Provision for credit losses
                                                                                       
Model changes
 
 
 
 
 
 
         
 
 
 
 
 
            (2                         (2
Transfers to stage 1
 
 
539
 
 
 
(539
         
 
 
 
 
 
            495       (495                    
Transfers to stage 2
 
 
(101
 
 
101
 
         
 
 
 
 
 
            (95     95                      
Transfers to stage 3
 
 
(2
 
 
(394
         
 
396
 
 
 
 
            (2     (325             327        
Originations
 
 
13
 
 
 
 
         
 
 
 
 
13
 
            10                           10  
Maturities
 
 
(6
 
 
(33
         
 
 
 
 
(39
            (5     (29                   (34
Changes in risk, parameters and exposures
 
 
(417
 
 
1,015
 
         
 
64
 
 
 
662
 
            (458     826               6       374  
Write-offs
 
 
 
 
 
 
         
 
(650
 
 
(650
                                (503     (503
Recoveries
 
 
 
 
 
 
         
 
190
 
 
 
190
 
                                171       171  
Exchange rate and other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    1       2    
 
 
 
    (1     2  
Balance at end of period
 
$
203
 
 
$
866
 
 
 
 
 
 
$
 
 
$
1,069
 
 
 
 
 
  $ 177     $ 716    
 
 
 
  $     $ 893  
                       
Small business
                                                                                       
Balance at beginning of period
 
$
73
 
 
$
73
 
         
$
48
 
 
$
194
 
          $ 88     $ 55             $ 34     $ 177  
Provision for credit losses
                                                                                       
Model changes
 
 
 
 
 
 
         
 
 
 
 
 
                                       
Transfers to stage 1
 
 
39
 
 
 
(39
         
 
 
 
 
 
            27       (27                    
Transfers to stage 2
 
 
(14
 
 
14
 
         
 
 
 
 
 
            (17     17                      
Transfers to stage 3
 
 
(1
 
 
(10
         
 
11
 
 
 
 
            (1     (4             5        
Originations
 
 
36
 
 
 
 
         
 
 
 
 
36
 
            32                           32  
Maturities
 
 
(18
 
 
(21
         
 
 
 
 
(39
            (22     (24                   (46
Changes in risk, parameters and exposures
 
 
(48
 
 
44
 
         
 
50
 
 
 
46
 
            (43     50               38       45  
Write-offs
 
 
 
 
 
 
         
 
(50
 
 
(50
                                (32     (32
Recoveries
 
 
 
 
 
 
         
 
11
 
 
 
11
 
                                9       9  
Exchange rate and other
 
 
3
 
 
 
5
 
 
 
 
 
 
 
(12
 
 
(4
 
 
 
 
    9       6    
 
 
 
    (6     9  
Balance at end of period
 
$
70
 
 
$
66
 
 
 
 
 
 
$
58
 
 
$
194
 
 
 
 
 
  $ 73     $ 73    
 
 
 
  $ 48     $ 194  
                       
Wholesale
                                                                                       
Balance at beginning of period
 
$
597
 
 
$
585
 
         
$
392
 
 
$
1,574
 
          $ 566     $ 794             $ 437     $ 1,797  
Provision for credit losses
                                                                                       
Model changes
 
 
 
 
 
 
         
 
 
 
 
 
            (14     (3                   (17
Transfers to stage 1
 
 
216
 
 
 
(215
         
 
(1
 
 
 
            415       (411             (4      
Transfers to stage 2
 
 
(87
 
 
89
 
         
 
(2
 
 
 
            (78     80               (2      
Transfers to stage 3
 
 
(10
 
 
(60
         
 
70
 
 
 
 
            (3     (62             65        
Originations
 
 
651
 
 
 
 
         
 
 
 
 
651
 
            641                           641  
Maturities
 
 
(448
 
 
(270
         
 
 
 
 
(718
            (439     (345                   (784
Changes in risk, parameters and exposures
 
 
(153
 
 
647
 
         
 
718
 
 
 
1,212
 
            (504     503               71       70  
Write-offs
 
 
 
 
 
 
         
 
(324
 
 
(324
                                (202     (202
Recoveries
 
 
 
 
 
 
         
 
31
 
 
 
31
 
                                66       66  
Exchange rate and other
 
 
8
 
 
 
9
 
 
 
 
 
 
 
(117
 
 
(100
 
 
 
 
    13       29    
 
 
 
    (39     3  
Balance at end of period
 
$
774
 
 
$
785
 
 
 
 
 
 
$
767
 
 
$
2,326
 
 
 
 
 
  $ 597     $ 585    
 
 
 
  $ 392     $ 1,574  
 
180            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Key inputs and assumptions
The measurement of expected credit losses is a complex calculation that involves a significant number of interrelated inputs and assumptions and the allowance is not sensitive to any one single factor. The key drivers of changes in expected credit losses include the following:
   
Changes in the credit quality of the borrower or instrument, primarily reflected in changes in internal risk ratings;
   
Changes in forward-looking macroeconomic conditions, specifically the macroeconomic variables to which our models are calibrated, which are those most closely correlated with credit losses in the relevant portfolio;
   
Changes in scenario design and the weight assigned to each scenario; and
   
Transfers between stages, which can be triggered by changes to any of the above inputs.
To reflect relevant risk factors not captured in our modelled results, we applied expert credit judgment in determining the measurement of our weighted allowance for credit losses. The measurement of expected credit losses, including scenario design and weightings, determining significant increases in credit risk since origination and application of expert credit judgment, is overseen by a senior management committee that includes representation from Finance, Group Risk Management and Economics.
Internal risk ratings
Internal risk ratings are assigned according to the risk management framework outlined under the headings Wholesale credit risk and Retail credit risk of the Credit risk section of Management’s Discussion and Analysis. Changes in internal risk ratings are primarily reflected in the PD parameters, which are estimated based on our historical loss experience at the relevant risk segment or risk rating level, adjusted for forward-looking information.
Scenario design and weightings
Our estimation of expected credit losses in Stage 1 and Stage 2 considers five distinct future macroeconomic scenarios. Scenarios are designed to capture a wide range of possible outcomes and are weighted according to our expectation of the relative likelihood of the range of outcomes that each scenario represents at the reporting date. We weight each scenario to take into account historical frequency, current trends, and forward-looking conditions which will change over time. Scenario weightings take into consideration the extent to which the base case scenario includes both favourable and unfavourable economic expectations, and upside and downside risks to the base scenario materializing in the future. The base case scenario is based on forecasts of the expected rate, value or yield for each relevant macroeconomic variable. The upside and downside scenarios are set by adjusting our base projections to construct reasonably possible scenarios and weightings that are more optimistic and pessimistic, respectively, than the base case. Two additional downside scenarios capture the non-linear nature of potential credit losses across our portfolios. When the economy is at or near equilibrium, the severity of the downside scenario generally reflects an adverse event typical for a business cycle and both the non-linear downside scenarios reflect an outcome that is materially more adverse than the downside scenario.
The impact of each of our five scenarios varies across our portfolios given the portfolios have different sensitivities to movements in each macroeconomic variable. Our scenario weights are unchanged relative to October 31, 2022 to reflect continued uncertainty and downside risks that may drive recession outcomes that are more severe than contemplated in our base scenario.
The impact of weighting these multiple scenarios increased our ACL on performing loans, relative to our base scenario, by $868 million at October 31, 2023 (October 31, 2022 – $738 million).
Forward looking macroeconomic variables
The PD, LGD and EAD inputs used to estimate Stage 1 and Stage 2 credit loss allowances are modelled based on the macroeconomic variables (or changes in macroeconomic variables) that are most closely correlated with credit losses in the relevant portfolio. Each macroeconomic scenario used in our expected credit loss calculation includes a projection of all relevant macroeconomic variables used in our models for a five year horizon, reverting to long-run averages generally within the 2 to 5 year period. Depending on their usage in the models, macroeconomic variables are projected at a country, province/state or more granular level. These include one or more of the variables described below, which differ by portfolio and region.
Our allowance for credit losses reflects our economic outlook as at October 31, 2023. Subsequent changes to this forecast and related estimates will be reflected in our allowance for credit losses in future periods.
Our base scenario reflects rising unemployment rates, high central bank policy interest rates and elevated but declining inflation, which result in mild recessions in Canada in the second half of calendar 2023 and the U.S. in the first half of calendar 2024. Expectations are that there will be no further increases in central bank interest rates in Canada and the U.S. Our base scenario also reflects commercial real estate price declines in the near term.
Downside scenarios, including two additional and more severe downside scenarios designed for the energy and real estate sectors, reflect the possibility of a more severe macroeconomic shock beginning in calendar Q1 2024 relative to our base scenario. In these scenarios, conditions are expected to deteriorate from calendar Q4 2023 levels for up to 18 months, followed by a recovery for the remainder of the period. These scenarios assume monetary policy responses that return the economy to a long-run, sustainable growth rate within the forecast period. The possibility of a deeper recession and a more prolonged recovery as compared to our base scenario, including further monetary policy responses to elevated inflation rates which may increase credit risk, is reflected in our general downside scenario.
The upside scenario reflects slightly stronger economic growth than the base scenario, without prompting a further offsetting monetary policy response as compared to our base scenario, followed by a return to a long-run sustainable growth rate within the forecast period.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            181

Note 5    Loans and allowance for credit losses
(continued)
 
The following provides additional detail about our calendar quarter forecasts for certain key macroeconomic variables used in the models to estimate ACL:


 
Unemployment
– In our base forecast, calendar Q4 2023 unemployment rates are expected to rise to 5.9% in Canada and 4.0% in the U.S., peaking in Q2 2024 at 6.6% in Canada and in Q3 2024 at 4.7% in the U.S., then reverting to long run equilibrium levels by calendar Q2 and Q3 2026, respectively. 
 
 

  
 
 
Gross Domestic Product (GDP)
– In our base forecast, we expect Canadian GDP to continuously grow in calendar Q1 2024 and thereafter, while U.S. GDP growth is expected to experience a mild recession during the first half of calendar 2024 followed by continuous growth. GDP in calendar Q4 2024 is expected to be 1.6% and 0.1% above Q4 2023 levels in Canada and the U.S., respectively.
 
 

  
 
 
Oil price (West Texas Intermediate in US$)
– In our base forecast, we expect oil prices to average $81 per barrel over the next 12 months from calendar Q4 2023 and $67 per barrel in the following 2 to 5 years. The range of average prices in our alternative downside and upside scenarios is $28 to $103 per barrel for the next 12 months and $43 to $74 per barrel for the following 2 to 5 years. As at October 31, 2022, our base forecast included an average price of $88 per barrel for the next 12 months and $72 per barrel for the following 2 to 5 years.
 
 
Canadian housing price
index
– In our base forecast, we expect housing prices to increase by 1.6% over the next 12 months from calendar Q4 2023, with a compound annual growth rate of 5.0% for the following 2 to 5 years. The range of annual housing price growth (contraction) in our alternative real estate downside and upside scenarios is (30.0)% to 10.9% over the next 12 months and 4.2% to 9.6% for the following 2 to 5 years. As at October 31, 2022 our base forecast included housing price contraction of (1.0)% from calendar Q4 2022 for the next 12 months and housing price growth of 5.2% for the following 2 to 5 years.
 
182            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

The primary variables driving credit losses in our retail portfolios are Canadian unemployment rates, Canadian housing price index and Canadian GDP. The Canadian overnight interest rate also impacts our retail portfolios. Our wholesale portfolios are affected by all of the variables discussed above; however, the specific variables differ by sector. Other variables also impact our wholesale portfolios including, but not limited to, Canadian and U.S. 10 year BBB corporate bond credit spreads, Canadian and U.S. 10 year government bond yields, U.S. 10 year BBB corporate bond yield, Canadian consumer confidence index, Canadian and U.S. commercial real estate price indices, U.S. housing price index, and natural gas prices (Henry Hub).
Increases in the following macroeconomic variables will generally correlate with higher expected credit losses: Canadian and U.S. unemployment rates, Canadian overnight interest rates, Canadian and U.S. 10 year BBB corporate bond credit spreads, Canadian and U.S. 10 year government bond yields, and U.S. 10 year BBB corporate bond yield.
Increases in the following macroeconomic variables will generally correlate with lower expected credit losses: Canadian and U.S. housing price indices, Canadian and U.S. GDP, Canadian consumer confidence index, Canadian and U.S. commercial real estate price indices, and oil and natural gas prices.
Transfers between stages
Transfers between Stage 1 and Stage 2 are based on the assessment of significant increases in credit risk relative to initial recognition, as described in Note 2. The impact of moving from 12 months expected credit losses to lifetime expected credit losses, or vice versa, varies by product and is dependent on the expected remaining life at the date of the transfer. Stage transfers may result in significant fluctuations in expected credit losses.
The following table illustrates the impact of staging on our ACL by comparing our allowance if all performing loans were in Stage 1 to the actual ACL recorded on these assets.
 
           As at      
       
   
October 31, 2023
           October 31, 2022  
               
(Millions of Canadian dollars)  
ACL – All performing
loans in Stage 1
    
Impact of
staging
    
Stage 1 and 2
ACL
            ACL – All performing
loans in Stage 1
     Impact of
staging
     Stage 1 and 2
ACL
 
Performing loans
(1)
 
 
$  2,893
 
  
 
$  1,257
 
  
 
$  4,150
 
 
 
 
 
     $  2,373        $  1,094        $  3,467  
 
(1)   Represents loans and commitments in Stage 1 and Stage 2.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            183

Note 5    Loans and allowance for credit losses
(continued)
 

Credit risk exposure by internal risk rating
The following table presents the gross carrying amount of loans measured at amortized cost, and the full contractual amount of undrawn loan commitments subject to the impairment requirements of IFRS 9. Risk ratings are based on internal ratings used in the measurement of expected credit losses as at the reporting date, as outlined in the internal ratings maps for Wholesale and Retail facilities in the Credit risk section of Management’s Discussion and Analysis.
 
    
As at        
 
   
October 31, 2023
         
October 31, 2022
 
                   
(Millions of Canadian dollars)  
Stage 1
   
Stage 2
   
Stage 3 
(1)
   
Total
           Stage 1     Stage 2     Stage 3 (1)     Total  
Retail
                                                                       
Loans outstanding – Residential mortgages
                                                                       
Low risk
 
$
349,001
 
 
$
1,630
 
 
$
 
 
$
350,631
 
          $ 340,716     $ 2,573     $     $ 343,289  
Medium risk
 
 
19,126
 
 
 
1,610
 
 
 
 
 
 
20,736
 
            15,035       1,932             16,967  
High risk
 
 
1,582
 
 
 
4,927
 
 
 
 
 
 
6,509
 
            1,188       3,125             4,313  
Not rated
(2)
 
 
54,247
 
 
 
1,220
 
 
 
 
 
 
55,467
 
            51,915       1,304             53,219  
Impaired
 
 
 
 
 
 
 
 
682
 
 
 
682
 
 
 
 
 
                560       560  
 
 
 
423,956
 
 
 
9,387
 
 
 
682
 
 
 
434,025
 
 
 
 
 
    408,854       8,934       560       418,348  
Items not subject to impairment
(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
476
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    448  
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
$
434,501
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  $ 418,796  
Loans outstanding – Personal
                                                                       
Low risk
 
$
75,572
 
 
$
1,676
 
 
$
 
 
$
77,248
 
          $ 73,339     $ 2,575     $     $ 75,914  
Medium risk
 
 
5,587
 
 
 
2,915
 
 
 
 
 
 
8,502
 
            5,482       3,780             9,262  
High risk
 
 
477
 
 
 
2,088
 
 
 
 
 
 
2,565
 
            836       1,660             2,496  
Not rated
(2)
 
 
9,982
 
 
 
157
 
 
 
 
 
 
10,139
 
            9,733       104             9,837  
Impaired
 
 
 
 
 
 
 
 
280
 
 
 
280
 
 
 
 
 
                200       200  
Total
 
$
91,618
 
 
$
6,836
 
 
$
280
 
 
$
98,734
 
 
 
 
 
  $ 89,390     $ 8,119     $ 200     $ 97,709  
Loans outstanding – Credit cards
                                                                       
Low risk
 
$
16,331
 
 
$
135
 
 
$
 
 
$
16,466
 
          $ 15,088     $ 83     $     $ 15,171  
Medium risk
 
 
1,771
 
 
 
2,132
 
 
 
 
 
 
3,903
 
            1,418       1,911             3,329  
High risk
 
 
41
 
 
 
1,734
 
 
 
 
 
 
1,775
 
            39       1,255             1,294  
Not rated
(2)
 
 
856
 
 
 
35
 
 
 
 
 
 
891
 
 
 
 
 
    751       32             783  
Total
 
$
18,999
 
 
$
4,036
 
 
$
 
 
$
23,035
 
 
 
 
 
  $ 17,296     $ 3,281     $     $ 20,577  
Loans outstanding – Small business
                                                                       
Low risk
 
$
8,641
 
 
$
920
 
 
$
 
 
$
9,561
 
          $ 8,571     $ 838     $     $ 9,409  
Medium risk
 
 
2,238
 
 
 
936
 
 
 
 
 
 
3,174
 
            1,512       1,130             2,642  
High risk
 
 
99
 
 
 
592
 
 
 
 
 
 
691
 
            102       375             477  
Not rated
(2)
 
 
11
 
 
 
 
 
 
 
 
 
11
 
            3                   3  
Impaired
 
 
 
 
 
 
 
 
244
 
 
 
244
 
 
 
 
 
                138       138  
Total
 
$
10,989
 
 
$
2,448
 
 
$
244
 
 
$
13,681
 
 
 
 
 
  $ 10,188     $ 2,343     $ 138     $ 12,669  
Undrawn loan commitments – Retail
                                                                       
Low risk
 
$
266,209
 
 
$
610
 
 
$
 
 
$
266,819
 
          $ 247,620     $ 1,041     $     $ 248,661  
Medium risk
 
 
10,759
 
 
 
298
 
 
 
 
 
 
11,057
 
            9,021       246             9,267  
High risk
 
 
956
 
 
 
434
 
 
 
 
 
 
1,390
 
            876       367             1,243  
Not rated
(2)
 
 
6,686
 
 
 
138
 
 
 
 
 
 
6,824
 
 
 
 
 
    5,668       118             5,786  
Total
 
$
284,610
 
 
$
1,480
 
 
$
 
 
$
286,090
 
 
 
 
 
  $ 263,185     $ 1,772     $     $ 264,957  
Wholesale – Loans outstanding
                                                                       
Investment grade
 
$
89,037
 
 
$
416
 
 
$
 
 
$
89,453
 
          $ 88,513     $ 202     $     $ 88,715  
Non-investment grade
 
 
156,211
 
 
 
19,210
 
 
 
 
 
 
175,421
 
            145,908       15,758             161,666  
Not rated
(2)
 
 
10,968
 
 
 
238
 
 
 
 
 
 
11,206
 
            11,789       360             12,149  
Impaired
 
 
 
 
 
 
 
 
  2,498
 
 
 
2,498
 
 
 
 
 
                1,301       1,301  
Items not subject to impairment 
(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9,248
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    10,136  
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
$
287,826
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  $ 273,967  
Undrawn loan commitments –Wholesale
                                                                       
Investment grade
 
$
312,178
 
 
$
186
 
 
$
 
 
$
312,364
 
          $   284,481     $ 179     $     $ 284,660  
Non-investment grade
 
 
  130,994
 
 
 
  13,947
 
 
 
 
 
 
  144,941
 
            126,225         10,657             136,882  
Not rated
(2)
 
 
4,176
 
 
 
 
 
 
 
 
 
4,176
 
 
 
 
 
    3,692       1             3,693  
Total
 
$
447,348
 
 
$
14,133
 
 
$
 
 
$
461,481
 
 
 
 
 
  $ 414,398     $ 10,837     $     $   425,235  
 
(1)   As at October 31, 2023, 88% of credit-impaired loans were either fully or partially collateralized (October 31, 2022 – 88%). For details on the types of collateral held against credit-impaired assets and our policies on collateral, refer to the Credit risk mitigation section of Management’s Discussion and Analysis.
(2)   In certain cases where an internal risk rating is not assigned, we use other approved credit risk assessments or rating methodologies, policies and tools to manage our credit risk.
(3)   Items not subject to impairment are loans held at FVTPL.
 
184            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Loans past due but not impaired
(1), (2)
 
    
     As at       
 
   
October 31, 2023
       
October 31, 2022
 
               
(Millions of Canadian dollars)
 
30 to 89 days
   
90 days
and greater
   
Total
        30 to 89 days     90 days
and greater
    Total  
Retail
 
$
1,840
 
 
$
  208
 
 
$
2,048
 
      $   1,328     $   168     $ 1,496  
Wholesale
 
 
1,823
 
 
 
49
 
 
 
1,872
 
 
 
      1,279       2       1,281  
 
 
$
  3,663
 
 
$
257
 
 
$
  3,920
 
 
 
  $ 2,607     $ 170     $   2,777  
 
(1)   Excludes loans less than 30 days past due as they are not generally representative of the borrowers’ ability to meet their payment obligations.
(2)   Amounts presented may include loans past due as a result of administrative processes, such as mortgage loans on which payments are restrained pending payout due to sale or refinancing. Past due loans arising from administrative processes are not representative of the borrowers’ ability to meet their payment obligations.
 
Note 6    Significant acquisitions and disposition
Acquisitions
HSBC Bank Canada
On November 29, 2022, we entered into an agreement to acquire 100% of the common shares of HSBC Bank Canada (HSBC Canada) for an all-cash purchase price of $13.5 billion. HSBC Canada is a premier Canadian personal and commercial bank focused on globally connected clients. We will also purchase all of the existing preferred shares and subordinated debt of HSBC Canada held directly or indirectly by HSBC Holdings plc at par value ($2.1 billion as of September 30, 2023).
The agreement includes a locked box mechanism under which HSBC Canada’s earnings from June 30, 2022 to the closing date accrue to RBC and will be reflected in the acquired net assets on closing. Relatedly, we will pay an additional amount that accrues from August 30, 2023 to the closing date, which is calculated based on the all-cash purchase price for the common shares of HSBC Canada and the Canadian Overnight Repo Rate Average.
The transaction is expected to close in the first calendar quarter of 2024 and is subject to the satisfaction of customary closing conditions, including regulatory approvals. The results of the acquired business will be consolidated from the date of close.
Wealth Management
On September 27, 2022, we completed the acquisition of 100% of the issued share capital of Brewin Dolphin Holdings PLC (RBC Brewin Dolphin) via our subsidiary, RBC Wealth Management (Jersey) Holdings Limited. RBC Brewin Dolphin provides discretionary wealth management services in the U.K., Ireland and the Channel Islands. RBC Brewin Dolphin’s business gives us a platform to significantly transform our wealth management business in the U.K., Ireland and the Channel Islands, and provides us with the opportunity to position the combined businesses as a premier integrated wealth management provider to private and institutional clients.
Total consideration of £1,591 million ($2,341 million) as of the date of close consisted of £1,564 million ($2,302 million) in cash, as well as amounts related to share based compensation. Our purchase price allocation assigned $3,279 million to assets and $938 million to liabilities, including customer relationship intangible assets of $1,292 million and goodwill of $913 million, which is allocated to our International Wealth Management and Global Asset Management CGUs and is not deductible for tax purposes. Goodwill reflects the expected synergies from the combined businesses and the expected growth of the Wealth Management segment.
The results of the acquisition have been consolidated from the date of close and included in our Wealth Management segment.
Disposition
Wealth Management
On July 3, 2023, we completed the previously announced sale of the European asset servicing activities of RBC Investor Services
®
and its associated Malaysian centre of excellence to CACEIS, the asset servicing banking group of Crédit Agricole S.A. and Banco Santander, S.A. As a result of the transaction, we recorded a pre-tax gain on disposal of $69 million in Non-Interest income within the Wealth Management segment ($77 million after-tax). The completion of the sale of the business of the U.K. branch of RBC Investor Services Trust and the RBC Investor Services business in Jersey remains subject to customary closing conditions, including regulatory approvals. The disposal group consists of $2.6 billion of assets, primarily consisting of cash and due from banks, and $2.6 billion of liabilities, primarily consisting of deposits, and remains classified as held-for-sale, presented in Other assets and Other liabilities, respectively.
 
Note 7    Derecognition of financial assets
We enter into transactions in which we transfer financial assets such as loans or securities to structured entities or other third parties. The majority of assets transferred under repurchase agreements, securities lending agreements, and in our Canadian residential mortgage securitization transactions do not qualify for derecognition as we continue to be exposed to substantially all of the risks and rewards of the transferred assets, such as prepayment, credit, price, interest rate and foreign exchange risks.
Transferred financial assets not derecognized
Securitization of Canadian residential mortgage loans
We periodically securitize insured Canadian residential mortgage loans through the creation of MBS pools under the National Housing Act MBS (NHA MBS) program. All loans securitized under the NHA MBS program are required to be insured by the Canadian Mortgage and Housing Corporation (CMHC) or a third-party insurer. We require the borrower to pay for mortgage insurance when the loan amount is greater than 80% of the original appraised value of the property (LTV ratio). For residential mortgage loans securitized under this program with LTV ratios less than 80%, we are required to insure the mortgages at our own expense. Under the NHA MBS program, we are responsible for making all payments due on our issued MBS, regardless of whether we collect the necessary funds from the mortgagor or the insurer. When a borrower defaults on a mortgage, we submit a claim to the insurer if the amount recovered from the collection or foreclosure process is lower than the sum of the principal balance,

 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            185

Note 7    Derecognition of financial assets
(continued)
 
accrued interest and collection costs on the outstanding loan. The insurance claim process is managed by the insurance provider in accordance with the insurer’s policies and covers the entire unpaid loan balance plus generally up to 12 months of interest, selling costs and other eligible expenses. If an insurance claim is denied, a loss is recognized in Provision for credit losses in our Consolidated Statements of Income. The amount recorded as a loss is not significant to our Consolidated Financial Statements and no significant losses were incurred due to legal action arising from mortgage defaults during 2023 and 2022.
We sell the NHA MBS pools primarily to Canada Housing Trust, a government-sponsored structured entity under the Canada Mortgage Bond (CMB) program. The entity periodically issues CMBs, which are guaranteed by the government, and sells them to third-party investors. Proceeds of the CMB issuances are used by the entity to purchase the NHA MBS pools from eligible NHA MBS issuers who participate in the issuance of a particular CMB series. Our continuing involvement includes servicing the underlying residential mortgage loans we have securitized, either ourselves or through a third-party servicer. We also act as counterparty in interest rate swap agreements where we pay the entity the interest due to CMB investors and receive the interest on the underlying MBS and reinvested assets. As part of the swaps, we are also required to maintain a principal reinvestment account for principal payments received on the underlying mortgage loans to meet the repayment obligation upon maturity of the CMB. We reinvest the collected principal payments in permitted investments as outlined in the swap agreements.
We have determined that certain of the NHA MBS program loans transferred to the entity do not qualify for derecognition as we have not transferred substantially all of the risks and rewards of ownership. As a result, these transferred MBS continue to be classified as residential mortgage loans and recognized on our Consolidated Balance Sheets. The cash received for these transferred MBS is treated as a secured borrowing and a corresponding liability is recorded in Deposits – Business and government on our Consolidated Balance Sheets.
Securities sold under repurchase agreements and securities loaned
We also enter into transactions such as repurchase agreements and securities lending agreements where we transfer assets under agreements to repurchase them at a future date and retain substantially all of the risks and rewards associated with the assets. These transferred assets remain on our Consolidated Balance Sheets and are accounted for as collateralized borrowing transactions.
The following table provides information on the carrying amount and fair value of the transferred assets that did not qualify for derecognition, and their associated liabilities.
 
    
     As at
 
   
October 31, 2023
        October 31, 2022  
                   
(Millions of Canadian dollars)
 
Canadian
residential
mortgage
loans 
(1), (2)
   
Securities
sold under
repurchase
agreements 
(3)
   
Securities
loaned 
(3)
   
Total
         Canadian
residential
mortgage
loans 
(1), (2)
    Securities
sold under
repurchase
agreements 
(3)
    Securities
loaned 
(3)
    Total  
Carrying amount of transferred assets that do not qualify for derecognition
 
$
28,312
 
 
$
313,558
 
 
$
21,680
 
 
$
363,550
 
      $   32,812     $   258,615     $   15,332     $   306,759  
Carrying amount of associated liabilities
 
 
28,007
 
 
 
313,558
 
 
 
21,680
 
 
 
363,245
 
 
 
    32,177       258,615       15,332       306,124  
Fair value of transferred assets
 
$
  26,472
 
 
$
  313,558
 
 
$
  21,680
 
 
$
  361,710
 
      $ 31,174     $ 258,615     $ 15,332     $ 305,121  
Fair value of associated liabilities
 
 
26,780
 
 
 
313,558
 
 
 
21,680
 
 
 
362,018
 
 
 
    30,900       258,615       15,332       304,847  
Fair value of net position
 
$
(308
 
$
 
 
$
 
 
$
(308
 
 
  $ 274     $     $     $ 274  
 
(1)   Includes Canadian residential mortgage loans transferred primarily to Canada Housing Trust at the initial securitization and other permitted investments used for funding requirements after the initial securitization.
(2)   CMB investors have legal recourse only to the transferred assets, and do not have recourse to our general assets.
(3)   Does not include over-collateralization of assets pledged.
 
Note 8    Structured entities
In the normal course of business, we engage in a variety of financial transactions with structured entities to support our financing and investing needs as well as those of our clients. A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding control. Structured entities are generally created to achieve a narrow and well defined objective with restrictions around their ongoing activities. We consolidate a structured entity when we control the entity in accordance with our accounting policy as described in Note 2. In other cases, we may sponsor or have an interest in such an entity but may not consolidate it.
Consolidated structured entities
We consolidate the following structured entities, whose assets and liabilities are recorded on our Consolidated Balance Sheets. Third-party investors in these structured entities generally have recourse only to the assets of the related entity and do not have recourse to our general assets unless we breach our contractual obligations to those entities. In the ordinary course of business, the assets of each consolidated structured entity can generally only be used to settle the obligations of that entity.
Multi-seller conduits
We generally do not maintain ownership in the multi-seller conduits that we administer and generally do not have rights to, or control of, their assets. However, we issue asset-backed commercial paper (ABCP) through a multi-seller conduit that does not have an expected loss investor with substantive power to direct the significant operating activities of the conduit. This conduit is
 
186            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

consolidated because we have exposure to
variability
of returns from performance in the multi-seller arrangements through providing transaction-specific and program-wide liquidity, credit and loan facilities to the conduit and have decision-making power over the relevant activities. As of October 31, 2023, $1,316 million of financial assets held by the conduit w
ere
 included in Loans (October 31, 2022 – $1,826 million) and $1,194 million of ABCP issued by the conduit was included in Deposits (October 31, 2022 – $1,284 million) on our
Consolidated
Balance Sheets.
Credit card securitization vehicle
We securitize a portion of our credit card receivables through a structured entity on a revolving basis. The entity purchases
co-ownership
interests in a pool of credit card receivables and issues senior and subordinated term notes collateralized by that co-ownership interest in the underlying pool of credit card receivables. Investors who purchase the term notes have recourse only to that co-ownership interest in the underlying pool of credit card receivables.
We continue to service the credit card receivables and perform an administrative role for the entity. We also retain risk in the underlying pool of credit card receivables through our retained interest in the transferred assets, the cash reserve balance we fund from time to time, and also through certain subordinated notes which we retain. Additionally, we may own some senior notes as investments or for market-making activities and we act as counterparty to interest rate and cross currency swap agreements which hedge the entity’s interest rate and currency risk exposure.
We consolidate the structured entity because we have decision-making power over the timing and size of future issuances and other relevant activities which were predetermined by us at inception. We also obtain significant funding benefits and are exposed to variability from the performance of the underlying credit card receivables through our retained interest. As at October 31, 2023, $7 billion of notes issued by our credit card securitization vehicle were included in Deposits on our Consolidated Balance Sheets (October 31, 2022 – $6 billion).
Collateralized commercial paper vehicle
We established a funding vehicle that provides loans to us and finances those loans by issuing commercial paper to third-party investors. The structured entity’s commercial paper carries an equivalent credit rating to RBC because we are obligated to advance funds to the entity in the event there are insufficient funds from other sources to settle maturing commercial paper. We pledge collateral to secure the loans and are exposed to the market and credit risks of the pledged securities.
We consolidate the structured entity because we have decision-making power over the relevant activities, are the sole borrower from the structure, and are exposed to a majority of the residual ownership risks through the credit support provided. As at October 31, 2023, $17 billion of commercial paper issued by the vehicle was included in Deposits on our Consolidated Balance Sheets (October 31, 2022 – $14 billion).
Covered bonds
We periodically transfer mortgages to RBC Covered Bond Guarantor Limited Partnership (the Guarantor LP) to support funding activities and asset coverage requirements under our covered bonds program. The Guarantor LP was created to guarantee interest and principal payments under the covered bond program. The covered bonds guaranteed by the Guarantor LP are direct, unsecured and unconditional obligations of RBC; therefore, investors have a claim against the Bank which will continue if the covered bonds are not paid by the Bank and the mortgage assets in the Guarantor LP are insufficient to satisfy the obligations owing on the covered bonds. We act as general partner, limited partner, swap counterparty, lender and liquidity provider to the Guarantor LP, servicer for the underlying mortgages as well as the registered issuer of the covered bonds.
We consolidate the Guarantor LP as we have the decision-making power over the relevant activities through our role as general partner and are exposed to variability from the performance of the underlying mortgages. As at October 31, 2023, the total amount of mortgages transferred and outstanding was $100 billion (October 31, 2022 – $121 billion) and $50 billion of covered bonds were recorded as Deposits on our Consolidated Balance Sheets (October 31, 2022 – $43 billion).
Structured finance
We sell taxable and tax-exempt municipal bonds into Tender Option Bond (TOB) structures, which consist of a bond that is credit enhanced by us and purchased by a TOB trust. The TOB trust finances the purchase from us by issuing floating-rate certificates to short-term investors and a residual certificate that is purchased by us. We are the remarketing agent for the floating-rate certificates and provide a liquidity facility to the short-term investors which requires us to purchase any certificates tendered but not successfully remarketed. We credit enhance the bond purchased by the TOB trust with a letter of credit under which we are required to extend funding if there are any losses on the underlying bonds. We earn interest on the residual certificate and receive market-based fees for acting as remarketing agent and providing the liquidity facility and letter of credit.
We consolidate the TOB trust when we are the holder of the residual certificate as we have decision-making power over the relevant activities, including the selection of the underlying municipal bonds and the ability to terminate the structure, and are exposed to variability from the performance of the underlying municipal bonds. As at October 31, 2023, $5 billion of municipal bonds were included in Securities related to consolidated TOB structures (October 31, 2022 – $6 billion) and a corresponding $5 billion of floating-rate certificates were included in Deposits on our Consolidated Balance Sheets (October 31, 2022 – $7 billion).
We establish structured entities to acquire loans for the purposes of issuing term collateralized loan obligation (CLO) transactions and act as collateral manager. During the warehouse phase, we provide subordinated financing and, for certain term CLO transactions, act as the arranger and placement agent, and may provide senior warehouse financing. Proceeds from the sale of the term CLO are used to repay our warehouse financing. During the term CLO phase, we continue to provide subordinated financing, which serves as the first loss tranche that absorbs losses prior to the senior tranches, and may also directly invest in the other tranches.
We consolidate these CLO structures as we have decision-making power over the relevant activities of the entity, which include the initial selection and subsequent management of the underlying debt portfolio, and when our interests, including direct investment plus collateral management fees, indicate that we are acting as a principal. As at October 31, 2023
,
$493
 million of Cash and due from banks and $
1,675
million of Loans
related
to consolidated CLO structures (October 31, 2022 – $
108
million and $
1,410
million, respectively) and
 
$
1,706
 
million of Deposits representing the subordinated and senior tranches held by third parties (October 31, 2022 – $1,314 million) were recorded on our Consolidated Balance Sheets. 

Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            187

Note 8    Structured entities
(continued)
 
RBC managed investment funds
We are sponsors and investment managers of mutual and pooled funds, which give us the ability to direct the investment decisions of the funds. We consolidate those mutual and pooled funds in which our interests, which include direct investment in seed capital plus management or performance fees, indicate that we are acting as a principal. As at October 31, 2023, $400 million of Trading securities held in the consolidated funds (October 31, 2022 – $524 million) and $331 million of Other liabilities representing the fund units held by third parties (October 31, 2022 – $363 million) were recorded on our Consolidated Balance Sheets.
Unconsolidated structured entities
We have interests in certain structured entities that we do not consolidate but have recorded assets and liabilities on our Consolidated Balance Sheets related to our transactions and involvement with these entities.

The following table presents the assets and liabilities recorded on our Consolidated Balance Sheets and our maximum exposure to loss related to our interests in unconsolidated structured entities. It also presents the size of each class of unconsolidated structured entity, as measured by the total assets of the entities in which we have an interest.
 
    
As at October 31, 2023
 
             
(Millions of Canadian dollars)  
Multi-seller
conduits
(1)
   
Structured
finance
   
Non-RBC
managed
investment
funds
   
Third-party
securitization
vehicles
   
Other
   
Total
 
On-balance sheet assets
                                               
Securities
 
$
4
 
 
$
 
 
$
2,411
 
 
$
 
 
$
743
 
 
$
3,158
 
Loans
   
   
 
5,790
 
 
 
 
 
 
8,451
 
 
 
2,403
 
 
 
16,644
 
Derivatives
 
 
2
 
 
 
 
 
 
26
 
 
 
 
 
 
91
 
 
 
119
 
Other assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
365
 
 
 
365
 
 
 
$
6
 
 
$
5,790
 
 
$
2,437
 
 
$
8,451
 
 
$
3,602
 
 
$
20,286
 
On-balance sheet liabilities
                                               
Deposits
 
$
 
 
$
 
 
$

 
 
$
 
 
$
166

 
 
$
166
 
Derivatives
 
 
245
 
 
 
 
 
 
1
 
 
 
 
 
 
 
 
 
246
 
Other liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7
 
 
 
7
 
 
 
$
245
 
 
$
 
 
$
1
 
 
$
 
 
$
173
 
 
$
419
 
Maximum exposure to loss
(2)
 
$
54,715
 
 
$
10,580
 
 
$
3,068
 
 
$
14,863
 
 
$
5,595
 
 
$
88,821
 
Total assets of unconsolidated structured entities
 
$
53,641
 
 
$
31,037
 
 
$
440,924
 
 
$
81,028
 
 
$
461,919
 
 
$
1,068,549
 
             
                                              
    As at October 31, 2022  
             
(Millions of Canadian dollars)   Multi-seller
conduits
(1)
    Structured
finance
    Non-RBC
managed
investment
funds
    Third-party
securitization
vehicles
    Other     Total  
On-balance sheet assets
                                               
Securities
  $ 255     $     $ 3,089     $     $ 595     $ 3,939  
Loans
          5,334             8,494       2,487       16,315  
Derivatives
    25                         100       125  
Other assets
          6                   568       574  
 
  $ 280     $ 5,340     $ 3,089     $ 8,494     $ 3,750     $ 20,953  
On-balance sheet liabilities
                                               
Deposits
  $     $     $     $     $     $  
Derivatives
    171                               171  
Other liabilities
                                   
 
  $ 171     $     $     $     $     $ 171  
Maximum exposure to loss
(2)
  $ 48,260     $ 8,658     $ 3,758     $ 14,339     $ 5,523     $ 80,538  
Total assets of unconsolidated structured entities
  $ 47,289     $ 26,543     $ 548,320     $ 64,361     $ 554,573     $ 1,241,086  
 
(1)   Total assets of unconsolidated structured entities represent the maximum assets that may have to be purchased by the conduits under purchase commitments outstanding. Of the purchase commitments outstanding, the conduits have purchased financial assets totalling $37 billion as at October 31, 2023 (October 31, 2022 – $32 billion).
(2)
 
The maximum exposure to loss resulting from our interests in these entities consists mostly of investments, loans, fair value of derivatives, liquidity and credit enhancement facilities. The maximum exposure to loss of the multi-seller conduits is higher than the on-balance sheet assets primarily because of the notional amounts of the backstop liquidity and credit enhancement facilities. Refer to Note 24 for further details.
Below is a description of our involvement with each significant class of unconsolidated structured entity.
Multi-seller conduits
We administer multi-seller ABCP conduit programs. Multi-seller conduits primarily purchase financial assets from clients and finance those purchases by issuing ABCP.
In certain multi-seller conduit arrangements, we do not maintain any ownership of the multi-seller conduits that we administer and have no rights to, or control of, its assets. As the administrative agent, we earn a residual fee for providing services such as coordinating funding activities, transaction structuring, documentation, execution and monitoring. The ABCP issued by each multi-seller conduit is in the conduit’s own name with recourse to the financial assets owned by the multi-seller conduit, and is non-recourse to us except through our participation in liquidity and/or credit enhancement facilities.
We provide transaction-specific and program-wide liquidity facilities to the multi-seller conduits. In addition, we provide program-wide credit enhancement to the multi-seller conduits which obligate us to purchase assets or advance funds in the
 
188            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

event the multi-seller conduit does not otherwise have funds from other sources, such as from the liquidity facilities, to settle maturing ABCP. In some cases, we or another third party may provide transaction-specific credit enhancement which can take various forms. We receive market-based fees for providing these liquidity and credit facilities.
For certain transactions, we act as counterparty to various hedging contracts to facilitate our clients’ securitization of fixed rate and/or foreign currency denominated assets through the conduits. These may take the form of forward contracts, interest rate swaps or cross currency swaps. These derivatives expose us to foreign exchange and interest rate risks that are centrally managed by our foreign exchange trading and swap desks, respectively, and credit risk on the underlying assets that is mitigated by the credit enhancement described below.
Each transaction is structured with transaction-specific first loss protection provided by the third-party seller. This enhancement can take various forms, including but not limited to overcollateralization, excess spread, subordinated classes of financial assets, guarantees or letters of credit. The amount of this enhancement varies but is generally designed to cover a multiple of historical losses.
An unrelated third party (expected loss investor) absorbs losses, up to a maximum contractual amount, that may occur in the future on the assets in the multi-seller conduits before the multi-seller conduits’ debt holders and us. In return for assuming this multi-seller conduit first-loss position, each multi-seller conduit pays the expected loss investor a return commensurate with its risk position. The expected loss investor has substantive power to direct the majority of the activities which significantly impact the conduit’s economic performance, including initial selection and approval of the asset purchase commitments and liquidity facilities, approval of renewal and amendment of these transactions and facilities, sale or transfer of assets, ongoing monitoring of asset performance, mitigation of losses, and management of the ABCP liabilities.
We do not consolidate these multi-seller conduits as we do not control the conduits as noted above.
Structured finance
We participate in certain municipal bond TOB structures that we do not consolidate. These structures are similar to those consolidated municipal bond TOB structures described above; however, the residual certificates are held by third parties. We provide liquidity facilities for the benefit of floating-rate certificate holders which may be drawn if certificates are tendered but not able to be remarketed. For a portion of these trusts, we also provide a letter of credit for the underlying bonds held in the trust. We do not have decision-making power over the relevant activities of the structures; therefore, we do not consolidate these structures.
We provide senior warehouse financing to unaffiliated structured entities that are established by third parties to acquire loans for the purposes of issuing a term CLO transaction. Subordinated financing is provided during the warehouse phase by either the collateral manager or third-party investors. Subordinated financing serves as the first loss tranche which absorbs losses prior to ourselves as the senior lender. We act as the arranger and placement agent for the term CLO transaction. Proceeds from the sale of the term CLO are used to repay our senior warehouse financing, at which point we have no further involvement with the transaction. We do not consolidate these CLO structures as we do not have decision-making power over the relevant activities of the entity, which include the initial selection and subsequent management of the underlying debt portfolio.
We provide senior financing to unaffiliated structured entities that are established by third parties to acquire loans. Subordinated financing is provided by either the collateral manager or third-party investors. Subordinated financing serves as the first loss tranche which absorbs losses prior to ourselves as the senior lender. These facilities tend to be longer in term than the CLO warehouse facilities and benefit from credit enhancement generally designed to cover a multiple of historical losses. We do not consolidate these structures as we do not have
decision-making
power over the relevant activities of the entity, which include the initial selection and subsequent management of the underlying debt portfolio.
Non-RBC managed investment funds
We enter into fee-based equity derivative transactions with third parties including mutual funds, unit investment trusts and other investment funds. These transactions provide their investors with the desired exposure to reference funds, and we economically hedge our exposure to these derivatives by investing in those reference funds. We also act as custodian for several funds. We do not consolidate those reference funds that are managed by third parties as we do not have power to direct their investing activities.
We provide liquidity facilities to certain third-party investment funds. The funds issue unsecured variable-rate preferred shares and invest in portfolios of tax-exempt municipal bonds. Undrawn liquidity commitments expose us to the liquidity risk of the preferred shares and drawn commitments expose us to the credit risk of the underlying municipal bonds. We do not consolidate these third-party managed funds as we do not have power to direct their investing activities.
Third-party securitization vehicles
We hold interests in securitization vehicles that provide funding to certain third parties on whose behalf the entities were created. The activities of these entities are limited to the purchase and sale of specified financial assets from the sponsor. We, as well as other financial institutions, are obligated to provide funding up to our maximum commitment level and are exposed to credit losses on the underlying assets after various credit enhancements. Enhancements can take various forms, including but not limited to overcollateralization, excess spread, subordinated classes of financial assets, guarantees or letters of credit. The amount of this enhancement varies but is generally designed to cover a multiple of historical losses. We do not consolidate these entities as we do not have decision-making power over the relevant activities, including the entities’ investing and financing activities.
Other
Other unconsolidated structured entities include managed investment funds, arrangements to pass credit risk to third parties, credit investment products and tax credit funds.
We are sponsors and investment managers of mutual and pooled funds, which gives us the ability to direct the investment decisions of the funds. We do not consolidate those mutual and pooled funds if we exercise our decision-making power as an agent on behalf of other unit holders.
We use structured entities to generally transform credit derivatives into cash instruments, to distribute credit risk and to create customized credit products to meet investors’ specific requirements. We enter into derivative contracts, including credit derivatives, to purchase protection from these entities (credit protection) and convert various risk factors such as yield, currency or credit risk of underlying assets to meet the needs of the investors. We act as sole arranger and swap provider for certain entities and, in some cases, fulfill other administrative functions for the entities. We do not consolidate these credit investment product entities as we do not have decision-making power over the relevant activities, which include selection of the collateral and reference portfolio, and are not exposed to a majority of the benefits or risks of the entities.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            189

Note 8    Structured entities
(continued)
 
We
created certain funds to pass through tax credits received from underlying low-income housing, historic rehabilitation real estate projects to third parties, new market tax credits or renewable energy tax credits to third parties (tax credit funds). We are sponsors of the tax credit funds as a result of our responsibility to manage the funds, arrange the financing, and perform the administrative duties of these tax credit funds. We do not consolidate the tax credit funds as the third-party investors in these funds have the decision-making power to select the underlying investments and are exposed to the majority of the residual ownership and tax risks of the funds.
We also purchase passive interests in renewable energy tax credit entities created and controlled by third parties. We do not consolidate these third-party funds as we do not have decision-making power over the relevant activities and our investments are managed as part of larger portfolios which are held for trading purposes.
Other interests in unconsolidated structured entities
In the normal course of business, we buy and sell passive interests in certain third-party structured entities, including mutual funds, exchange traded funds, and government-sponsored ABS vehicles. Our investments in these entities are managed as part of larger portfolios which are held for trading, liquidity or hedging purposes. We did not create or sponsor these entities and do not have any decision-making power over their ongoing activities. Our maximum exposure to loss is limited to our on-balance sheet investments in these entities, which are not included in the table above. As at October 31, 2023 and 2022, our investments in these entities were included in Trading and Investment securities on our Consolidated Balance Sheets. Refer to Note 3 and Note 4 for further details on our Trading and Investment securities.
Sponsored entities
We are a sponsor of certain structured entities in which we have interests but do not consolidate. In determining whether we are a sponsor of a structured entity, we consider both qualitative and quantitative factors, including the purpose and nature of the entity, our initial and continuing involvement and whether we hold subordinated interests in the entity. We are considered to be the sponsor of certain credit investment products, tax credit entities, RBC managed mutual funds and a commercial mortgage securitization vehicle. During the year ended October 31, 2023, we did not transfer any commercial mortgages (October 31, 2022 – $450 million) to a sponsored securitization vehicle in which we did not have any interests as at the end of the reporting period.
Financial support provided to structured entities
During the years ended October 31, 2023 and 2022, we have not provided any financial or non-financial support to any consolidated or unconsolidated structured entities when we were not contractually obligated to do so. Furthermore, we have no intention to provide such support in the future.
 
Note 9    Derivative financial instruments and hedging activities
Derivative instruments are categorized as either financial or non-financial derivatives. Financial derivatives are financial contracts whose value is derived from an underlying interest rate, foreign exchange rate, credit risk, and equity or equity index. Non-financial derivatives are contracts whose value is derived from a precious metal, commodity instrument or index. The notional amount of derivatives represents the contract amount used as a reference point to calculate payments. Notional amounts are generally not exchanged by counterparties, and do not reflect our EAD.
Financial derivatives
Forwards and futures
Forward contracts are non-standardized agreements that are transacted between counterparties in the OTC market, whereas futures are standardized contracts with respect to amounts and settlement dates, and are traded on regular futures exchanges. Examples of forwards and futures are described below.
Interest rate forwards (forward rate agreements) and futures are contractual obligations to buy or sell an interest-rate sensitive financial instrument on a predetermined future date at a specified price.
Foreign exchange forwards and futures are contractual obligations to exchange one currency for another at a specified price for settlement at a predetermined future date.
Equity forwards and futures are contractual obligations to buy or sell at a fixed value (the specified price) of an equity index, a basket of stocks or a single stock at a predetermined future date.
Swaps
Swaps are OTC contracts in which two counterparties exchange a series of cash flows based on agreed upon rates applied to a notional amount. Examples of swap agreements are described below.
Interest rate swaps are agreements where two counterparties exchange a series of payments based on different interest rates applied to a notional amount in a single currency. Certain interest rate swaps are transacted and settled through clearing houses which act as central counterparties. Cross currency swaps involve the exchange of fixed payments in one currency for the receipt of fixed payments in another currency. Cross currency interest rate swaps involve the exchange of both interest and notional amounts in two different currencies.
Equity swaps are contracts in which one counterparty agrees to pay or receive from the other cash flows based on changes in the value of an equity index, a basket of stocks or a single stock.
Options
Options are contractual agreements under which the seller (writer) grants the purchaser the right, but not the obligation, either to buy (call option) or sell (put option) a security, exchange rate, interest rate, or other financial instrument or commodity at a specified price, at or by a predetermined future date. The seller (writer) of an option can also settle the contract by paying the cash settlement value of the purchaser’s right. The seller (writer) receives a premium from the purchaser for this right. The various option agreements that we enter into include but are not limited to interest rate options, foreign currency options, equity options and index options.
 
190            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Table of Contents
Credit derivatives
Credit derivatives are OTC contracts that transfer credit risk related to an underlying financial instrument (referenced asset) from one counterparty to another. Credit derivatives include credit default swaps, credit default baskets and total return swaps.
Credit default swaps provide protection against the decline in the value of the referenced asset as a result of specified credit events such as default or bankruptcy. They are similar in structure to an option, whereby the purchaser pays a premium to the seller of the credit default swap in return for payment contingent on a credit event affecting the referenced asset.
Credit default baskets are similar to credit default swaps except that the underlying referenced financial instrument is a group of assets instead of a single asset.
Total return swaps are contracts where one counterparty agrees to pay or receive from the other cash amounts based on changes in the value of a referenced asset or group of assets, including any returns such as interest earned on these assets, in exchange for amounts that are based on prevailing market funding rates.
Other derivative products
Other contracts are stable value and equity derivative contracts.
Non-financial derivatives
Other contracts also include non-financial derivative products such as precious metal and commodity derivative contracts in both the OTC and exchange markets.
Derivatives issued for trading purposes
Most of our derivative transactions relate to client-driven sales and trading activities, and associated market risk hedging. Sales activities include the structuring and marketing of derivative products to clients, enabling them to modify or reduce risks. Trading involves market-making, positioning and arbitrage activities. Market-making involves quoting bid and offer prices to other market participants with the intention of generating revenue based on spread and volume. Positioning involves the active management of derivative transactions with the expectation of profiting from favourable movements in prices, rates, or indices. Arbitrage activities involve identifying and profiting from price differentials between markets and product types. Any realized and unrealized gains or losses on derivatives used for trading purposes are recognized immediately in Non-interest income – Trading revenue.
Derivatives issued for other-than-trading purposes
We also use derivatives for purposes other than trading, primarily for hedging, in conjunction with the management of interest rate, credit, equity and foreign exchange risk related to our funding, lending, investment activities and asset/liability management.
Interest rate swaps are used to manage our exposure to interest rate risk by modifying the repricing or maturity characteristics of existing and/or forecasted assets and liabilities, including funding and investment activities. Purchased options are used to hedge redeemable deposits and other options embedded in consumer products. We manage our exposure to foreign currency risk with cross currency swaps and foreign exchange forward contracts. We predominantly use credit derivatives to manage our credit exposures. We mitigate industry sector concentrations and single-name exposures related to our credit portfolio by purchasing credit derivatives to transfer credit risk to third parties.
Certain derivatives and cash instruments are specifically designated and qualify for hedge accounting. We also enter into derivative transactions to economically hedge certain exposures that do not otherwise qualify for hedge accounting, or where hedge accounting is not considered economically feasible to implement. In such circumstances, changes in fair value are reflected in Non-interest income – Other income.
Notional amount of derivatives by term to maturity (absolute amounts)
(1)
 
    
As at October 31, 2023
 
   
Term to maturity
             
             
(Millions of Canadian dollars)
 
Within
1 year
   
1 through
5 years
   
Over
5 years
   
Total
   
Trading
   
Other than
Trading
 
Over-the-counter contracts
                                               
Interest rate contracts
                                               
Forward rate agreements
 
$
1,008,978
 
 
$
691,397
 
 
$
358
 
 
$
1,700,733
 
 
$
1,700,733
 
 
$
 
Swaps
 
 
4,220,675
 
 
 
6,651,849
 
 
 
4,418,165
 
 
 
15,290,689
 
 
 
14,169,938
 
 
 
1,120,751
 
Options purchased
 
 
162,845
 
 
 
420,341
 
 
 
166,275
 
 
 
749,461
 
 
 
749,257
 
 
 
204
 
Options written
 
 
144,138
 
 
 
412,239
 
 
 
179,532
 
 
 
735,909
 
 
 
735,562
 
 
 
347
 
Foreign exchange contracts
                                               
Forward contracts
 
 
2,336,565
 
 
 
106,069
 
 
 
4,082
 
 
 
2,446,716
 
 
 
2,363,796
 
 
 
82,920
 
Cross currency swaps
 
 
30,098
 
 
 
88,625
 
 
 
74,538
 
 
 
193,261
 
 
 
189,100
 
 
 
4,161
 
Cross currency interest rate swaps
 
 
972,658
 
 
 
2,055,058
 
 
 
1,141,295
 
 
 
4,169,011
 
 
 
4,107,125
 
 
 
61,886
 
Options purchased
 
 
244,721
 
 
 
73,407
 
 
 
2,663
 
 
 
320,791
 
 
 
320,791
 
 
 
 
Options written
 
 
254,534
 
 
 
71,039
 
 
 
2,305
 
 
 
327,878
 
 
 
327,878
 
 
 
 
Credit derivatives
(2)
 
 
11,709
 
 
 
108,637
 
 
 
114,463
 
 
 
234,809
 
 
 
234,066
 
 
 
743
 
Other contracts
(3)
 
 
261,528
 
 
 
140,225
 
 
 
13,088
 
 
 
414,841
 
 
 
401,373
 
 
 
13,468
 
Exchange-traded contracts
                                               
Interest rate contracts
                                               
Futures – long positions
 
 
103,195
 
 
 
24,283
 
 
 
1
 
 
 
127,479
 
 
 
126,879
 
 
 
600
 
Futures – short positions
 
 
99,792
 
 
 
54,817
 
 
 
1
 
 
 
154,610
 
 
 
154,445
 
 
 
165
 
Options purchased
 
 
12,801
 
 
 
3
 
 
 
 
 
 
12,804
 
 
 
12,804
 
 
 
 
Options written
 
 
11,206
 
 
 
1,468
 
 
 
 
 
 
12,674
 
 
 
12,674
 
 
 
 
Foreign exchange contracts
                                               
Futures – long positions
 
 
124
 
 
 
 
 
 
 
 
 
124
 
 
 
124
 
 
 
 
Other contracts
 
 
571,970
 
 
 
154,677
 
 
 
4,586
 
 
 
731,233
 
 
 
731,233
 
 
 
 
 
 
$
  10,447,537
 
 
$
  11,054,134
 
 
$
  6,121,352
 
 
$
  27,623,023
 
 
$
  26,337,778
 
 
$
  1,285,245
 
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            191

Note 9    Derivative financial instruments and hedging activities
(continued)
 
     As at October 31, 2022  
    Term to maturity              
             
(Millions of Canadian dollars)
  Within
1 year
    1 through
5 years
    Over
5 years
    Total     Trading     Other than
Trading
 
Over-the-counter contracts
                                               
Interest rate contracts
                                               
Forward rate agreements
  $ 763,398     $ 44,188     $ 353     $ 807,939     $ 806,576     $ 1,363  
Swaps
    4,994,006       6,934,996       4,781,148       16,710,150       16,001,414       708,736  
Options purchased
    100,504       577,780       151,084       829,368       829,368        
Options written
    108,770       556,652       182,841       848,263       848,263        
Foreign exchange contracts
                                               
Forward contracts
    2,187,124       86,136       2,648       2,275,908       2,230,901       45,007  
Cross currency swaps
    87,942       67,345       82,659       237,946       233,617       4,329  
Cross currency interest rate swaps
    518,244       1,572,490       879,541       2,970,275       2,918,063       52,212  
Options purchased
    58,075       18,061       3,199       79,335       79,335        
Options written
    62,266       16,623       3,274       82,163       82,163        
Credit derivatives
(2)
    1,143       35,621       6,751       43,515       42,785       730  
Other contracts
(3)
    228,709       93,431       19,392       341,532       327,860       13,672  
Exchange-traded contracts
                                               
Interest rate contracts
                                               
Futures – long positions
    148,032       50,869             198,901       197,251       1,650  
Futures – short positions
    233,941       98,763       65       332,769       332,320       449  
Options purchased
    56,353       12,173             68,526       68,526        
Options written
    16,394       6,168             22,562       22,562        
Foreign exchange contracts
                                               
Futures – long positions
    164                   164       164        
Other contracts
    539,103       89,147       2,094       630,344       630,344        
 
  $    10,104,168     $   10,260,443     $   6,115,049     $   26,479,660     $   25,651,512     $   828,148  
 
(1)   The derivative notional amounts are determined using the standardized approach for measuring counterparty credit risk (SA-CCR) in accordance with the Capital Adequacy Requirements (CAR).
(2)   Credit derivatives with a notional value of $1 billion (October 31, 2022 – $1 billion) are economic hedges. Trading credit derivatives comprise protection purchased of $119 billion (October 31, 2022 – $26 billion) and protection sold of $115 billion (October 31, 2022 – $17 billion).
(3)   Other contracts exclude loan underwriting commitments of $2 billion (October 31, 2022 – $6 billion), which are not classified as derivatives under CAR guidelines.
Fair value of derivative instruments
(1)
 
           As at  
   
October 31, 2023
        October 31, 2022  
           
(Millions of Canadian dollars)
 
Positive
   
Negative
         Positive     Negative  
Held or issued for trading purposes
                                   
Interest rate contracts
                                   
Forward rate agreements
 
$
76
 
 
$
24
 
      $ 77     $ 25  
Swaps
 
 
26,320
 
 
 
22,965
 
        25,690       21,608  
Options purchased
 
 
11,230
 
 
 
 
        12,056        
Options written
 
 
 
 
 
11,776
 
 
 
          12,201  
 
 
 
37,626
 
 
 
34,765
 
 
 
    37,823       33,834  
Foreign exchange contracts
                                   
Forward contracts
 
 
22,972
 
 
 
22,655
 
        37,734       37,631  
Cross currency swaps
 
 
7,370
 
 
 
5,815
 
        8,680       9,087  
Cross currency interest rate swaps
 
 
55,268
 
 
 
46,550
 
        49,758       38,230  
Options purchased
 
 
2,623
 
 
 
 
        2,623        
Options written
 
 
 
 
 
1,790
 
 
 
          2,571  
 
 
 
88,233
 
 
 
76,810
 
 
 
    98,795       87,519  
Credit derivatives
 
 
175
 
 
 
176
 
        388       125  
Other contracts
 
 
16,319
 
 
 
20,865
 
 
 
    18,474       21,084  
 
 
 
  142,353
 
 
 
132,616
 
 
 
    155,480       142,562  
Held or issued for other-than-trading purposes
                                   
Interest rate contracts
                                   
Swaps
 
 
1,907
 
 
 
7,436
 
 
 
    2,244       6,880  
 
 
 
1,907
 
 
 
7,436
 
 
 
    2,244       6,880  
Foreign exchange contracts
                                   
Forward contracts
 
 
860
 
 
 
509
 
        268       237  
Cross currency swaps
 
 
 
 
 
 
              22  
Cross currency interest rate swaps
 
 
555
 
 
 
4,484
 
 
 
    374       6,677  
 
 
 
1,415
 
 
 
4,993
 
 
 
    642       6,936  
Credit derivatives
 
 
49
 
 
 
 
               
Other contracts
 
 
71
 
 
 
109
 
 
 
    313       273  
 
 
 
3,442
 
 
 
12,538
 
 
 
    3,199       14,089  
Total gross fair values before:
 
 
145,795
 
 
 
145,154
 
        158,679       156,651  
Valuation adjustments determined on a pooled basis
 
 
(1,801
 
 
(981
        (2,055     (975
Impact of netting agreements that qualify for balance sheet offset
 
 
(1,544
 
 
(1,544
 
 
    (2,185     (2,185
 
 
$
142,450
 
 
$
  142,629
 
 
 
  $   154,439     $   153,491  
 
(1)   The fair value reflects the impact of characterizing the daily variation margin as settlement of the related derivative fair values as permitted by certain central counterparties.
 
192            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Fair value of derivative instruments by term to maturity
(1)
 
          As at  
   
October 31, 2023
        October 31, 2022  
                   
(Millions of Canadian dollars)
 
  Less than
1 year
   
1 through
5 years
   
Over
5 years
   
Total
         Less than
1 year
    1 through
5 years
    Over
5 years
    Total  
Derivative assets
 
$
  46,148
 
 
 
52,165
 
 
 
44,137
 
 
$
  142,450
 
      $   56,050       56,792       41,597     $   154,439  
Derivative liabilities
 
 
47,707
 
 
 
51,690
 
 
 
43,232
 
 
 
142,629
 
 
 
    58,504       54,361       40,626       153,491  
 
(1)   The fair value reflects the impact of characterizing the daily variation margin as settlement of the related derivative fair values as permitted by certain central counterparties.
Interest rate benchmark reform
(1)
We use interest rate contracts in fair value hedges and cash flow hedges to manage our exposure to interest rate risk from our existing and/or forecast assets and liabilities. We also use foreign denominated deposit liabilities in net investment hedges to manage the foreign exchange risk arising from our investments in foreign operations. The hedging instruments designated to manage these risks reference IBORs in multiple jurisdictions and will be affected by the Reform as the markets transition to ABRs as discussed in Note 2.
The following table presents the notional or principal amount of our hedging instruments which reference IBORs and are affected by the Reform as discussed in Note 2. The notional or principal amounts of our hedging instruments also approximates the extent of the risk exposure we manage through hedging relationships:
 
      As at     
   
October 31, 2023
         October 31, 2022  
       
(Millions of Canadian dollars)
 
Notional/Principal
amounts
         Notional/Principal
amounts
 
Interest rate contracts
                   
USD LIBOR
 
$
 
      $ 40,208  
CDOR
 
 
115,048
 
        114,159  
Total Return Swaps
                   
CDOR
 
 
736
 
        801  
Non-derivative instruments
                   
USD LIBOR
 
 
 
 
 
    237  
 
 
$
  115,784
 
 
 
  $   155,405  
 
(1)   Excludes interest rate contracts and non-derivative instruments which reference rates in multi-rate jurisdictions, including EURO Interbank Offered Rate and Australian Bank Bill Swap Rate (BBSW).
Derivative-related credit risk
Credit risk from derivative transactions is generated by the potential for the counterparty to default on its contractual obligations when one or more transactions have a positive market value to us. Therefore, derivative-related credit risk is represented by the positive fair value of the instrument and is normally a small fraction of the contract’s notional amount.
We subject our derivative transactions to the same credit approval, limit and monitoring standards that we use for managing other transactions that create credit exposure. This includes evaluating the creditworthiness of counterparties, and managing the size, diversification and maturity structure of the portfolio. Credit utilization for all products is compared with established limits on a continual basis and is subject to a standard exception reporting process. We use a single internal rating system for all credit risk exposure, as outlined in the internal ratings maps in the Credit risk section of Management’s Discussion and Analysis.
Offsetting is a technique that can reduce credit exposure from derivatives and is generally facilitated through the use of master netting agreements and achieved when specific criteria are met in accordance with our accounting policy in Note 2. A master netting agreement provides for a single net settlement of all financial instruments covered by the agreement in the event of default. However, credit risk is reduced only to the extent that our financial obligations to the same counterparty can be set off against obligations of the counterparty to us. We maximize the use of master netting agreements to reduce derivative-related credit exposure. Our overall exposure to credit risk that is reduced through master netting agreements may change substantially following the reporting date as the exposure is affected by each transaction subject to the agreement as well as by changes in underlying market rates. Measurement of our credit exposure arising out of derivative transactions is reduced to reflect the effects of netting in cases where the enforceability of that netting is supported by appropriate legal analysis as documented in our trading credit risk policies.
The use of collateral is another significant credit mitigation technique for managing derivative-related counterparty credit risk. Mark-to-market provisions in our agreements with some counterparties, typically in the form of a Credit Support Annex, provide us with the right to request that the counterparty pay down or collateralize the current market value of its derivatives positions when the value exceeds a specified threshold amount.
Replacement cost and credit equivalent amounts are determined in accordance with OSFI’s non-modelled regulatory SA-CCR under the CAR guidelines. The replacement cost represents the total fair value of all outstanding contracts in a gain position after factoring in the master netting agreements and applicable margins. The credit equivalent amount is defined as the replacement cost plus an additional amount for potential future credit exposure, scaled by a regulatory factor. The risk-weighted equivalent is determined by applying appropriate risk-weights to the credit equivalent amount, including those risk weights reflective of model approval under the internal ratings based approach.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            193

Note 9    Derivative financial instruments and hedging activities
(continued)
 
Derivative-related credit risk
(1)
 
        As at         
   
October 31, 2023
          October 31, 2022  
               
(Millions of Canadian dollars)
 
Replacement
cost
    
Credit
equivalent
amount
    
Risk-weighted

equivalent 
(2)
           Replacement
cost
     Credit
equivalent
amount
    
Risk-weighted

equivalent 
(2)
 
Over-the-counter contracts
                                                           
Interest rate contracts
                                                           
Forward rate agreements
 
$
58
 
  
$
94
 
  
$
6
 
          $ 46      $ 76      $ 5  
Swaps
 
 
9,613
 
  
 
24,448
 
  
 
3,721
 
            9,699        21,698        5,187  
Options purchased
 
 
610
 
  
 
1,547
 
  
 
353
 
            108        426        119  
Options written
 
 
123
 
  
 
564
 
  
 
152
 
            15        543        164  
Foreign exchange contracts
                                                           
Forward contracts
 
 
5,655
 
  
 
27,862
 
  
 
5,611
 
            8,772        29,565        5,940  
Swaps
 
 
4,261
 
  
 
21,483
 
  
 
4,274
 
            6,072        22,188        4,556  
Options purchased
 
 
841
 
  
 
1,742
 
  
 
383
 
            536        1,111        340  
Options written
 
 
95
 
  
 
441
 
  
 
109
 
            28        313        86  
Credit derivatives
 
 
356
 
  
 
1,834
 
  
 
219
 
            299        766        114  
Other contracts
 
 
1,933
 
  
 
16,002
 
  
 
4,929
 
            5,196        20,457        7,520  
Exchange-traded contracts
 
 
7,186
 
  
 
16,191
 
  
 
324
 
 
 
 
 
    11,098        19,870        397  
 
 
$
  30,731
 
  
$
  112,208
 
  
$
  20,081
 
 
 
 
 
  $   41,869      $   117,013      $   24,428  
 
(1)   The amounts presented are net of master netting agreements in accordance with CAR guidelines.
(2)   The risk-weighted balances are calculated in accordance with CAR guidelines and exclude CVA of $13 billion (October 31, 2022 – $16 billion).
Replacement cost of derivative instruments by risk rating and by counterparty type
 
   
   
As at October 31, 2023
 
   
Risk rating
(1)
         
Counterparty type
(2)
       
                   
(Millions of Canadian dollars)
 
AAA, AA
   
A
   
BBB
   
BB or lower
   
Total
   
Banks
   
OECD
governments
   
Other
   
Total
 
Gross positive fair values
 
$
  36,224
 
 
$
  70,010
 
 
$
  28,956
 
 
$
  10,605
 
 
$
  145,795
 
 
$
  69,841
 
 
$
  20,268
 
 
$
  55,686
 
 
$
  145,795
 
Impact of master netting agreements and applicable margins
 
 
24,025
 
 
 
60,556
 
 
 
22,765
 
 
 
7,718
 
 
 
115,064
 
 
 
68,151
 
 
 
20,237
 
 
 
26,676
 
 
 
115,064
 
Replacement cost (after netting agreements)
 
$
12,199
 
 
$
9,454
 
 
$
6,191
 
 
$
2,887
 
 
$
30,731
 
 
$
1,690
 
 
$
31
 
 
$
29,010
 
 
$
30,731
 
                                                                         
   
   
 
As at October 31, 2022
 
    Risk rating
(1)
          Counterparty type
(2)
       
                   
(Millions of Canadian dollars)
  AAA, AA     A     BBB     BB or lower     Total     Banks     OECD
governments
    Other     Total  
Gross positive fair values
  $   39,001     $   72,983     $   29,690     $   17,005     $   158,679     $   73,616     $   22,727     $   62,336     $   158,679  
Impact of master netting agreements and applicable margins
    21,552       62,614       21,818       10,826       116,810       71,582       22,597       22,631       116,810  
Replacement cost (after netting agreements)
  $ 17,449     $ 10,369     $ 7,872     $ 6,179     $ 41,869     $ 2,034     $ 130     $ 39,705     $ 41,869  
 
(1)   Our internal risk ratings of AAA, AA, A and BBB represent investment grade ratings and ratings of BB or lower represent non-investment grade ratings, as outlined in the internal ratings maps in the Credit risk section of Management’s Discussion and Analysis.
(2)   Counterparty type is defined in accordance with CAR guidelines.
Derivatives in hedging relationships
We apply hedge accounting to minimize volatility in earnings and capital caused by changes in interest rates or foreign exchange rates. Interest rate and currency fluctuations will either cause assets and liabilities to appreciate or depreciate in market value or cause variability in forecasted cash flows. When a hedging relationship is effective, gains, losses, revenue and expenses of the hedging instrument will offset the gains, losses, revenue and expenses of the hedged item.
Derivatives used in hedging relationships are recorded in Other Assets – Derivatives or Other Liabilities – Derivatives on our Consolidated Balance Sheets. Foreign currency-denominated liabilities used in net investment hedging relationships are recorded in Deposits – Business and Government and Subordinated debentures on our Consolidated Balance Sheets. Gains and losses relating to hedging ineffectiveness are recorded in Non-Interest income and amounts reclassified from hedge reserves in OCI to income are recorded in Net-interest income for cash flow hedges and Non-interest income for net investment hedges.
We assess and measure the effectiveness of a hedging relationship based on the change in the fair value or cash flows of the derivative hedging instrument relative to the change in the fair value or cash flows of the hedged item attributable to the hedged risk. When cash instruments are designated as hedges of foreign exchange risks, only changes in their value due to foreign exchange risk are included in the assessment and measurement of hedge effectiveness.
Potential sources of ineffectiveness can be attributed to differences between hedging instruments and hedged items:
   
Mismatches in the terms of hedged items and hedging instruments, for example the frequency and timing of when interest rates are reset and frequency of payment.
   
Difference in the discounting factors between the hedged item and the hedging instrument, taking into consideration the different reset frequency of the hedged item and hedging instrument.
   
Hedging derivatives with a non-zero fair value at inception date of the hedging relationship, resulting in mismatch in terms with the hedged item.
 
194            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Below is a description of our risk management strategy for each risk exposure that we decide to hedge:
Interest rate risk
We use interest rate contracts to manage our exposure to interest rate risk by modifying the repricing characteristics of existing and/or forecasted assets and liabilities, including funding and investment activities. The swaps are designated in either a fair value hedge or a cash flow hedge and predominantly reference IBORs across multiple jurisdictions. Certain swaps will be affected by the Reform as the market transitions to ABRs.
For fair value hedges, we use interest rate contracts to manage the fair value movements of our fixed rate instruments due to changes in benchmark interest. The interest rate swaps are entered into on a one-to-one basis to manage the benchmark interest rate risk, and its terms are critically matched to the specified fixed rate instruments.
We also use interest rate swaps in fair value hedges to manage interest rate risk from residential mortgage assets and funding liabilities. Our exposure from this portfolio changes with the origination of new loans, repayments of existing loans and sale of securitized mortgages. Accordingly, we have adopted dynamic hedging for that portfolio, in which the hedge relationship is rebalanced on a more frequent basis, such as on a bi-weekly or on a monthly basis.
For cash flow hedges, we use interest rate contracts to manage the exposure to cash flow variability of our variable rate instruments as a result of changes in benchmark interest rates. The variable rate instruments and forecast transactions which reference certain IBORs and will be affected by the Reform. Whilst some of the interest rate swaps are entered into on a one-to-one basis to manage a specific exposure, other interest rate swaps may be entered into for managing interest rate risks of a portfolio of assets and liabilities.
Foreign exchange risk
We manage our exposure to foreign currency risk with cross currency swaps in a cash flow hedge, and foreign exchange forward contracts in a net investment hedge. Certain cash instruments may also be designated in a net investment hedge, where applicable.
For cash flow hedges, we use cross currency swaps and forward contracts to manage the cash flow variability arising from fluctuations in foreign exchange rates on our issued foreign denominated fixed rate liabilities and highly probable forecasted transactions. The maturity profile and repayment terms of these swaps are matched to those of our foreign denominated exposures to limit our cash flow volatility from changes in foreign exchange rates.
For net investment hedges, we use a combination of foreign exchange forwards and cash instruments, such as foreign denominated deposit liabilities, to manage our foreign exchange risk arising from our investments in foreign operations. Our most significant exposures include USD, GBP and Euro. When hedging net investments in foreign operations using foreign exchange forwards, only the undiscounted spot element of the foreign exchange forward is designated as the hedging instrument. Accordingly, changes in the fair value of the hedging instrument as a result of changes in forward rates and the effects of discounting are not included in the hedging effectiveness assessment. Foreign operations are only hedged to the extent of the principal of the foreign denominated deposit liabilities or notional amount of the derivative; we generally do not expect to incur significant ineffectiveness on hedges of net investments in foreign operations.
Equity price risk
We use total return swaps in cash flow hedges to mitigate the cash flow variability of the expected payment associated with our cash settled share-based compensation plan for certain key employees by exchanging interest payments for indexed RBC share price change and dividend returns.
Credit risk
We predominantly use credit derivatives to economically hedge our credit exposures. We mitigate industry sector concentrations and single-name exposures related to our credit portfolio by purchasing credit derivatives to transfer credit risk to third parties.
Derivative instruments designated in hedging relationships
(1)
The following table presents the fair values of the derivative instruments and the principal amounts of the non-derivative liabilities, categorized by their hedging relationships, as well as derivatives that are not designated in hedging relationships.
 
 
  
 
        As at 
 
 
 
October 31, 2023
 
 
 
 
October 31, 2022
 
 
 
Designated as hedging instruments
in hedging relationships
 
 
Not designated
in a hedging
relationship
 
 
 
 
Designated as hedging instruments
in hedging relationships
 
 
Not designated
in a hedging
relationship
 
(Millions of Canadian dollars)
 
Fair value
 
 
Cash flow
 
 
Net
investment
 
 
  
 
Fair value
 
 
Cash flow
 
 
Net
investment
 
Assets
 
 
 
 
 
 
 
 
 
Derivative instruments
 
$
156
 
 
$
19
 
 
$
13
 
 
$
142,262
 
      $ 247     $ 57     $ 36     $ 154,099  
Liabilities
                                                                   
Derivative instruments
 
 
50
 
 
 
100
 
 
 
409
 
 
 
142,070
 
        27             126       153,338  
Non-derivative instruments
 
 
 
 
 
 
 
 
25,427
 
 
 
n.a.
 
 
 
                25,798       n.a.  
 
(1)   The fair value reflects the impact of characterizing the daily variation margin as settlement of the related derivative fair values as permitted by certain central counterparties.
n.a.   not applicable
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            195

Note 9    Derivative financial instruments and hedging activities
(continued)
 
The following tables provide the remaining term to maturity analysis of the notional amounts and the weighted average rates of the hedging instruments and their carrying amounts by types of hedging relationships:
Fair value hedges
 
    
As at October 31, 2023
 
   
Notional amounts
          
Carrying amount
(1)
 
               
(Millions of Canadian dollars, except average rates)
 
Within
1 year
    
1 through
5 years
    
Over
5 years
    
Total
           
Assets
    
Liabilities
 
Interest rate risk
                                                            
Interest rate contracts
                                                            
Hedge of fixed rate assets
 
$
8,853
 
  
$
62,948
 
  
$
  21,702
 
  
$
    93,503
 
          
$
156
 
  
$
 
Hedge of fixed rate liabilities
 
 
23,592
 
  
 
75,130
 
  
 
10,236
 
  
 
108,958
 
          
 
 
  
 
50
 
Weighted average fixed interest rate
                                                            
Hedge of fixed rate assets
 
 
4.3%
 
  
 
3.6%
 
  
 
3.2%
 
  
 
3.6%
 
                         
Hedge of fixed rate liabilities
 
 
2.1%
 
  
 
2.4%
 
  
 
2.6%
 
  
 
2.3%
 
 
 
 
 
  
 
 
 
  
 
 
 
               
                                                          
    As at October 31, 2022  
    Notional amounts            Carrying amount
(1)
 
               
(Millions of Canadian dollars, except average rates)  
Within
1 year
    
1 through
5 years
    
Over
5 years
     Total             Assets      Liabilities  
Interest rate risk
                                                            
Interest rate contracts
                                                            
Hedge of fixed rate assets
  $ 9,083      $ 32,173      $ 15,516      $ 56,772              $ 247      $ 3  
Hedge of fixed rate liabilities
    13,231        69,419        10,094        92,744                       24  
Weighted average fixed interest rate
                                                            
Hedge of fixed rate assets
    1.1%        2.5%        2.8%        2.3%                            
Hedge of fixed rate liabilities
    1.9%        1.8%        2.0%        1.9%    
 
 
 
  
 
 
 
  
 
 
 
 
(1)   The carrying amount reflects the impact of characterizing the daily variation margin as settlement of the related derivative fair values as permitted by certain central counterparties.
Cash flow hedges
 
    
As at October 31, 2023
 
   
Notional amounts
        
Carrying amount
(1)
 
               
(Millions of Canadian dollars, except average rates)
 
Within
1 year
    
1 through
5 years
    
Over
5 years
    
Total
         
Assets
    
Liabilities
 
Interest rate risk
                                                        
Interest rate contracts
                                                        
Hedge of variable rate assets
 
$
63,927
 
  
$
68,470
 
  
$
1,097
 
  
$
  133,494
 
      
$
 
  
$
 
Hedge of variable rate liabilities
 
 
16,696
 
  
 
63,527
 
  
 
32,802
 
  
 
113,025
 
      
 
 
  
 
 
Weighted average fixed interest rate
                                                        
Hedge of variable rate assets
 
 
4.5%
 
  
 
3.4%
 
  
 
3.7%
 
  
 
4.0%
 
                     
Hedge of variable rate liabilities
 
 
4.9%
 
  
 
3.8%
 
  
 
2.8%
 
  
 
3.7%
 
 
 
  
 
 
 
  
 
 
 
Foreign exchange risk
                                                        
Cross currency swaps
 
$
63
 
  
$
916
 
  
$
 
  
$
979
 
      
$
19
 
  
$
14
 
Weighted average CAD-EUR exchange rate
 
 
1.48
 
  
 
1.44
 
  
 
n.a.
 
  
 
1.45
 
                     
Weighted average CAD-USD exchange rate
 
 
n.a.
 
  
 
1.34
 
  
 
n.a.
 
  
 
1.34
 
 
 
  
 
 
 
  
 
 
 
               
                                                        
    As at October 31, 2022  
    Notional amounts          Carrying amount
(1)
 
               
(Millions of Canadian dollars, except average rates)  
Within
1 year
    
1 through
5 years
    
Over
5 years
     Total           Assets      Liabilities  
Interest rate risk
                                                        
Interest rate contracts
                                                        
Hedge of variable rate assets
  $ 50,436      $ 74,726      $ 1,023      $ 126,185          $      $  
Hedge of variable rate liabilities
    6,221        42,830        24,024        73,075                    
Weighted average fixed interest rate
                                                        
Hedge of variable rate assets
    3.3%        2.8%        2.5%        3.0%                        
Hedge of variable rate liabilities
    2.0%        1.5%        2.0%        1.7%    
 
  
 
 
 
  
 
 
 
Foreign exchange risk
                                                        
Cross currency swaps
  $      $ 314      $      $ 314          $ 32      $  
Weighted average CAD-EUR exchange rate
    n.a.        1.44        n.a.        1.44                        
Weighted average CAD-USD exchange rate
    n.a.        n.a.        n.a.        n.a.    
 
  
 
 
 
  
 
 
 
 
(1)   The carrying amount reflects the impact of characterizing the daily variation margin as settlement of the related derivative fair values as permitted by certain central counterparties.
n.a.   not applicable
 
196            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Net investment hedges
 
    
As at October 31, 2023
 
   
Notional/Principal
        
Carrying amount
 
               
(Millions of Canadian dollars, except average rates)
 
Within
1 year
    
1 through
5 years
    
Over
5 years
    
Total
         
Assets
    
Liabilities
 
Foreign exchange risk
                                                        
Foreign currency liabilities
 
$
6,061
 
  
$
14,653
 
  
$
6,413
 
  
$
27,127
 
      
 
n.a.
 
  
$
25,427
 
Weighted average CAD-USD exchange rate
 
 
1.28
 
  
 
1.29
 
  
 
1.33
 
  
 
1.30
 
                     
Weighted average CAD-EUR exchange rate
 
 
n.a.
 
  
 
n.a.
 
  
 
n.a.
 
  
 
n.a.
 
                     
Weighted average CAD-GBP exchange rate
 
 
 
  
 
1.71
 
  
 
 
  
 
1.71
 
                     
Forward contracts
 
$
18,920
 
  
$
 
  
$
 
  
$
18,920
 
      
$
13
 
  
$
409
 
Weighted average CAD-USD exchange rate
 
 
1.36
 
  
 
n.a.
 
  
 
n.a.
 
  
 
1.36
 
                     
Weighted average CAD-EUR exchange rate
 
 
1.45
 
  
 
n.a.
 
  
 
n.a.
 
  
 
1.45
 
                     
Weighted average CAD-GBP exchange rate
 
 
1.68
 
  
 
n.a.
 
  
 
n.a.
 
  
 
1.68
 
 
 
  
 
 
 
  
 
 
 
               
                                                        
    As at October 31, 2022  
    Notional/Principal          Carrying amount  
               
(Millions of Canadian dollars, except average rates)
 
Within
1 year
     1 through
5 years
    
Over
5 years
     Total           Assets      Liabilities  
Foreign exchange risk
                                                        
Foreign currency liabilities
  $    5,462      $   20,851      $   1,025      $   27,338            n.a.      $ 25,798  
Weighted average CAD-USD exchange rate
    1.31        1.28        1.28        1.29                        
Weighted average CAD-EUR exchange rate
           1.51        1.48        1.51                        
Weighted average CAD-GBP exchange rate
           1.71               1.71                        
Forward contracts
  $ 6,089      $      $      $ 6,089          $     36      $ 126  
Weighted average CAD-USD exchange rate
    1.34        n.a.        n.a.        1.34                        
Weighted average CAD-EUR exchange rate
    1.36        n.a.        n.a.        1.36                        
Weighted average CAD-GBP exchange rate
    1.55        n.a.        n.a.        1.55    
 
  
 
 
 
  
 
 
 
 
n.a.   not applicable
The following tables present the details of the hedged items categorized by their hedging relationships:
Fair value hedges – Assets and liabilities designated as hedged items
 
    
As at and for the year ended October 31, 2023
 
   
Carrying amount
   
Accumulated amount of fair
value adjustments on the
hedged item included in the
carrying amount
        
             
(Millions of Canadian dollars)
 
Assets
   
Liabilities
   
Assets
   
Liabilities
   
Consolidated Balance Sheet items:
 
Changes in fair
values used for
calculating hedge
ineffectiveness
 
Interest rate risk
                                           
Fixed rate assets
(1)
 
$
86,734
 
 
$
 
 
$
(3,911
 
$
 
 
Securities – Investment, net of
applicable allowance; Loans – Retail;
Loans – Wholesale
 
$
(1,445
Fixed rate liabilities
(1)
 
 
 
 
 
102,535
 
 
 
 
 
 
(6,340
 
Deposits – Business and government; Subordinated debentures;
Deposits – Bank
 
 
        276
 
 
     As at and for the year ended October 31, 2022  
    Carrying amount    
Accumulated amount of fair
value adjustments on the
hedged item included in the
carrying amount
        
             
(Millions of Canadian dollars)
  Assets     Liabilities     Assets     Liabilities     Consolidated Balance Sheet items:   Changes in fair
values used for
calculating hedge
ineffectiveness
 
Interest rate risk
                                           
Fixed rate assets
(1)
  $ 52,216     $     $ (3,285   $    
Securities – Investment, net of
 applicable allowance; Loans – Retail;
 Loans – Wholesale
  $ (3,695
Fixed rate liabilities
(1)
          86,738             (5,924  
Deposits – Business and government;
Subordinated debentures;
Deposits – Bank
         5,742  
 
(1)   As at October 31, 2023, the accumulated amount of fair value hedge adjustments remaining on our Consolidated Balance Sheets for hedged items that have ceased to be adjusted for hedging gains and losses is a of loss of $539 million for fixed rate as
s
ets and a gain of $259 million for fixed rate liabilities (October 31, 2022 – loss of $486 million and loss of $25 million, respectively).
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            197

Note 9    Derivative financial instruments and hedging activities
(continued)
 
Cash flow and net investment hedges – Assets
and
liabilities designated
as
hedged items
 
    
As at and for the year ended October 31, 2023
 
       
Changes in fair
values used for
calculating hedge
ineffectiveness
   
Cash flow hedge/foreign
currency translation reserve
 
(Millions of Canadian dollars)
 
Consolidated Balance Sheet items:
 
Continuing
hedges
   
Discontinued
hedges
 
Cash flow hedges
                           
Interest rate risk
                           
Variable rate assets
 
Securities – Investment, net of
applicable allowance; Loans – Retail;
 
$
2,248
 
 
$
(2,115
 
$
(3,126
   
Interest bearing deposits with banks;
                       
   
Assets purchased under reverse
                       
   
repurchase agreements and securities borrowed
                       
Variable rate liabilities
 
Deposits – Business and government;
Deposits – Personal;
 
 
(2,558
 
 
3,535
 
 
 
5,607
 
   
Obligations related to assets sold under
repurchase agreements and securities loaned
                       
Foreign exchange risk
                           
Fixed rate assets
 
Securities – Investment, net of
applicable allowance
 
 
50
 
 
 
 
 
 
 
Net investment hedges
                           
Foreign exchange risk
                           
Foreign subsidiaries
 
n.a.
 
 
1,513
 
 
 
(7,297
 
 
(382
 
     As at and for the year ended October 31, 2022  
   
Consolidated Balance Sheet items:
 
Changes in fair
values used for
calculating hedge
ineffectiveness
   
Cash flow hedge/foreign
currency translation reserve
 
(Millions of Canadian dollars)
 
Continuing
hedges
    Discontinued
hedges
 
Cash flow hedges
                           
Interest rate risk
                           
Variable rate assets
 
Securities – Investment, net of
applicable allowance; Loans – Retail;
  $ 4,720     $ (1,777   $ (2,668
    Interest bearing deposits with banks;                        
   
Assets purchased under reverse
repurchase agreements and securities borrowed
                       
Variable rate liabilities
  Deposits – Business and government;     (6,895     5,471       2,231  
    Deposits – Personal;                        
    Obligations related to assets sold under                        
    repurchase agreements and securities loaned                        
Foreign exchange risk
                           
Fixed rate assets
 
Securities – Investment, net of
applicable allowance
    (17     7        
Net investment hedges
                           
Foreign exchange risk
                           
Foreign subsidiaries
  n.a.     1,927       (5,936     (421
 
n.a.   not applicable
Effectiveness of designated hedging relationships
 
    
For the year ended October 31, 2023
 
         
(Millions of Canadian dollars)
 
Change in fair value
of hedging
instrument
   
Hedge
ineffectiveness
recognized in
income
(1)
   
Changes in the value of
the hedging instrument
recognized in OCI
   
Amount reclassified
from hedge reserves
to income
 
Fair value hedges
                               
Interest rate risk
                               
Interest rate contracts – fixed rate assets
 
$
1,385
 
 
$
(60
 
 
n.a.
 
 
 
n.a.
 
Interest rate contracts – fixed rate liabilities
 
 
(205
 
 
71
 
 
 
n.a.
 
 
 
n.a.
 
Cash flow hedges
                               
Interest rate risk
                               
Interest rate contracts – variable rate assets
 
 
(2,232
 
 
7
 
 
$
(3,930
 
$
(3,121
Interest rate contracts – variable rate liabilities
 
 
2,416
 
 
 
(11
 
 
4,498
 
 
 
3,045
 
Foreign exchange risk
                               
Cross currency swap – fixed rate assets
 
 
(50
 
 
 
 
 
(44
 
 
(37
Net investment hedges
                               
Foreign exchange risk
                               
Foreign currency liabilities
 
 
(684
 
 
 
 
 
(684
 
 
 
Forward contracts
 
 
(828
 
 
 
 
 
(828
 
 
(191
 
198            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

     For the year ended October 31, 2022  
         
(Millions of Canadian dollars)
 
Change in fair value
of hedging
instrument
   
Hedge
ineffectiveness
recognized in
income
(1)
   
Changes in the value of
the hedging instrument
recognized in OCI
   
Amount reclassified
from hedge reserves
to income
 
Fair value hedges
                               
Interest rate risk
                               
Interest rate contracts – fixed rate assets
  $ 3,650     $ (45     n.a.       n.a.  
Interest rate contracts – fixed rate liabilities
    (5,713     29       n.a.       n.a.  
Cash flow hedges
                               
Interest rate risk
                               
Interest rate contracts – variable rate assets
    (4,698     (36   $ (4,432   $ (185
Interest rate contracts – variable rate liabilities
         6,713       37            6,673       (118
Foreign exchange risk
                               
Cross currency swap – fixed rate assets
    17                      –       23       17  
Net investment hedges
                               
Foreign exchange risk
                               
Foreign currency liabilities
    (1,771     (3     (1,768                    –  
Forward contracts
    (159           (159     (23
 
(1)   Hedge ineffectiveness recognized in income included gains of $3 million that are excluded from the assessment of hedge effectiveness and are offset by economic hedges (October 31, 2022 – losses of $19 million).
n.a.   not applicable
Reconciliation of components of equity
The following table provides a reconciliation by risk category
of
each component of equity and an analysis of other comprehensive income relating to hedge accounting:
 
    
For the year ended October 31, 2023
        
For the year ended October 31, 2022
 
           
(Millions of Canadian dollars)
 
Cash flow hedge
reserve
   
Foreign currency
translation reserve
        
Cash flow hedge
reserve
   
Foreign currency
translation reserve
 
Balance at the beginning of the year
 
$
  2,394
 
 
$
  5,688
 
      $ 566     $ 2,055  
Cash flow hedges
                                   
Effective portion of changes in fair value:
                                   
Interest rate risk
 
 
568
 
                2,241          
Foreign exchange risk
 
 
(44
                23          
Equity price risk
 
 
(119
                (1        
Net amount reclassified to profit or loss:
                                   
Ongoing hedges:
                                   
Interest rate risk
 
 
(377
                (227        
Foreign exchange risk
 
 
37
 
                (17        
Equity price risk
 
 
93
 
                (23        
De-designated hedges:
                                   
Interest rate risk
 
 
453
 
                530          
Hedges of net investment in foreign operations
                                   
Foreign exchange denominated debt
         
 
(684
                (1,768
Forward foreign exchange contracts
         
 
(828
                (159
Foreign currency translation differences for foreign operations
         
 
2,164
 
                    5,085  
Reclassification of losses (gains) on foreign currency translation to income
         
 
(160
                (18
Reclassification of losses (gains) on net investment hedging activities to income
         
 
191
 
                23  
Tax on movements on reserves during the period
 
 
(249
 
 
241
 
 
 
    (698     470  
Balance at the end of the year
 
$
2,756
 
 
$
6,612
 
 
 
  $     2,394     $ 5,688  
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            199

Note 10    Premises and equipment
 
    
For the year ended October 31, 2023
 
   
Owned by the Bank
(1)
         
Right-of-use lease assets
       
                     
(Millions of Canadian dollars)
 
Land
   
Buildings
   
Computer
equipment
   
Furniture,
fixtures
and other
equipment
   
Leasehold
improvements
   
Work in
process
          
Buildings
   
Equipment
   
Total
 
Cost
                                                                               
Balance at beginning of period
 
$
141
 
 
$
1,261
 
 
$
1,169
 
 
$
836
 
 
$
2,845
 
 
$
120
 
         
$
5,748
 
 
$
299
 
 
$
12,419
 
Additions
 
 
 
 
 
 
 
 
32
 
 
 
12
 
 
 
29
 
 
 
511
 
         
 
385
 
 
 
80
 
 
 
1,049
 
Acquisition through business combination
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
         
 
 
 
 
 
 
 
 
Transfers from work in process
 
 
 
 
 
19
 
 
 
246
 
 
 
62
 
 
 
187
 
 
 
(514
         
 
 
 
 
 
 
 
 
Disposals
 
 
 
 
 
(53
 
 
(216
 
 
(96
 
 
(78
 
 
(2
         
 
(331
)
 
 
(31
)
 
 
 
(807
)
Foreign exchange translation
 
 
1
 
 
 
6
 
 
 
22
 
 
 
9
 
 
 
32
 
 
 
1
 
         
 
103
 
 
 
 
 
 
174
 
Other
 
 
(2
 
 
18
 
 
 
30
 
 
 
12
 
 
 
(8
 
 
(8
 
 
 
 
 
 
(12
)
 
 
 
(31

)
 
 
(1
)
 
Balance at end of period
 
$
  140
 
 
$
  1,251
 
 
$
  1,283
 
 
$
  835
 
 
$
  3,007
 
 
$
  108
 
 
 
 
 
 
$
  5,893
 
 
$
  317
 
 
$
  12,834
 
Accumulated depreciation
                                                                               
Balance at beginning of period
 
$
 
 
$
627
 
 
$
640
 
 
$
525
 
 
$
1,656
 
 
$
 
         
$
1,643
 
 
$
114
 
 
$
5,205
 
Depreciation
 
 
 
 
 
51
 
 
 
247
 
 
 
91
 
 
 
235
 
 
 
 
         
 
559
 
 
 
92
 
 
 
1,275
 
Disposals
 
 
 
 
 
(50
 
 
(216
 
 
(88
 
 
(70
 
 
 
         
 
(112
)
 
 
(31
)
 
 
 
(567
)
Foreign exchange translation
 
 
 
 
 
3
 
 
 
16
 
 
 
6
 
 
 
16
 
 
 
 
         
 
31
 
 
 
 
 
 
72
 
Other
 
 
 
 
 
15
 
 
 
36
 
 
 
16
 
 
 
26
 
 
 
 
 
 
 
 
 
 
28
 
 
 
(21
)
 
 
 
100
 
Balance at end of period
 
$
 
 
$
646
 
 
$
723
 
 
$
550
 
 
$
1,863
 
 
$
 
 
 
 
 
 
$
2,149
 
 
$
154
 
 
$
6,085
 
Net carrying amount at end of period
 
$
140
 
 
$
605
 
 
$
560
 
 
$
285
 
 
$
1,144
 
 
$
108
 
 
 
 
 
 
$
3,744
 
 
$
163
 
 
$
6,749
 
   
       
   
    For the year ended October 31, 2022  
    Owned by the Bank
(1)
          Right-of-use lease assets        
                     
(Millions of Canadian dollars)
  Land     Buildings     Computer
equipment
    Furniture,
fixtures
and other
equipment
    Leasehold
improvements
    Work in
process
           Buildings     Equipment     Total  
Cost
                                                                               
Balance at beginning of period
  $ 145     $ 1,308     $ 1,126     $ 773     $ 2,754     $ 170             $ 5,394     $ 308     $ 11,978  
Additions
                24       3       28       397               270       138       860  
Acquisition through business combination
                4       1       6       1               55             67  
Transfers from work in process
          15       195       49       206       (465                          
Disposals
    (10     (83     (195     (5     (205     (1             (153     (146     (798
Foreign exchange translation
    7       24       17       15       67       6               58       (1     193  
Other
    (1     (3     (2           (11     12    
 
 
 
    124             119  
Balance at end of period
  $ 141     $ 1,261     $ 1,169     $ 836     $ 2,845     $ 120    
 
 
 
  $ 5,748     $ 299     $ 12,419  
Accumulated depreciation
                                                                               
Balance at beginning of period
  $     $ 664     $ 584     $ 427     $ 1,589     $             $ 1,133     $ 157     $ 4,554  
Depreciation
          48       234       94       233                     569       87       1,265  
Disposals
          (80     (192     (4     (204                   (106     (146     (732
Foreign exchange translation
          11       12       6       38                     2       (1     68  
Other
          (16     2       2                
 
 
 
    45       17       50  
Balance at end of period
  $     $ 627     $ 640     $ 525     $ 1,656     $    
 
 
 
  $ 1,643     $ 114     $ 5,205  
Net carrying amount at end of period
  $ 141     $ 634     $ 529     $ 311     $ 1,189     $ 120    
 
 
 
  $ 4,105     $ 185     $ 7,214  
 
(1)   As at October 31, 2023, we had total contractual commitments of $120 million to purchase premises and equipment (October 31, 2022 – $185 million).
Lease payments
Total lease payments for the year ended October 31, 2023 were $1,326 million, of which $655 million or 49% relates to variable payments and $671 million or 51% relates to fixed payments. Total lease payments for the year ended October 31, 2022 were $1,213 million, of which $578 million or 48% relates to variable payments and $635 million or 52% relates to fixed payments.
Total variable lease payments not included in the measurement of lease liabilities were $647 million for the year ended October 31, 2023 (October 31, 2022 – $571 million).
 
200            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Note 11    Goodwill and other intangible assets
Goodwill
 
   
   
For the year ended October 31, 2023
 
                     
(Millions of
Canadian dollars)
 
Canadian
Banking
   
Caribbean
Banking
   
Canadian
Wealth
Management
   
Global Asset
Management
   
U.S. Wealth
Management
(including
City National)
   
International
Wealth
Management
   
Investor
Services
   
Insurance
   
Capital
Markets
   
Total
 
Balance at beginning of period
 
$
2,574
 
 
$
1,759
 
 
$
589
 
 
$
1,928
 
 
$
3,027
 
 
$
1,042
 
 
$
59
 
 
$
112
 
 
$
1,187
 
 
$
 12,277
 
Acquisitions
 
 
70
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
70
 
Dispositions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(30
 
 
 
 
 
 
 
 
(30
Currency translations
 
 
 
 
 
32
 
 
 
4
 
 
 
88
 
 
 
53
 
 
 
82
 
 
 
 
 
 
 
 
 
18
 
 
 
277
 
Balance at end of period
 
$
2,644
 
 
$
1,791
 
 
$
593
 
 
$
2,016
 
 
$
3,080
 
 
$
1,124
 
 
$
29
 
 
$
112
 
 
$
1,205
 
 
$
12,594
 
                     
                                                             
   
    For the year ended October 31, 2022  
                     
(Millions of
Canadian dollars)
  Canadian
Banking
    Caribbean
Banking
    Canadian
Wealth
Management
    Global Asset
Management
    U.S. Wealth
Management
(including
City National)
    International
Wealth
Management
   
Investor
Services 
(1)
   
Insurance
    Capital
Markets 
(1)
    Total  
Balance at beginning of period
  $ 2,557     $ 1,600     $ 577     $ 1,964     $ 2,768     $ 115     $ 60     $ 112     $ 1,101     $ 10,854  
Acquisitions
    17                   33             880                         930  
Dispositions
                            (19                             (19
Currency translations
          159       12       (69     278       47       (1           86       512  
Balance at end of period
  $   2,574     $   1,759     $   589     $   1,928     $   3,027     $   1,042     $   59     $    112     $   1,187     $   12,277  
 
(1)   Amounts have been revised from those previously presented to conform to our new basis of segment presentation. Refer to Note 27 for further details of our business segments.
We perform our annual impairment test by comparing the carrying amount of each CGU to its recoverable amount. The recoverable amount of a CGU is represented by its VIU, except in circumstances where the carrying amount of a CGU exceeds its VIU. In such cases, the greater of the CGU’s FVLCD and its VIU is the recoverable amount. Our annual impairment test is performed as at August 1.
In our 2023 annual impairment tests, the recoverable amount of our Caribbean Banking CGU was based on its FVLCD and the recoverable amounts of all other CGUs tested were based on their VIU. In our 2022 annual impairment tests, the recoverable amounts of the Caribbean Banking CGU and International Wealth Management CGU were based on their FVLCD and the recoverable amounts of all other CGUs tested were based on their VIU.
Value in use
We calculate VIU using a five-year discounted cash flow method, with the exception of our International Wealth Management CGU where cash flow projections covering a seven-year period were used, which more closely aligns with the strategic growth plan resulting from the acquisition of RBC Brewin Dolphin. Future cash flows are based on financial plans agreed by management, estimated based on forecast results, business initiatives, capital required to support future cash flows and returns to shareholders. Key drivers of future cash flows include net interest margins and average interest-earning assets. The values assigned to these drivers over the forecast period are based on past experience, external and internal economic forecasts, and management’s expectations of the impact of economic conditions on our financial results. Beyond the initial cash flow projection period, cash flows are assumed to increase at a constant rate using a nominal long-term growth rate (terminal growth rate). Terminal growth rates are based on the long-term steady state growth expectations in the countries within which the CGU operates. The discount rates used to determine the present value of each CGU’s projected future cash flows are based on the bank-wide cost of capital, adjusted for the risks to which each CGU is exposed.
CGU-specific
risks include: country risk, business/operational risk, geographic risk (including political risk, devaluation risk, and government regulation), currency risk, and price risk (including product pricing risk and inflation).
The estimation of VIU involves significant judgment in the determination of inputs to the discounted cash flow model and is most sensitive to changes in future cash flows, discount rates and terminal growth rates applied to cash flows beyond the forecast period. The sensitivity of the VIU to key inputs and assumptions used was tested by recalculating the recoverable amount using reasonably possible changes to those parameters. As at August 1, 2023, no reasonably possible change in an individual key input or assumption, as described, would result in a CGU’s carrying amount exceeding its recoverable amount based on VIU.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            201

Note 11    Goodwill and other intangible assets
(continued)
 
The terminal growth rates and
pre-tax
discount rates used in our discounted cash flow models are summarized below.
 
     As at      
   
August 1, 2023
         August 1, 2022  
           
    
Discount
rate
(1)
    
Terminal
growth
rate
          Discount
rate
(1)
     Terminal
growth
rate
 
Group of cash generating units
                                      
Canadian Banking
 
 
11.7%
 
  
 
3.0%
 
         11.0%        3.0%  
Caribbean Banking
 
 
12.9    
 
  
 
3.5    
 
         12.6            3.5      
Canadian Wealth Management
 
 
12.5    
 
  
 
3.0    
 
         11.8            3.0      
Global Asset Management
 
 
12.5    
 
  
 
3.0    
 
         11.8            3.0      
U.S. Wealth Management (including City National)
 
 
12.5    
 
  
 
3.0    
 
         12.8            3.0      
International Wealth Management
(2)
 
 
12.5    
 
  
 
3.0    
 
         n.m.            n.m.      
Investor Services
 
 
12.4    
 
  
 
3.0    
 
         11.8            3.0      
Insurance
 
 
12.4    
 
  
 
3.0    
 
         11.6            3.0      
Capital Markets
 
 
12.7    
 
  
 
3.0    
 
 
 
     12.4            3.0      
 
(1)  
Pre-tax
discount rates are determined implicitly based on
post-tax
discount rates.
(2)   The recoverable amount for our International Wealth Management CGU was determined using a multiples-based approach in 2022.
n.m.
not meaningful
Fair value less costs of disposal – Caribbean Banking
As at August 1, 2023, the recoverable amount of our Caribbean Banking CGU, based on FVLCD, was 109% of its carrying amount (August 1, 2022 – 109%). We calculated FVLCD using a discounted cash flow method that projects future cash flows over a
5-year
period. Cash flows are based on management forecasts, adjusted to approximate the considerations of a prospective third-party buyer. Cash flows beyond the initial
5-year
period are assumed to increase at a constant rate using a nominal long-term growth rate. Future cash flows, terminal growth rates, and discount rates are based on the same factors noted above. The forecast future cash flows were discounted using a
pre-tax
rate of 12.9% (August 1, 2022 – 12.6%), reflecting a higher interest rate environment. This fair value measurement is categorized as level 3 in the fair value hierarchy as certain significant inputs are not observable. We use significant judgment to determine inputs to the discounted cash flow model, which is most sensitive to changes in future cash flows, discount rates and terminal growth rates.
We considered reasonably possible alternative scenarios, including market comparable transactions, which yielded valuations ranging from an immaterial deficit to an immaterial surplus. The sensitivity of the FVLCD to key inputs and assumptions was tested by recalculating the recoverable amount using reasonably possible changes to those parameters. A 50 bps change in the terminal growth rate would increase and decrease the recoverable amount by $235 million and $209 million, respectively. A 50 bps increase in the discount rate would decrease the recoverable amount by $278 million. A reduction in the forecasted cash flows of 10% per annum would reduce the recoverable amount by $485 million. If future cash flows were reduced by 8%, the recoverable amount would approximate the carrying amount. Changes in these assumptions have been applied holding other individual factors constant. However, changes in one factor may be magnified or offset by related changes in other assumptions as impacts to the recoverable amount are highly interdependent and changes in assumptions may not have a linear effect on the recoverable amount of the CGU. In aggregate, the range of reasonably possible outcomes would not materially affect the recoverable amount of the CGU.
 
202            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Other intangible assets
 
   
   
For the year ended October 31, 2023
 
             
(Millions of Canadian dollars)
 
Internally
generated
software
   
Other
software
   
Core
deposit
intangibles
   
Customer
list and
relationships
   
In process
software
   
Total
 
Gross carrying amount
                                               
Balance at beginning of period
 
$
5,076
 
 
$
908
 
 
$
1,630
 
 
$
2,472
 
 
$
1,535
 
 
$
11,621
 
Additions
 
 
81
 
 
 
179
 
 
 
 
 
 
 
 
 
1,134
 
 
 
1,394
 
Acquisition through business combination
 
 
 
 
 
31
 
 
 
 
 
 
 
 
 
 
 
 
31
 
Transfers
 
 
1,067
 
 
 
78
 
 
 
 
 
 
 
 
 
(1,145
 
 
 
Dispositions
 
 
(509
 
 
(145
 
 
 
 
 
(160
)
 
 
 
8
 
 
 
(806
)
 
Impairment losses
 
 
(73
 
 
 
 
 
 
 
 
(9
 
 
(5
 
 
(87
Currency translations
 
 
68
 
 
 
17
 
 
 
28
 
 
 
144
 
 
 
38
 
 
 
295
 
Other changes
 
 
(115
 
 
29
 
 
 
 
 
 
9
 
 
 
(33
 
 
(110
Balance at end of period
 
$
  5,595
 
 
$
  1,097
 
 
$
   1,658
 
 
$
  2,456
 
 
$
   1,532
 
 
$
  12,338
 
Accumulated amortization
                                               
Balance at beginning of period
 
$
(3,031
 
$
(612
 
$
(1,146
 
$
(749
 
$
 
 
$
(5,538
Amortization charge for the year
 
 
(1,009
 
 
(146
 
 
(160
 
 
(172
 
 
 
 
 
(1,487
Dispositions
 
 
506
 
 
 
157
 
 
 
 
 
 
114
 
 
 
 
 
 
777
 
Impairment losses
 
 
(19
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(19
Currency translations
 
 
(37
 
 
(13
 
 
(24
 
 
(33
 
 
 
 
 
(107
Other changes
 
 
(7
 
 
(44
 
 
 
 
 
(6
 
 
 
 
 
(57
Balance at end of period
 
$
(3,597
 
$
(658
 
$
(1,330
 
$
(846
)
 
 
$
 
 
$
(6,431
)
 
Net balance at end of period
 
$
1,998
 
 
$
439
 
 
$
328
 
 
$
1,610
 
 
$
1,532
 
 
$
5,907
 
             
                                            
     For the year ended October 31, 2022  
             
(Millions of Canadian dollars)
  Internally
generated
software
    Other
software
    Core
deposit
intangibles
    Customer
list and
relationships
    In process
software
    Total  
Gross carrying amount
                                               
Balance at beginning of period
  $    4,886     $    894     $   1,474     $   1,414     $    1,236     $    9,904  
Additions
    25       16                   1,256       1,297  
Acquisition through business combination
          14             1,292       148       1,454  
Transfers
    1,121       76                   (1,197      
Dispositions
    (960     (111           (329     (5     (1,405
Impairment losses
    (16                       (11     (27
Currency translations
    71       48       149       113       30       411  
Other changes
    (51     (29     7       (18     78       (13
Balance at end of period
  $ 5,076     $ 908     $ 1,630     $ 2,472     $ 1,535     $ 11,621  
Accumulated amortization
                                               
Balance at beginning of period
  $ (2,979   $ (572   $ (885   $ (997   $     $ (5,433
Amortization charge for the year
    (976     (137     (153     (103           (1,369
Dispositions
    959       109             315             1,383  
Impairment losses
    9                               9  
Currency translations
    (36     (31     (98     13             (152
Other changes
    (8     19       (10     23             24  
Balance at end of period
  $ (3,031   $ (612   $ (1,146   $ (749   $     $ (5,538
Net balance at end of period
  $ 2,045     $ 296     $ 484     $ 1,723     $ 1,535     $ 6,083  
 
Note 12    Joint ventures and associated companies
We do not have any joint ventures or associated companies that are individually material to our financial results. The following table summarizes the carrying value of our interests in joint ventures and associated companies accounted for under the equity method as well as our share of the income of those entities.
 
    
Joint ventures
        
Associated companies
 
   
As at and for the year ended  
 
           
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
        
October 31
2023
   
October 31
2022
 
Carrying amount
 
$
215
 
  $ 248    
 
 
$
286
 
  $ 463  
Share of:
                                   
Net income
(1)
 
$
18
 
  $ 103    
 
 
$
5
 
  $ 7  
 
(1)   Excludes impairment losses recognized on our interests in joint ventures and associated companies. During the year ended October 31, 2023, we recognized impairment losses of $242 million in Non-interest income – Income (loss) from joint ventures and associates with respect to our interest in an associated company in our Wealth Management segment (October 31, 2022 – $nil).
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            203

Note 13    Other assets
 
     As at    
     
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
 
Accounts receivable and prepaids
 
$
  4,373
 
  $ 4,250  
Accrued interest receivable
 
 
7,775
 
    4,703  
Cash collateral
 
 
20,104
 
    25,634  
Commodity trading receivables
 
 
5,979
 
    7,054  
Deferred income tax asset
 
 
2,446
 
    1,472  
Employee benefit assets
 
 
2,826
 
    3,331  
Held-for-sale assets
 
 
2,562
 
    11  
Insurance-related assets
               
Collateral loans
 
 
528
 
    524  
Policy loans
 
 
87
 
    85  
Reinsurance assets
 
 
1,127
 
    1,084  
Other
 
 
13
 
    12  
Investments in joint ventures and associates
 
 
501
 
    711  
Margin deposits
 
 
8,849
 
    14,684  
Precious metals
 
 
2,753
 
    1,772  
Receivable from brokers, dealers and clients
 
 
2,834
 
    3,299  
Taxes receivable
 
 
8,908
 
    6,933  
Other
 
 
5,403
 
    4,741  
 
 
$
  77,068
 
  $   80,300  
 
Note 14    Deposits
 
     As at      
   
October 31, 2023
        October 31, 2022  
                   
(Millions of Canadian dollars)
 
Demand 
(1)
   
Notice 
(2)
   
Term 
(3)
   
    Total
         Demand 
(1)
    Notice 
(2)
    Term 
(3)
    Total  
Personal
 
$
186,530
 
 
$
57,614
 
 
$
197,802
 
 
$
441,946
 
      $ 203,645     $ 64,743     $ 136,544     $ 404,932  
Business and government
 
 
316,200
 
 
 
19,056
 
 
 
409,819
 
 
 
745,075
 
        348,004       17,855       394,011       759,870  
Bank
 
 
7,996
 
 
 
769
 
 
 
35,901
 
 
 
44,666
 
 
 
    10,458       490       33,064       44,012  
 
 
$
  510,726
 
 
$
  77,439
 
 
$
  643,522
 
 
$
  1,231,687
 
 
 
  $ 562,107     $ 83,088     $ 563,619     $ 1,208,814  
Non-interest-bearing
(4)
                                                                   
Canada
 
$
132,994
 
 
$
6,107
 
 
$
168
 
 
$
139,269
 
      $ 149,737     $ 7,797     $ 466     $ 158,000  
United States
 
 
40,646
 
 
 
 
 
 
 
 
 
40,646
 
        52,702                   52,702  
Europe
(5)
 
 
17
 
 
 
 
 
 
 
 
 
17
 
        620                   620  
Other International
 
 
7,265
 
 
 
 
 
 
 
 
 
7,265
 
        7,840                   7,840  
Interest-bearing
(4)
                                                                   
Canada
 
 
302,746
 
 
 
14,641
 
 
 
493,347
 
 
 
810,734
 
        305,779       17,982       409,586       733,347  
United States
 
 
16,210
 
 
 
55,895
 
 
 
78,837
 
 
 
150,942
 
        11,410       57,055       85,111       153,576  
Europe
(5)
 
 
5,353
 
 
 
726
 
 
 
51,812
 
 
 
57,891
 
        28,276       254       52,144       80,674  
Other International
 
 
5,495
 
 
 
70
 
 
 
19,358
 
 
 
24,923
 
 
 
    5,743             16,312       22,055  
 
 
$
  510,726
 
 
$
  77,439
 
 
$
  643,522
 
 
$
  1,231,687
 
 
 
  $   562,107     $   83,088     $   563,619     $   1,208,814  
 
(1)   Demand deposits are deposits for which we do not have the right to require notice of withdrawal, which include both savings and chequing accounts.
(2)   Notice deposits are deposits for which we can legally require notice of withdrawal. These deposits are primarily savings accounts.
(3)   Term deposits are deposits payable on a fixed date, and include term deposits, guaranteed investment certificates and similar instruments.
(4)   The geographical splits of the deposits are based on the point of origin of the deposits and where the revenue is recognized. As at October 31, 2023, deposits denominated in U.S. dollars, British pounds, Euro and other foreign currencies were $445 billion, $34 billion, $49 billion and $32 billion, respectively (October 31, 2022 – $465 billion, $35 billion, $50 billion and $30 billion, respectively).
(5)   Europe includes the United Kingdom, the Channel Islands, France and Luxembourg.
Contractual maturities of term deposits
 
     As at        
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
 
Within 1 year:
               
less than 3 months
 
$
182,373
 
  $ 159,602  
3 to 6 months
 
 
69,868
 
    61,996  
6 to 12 months
 
 
151,079
 
    156,531  
1 to 2 years
 
 
76,232
 
    49,225  
2 to 3 years
 
 
49,965
 
    42,809  
3 to 4 years
 
 
36,774
 
    27,609  
4 to 5 years
 
 
36,506
 
    33,835  
Over 5 years
 
 
40,725
 
    32,012  
 
 
$
643,522
 
  $ 563,619  
Aggregate amount of term deposits in denominations of one hundred thousand dollars or more
 
$
  586,000
 
  $   521,000  
 
204            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Average deposit balances and average rates of interest
 
     For the year ended  
   
October 31, 2023
        October 31, 2022  
(Millions of Canadian dollars, except for percentage amounts)
 
Average
balances
    
Average
rates
         Average
balances
     Average
rates
 
Canada
 
$
913,669
 
  
 
3.02
      $ 847,052        1.02%  
United States
 
 
196,490
 
  
 
2.74
 
        207,436        0.50  
Europe
 
 
70,426
 
  
 
4.22
 
        81,824        1.03  
Other International
 
 
31,035
 
  
 
2.26
 
 
 
    28,613        0.72  
 
 
$
  1,211,620
 
  
 
3.03
 
 
  $   1,164,925        0.92%  
 
Note 15    Insurance
Risk management
Insurance risk is the risk of fluctuations in the timing, frequency or severity of insured events, relative to our expectations at the time of underwriting. We do not have a high degree of concentration risk due to our geographic diversity and business mix. Concentration risk is not a major concern for the life insurance business as it does not have a material level of region-specific characteristics. Reinsurance is also used for a majority of our Canadian insurance business to lower our risk profile and limit the liability on a single claim. We manage underwriting and pricing risk through the use of underwriting guidelines which detail the class, nature and type of business that may be accepted, pricing policies by product line and controls over policy wordings. The risk that claims are handled or paid inappropriately is mitigated by using a range of information technology (IT) system controls and manual processes conducted by experienced staff. These, together with a range of detailed policies and procedures, ensure that all claims are handled in a timely, appropriate and accurate manner.
Reinsurance ceded
In the ordinary course of business, our insurance operations reinsure risks to other insurance and reinsurance companies in order to lower our risk profile, limit loss exposure to large risks, and provide additional capacity for future growth. These ceding reinsurance arrangements do not relieve our insurance subsidiaries from our direct obligations to the insured parties. We evaluate the financial condition of the reinsurers and monitor our concentrations of credit risks to minimize our exposure to losses from reinsurer insolvency. Reinsurance amounts (ceded premiums) included in
Non-interest
income are shown in the table below.
Net premiums and claims
 
     For the year ended  
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
 
Gross premiums
 
$
5,428
 
  $ 4,913  
Premiums ceded to reinsurers
 
 
(297
    (260
Net premiums
 
$
5,131
 
  $ 4,653  
Gross claims and benefits
(1)
 
$
3,960
 
  $ 1,741  
Reinsurers’ share of claims and benefits
 
 
(261
    (273
Net claims
 
$
3,699
 
  $ 1,468  
 
(1)   Includes the change in fair value of investments backing our policyholder liabilities.
Insurance claims and policy benefit liabilities
All actuarial assumptions are set in conjunction with Canadian Institute of Actuaries Standards of Practice and OSFI requirements. The assumptions that have the greatest effect on the measurement of insurance liabilities, the processes used to determine them and the assumptions used as at October 31, 2023 are as follows:
Mortality and morbidity – Mortality estimates are based on standard industry insured mortality tables, adjusted where appropriate to reflect our own experience. Morbidity assumptions are made with respect to the rates of claim incidence and claim termination for health insurance policies and are based on a combination of industry and our own experience.
Future investment yield – Assumptions are based on the current yield rate, a reinvestment assumption and an allowance for future credit losses for each line of business, and are developed using interest rate scenario testing, including prescribed scenarios for determination of minimum liabilities as set out in the actuarial standards.
Policyholder behaviour
– Under certain policies, the policyholder has a contractual right to change benefits and premiums, as well as convert policies to permanent forms of insurance. All policyholders have the right to terminate their policies through lapse. Lapses represent the termination of policies due to
non-payment
of premiums. Lapse assumptions are primarily based on our recent experience adjusted for emerging industry experience where applicable.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            205

Note 15    Insurance
(continued)
 
Significant insurance assumptions
 
         As at  
     
    
October 31
2023
   
October 31
2022
 
Life Insurance
               
Canadian Insurance
               
Mortality rates
(1)
 
 
0.11
    0.11
Morbidity rates
(2)
 
 
1.79
 
    1.81  
Future reinvestment yield
(3)
 
 
3.73
 
    3.75  
Lapse rates
(4)
 
 
0.50
 
    0.50  
International Insurance
               
Mortality rates
(1)
 
 
0.83
 
    0.80  
Future reinvestment yield
(3)
 
 
2.90
 
    2.90  
 
(1)   Average annual death rate for the largest portfolio of insured policies.
(2)   Average net termination rate for the individual and group disability insurance portfolio.
(3)   Ultimate reinvestment rate of the insurance operations.
(4)   Ultimate policy termination rate (lapse rate) for the largest permanent life insurance portfolio that relies on a higher termination rate to maintain its profitability
(lapse-supported
policies).
Insurance claims and policy benefit liabilities
The following table summarizes our gross and reinsurers’ share of insurance liabilities at the end of the year.
 
           As at            
   
October 31, 2023
        October 31, 2022  
               
(Millions of Canadian dollars)
 
Gross
   
Ceded
   
Net
         Gross     Ceded     Net  
Life insurance policyholder liabilities
                                                   
Life, health and annuity
 
$
11,934
 
 
$
    968
 
 
$
    10,966
 
      $ 11,481     $ 902     $ 10,579  
Investment contracts
(1)
 
 
38
 
 
 
 
 
 
38
 
 
 
    41             41  
 
 
$
11,972
 
 
$
968
 
 
$
11,004
 
 
 
  $     11,522     $     902     $     10,620  
Non-life
insurance policyholder liabilities
                                                   
Unearned premium provision
(1)
 
$
9
 
 
$
 
 
$
9
 
      $ 7     $     $ 7  
Unpaid claims provision
 
 
32
 
 
 
1
 
 
 
31
 
 
 
    30       1       29  
 
 
$
41
 
 
$
1
 
 
$
40
 
 
 
  $ 37     $ 1     $ 36  
 
 
$
    12,013
 
 
$
969
 
 
$
    11,044
 
 
 
  $ 11,559     $ 903     $ 10,656  
 
(1)   Liabilities for investment contracts and unearned premium provision are reported in Other liabilities on the Consolidated Balance Sheets.
Reconciliation of life insurance policyholder liabilities
 
     For the year ended  
   
October 31, 2023
        October 31, 2022  
               
(Millions of Canadian dollars)
 
Gross
   
Ceded
   
Net
         Gross     Ceded     Net  
Balances at beginning of period
 
$
    11,522
 
 
$
    902
 
 
$
    10,620
 
      $     12,817     $ 861     $     11,956  
New and
in-force
policies
(1)
 
 
552
 
 
 
30
 
 
 
522
 
        (1,288     (130     (1,158
Changes in assumption and methodology
 
 
(99
)
 
 
 
36
 
 
 
(135
        (6     171       (177
Net change in investment contracts
 
 
(3
 
 
 
 
 
(3
 
 
    (1           (1
Balances at end of period
 
$
11,972
 
 
$
968
 
 
$
11,004
 
 
 
  $ 11,522     $     902     $ 10,620  
 
(1)   Includes the change in fair value of investments backing our policyholder liabilities.
The net increase in life insurance policyholder liabilities over the prior year was primarily attributable to business growth partially offset by asset and liability matching activities and market movements on assets backing life insurance policyholder liabilities. During the year, we reviewed all key actuarial methods and assumptions which are used in determining the life insurance policyholder liabilities resulting in a
$135 
million net decrease to such liabilities. This is primarily comprised of a decrease of
$170 
million arising from insurance risk related assumption updates largely due to mortality assumptions, partially offset by increases of
$15 
million due to changes to valuation models and related data and
$14
million due to an increase in the crediting rate on universal life insurance policies.
 
206            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Sensitivity analysis
The following table presents
the
sensitivity of the level of insurance policyholder liabilities disclosed in this note to reasonably possible changes in the actuarial assumptions used to calculate them. The percentage change in each variable is applied to a range of existing actuarial modelling assumptions to derive the possible impact on net income. The analyses are performed where a single assumption is changed while holding other assumptions constant, which is unlikely to occur in practice.
 
             Net income impact
for the year ended
 
(Millions of Canadian dollars, except for percentage amounts)
  
 
Change in
variable
   
 
October 31
2023
   
 
October 31
2022
 
Increase in market interest rates
(1)
     1%    
$
           1
 
  $ (10
Decrease in market interest rates
(1)
     1        
 
7
 
    5  
Increase in equity market values
(2)
     10        
 
2
 
                  6  
Decrease in equity market values
(2)
     10        
 
(8
    (10
Increase in maintenance expenses
(3)
     5        
 
(32
    (33
Life Insurance
(3)
               
Adverse change in annuitant mortality rates
     2        
 
(177
    (166
Adverse change in assurance mortality rates
     2        
 
(54
    (59
Adverse change in morbidity rates
     5        
 
(177
    (181
Adverse change in lapse rates
     10        
 
(192
    (199
 
(1)   Sensitivities for market interest rates include the expected current period earnings impact of a 100 basis points shift in the yield curve by increasing the current reinvestment rates while holding the assumed ultimate rates constant. The sensitivity consists of both the impact on assumed reinvestment rates in the actuarial liabilities and any changes in fair value of assets and liabilities from the yield curve shift.
(2)   Sensitivities to changes in equity market values are composed of the expected current period earnings impact from differences in the changes in fair value of the equity asset holdings and the partially offsetting impact on the actuarial liabilities.
(3)   Sensitivities to changes in maintenance expenses and life insurance actuarial assumptions include the expected current period earnings impact from recognition of increased liabilities due to an adverse change in the given assumption over the lifetime of all
in-force
policies.
 
Note 16    Segregated funds
We offer certain individual variable insurance contracts that allow policyholders to invest in segregated funds. The investment returns on these funds are passed directly to the policyholders. Amounts invested are at the policyholders’ risk, except where the policyholders have selected options providing maturity and death benefit guarantees. A liability for the guarantees is recorded in Insurance claims and policy benefit liabilities.
Segregated fund net assets are recorded at fair value. All of our segregated fund net assets are categorized as Level 1 in the fair value hierarchy. The fair value of the segregated fund liabilities is equal to the fair value of the segregated fund net assets. Segregated fund net assets and segregated fund liabilities are presented on separate lines on the Consolidated Balance Sheets. The following tables present the composition of net assets and the changes in net assets for the year.
Segregated fund net assets
 
              As at      
     
(Millions of Canadian dollars)
 
 
October 31
2023
   
 
October 31
2022
 
Cash
 
$
40
 
  $ 39  
Investment in mutual funds
 
 
2,719
 
    2,598  
Other assets (liabilities), net
 
 
1
 
    1  
 
 
$
2,760
 
  $ 2,638  
Changes in net assets
 
     For the year ended  
     
(Millions of Canadian dollars)
 
 
October 31
2023
   
 
October 31
2022
 
Net assets at beginning of period
 
$
2,638
 
  $ 2,666  
Additions (deductions):
               
Deposits from policyholders
 
 
734
 
    859  
Net realized and unrealized gains (losses)
 
 
52
 
    (301
Interest and dividends
 
 
76
 
    56  
Payment to policyholders
 
 
(668
    (573
Management and administrative fees
 
 
(72
    (69
Net assets at end of period
 
$
2,760
 
  $   2,638  
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            207

Note 17    Employee benefits – Pension and other post-employment benefits
Plan characteristics
We sponsor a number of programs that provide pension and post-employment benefits to eligible employees. The majority of beneficiaries of the pension plans are located in Canada and other beneficiaries of the pension plans are primarily located in the U.S., the U.K. and the Caribbean. The pension arrangements including investment, plan benefits and funding decisions are governed by local pension committees or trustees, who are legally segregated from the Bank, or management. Significant plan changes require the approval of the Board of Directors.
Our defined benefit pension plans provide pension benefits based on years of service, contributions and average earnings at retirement. Our primary defined benefit pension plans are closed to new members. New employees are generally eligible to join defined contribution pension plans. The specific features of these plans vary by location. We also provide supplemental
non-registered
(non-qualified)
pension plans for certain executives and senior management that are typically unfunded or partially funded.
Our defined contribution pension plans provide pension benefits based on accumulated employee and Bank contributions. The Bank contributions are based on a percentage of an employee’s annual earnings and a portion of the Bank contribution may be dependent on the amount being contributed by the employee and their years of service.
Our primary other post-employment benefit plans provide health, dental, disability and life insurance coverage and cover a number of current and retired employees who are mainly located in Canada. These plans are unfunded unless required by legislation.
We measure our benefit obligations and pension assets as at October 31 each year. All plans are valued using the projected unit-credit method. We fund our registered defined benefit pension plans in accordance with actuarially determined amounts required to satisfy employee benefit obligations under current pension regulations. For our principal pension plan, the most recent funding actuarial valuation was completed on January 1, 2023, and the next valuation is required no later than January 1, 2026.
For the year ended October 31, 2023, total contributions to our pension plans (defined benefit and defined contribution plans) and other post-employment benefit plans were $346 million and $80 million (October 31, 2022 – $427 million and $79 million), respectively. For 2024, total contributions to our pension plans and other post-employment benefit plans are expected to be $408 million and $86 million, respectively.
Risks
By their design, the defined benefit pension and other post-employment benefit plans expose the Bank to various risks such as investment performance, reductions in discount rates used to value the obligations, increased longevity of plan members, future inflation levels impacting future salary increases as well as future increases in healthcare costs. These risks will reduce over time due to the membership closure of our primary defined benefit pension plans and migration to defined contribution pension plans.
The following table presents the financial position related to all of our material pension and other post-employment benefit plans worldwide, including executive retirement arrangements.
 
   
      As at    
       
   
October 31, 2023
        October 31, 2022  
           
(Millions of Canadian dollars)
 
Defined benefit
pension plans
   
Other post-
employment
benefit plans
         Defined benefit
pension plans
    Other post-
employment
benefit plans
 
Canada
                                   
Fair value of plan assets
 
$
13,704
 
 
$
 
      $ 14,310     $  
Present value of defined benefit obligation
 
 
11,142
 
 
 
1,348
 
 
 
    11,271       1,387  
Net surplus (deficit)
 
$
2,562
 
 
$
(1,348
 
 
  $ 3,039     $ (1,387
International
                                   
Fair value of plan assets
 
$
664
 
 
$
 
      $ 716     $  
Present value of defined benefit obligation
 
 
585
 
 
 
69
 
 
 
    622       75  
Net surplus (deficit)
 
$
79
 
 
$
(69
 
 
  $ 94     $ (75
Total
                                   
Fair value of plan assets
 
$
14,368
 
 
$
 
      $ 15,026     $  
Present value of defined benefit obligation
 
 
11,727
 
 
 
1,417
 
 
 
    11,893       1,462  
Total net surplus (deficit)
 
$
2,641
 
 
$
(1,417
 
 
  $ 3,133     $ (1,462
Effect of asset ceiling
 
 
(9
 
 
 
 
 
    (8      
Total net surplus (deficit), net of effect of asset ceiling
 
$
2,632
 
 
$
(1,417
 
 
  $ 3,125     $ (1,462
Amounts recognized in our Consolidated Balance Sheets
                                   
Employee benefit assets
 
$
2,826
 
 
$
 
      $ 3,331     $  
Employee benefit liabilities
 
 
(194
 
 
(1,417
 
 
    (206     (1,462
Total net surplus (deficit), net of effect of asset ceiling
 
$
2,632
 
 
$
(1,417
 
 
  $ 3,125     $ (1,462
 
208            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

The following table presents an analysis of the movement in the financial position related to all of our material pension and other post-employment benefit plans worldwide, including executive retirement arrangements.
 
   
    As at or for the year ended  
       
   
October 31, 2023
        October 31, 2022  
           
(Millions of Canadian dollars)
 
Defined benefit
pension plans 
(1)
   
Other post-
employment
benefit plans
         Defined benefit
pension plans 
(1)
    Other post-
employment
benefit plans
 
Fair value of plan assets at beginning of period
 
$
15,026
 
 
$
 
      $ 17,703     $  
Interest income
 
 
786
 
 
 
 
        580        
Remeasurements
                                   
Return on plan assets (excluding interest income)
 
 
(895
 
 
 
        (2,931      
Change in foreign currency exchange rate
 
 
55
 
 
 
 
        (62      
Contributions – Employer
 
 
23
 
 
 
80
 
        177       79  
Contributions – Plan participant
 
 
44
 
 
 
22
 
        45       20  
Payments
 
 
(645
 
 
(102
        (610     (99
Payments – amount paid in respect of settlements
 
 
 
 
 
 
        3        
Business combinations/Disposals
 
 
(17
 
 
 
        135    
 
 
Other
 
 
(9
 
 
 
 
 
    (14      
Fair value of plan assets at end of period
 
$
14,368
 
 
$
 
 
 
  $ 15,026     $  
Benefit obligation at beginning of period
 
$
11,893
 
 
$
1,462
 
      $ 15,315     $ 1,780  
Current service costs
 
 
195
 
 
 
33
 
        308       42  
Past service costs
 
 
 
 
 
(2
        (1     2  
Gains and losses on settlements
 
 
 
 
 
 
        (3      
Interest expense
 
 
624
 
 
 
77
 
        496       63  
Remeasurements
                                   
Actuarial losses (gains) from demographic assumptions
 
 
(2
 
 
(24
        (2     (1
Actuarial losses (gains) from financial assumptions
 
 
(480
 
 
(46
        (3,797     (341
Actuarial losses (gains) from experience adjustments
 
 
70
 
 
 
(1
        83       (9
Change in foreign currency exchange rate
 
 
45
 
 
 
1
 
        (47     6  
Contributions – Plan participant
 
 
44
 
 
 
22
 
        45       20  
Payments
 
 
(645
 
 
(102
        (610     (99
Payments – amount paid in respect of settlements
 
 
 
 
 
 
        3        
Business combinations/Disposals
 
 
(17
 
 
(3
 
 
    103       (1
Benefit obligation at end of period
 
$
11,727
 
 
$
1,417
 
 
 
  $ 11,893     $ 1,462  
Unfunded obligation
 
$
18
 
 
$
1,417
 
      $ 23     $ 1,462  
Wholly or partly funded obligation
 
 
11,709
 
 
 
 
 
 
    11,870        
Total benefit obligation
 
$
11,727
 
 
$
1,417
 
 
 
  $ 11,893     $ 1,462  
 
(1)   For pension plans with funding deficits, the benefit obligations and fair value of plan assets as at October 31, 2023 were $300 million and $106 million, respectively (October 31, 2022 – $323 million and $117 million, respectively).
Pension and other post-employment benefit expense
The following table presents the composition of our pension and other post-employment benefit expense related to our material pension and other post-employment benefit plans worldwide.
 
     For the year ended  
    Pension plans        
Other post-employment

benefit plans
 
           
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
        
October 31
2023
   
October 31
2022
 
Current service costs
 
$
195
 
  $ 308        
$
33
 
  $ 42  
Past service costs
 
 
 
    (1      
 
(2
    2  
Gains and losses on settlements
 
 
 
    (3      
 
 
     
Net interest expense (income)
 
 
(162
    (84      
 
77
 
    63  
Remeasurements of other long term benefits
 
 
 
           
 
(1
    (26
Administrative expense
 
 
9
 
    14    
 
 
 
 
     
Defined benefit pension expense
 
$
42
 
  $ 234        
$
107
 
  $ 81  
Defined contribution pension expense
 
 
323
 
    250    
 
 
 
 
     
 
 
$
365
 
  $ 484    
 
 
$
107
 
  $ 81  
Service costs for the year ended October 31, 2023 totalled $193 million (October 31, 2022 – $305 million) for pension plans in Canada and $2 million (October 31, 2022 – $2 million) for International plans. Net interest expense (income) for the year ended October 31, 2023 totalled $(157) million (October 31, 2022 – $(83) million) for pension plans in Canada and $(5) million (October 31, 2022 – $(1) million) for International plans.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            209

Note 17    Employee benefits – Pension and other post-employment benefits
(continued)
 
Pension and other post-employment benefit remeasurements
The following table presents the composition of our remeasurements recorded in OCI related
to
our material pension and other post-employment benefit plans worldwide.
 
     For the year ended  
    Defined benefit pension
plans
          Other post-employment
benefit plans
 
           
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
          
October 31
2023
   
October 31
2022
 
Actuarial (gains) losses:
                                       
Changes in demographic assumptions
 
$
(2
  $ (2          
$
(27
  $ (1
Changes in financial assumptions
 
 
(480
    (3,797          
 
(45
    (319
Experience adjustments
 
 
70
 
    83            
 
2
 
    (5
Return on plan assets (excluding interest based on discount rate)
 
 
895
 
    2,931            
 
 
     
Change in asset ceiling (excluding interest income)
 
 
          1
 
    2    
 
 
 
 
 
 
     
 
 
$
484
 
  $ (783  
 
 
 
 
$
(70
  $ (325
Remeasurements recorded in OCI for the year ended October 31, 2023 were losses of $440 million (
October
31, 2022 – gains of $798 million) for pension plans in Canada and losses of $44 million (October 31, 2022 – losses of $15 million) for International plans.
Investment policy and strategies
Defined benefit pension plan assets are invested prudently in order to meet our longer-term pension obligations. The pension plans’ investment strategy is to hold a diversified mix of investments by asset class and geographic location in order to reduce investment-specific risk to the funded status while maximizing the expected returns to meet pension obligations. Investment of the plan’s assets follows an asset/liability framework as investment is conducted with careful consideration of the pension obligation’s sensitivity to interest rates and credit spreads which are key risk factors impacting the obligation’s value. Factors taken into consideration in developing our asset mix include but are not limited to the following:
   
the nature of the underlying benefit obligations, including the duration and term profile of the liabilities;
   
the member demographics, including expectations for normal retirements, terminations, and deaths;
   
the financial position of the pension plans;
   
the diversification benefits obtained by the inclusion of multiple asset classes; and
   
expected asset returns, including asset and liability correlations, along with liquidity requirements of the plan.
To implement our asset mix policy, we may invest in debt securities, equity securities, and alternative investments. Our holdings in certain investments, including common shares, debt securities rated lower than BBB and residential and commercial mortgages, cannot exceed a defined percentage of the market value of our defined benefit pension plan assets. We may use derivative instruments as either a synthetic investment to more efficiently replicate the performance of an underlying security, or as a hedge against financial risks within the plan. To manage our credit risk exposure, where derivative instruments are not centrally cleared, counterparties are required to meet minimum credit ratings and enter into collateral agreements.
Our defined benefit pension plan assets are primarily comprised of debt and equity securities and alternative investments. Our equity securities generally have unadjusted quoted market prices in an active market (Level 1) and our debt securities generally have quoted market prices for similar assets in an active market (Level 2). Alternative investments and other includes cash, hedge funds, and private fund investments including infrastructure equity, real estate, private debt and private equity. In the case of private fund investments, no quoted market prices are usually available (Level 2 or Level 3). These fund assets are either valued by an independent valuator or priced using observable market inputs.
During the year ended October 31, 2023, the management of defined benefit pension investments focused on increased allocation to risk reducing investments and strategies, improving diversification, while striving to maintain expected investment return. Over time, an increasing allocation to debt securities is being used to reduce asset/liability duration mismatch and hence variability of the plan’s funded status due to interest rate movement. Longer maturity debt securities, given their price sensitivity to movements in interest rates, are considered to be a good economic hedge to risk associated with the plan’s liabilities, which are discounted using predominantly long maturity bond interest rates as inputs.
 
210            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Asset allocation of defined benefit pension plans
(1), (2)
 
    
    As at    
 
   
October 31, 2023
          
October 31, 2022
 
               
(Millions of Canadian dollars, except percentages)
 
Fair value
    
Percentage
of total
plan assets
   
Quoted
in active
market 
(3)
            Fair value      Percentage
of total
plan assets
    Quoted
in active
market 
(3)
 
Equity securities
                                                          
Domestic
 
$
723
 
  
 
5
 
 
100
           $ 1,469        10     100
Foreign
 
 
1,726
 
  
 
12
 
 
 
100
 
             2,799        19       100  
Debt securities
                                                          
Domestic government bonds
(4)
 
 
4,343
 
  
 
30
 
 
 
 
             3,489        23        
Foreign government bonds
 
 
128
 
  
 
1
 
 
 
 
             114        1        
Corporate and other bonds
 
 
3,296
 
  
 
23
 
 
 
 
             3,171        21        
Alternative investments and other
 
 
4,152
 
  
 
29
 
 
 
6
 
 
 
 
 
     3,984        26       8  
               
 
 
$
14,368
 
  
 
100
 
 
19
 
 
 
 
   $ 15,026        100     30
 
(1)   The asset allocation is based on the underlying investments held directly and indirectly through the funds as this is how we manage our investment policy and strategies.
(2)   Represents the total plan assets held in our Canadian and International pension plans.
(3)   If our assessment of whether or not an asset was quoted in an active market was based on direct investments, 22% of our total plan assets would be classified as quoted in an active market (October 31, 2022 – 34%).
(4)   Amounts are net of securities sold under repurchase agreements.
As at October 31, 2023, the plan assets include 0.3 million (October 31, 2022 – 0.7 million) of our common shares with a fair value of $37 million (October 31, 2022 – $89 million) and $62 million (October 31, 2022 – $48 million) of our debt securities. For the year ended October 31, 2023, dividends received on our common shares held in the plan assets were $3 million (October 31, 2022 – $4 million).
Maturity profile
The following table presents the maturity profile of our defined benefit pension plan obligation.
 
(Millions of Canadian dollars, except participants and years)  
As at October 31, 2023
 
 
Canada
   
International
   
Total
 
Number of plan participants
 
 
65,890
 
 
 
5,963
 
 
 
71,853
 
Actual benefit payments 2023
 
$
604
 
 
$
41
 
 
$
645
 
Benefits expected to be paid 2024
 
 
670
 
 
 
44
 
 
 
714
 
Benefits expected to be paid 2025
 
 
694
 
 
 
40
 
 
 
734
 
Benefits expected to be paid 2026
 
 
717
 
 
 
42
 
 
 
759
 
Benefits expected to be paid 2027
 
 
738
 
 
 
42
 
 
 
780
 
Benefits expected to be paid 2028
 
 
757
 
 
 
42
 
 
 
799
 
Benefits expected to be paid 2029-2033
 
 
4,013
 
 
 
226
 
 
 
4,239
 
Weighted average duration of defined benefit payments
 
 
12.2 years
   
 
15.1 years
   
 
12.3 years
 
Significant assumptions
Our methodologies to determine significant assumptions used in calculating the defined benefit pension and other post-employment benefit expense are as follows:
Discount rate
For the Canadian pension and other post-employment benefit plans, all future expected benefit payments at each measurement date are discounted at spot rates from a derived Canadian AA corporate bond yield curve. The derived curve is based on actual short and
mid-maturity
corporate AA rates and extrapolated longer term rates. The extrapolated corporate AA rates are derived from observed corporate A, corporate AA and provincial AA yields. For the International pension and other post-employment benefit plans, all future expected benefit payments at each measurement date are discounted at spot rates from a local AA corporate bond yield curve. Spot rates beyond 30 years are set to equal the
30-year
spot rate. The discount rate is the equivalent single rate that produces the same discounted value as that determined using the entire discount curve. This valuation methodology does not rely on assumptions regarding reinvestment returns.
Rate of increase in future compensation
The assumptions for increases in future compensation are developed separately for each plan, where relevant. Each assumption is set based on the price inflation assumption and compensation policies in each market, as well as relevant local statutory and plan-specific requirements.
Healthcare cost trend rates
Healthcare cost calculations are based on both short and long term trend assumptions established using the plan’s recent experience as well as market expectations.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            211

Note 17    Employee benefits – Pension and other post-employment benefits
(continued)
 
Weighted average assumptions to determine benefit obligation
 
         As at   
     Defined benefit pension
plans
           Other post-employment
benefit plans
 
           
     
October 31
2023
    
October 31
2022
           
October 31
2023
    
October 31
2022
 
Discount rate
  
 
5.7%
 
     5.4%             
 
5.8%
 
     5.5%  
Rate of increase in future compensation
  
 
3.0%
 
     3.0%             
 
n.a.
 
     n.a.  
Healthcare cost trend rates
(1)
                                           
– Medical
  
 
n.a.
 
     n.a.             
 
3.4%
 
     3.5%  
– Dental
  
 
n.a.
 
     n.a.    
 
 
 
  
 
3.1%
 
     3.1%  
 
(1)   For our other post-employment benefit plans, the assumed trend rates used to measure the expected benefit costs of the defined benefit obligations are also the ultimate trend rates.
n.a.   not applicable
Mortality assumptions
Mortality assumptions are significant in measuring our obligations under the defined benefit pension plans. These assumptions have been set based on country specific statistics. Future longevity improvements have been considered and included where appropriate. The following table summarizes the mortality assumptions used for material plans.
 
              As at              
   
October 31, 2023
          October 31, 2022  
   
Life expectancy at 65 for a member currently at
          Life expectancy at 65 for a member currently at  
   
Age 65
         
Age 45
          Age 65           Age 45  
                       
(In years)
 
Male
   
Female
          
Male
   
Female
           Male     Female            Male     Female  
Country
                                                                                       
Canada
 
 
23.9
 
 
 
24.3
 
         
 
24.8
 
 
 
25.2
 
            23.9       24.2               24.8       25.1  
United Kingdom
 
 
23.5
 
 
 
25.4
 
 
 
 
 
 
 
24.7
 
 
 
26.8
 
 
 
 
 
    23.4       25.4    
 
 
 
    24.7       26.8  
Sensitivity analysis
Assumptions adopted can have a significant effect on the value of the obligations for defined benefit pension and other post-employment benefit plans and are based on historical experience and market inputs. The increase (decrease) in obligation in the following table has been determined for key assumptions assuming all other assumptions are held constant. In practice, this is unlikely to occur, as changes in some of the assumptions may be correlated. The following table presents the sensitivity analysis of key assumptions for 2023.
 
    
Increase (decrease)
in obligation
 
     
(Millions of Canadian dollars)
 
Defined benefit
pension plans
   
Other post-
employment
benefit plans
 
Discount rate
               
Impact of 100 bps increase in discount rate
 
$
(1,228
 
$
(149
Impact of 100 bps decrease in discount rate
 
 
1,536
 
 
 
184
 
Rate of increase in future compensation
               
Impact of 50 bps increase in rate of increase in future compensation
 
 
23
 
 
 
 
Impact of 50 bps decrease in rate of increase in future compensation
 
 
(25
 
 
 
Mortality rate
               
Impact of an increase in longevity by one additional year
 
 
289
 
 
 
18
 
Healthcare cost trend rate
               
Impact of 100 bps increase in healthcare cost trend rate
 
 
n.a.
   
 
50
 
Impact of 100 bps decrease in healthcare cost trend rate
 
 
n.a.
   
 
(42
 
n.a.    not   applicable
 
212            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Note 18    Other liabilities
 
                   As at        
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
 
Accounts payable and accrued expenses
 
$
1,599
 
  $ 1,292  
Accrued interest payable
 
 
10,936
 
    5,019  
Cash collateral
 
 
23,365
 
    26,143  
Commodity liabilities
 
 
11,716
 
    10,038  
Deferred income
 
 
3,830
 
    3,660  
Deferred income taxes
 
 
426
 
    439  
Dividends payable
 
 
1,975
 
    1,856  
Employee benefit liabilities
 
 
1,611
 
    1,668  
Held-for-sale liabilities
 
 
2,560
 
 
 
 
Insurance related liabilities
 
 
342
 
    324  
Lease liabilities
 
 
4,764
 
    5,110  
Negotiable instruments
 
 
1,684
 
    1,715  
Payable to brokers, dealers and clients
 
 
8,065
 
    10,974  
Payroll and related compensation
 
 
9,088
 
    8,991  
Precious metals certificates
 
 
775
 
    557  
Provisions
 
 
644
 
    627  
Short-term borrowings of subsidiaries
 
 
4,507
 
    9,609  
Taxes payable
 
 
2,959
 
    2,136  
Other
 
 
5,324
 
    5,077  
 
 
$
96,170
 
  $ 95,235  
 
Note 19    Subordinated debentures
The debentures are unsecured obligations and are subordinated in right of payment to the claims of depositors and certain other creditors. The amounts presented below are net of our own holdings in these debentures, and include the impact of fair value hedges used for managing interest rate risk.
 
(Millions of Canadian dollars, except percentage and foreign currency)    Interest
rate
   
Denominated in
foreign currency
(millions)
          As at      
Maturity
 
Earliest par value
redemption date
 
October 31
2023
   
October 31
2022
 
June 8, 2023
(1)
 
 
     9.30%    
 
 
 
 
$
 
  $ 110  
January 27, 2026
(2)
         4.65%       US$1,500    
 
1,939
 
    1,884  
November 1, 2027
(3)
  November 1, 2022      4.75%       TT$300    
 
 
    60  
July 25, 2029
(2)
  July 25, 2024      2.74%
 (4)
 
         
 
1,459
 
    1,415  
December 23, 2029
(2)
  December 23, 2024      2.88%
 (5)
 
         
 
1,442
 
    1,412  
February 1, 2033
(2)
  February 1, 2028      5.01%
 (6)
 
         
 
1,418
 
     
June 30, 2030
(2)
  June 30, 2025      2.09%
 (7)
 
         
 
1,249
 
    1,250  
November 3, 2031
(2)
  November 3, 2026      2.14%
 (8)
 
         
 
1,637
 
    1,637  
May 3, 2032
(2)
  May 3, 2027      2.94%
 (9)
 
         
 
919
 
    932  
January 28, 2033
(2)
  January 28, 2028      1.67%
 (10)
 
         
 
868
 
    875  
October 1, 2083
  Any interest payment date       
 (11)
 
         
 
224
 
    224  
           
June 29, 2085
  Any interest payment date       
 (12)
 
    US$174    
 
241
 
    237  
                        
$
11,396
 
  $ 10,036  
Deferred financing costs
 
 
  
 
 
 
 
 
 
 
 
 
(10
    (11
 
 
 
  
 
 
 
 
 
 
 
 
$
11,386
 
  $ 10,025  
 
(1)   On June 8, 2023, all $110 million of outstanding 9.30% subordinated debentures matured. The principal plus accrued interest were paid to noteholders on the maturity date.
(2)   The notes include NVCC provisions, necessary for the notes to qualify as Tier 2 regulatory capital under Basel III. NVCC provisions require the conversion of the instrument into a variable number of common shares in the event that OSFI deems the Bank
non-viable
or a federal or provincial government in Canada publicly announces that the Bank has accepted or agreed to accept a capital injection. In such an event, each note is convertible into common shares pursuant to an automatic conversion formula with a multiplier of 1.5 and a conversion price based on the greater of: (i) a floor price of $5.00 and (ii) the current market price of our common shares based on the volume weighted average trading price of our common shares on the Toronto Stock Exchange. The number of shares issued is determined by dividing the par value of the note (including accrued and unpaid interest on such note) by the conversion price and then times the multiplier.
(3)   On November 1, 2022, we redeemed all TT$300 million of outstanding 4.75% subordinated debentures due on November 1, 2027 for 100% of their principal amount plus interest accrued to, but excluding, the redemption date.
(4)   Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.98% above the
3-month
CDOR.
(5)   Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.89% above the
3-month
CDOR.
(6)   Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 2.12% above the Daily Compounded CORRA.
(7)   Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.31% above the
3-month
CDOR.
(8)   Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.61% above the
3-month
CDOR.
(9)   Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.76% above the
3-month
CDOR.
(10)   Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.55% above the
3-month
CDOR.
(11)   Interest at a rate of 0.40% above the
30-day
Bankers’ Acceptance rate.
(12)   Interest at a rate of 0.25% above the U.S. dollar 3-month London Interbank Mean Rate (LIMEAN) under a synthetic methodology. In the
event
of a reduction of the annual dividend we declare on our common shares, the interest payable on the debentures is reduced pro rata to the dividend reduction and the interest reduction is payable with the proceeds from the sale of newly issued common shares.
All redemptions, cancellations and exchanges of subordinated debentures are subject to the consent and approval of OSFI.
Maturity schedule
The aggregate maturities of subordinated debentures, based on the maturity dates under the terms of issue, are as follows:
 
     As at  
   
(Millions of Canadian dollars)
 
October 31
2023
 
Within 1 year
 
$
 
1 to 5 years
 
 
1,939
 
5 to 10 years
 
 
8,992
 
Thereafter
 
 
465
 
 
 
$
11,396
 
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            213

Note 20    Equity
Share capital
Authorized share capital
Preferred – An unlimited number of First Preferred Shares and Second Preferred Shares without nominal or par value,
issuable in series; provided that the maximum aggregate consideration for all First Preferred Shares outstanding at any time may not exceed
$30 billion
,
and for all Second Preferred Shares that may be issued may not exceed $
5 billion
.
Common
 
An unlimited number of shares without nominal or par value may be issued
.
Outstanding share capital
The following table details our common and preferred shares and other equity instruments outstanding.
 
     As at and for the year ended  
 
October 31, 2023
          October 31, 2022  
               
(Millions of Canadian dollars, except the number
of shares and as otherwise noted)
 
Number of
shares
(thousands)
   
Amount
   
Dividends
declared
per share
           Number of
shares
(thousands)
    Amount     Dividends
declared
per share
 
Common shares issued
                                                       
Balance at beginning of period
 
 
1,385,591
 
 
$
  17,318
 
                    1,425,187     $   17,728          
Issued in connection with share-based compensation plans
(1)
 
 
740
 
 
 
68
 
                    1,270       99          
Issued in connection with dividend reinvestment plan
 
 
16,042
 
 
 
2,012
 
                                   
Purchased for cancellation
(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    (40,866     (509  
 
 
 
Balance at end of period
 
 
1,402,373
 
 
$
19,398
 
 
     $
5.34
 
 
 
 
 
    1,385,591     $ 17,318          $ 4.96  
Treasury – common shares
                                                       
Balance at beginning of period
(3)
 
 
(2,680
 
$
(334
                    (662   $ (73        
Purchases
 
 
(30,195
 
 
(3,556
                    (48,437     (5,183        
Sales
 
 
31,013
 
 
 
3,659
 
 
 
 
 
 
 
 
 
    46,419       4,922    
 
 
 
Balance at end of period
(3)
 
 
(1,862
 
$
(231
 
 
 
 
 
 
 
 
    (2,680   $ (334  
 
 
 
Common shares outstanding
 
 
1,400,511
 
 
$
19,167
 
 
 
 
 
 
 
 
 
    1,382,911     $ 16,984    
 
 
 
Preferred shares and other equity instruments issued
                                                       
First preferred
(4)
                                                       
Non-cumulative,
fixed rate
                                                       
Series BH
 
 
6,000
 
 
$
150
 
 
$
1.23
 
            6,000     $ 150     $ 1.23  
Series BI
 
 
6,000
 
 
 
150
 
 
 
1.23
 
            6,000       150       1.23  
Non-cumulative,
5-Year
Rate Reset
                                                       
Series AZ
 
 
20,000
 
 
 
500
 
 
 
0.93
 
            20,000       500       0.93  
Series BB
 
 
20,000
 
 
 
500
 
 
 
0.91
 
            20,000       500       0.91  
Series BD
 
 
24,000
 
 
 
600
 
 
 
0.80
 
            24,000       600       0.80  
Series BF
 
 
12,000
 
 
 
300
 
 
 
0.75
 
            12,000       300       0.75  
Series BO
 
 
14,000
 
 
 
350
 
 
 
1.20
 
            14,000       350       1.20  
Series BT
 
 
750
 
 
 
750
 
 
 
4.20%
 
            750       750       4.20%  
Non-cumulative,
fixed rate/floating rate
                                                       
Series
C-2
(5)
 
 
15
 
 
 
23
 
 
US$
  67.50
 
            15       23     US$   67.50  
Other equity instruments
                                                       
Limited recourse capital notes (LRCNs)
(6)
                                                       
Series 1
(7)
 
 
1,750
 
 
 
1,750
 
 
 
4.50%
 
            1,750       1,750       4.50%  
Series 2
(7)
 
 
1,250
 
 
 
1,250
 
 
 
4.00%
 
            1,250       1,250       4.00%  
Series 3
(7)
 
 
1,000
 
 
 
1,000
 
 
 
3.65%
 
 
 
 
 
    1,000       1,000       3.65%  
 
 
 
106,765
 
 
$
7,323
 
 
 
 
 
 
 
 
 
    106,765     $ 7,323    
 
 
 
Treasury – preferred shares and other equity instruments
                                                       
Balance at beginning of period
(3)
 
 
(12
 
$
(5
                    (164   $ (39        
Purchases
 
 
(1,924
 
 
(519
                    (2,811     (518        
Sales
 
 
1,927
 
 
 
515
 
 
 
 
 
 
 
 
 
    2,963       552    
 
 
 
Balance at end of period
(3)
 
 
(9
 
$
(9
 
 
 
 
 
 
 
 
    (12   $ (5  
 
 
 
Preferred shares and other equity instruments outstanding
 
 
106,756
 
 
$
7,314
 
 
 
 
 
 
 
 
 
    106,753     $ 7,318    
 
 
 
 
(1)   Includes fair value adjustments to stock options of $6 million (October 31, 2022 – $6 million).
(2)   During the year ended October 31, 2023, we did not purchase for cancellation any common shares. During the year ended October 31, 2022, we purchased for cancellation common shares at a total fair value of $5,426 million (average cost of $132.80 per share), with a book value of $509 million (book value of $12.47 per share).
(3)   Positive amounts represent a short position and negative amounts represent a long position.
(4)   First Preferred Shares were issued at $25 per share with the exception of
Non-Cumulative
5-Year
Rate Reset First Preferred Shares Series BT (Series BT) and
Non-Cumulative
Fixed Rate/Floating Rate First Preferred Shares Series
C-2
(Series
C-2)
which were issued at $1,000 and US$1,000 per share (equivalent to US$25 per depositary share), respectively.
(5)   On November 7, 2023, we redeemed all of our issued and outstanding Non-Cumulative Fixed Rate/Floating Rate First Preferred Shares Series C-2 for cash at a redemption price of US$1,000 per share (equivalent to US$25 per depositary share).
(6)   Each series of LRCNs (LRCN Series) were issued at a $1,000 per note. The number of shares represent the number of notes issued and the dividends declared per share represent the annual interest rate percentage applicable to the notes issued as at the reporting date.
(7)   In connection with the issuance of LRCN Series 1, we issued $1,750 million of
Non-Cumulative
5-Year
Rate Reset First Preferred Shares Series BQ (Series BQ); in connection with the issuance of LRCN Series 2, we issued $1,250 million of
Non-Cumulative
5-Year
Rate Reset First Preferred Shares Series BR (Series BR); in connection with the issuance of LRCN Series 3, we issued $1,000 million of
Non-Cumulative
5-Year
Rate Reset First Preferred Shares Series BS (Series BS). The Series BQ, BR and BS preferred shares were issued at a price of $1,000 per share and were issued to a consolidated trust to be held as trust assets in connection with each respective LRCN Series.
 
214            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Significant terms and conditions of preferred shares and other equity instruments
 
             
As at October 31, 2023
 
Current
annual yield
    
Premium
    
Current
dividend
per share
 (1)
    
Earliest
redemption
date 
(2)
    
Issue date
    
Redemption
price
 (2), (3)
 
Preferred shares
                                                    
First preferred
                                                    
Non-cumulative, fixed rate
                                                    
Series BH
(4)
    4.90%                    $ .306250        November 24, 2020        June 5, 2015           $ 26.00  
Series BI
(4)
    4.90%                 .306250        November 24, 2020        July 22, 2015        26.00  
Non-cumulative, 5-Year Rate Reset
(5)
                                                    
Series AZ
(4)
    3.70%        2.21%        .231250        May 24, 2019        January 30, 2014        25.00  
Series BB
(4)
    3.65%        2.26%        .228125        August 24, 2019        June 3, 2014        25.00  
Series BD
(4)
    3.20%        2.74%        .200000        May 24, 2020        January 30, 2015        25.00  
Series BF
(4)
    3.00%        2.62%        .187500        November 24, 2020        March 13, 2015        25.00  
Series BO
(4)
    4.80%        2.38%        .300000        February 24, 2024        November 2, 2018        25.00  
Series BT
(4)
    4.20%        2.71%        21.000000        February 24, 2027        November 5, 2021        1,000.00  
Non-cumulative, fixed rate/floating rate
                                                    
Series C-2
(6)
    6.75%        4.052%      US$ 16.875000        November 7, 2023        November 2, 2015      US$ 1,000.00  
Other equity instruments
                                                    
Limited recourse capital
notes
(7)
                                                    
Series 1
(8)
    4.50%        4.137%        n.a.        October 24, 2025        July 28, 2020           $ 1,000.00  
Series 2
(9)
    4.00%        3.617%        n.a.        January 24, 2026        November 2, 2020        1,000.00  
Series 3
(10)
    3.65%        2.665%        n.a.        October 24, 2026        June 8, 2021        1,000.00  
 
(1)   With the exception of Series BT, non-cumulative preferential dividends of each Series are payable quarterly, as and when declared by the Board of Directors, on or about the 24th day (7th day for Series C-2) of February, May, August and November. In the case of Series BT, non-cumulative preferential dividends are payable semi-annually, as and when declared by the Board of Directors.
(2)   Subject to the consent of OSFI and the requirements of the
Bank Act
(Canada), we may, on or after the dates specified above, redeem First Preferred Shares. In the case of Series AZ, BB, BD, BF, and BO, these may be redeemed for cash at a price per share of $25 if redeemed on the earliest redemption date and on the same date every fifth year thereafter. In the case of BH and BI, these may be redeemed for cash at a price per share of $26 if redeemed during the 12 months commencing on the earliest redemption date and decreasing by $0.25 each 12-month period thereafter to a price per share of $25 if redeemed four years from the earliest redemption date or thereafter. Series BT may be redeemed for cash at a price per share of $1,000 if redeemed on the earliest redemption date and on the same date every fifth year thereafter. Series C-2 may be redeemed at a price of US$1,000 on the earliest redemption date and any dividend payment date thereafter.
(3)   Subject to the consent of OSFI and the requirements of the
Bank Act
(Canada), we may purchase the First Preferred Shares of each Series for cancellation at the lowest price or prices at which, in the opinion of the Board of Directors, such shares are obtainable.
(4)   The preferred shares include NVCC provisions, necessary for the shares to qualify as Tier 1 regulatory capital under Basel III. NVCC provisions require the conversion of the instrument into a variable number of common shares in the event that OSFI deems the Bank non-viable or a federal or provincial government in Canada publicly announces that the Bank has accepted or agreed to accept a capital injection. In such an event, each preferred share is convertible into common shares pursuant to an automatic conversion formula with a multiplier of 1 and with a conversion price based on the greater of: (i) a floor price of $5 and (ii) the current market price of our common shares based on the volume weighted average trading price of our common shares on the Toronto Stock Exchange. The number of shares issued is determined by dividing the preferred share value by the conversion price.
(5)   The dividend rate will reset on the earliest redemption date and every fifth year thereafter at a rate equal to the 5-year Government of Canada bond yield plus the premium indicated. The holders have the option to convert their shares into non-cumulative floating rate First Preferred Shares subject to certain conditions on the earliest redemption date and every fifth year thereafter at a rate equal to the three-month Government of Canada Treasury Bill rate plus the premium indicated.
(6)   The dividend rate will change on the earliest redemption date at a rate equal to the 3-month LIBOR plus the premium indicated. Series C-2 do not qualify as Tier 1 regulatory capital. On November 7, 2023, we redeemed all of our issued and outstanding Non-Cumulative Fixed Rate/Floating Rate First Preferred Shares Series C-2 for cash at a redemption price of US$1,000 per share (equivalent to US$25 per depositary share).
(7)   The current annual yield on each LRCN Series represents the annual interest rate applicable to the notes issued as at the reporting date. The payments of interest and principal in cash on the LRCN Series are made at our discretion, and non-payment of interest and principal in cash does not constitute an event of default. In the event of (i) non-payment of interest on any interest payment date, (ii) non-payment of the redemption price in case of a redemption of a LRCN Series, (iii) non-payment of principal at the maturity of a LRCN Series, or (iv) an event of default on a LRCN Series, holders of such LRCN Series will have recourse only to the assets (Trust Assets) held by a third-party trustee in a consolidated trust in respect of such LRCN Series and each such noteholder will be entitled to receive its pro rata share of the Trust Assets. In such an event, the delivery of the Trust Assets for each LRCN Series will represent the full and complete extinguishment of our obligations under the related LRCN Series. The LRCNs include NVCC provisions, necessary for the shares to qualify as Tier 1 regulatory capital under Basel III. NVCC provisions require the conversion of the instrument into a variable number of common shares in the event that OSFI deems the Bank non-viable or a federal or provincial government in Canada publicly announces that the Bank has accepted or agreed to accept a capital injection. In such an event, each note is automatically redeemed and the redemption price will be satisfied by the delivery of Trust Assets, which will consist of common shares pursuant to an automatic conversion of the series of preferred shares that were issued concurrently with the related LRCN Series. Each series of preferred shares include an automatic conversion formula with a conversion price based on the greater of: (i) a floor price of $5 and (ii) the current market price of our common shares based on the volume weighted average trading price of our common shares on the Toronto Stock Exchange. The number of common shares issued in respect of each series of preferred shares will be determined by dividing the preferred share value ($1,000 plus declared and unpaid dividends) by the conversion price. The number of common shares delivered to each noteholder will be based on such noteholder’s pro rata interest in the Trust Assets. Subject to the consent of OSFI, we may purchase LRCNs for cancellation at such price or prices and upon such terms and conditions as we in our absolute discretion may determine, subject to any applicable law restricting the purchase of notes.
(8)   LRCN Series 1 bear interest at a fixed rate of 4.5% per annum until November 24, 2025, and thereafter at a rate per annum, reset every fifth year, equal to the 5-Year Government of Canada Yield plus 4.137% until maturity on November 24, 2080. The interest is paid semi-annually on or about the 24
th
day of May and November. LRCN Series 1 is redeemable during the period from October 24 to and including November 24, commencing in 2025 and every fifth year thereafter to the extent we redeem Series BQ pursuant to their terms and subject to the consent of OSFI and requirements of the
Bank Act
(Canada).
(9)   LRCN Series 2 bear interest at a fixed rate of 4.0% per annum until February 24, 2026, and thereafter at a rate per annum, reset every fifth year, equal to the 5-Year Government of Canada Yield plus 3.617% until maturity on February 24, 2081. The interest is paid semi-annually on or about the 24th day of February and August. LRCN Series 2 is redeemable during the period from January 24 to and including February 24, commencing in 2026 and every fifth year thereafter to the extent we redeem Series BR pursuant to their terms and subject to the consent of OSFI and requirements of the
Bank Act
(Canada).
(10)   LRCN Series 3 bear interest at a fixed rate of 3.65% per annum until November 24, 2026, and thereafter at a rate per annum, reset every fifth year, equal to the 5-Year Government of Canada Yield plus 2.665% until maturity on November 24, 2081. The interest is paid semi-annually on or about the 24th day of May and November. LRCN Series 3 is redeemable during the period from October 24 to and including November 24, commencing in 2026 and every fifth year thereafter to the extent we redeem Series BS pursuant to their terms and subject to the consent of OSFI and requirements of the
Bank Act
(Canada).
n.a.   not applicable
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            215

Note 20    Equity
(continued)
 
Restrictions on the payment of dividends
We are prohibited by the
Bank Act
(Canada) from declaring any dividends on our preferred or common shares when we are, or would be placed as a result of the declaration, in contravention of the capital adequacy and liquidity regulations or any regulatory directives issued under the Act. We may not pay dividends on our common shares at any time unless all dividends to which preferred shareholders are then entitled have been declared and paid or set apart for payment.
Currently, these limitations do not restrict the payment of dividends on our preferred or common shares.
Dividend reinvestment plan
Our dividend reinvestment plan (DRIP) provides common and preferred shareholders with a means to receive additional common shares rather than cash dividends. The plan is only open to shareholders residing in Canada or the U.S. The requirements of our DRIP are satisfied through either open market share purchases or shares issued from treasury. During the second, third and fourth quarters of 2023, the requirements of our DRIP were satisfied through shares issued from treasury. During the first quarter of 2023 and the year ended October 31, 2022, the requirements of our DRIP were satisfied through open market share purchases.
Shares available for future issuances
As at October 31, 2023, 26.9 million common shares are available for future issue relating to our DRIP and potential exercise of stock options and awards outstanding. In addition, we may issue up to 38.9 million common shares from treasury under the RBC Umbrella Savings and Securities Purchase Plan that was approved by shareholders on February 26, 2009.
 
Note 21    Share-based compensation
Stock option plans
We have stock option plans for certain key employees. Under the plans, options are periodically granted to purchase common shares. The exercise price for the majority of the grants is determined as the higher of the volume-weighted average of the trading prices per board lot (100 shares) of our common shares on the Toronto Stock Exchange (i) on the day preceding the day of grant; and (ii) the five consecutive trading days immediately preceding the day of grant. The exercise price for the remaining grants is the closing market share price of our common shares on the New York Stock Exchange on the date of grant. All options vest over a four-year period, and are exercisable for a period not exceeding 10 years from the grant date.
The compensation expense recorded for the year ended October 31, 2023, in respect of the stock option plans was $11 million (October 31, 2022 – $8 million). The compensation expense related to non-vested options was $5 million at October 31, 2023 (October 31, 2022 – $4 million), to be recognized over the weighted average period of 1.9 years (October 31, 2022 – 2.0 years).
Analysis of the movement in the number and weighted average exercise price of options is set out below:
A summary of our stock option activity and related information
 
   
    For the year ended  
       
   
October 31, 2023
           October 31, 2022  
           
(Canadian dollars per share except share amounts)
 
Number of
options
  (thousands)
   
Weighted
average
exercise price 
(1)
            Number of
options
(thousands)
    Weighted
average
exercise price 
(1)
 
Outstanding at beginning of period
 
 
7,509
 
 
$
    100.07
 
             7,055     $ 92.27  
Granted
 
 
1,088
 
 
 
131.64
 
             1,184       129.99  
Exercised
(2), (3)
 
 
(740
 
 
84.76
 
             (684     73.98  
Forfeited in the period
 
 
(90
 
 
113.55
 
 
 
 
 
     (46     104.28  
Outstanding at end of period
 
 
7,767
 
 
$
  106.01
 
 
 
 
 
     7,509     $   100.07  
Exercisable at end of period
 
 
3,830
 
 
$
91.84
 
 
 
 
 
     3,502     $ 87.15  
 
(1)   The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rates as of October 31, 2023 and October 31, 2022. For foreign currency-denominated options exercised during the year, the weighted average exercise prices are translated using exchange rates as at the settlement date.
(2)   Cash received for options exercised during the year was $63 million (October 31, 2022 – $51 million) and the weighted average share price at the date of exercise was $130.94 (October 31, 2022 – $134.10).
(3)   New shares were issued for all stock options exercised in 2023 and 2022.
Options outstanding as at October 31, 2023 by range of exercise price
 
       
   
Options outstanding
          
Options exercisable
 
             
(Canadian dollars per share except
share amounts and years)
 
Number
  outstanding
(thousands)
    
Weighted
average
exercise price 
(1)
    
Weighted
average
remaining
contractual
life (years)
   
 
    
Number
exercisable
(thousands)
    
Weighted
average
exercise price 
(1)
 
$64.73 – $79.65
 
 
936
 
  
$
74.96
 
  
 
1.58
 
          
 
936
 
  
$
74.96
 
$90.23 – $96.55
 
 
1,779
 
  
 
93.48
 
  
 
3.82
 
          
 
1,779
 
  
 
93.48
 
$102.33 – $104.70
 
 
1,633
 
  
 
103.81
 
  
 
5.22
 
          
 
1,115
 
  
 
103.39
 
$106.00 – $106.00
 
 
1,202
 
  
 
106.00
 
  
 
7.12
 
          
 
 
  
 
 
$129.99 – $131.64
 
 
2,217
 
  
 
130.78
 
  
 
8.60
 
 
 
 
 
  
 
 
  
 
 
 
 
 
7,767
 
  
$
      106.01
 
  
 
5.72
 
 
 
 
 
  
 
3,830
 
  
$
          91.84
 
 
(1)   The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rate as of October 31, 2023.
 
216            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

The weighted average fair value of options granted during the year ended October 31, 2023 was estimated at $11.51 (October 31, 2022 – $7.80). This was determined by applying the Black-Scholes model on the date of grant, taking into account the specific terms and conditions under which the options are granted, such as the vesting period and expected share price volatility estimated by considering the historic average share price volatility over a historical period corresponding to the expected option life. The following assumptions were used
to
determine the fair value
of
options granted:
Weighted average assumptions
 
   
   
For the year ended
 
     
(Canadian dollars per share except percentages and years)
 
October 31
2023
   
October 31
2022
 
Share price at grant date
 
$
130.16
 
  $ 128.48  
Risk-free interest rate
 
 
2.89%
 
    1.25%  
Expected dividend yield
 
 
3.79%
 
    3.66%  
Expected share price volatility
 
 
14%
 
    13%  
Expected life of option
 
 
6 Years
      6 Years  
Employee savings and share ownership plans
We offer many employees an opportunity to own our common shares through savings and share ownership plans. Under these plans, the employees can generally contribute between 1% and 10% of their annual salary or benefit base for commission-based employees. For each contribution between 1% and 6%, we will match 50% of the employee contributions in our common shares. For the RBC Dominion Securities Savings Plan, our maximum annual contribution is $4,500 per employee. For the RBC U.K. Share Incentive Plan, our maximum annual contribution is £1,500 per employee. For the year ended October 31, 2023, we contributed $139 million (October 31, 2022 – $128 million), under the terms of these plans, towards the purchase of our common shares. As at October 31, 2023, an aggregate of 36 million common shares were held under these plans (October 31, 2022 – 36 million common shares).
Deferred share and other plans
We offer deferred share unit plans to executives, certain key employees and non-employee directors of the Bank. Under these plans, participants may choose to receive all or a percentage of their annual variable short-term incentive bonus, commission, or directors’ fee in the form of deferred share units (DSUs). The participants must elect to participate in the plan prior to the beginning of the year. DSUs earn dividend equivalents in the form of additional DSUs at the same rate as dividends on common shares. The participant is not allowed to convert the DSUs until retirement or termination of employment/directorship. The cash value of the DSUs is equivalent to the market value of common shares when conversion takes place.
We also offer unit awards for certain key employees within Capital Markets. The bonus is invested as RBC share units and a specified percentage vests on a specified number of anniversary dates each year. Each vested amount is paid in cash and is based on the original number of share units granted plus accumulated dividends, valued using the average closing price of RBC common shares during the five trading days immediately preceding the vesting date.
We offer performance deferred share award plans to certain key employees, all of which vest at the end of three years. Upon vesting, the award is paid in cash and is based on the original number of RBC share units granted plus accumulated dividends valued using the average closing price of RBC common shares during the five trading days immediately preceding the vesting date. A portion of the award under certain plans may be increased or decreased up to 25%, depending on our total shareholder return compared to a defined peer group of global financial institutions.
We maintain non-qualified deferred compensation plans for certain key employees in the U.S. These plans allow eligible employees to defer a portion of their annual income and a variety of productivity and recruitment bonuses and allocate the deferrals among specified fund choices, including a RBC Share Account fund that tracks the value of our common shares.
The following table presents the units granted under the deferred share and other plans for the year.
Units granted under deferred share and other plans
 
     For the year ended     
       
   
October 31, 2023
         October 31, 2022  
           
(Units and per unit amounts)
 
Units
granted
(thousands)
    
Weighted
average
fair value
per unit
          Units
granted
(thousands)
     Weighted
average
fair value
per unit
 
Deferred share unit plans
 
 
466
 
  
$
130.61
 
         469      $ 131.49  
Capital Markets compensation plan unit awards
 
 
4,231
 
  
 
110.32
 
         3,794        125.22  
Performance deferred share award plans
 
 
2,362
 
  
 
131.41
 
         2,220        129.65  
Deferred compensation plans
 
 
103
 
  
 
126.81
 
         92        135.44  
Other share-based plans
 
 
1,506
 
  
 
130.12
 
 
 
     1,083        128.50  
 
 
 
8,668
 
  
$
120.79
 
 
 
     7,658      $ 127.48  
Our liabilities for the awards granted under the deferred share and other plans are measured at fair value, determined based on the quoted market price of our common shares and specified fund choices as applicable. Annually, our obligation is increased by additional units earned by plan participants, and is reduced by forfeitures, cancellations, and the settlement of vested units. In addition, our obligation is impacted by fluctuations in the market price of our common shares and specified fund units. For performance deferred share award plans, the estimated outcome of meeting the performance conditions also impacts our obligation.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            217

Note 21    Share-based compensation
(continued)
 
The following tables present the units that have been earned by the participants, our obligations for these earned units under the deferred share and other plans, and the related compensation expenses (recoveries) recognized for the year.
Obligations under deferred share and other plans
 
              As at           
    
October 31, 2023
        October 31, 2022  
           
(Millions of Canadian dollars except units)
  
Units
(thousands)
    
Carrying
amount
         Units
(thousands)
     Carrying
amount
 
Deferred share unit plans
  
 
5,786
 
  
$
641
 
        5,429      $ 684  
Capital Markets compensation plan unit awards
  
 
9,934
 
  
 
1,098
 
        9,398        1,182  
Performance deferred share award plans
  
 
5,808
 
  
 
643
 
        6,006        757  
Deferred compensation plans
(1)
  
 
2,654
 
  
 
294
 
        2,537        319  
Other share-based plans
  
 
2,135
 
  
 
234
 
 
 
    1,772        218  
 
  
 
26,317
 
  
$
    2,910
 
 
 
    25,142      $   3,160  
 
(1)   Excludes obligations not determined based on the quoted market price of our common shares.
Compensation expenses recognized under deferred share and other plans
 
     For the year ended  
     
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
 
Deferred share unit plans
 
$
(51
  $ 20  
Capital Markets compensation plan unit awards
 
 
126
 
    210  
Performance deferred share award plans
 
 
216
 
    273  
Deferred compensation plans
 
 
213
 
    (261
Other share-based plans
 
 
104
 
    91  
 
 
$
608
 
  $ 333  
 
Note 22    Income taxes
Components of tax expense
 
   
    For the year ended  
     
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
 
Income taxes (recoveries) in Consolidated Statements of Income
               
Current tax
               
Tax expense for current year
 
$
4,081
 
  $ 4,151  
Adjustments for prior years
 
 
851
 
    (230
Recoveries arising from previously unrecognized tax loss, tax credit or temporary difference of a prior period
 
 
(100
     
 
 
 
4,832
 
    3,921  
Deferred tax
               
Origination and reversal of temporary difference
 
 
(1,286
    232  
Effects of changes in tax rates
 
 
(47
    4  
Adjustments for prior years
 
 
125
 
    231  
Recoveries arising from previously unrecognized tax loss, tax credit or temporary difference of a prior period, net
 
 
(24
    (86
 
 
 
(1,232
    381  
 
 
 
3,600
 
    4,302  
Income taxes (recoveries) in Consolidated Statements of Comprehensive Income and Changes in Equity
               
Other comprehensive income
               
Net unrealized gains (losses) on debt securities and loans at fair value through other comprehensive income
 
 
(10
    (633
Provision for credit losses recognized in income
 
 
 
    (2
Reclassification of net losses (gains) on debt securities and loans at fair value through other comprehensive income to income
 
 
(39
    2  
Unrealized foreign currency translation gains (losses)
 
 
20
 
    2  
Net foreign currency translation gains (losses) from hedging activities
 
 
(306
    (478
Reclassification of losses (gains) on net investment hedging activities to income
 
 
45
 
    6  
Net gains (losses) on derivatives designated as cash flow hedges
 
 
190
 
    628  
Reclassification of losses (gains) on derivatives designated as cash flow hedges to income
 
 
59
 
    70  
Remeasurement gains(losses) on employee benefit plans
 
 
(68
    287  
Net gains(losses) from fair value change due to credit risk on financial liabilities designated at fair value through profit or loss
 
 
(222
    622  
Net gains (losses) on equity securities designated at fair value through other comprehensive income
 
 
24
 
    (3
Share-based compensation awards
 
 
2
 
    10  
Distributions on other equity instruments and issuance costs
 
 
(59
    (45
 
 
 
(364
    466  
Total income taxes
 
$
3,236
 
  $ 4,768  
 
218            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

The following is an analysis of the differences between the income tax expense reflected in the Consolidated Statements of Income and the amounts calculated at the Canadian statutory tax rate.
Reconciliation to statutory tax rate
 
    
For the year ended
 
     
(Millions of Canadian dollars, except for percentage amounts)
 
October 31, 2023
   
October 31, 2022
 
Income taxes at Canadian statutory tax rate
 
$
5,115
 
  
 
27.7
  $ 5,269        26.2
Increase (decrease) in income taxes resulting from:
                                 
Lower average tax rate applicable to subsidiaries
 
 
(2,130
  
 
(11.5
    (428      (2.1
Tax-exempt income from securities
 
 
(337
  
 
(1.8
    (437      (2.2
Tax rate change
 
 
1,050
 
  
 
5.7
 
    4         
Other
 
 
(98
  
 
(0.6
    (106      (0.5
Income taxes in Consolidated Statements of Income / effective tax rate
 
$
3,600
 
  
 
19.5
  $ 4,302        21.4
The effective income tax rate of 19.5% decreased 190 bps, primarily due to lower average tax rate applicable to subsidiaries. This factor was partially offset by the impact of the Canada Recovery Dividend (CRD) and the 1.5% increase in the Canadian corporate tax rate in the current year.
Deferred tax assets and liabilities result from tax loss and tax credit carryforwards and temporary differences between the tax basis of assets and liabilities and their carrying amounts on our Consolidated Balance Sheets.
Significant components of deferred tax assets and liabilities
 
    
As at and for the year ended October 31, 2023
 
               
(Millions of Canadian dollars)
 
Net asset
beginning of
period
   
Change
through
equity
   
Change
through
profit or loss
   
Exchange
rate
differences
   
Acquisitions/
disposals
   
Other
   
Net asset
end of
period
 
Net deferred tax asset/(liability)
                                                       
Allowance for credit losses
 
$
987
 
 
$
 
 
$
185
 
 
$
2
 
 
$
 
 
$
 
 
$
1,174
 
Deferred compensation
 
 
1,504
 
 
 
(2
 
 
(2
 
 
22
 
 
 
 
 
 
 
 
 
1,522
 
Business realignment charges
 
 
12
 
 
 
 
 
 
11
 
 
 
            –
 
 
 
            –
 
 
 
 
 
 
23
 
Tax loss and tax credit carryforwards
 
 
322
 
 
 
 
 
 
(57
 
 
1
 
 
 
(5
 
 
 
 
 
261
 
Deferred (income) expense
 
 
6
 
 
 
(3
 
 
661
 
 
 
(11
 
 
(2
 
 
 
 
 
651
 
Financial instruments measured at fair value through other comprehensive income
 
 
(16
 
 
(330
 
 
            –
 
 
 
25
 
 
 
 
 
 
 
 
 
(321
Premises and equipment and intangibles
 
 
(1,234
 
 
 
 
 
302
 
 
 
(27
 
 
(8
 
 
 
 
 
(967
Pension and post-employment related
 
 
(435
 
 
68
 
 
 
37
 
 
 
1
 
 
 
(4
 
 
 
 
 
(333
Other
 
 
(113
 
 
4
 
 
 
95
 
 
 
24
 
 
 
 
 
 
 
 
 
10
 
 
 
$
  1,033
 
 
$
(263
 
$
1,232
 
 
$
37
 
 
$
(19
 
$
 
 
$
  2,020
 
Comprising
                                                       
Deferred tax assets
 
$
1,472
 
                                         
$
2,446
 
Deferred tax liabilities
 
 
(439
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(426
 
 
$
1,033
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
  2,020
 
       
     As at and for the year ended October 31, 2022  
               
(Millions of Canadian dollars)
  Net asset
beginning of
period
   
Change
through
equity
    Change
through
profit or loss
   
Exchange
rate
differences
    Acquisitions/
disposals
    Other     Net asset
end of
period
 
Net deferred tax asset/(liability)
                                                       
Allowance for credit losses
  $ 974     $     $ 2     $ 11     $     $     $ 987  
Deferred compensation
    1,614       (10     (211     101       10             1,504  
Business realignment charges
    11             1                         12  
Tax loss and tax credit carryforwards
    242             67       2       8       3       322  
Deferred (income) expense
    110       (1     (126     23                   6  
Financial instruments measured at fair value through other comprehensive income
    (19     (2           5                   (16
Premises and equipment and intangibles
    (836           4       (57     (345           (1,234
Pension and post-employment related
    (163     (287     19       4       (8           (435
Other
    4       22       (137     (6     4             (113
 
  $ 1,937     $ (278   $ (381   $ 83     $ (331   $   3     $ 1,033  
Comprising
                                                       
Deferred tax assets
  $ 2,011                                             $ 1,472  
Deferred tax liabilities
    (74  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    (439
 
  $ 1,937    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  $ 1,033  
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            219

Note 22    Income taxes
(continued)
 
The
tax loss and tax credit carryforwards amount of deferred tax assets primarily relates to losses and tax credits in our Canadian, U.S., and Caribbean operations. Deferred tax assets of $261 million were recognized at October 31, 2023 (October 31, 2022 – $322 million) in respect of tax losses and tax credits incurred in current or preceding years for which recognition is dependent on the projection of future taxable profits. Management’s forecasts support the assumption that it is probable that the results of future operations will generate sufficient taxable income to utilize the deferred tax assets. The forecasts rely on continued liquidity and capital support to our business operations, including tax planning strategies implemented
in
relation to such support.
As at October 31, 2023, unused tax losses and tax credits of $417 million and $18 million (October 31, 2022 – $429 million and $130 million) available to be offset against potential tax adjustments or future taxable income were not recognized as deferred tax assets. There are no unused tax losses that will expire within one year (October 31, 2022 – $nil), or in two to four years (October 31, 2022 – $nil) and there are $417 million of unused tax losses that will expire after four years (October 31, 2022 – $429 million). There are no tax credits that will expire in one year (October 31, 2022 – $nil), or in two to four years (October 31, 2022 – $93 million) and there are $18 million that will expire after four years (October 31, 2022 – $37 million).
The amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures for which deferred tax liabilities have not been recognized in the parent bank is $22 billion as at October 31, 2023 (October 31, 2022 – $26 billion).
Government of Canada Budget 2022
On December 15, 2022, Bill C-32, Fall Economic Statement Implementation Act, 2022 (the Bill), tabled by the Government of Canada, received royal assent. The Bill amends the Income Tax Act (Canada) to implement a CRD and a permanent increase in the Canadian corporate tax rate on banks and life insurer groups.
The CRD is a one-time 15% tax for 2022 determined based on the average taxable income above $1 billion for taxation years 2020 and 2021 and payable in equal installments over five years. The CRD resulted in an increase in income taxes of $1.2 billion for the year ended October 31, 2023, of which $1 billion was recognized in net income and $0.2 billion was recognized in other comprehensive income.
The permanent increase in the Canadian corporate tax rate is 1.5% on taxable income above $100 million and applies to taxation years that end after April 7, 2022, resulting in an increase in the Canadian statutory tax rate from 26.2% to 27.7% for the year ended October 31, 2023.
Tax examinations and assessments
During the year, we received proposal letters (the Proposals) from the Canada Revenue Agency (CRA) in respect of the 2018 taxation year, which
suggested
that Royal Bank of Canada owes additional taxes of approximately $228 million as they denied the deductibility of certain dividends.
On November 28, 2023, we received a reassessment in respect of the 2018 taxation year, consistent with the
 Proposals received during the year
. The reassessment received is
consistent with the reassessments received for taxation years 2012 to 2017 of approximately $1,628 million of additional income taxes and the reassessments received for taxation years 2009 to 2011 of approximately $434 million of additional income taxes and interest in respect of the same matter. These amounts represent the maximum additional taxes owing for those years.
Legislative amendments introduced in the 2015 Canadian Federal Budget resulted in disallowed deduction of dividends from transactions with Taxable Canadian Corporations including those hedged with Tax Indifferent Investors, namely pension funds and non-resident entities with prospective application effective May 1, 2017. The dividends to which the reassessments relate include both dividends in transactions similar to those which are the target of the 2015 legislative amendments and dividends which are unrelated to the legislative amendments.
It is possible that the CRA will reassess us for significant additional income tax for subsequent years on the same basis. In all cases, we are confident that our tax filing position was appropriate and intend to defend ourselves vigorously.
 
Note 23     Earnings per share
 
     For the year ended  
     
(Millions of Canadian dollars, except share and per share amounts)
 
October 31
2023
   
October 31
2022
 
Basic earnings per share
               
Net income
 
$
14,866
 
  $ 15,807  
Dividends on preferred shares and distributions on other equity instruments
 
 
(236
    (247
Net income attributable to non-controlling interests
 
 
(7
    (13
Net income available to common shareholders
 
$
14,623
 
  $ 15,547  
Weighted average number of common shares (in thousands)
 
 
1,391,020
 
      1,403,654  
Basic earnings per share (in dollars)
 
$
10.51
 
  $ 11.08  
Diluted earnings per share
               
Net income available to common shareholders
 
$
14,623
 
  $ 15,547  
Weighted average number of common shares (in thousands)
 
 
1,391,020
 
    1,403,654  
Stock options
(1)
 
 
1,483
 
    1,918  
Issuable under other share-based compensation plans
 
 
26
 
    462  
Average number of diluted common shares (in thousands)
 
 
1,392,529
 
    1,406,034  
Diluted earnings per share (in dollars)
 
$
10.50
 
  $ 11.06  
 
(1)   The dilutive effect of stock options was calculated using the treasury stock method. When the exercise price of options outstanding is greater than the average market price of our common shares, the options are excluded from the calculation of diluted earnings per share. For the year ended October 31, 2023, an average of 2,119,045 outstanding options with an average exercise price of $130.73 were excluded from the calculation of diluted earnings per share. For the year ended October 31, 2022, no outstanding options were excluded from the calculation of diluted earnings per share.
 
220            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Note 24    Guarantees, commitments, pledged assets and contingencies
Guarantees and commitments
We use guarantees and other off-balance sheet credit instruments to meet the financing needs of our clients.
The table below summarizes our maximum exposure to credit losses related to our guarantees and commitments provided to third parties. The maximum exposure to credit risk relating to a guarantee is the maximum risk of loss if there was a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions, insurance policies or from collateral held or pledged. The maximum exposure to credit risk relating to a commitment to extend credit is the full amount of the commitment. In both cases, the maximum risk exposure is significantly greater than the amount recognized as a liability in our Consolidated Balance Sheets.
 
     Maximum exposure
to credit losses
 
    As at      
     
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
 
Financial guarantees
               
Financial standby letters of credit
 
$
23,314
 
  $ 20,291  
Commitments to extend credit
               
Backstop liquidity facilities
 
 
51,544
 
    45,336  
Credit enhancements
 
 
3,226
 
    2,960  
Documentary and commercial letters of credit
 
 
291
 
    318  
Other commitments to extend credit
 
 
301,132
 
    284,602  
Other credit-related commitments
               
Securities lending indemnifications
 
 
95,055
 
    90,693  
Performance guarantees
 
 
7,503
 
    7,333  
Sponsored member guarantees
 
 
14,043
 
    1,241  
Other
 
 
203
 
    360  
Our credit review process, our policy for requiring collateral security, and the types of collateral security held are generally the same for guarantees and commitments as for loans. Our clients generally have the right to request settlement of, or draw on, our guarantees and commitments within one year. However, certain guarantees can only be drawn if specified conditions are met. These conditions, along with collateral requirements, are described below. We believe that it is highly unlikely that all or substantially all of the guarantees and commitments will be drawn or settled within one year, and contracts may expire without being drawn or settled.
Financial guarantees
Financial standby letters of credit
Financial standby letters of credit represent irrevocable assurances that we will make payments in the event that a client cannot meet its payment obligations to the third party. For certain guarantees, the guaranteed party can request payment from us even though the client has not defaulted on its obligations. These guarantees generally have a term of five to seven years.
Our policy for requiring collateral security with respect to these instruments and the types of collateral security held is generally the same as for loans. When collateral security is taken, it is determined on an account-by-account basis according to the risk of the borrower and the specifics of the transaction. Collateral security may include cash, securities and other assets pledged.
Commitments to extend credit
Backstop liquidity facilities
Backstop liquidity facilities are provided to ABCP conduit programs administered by us and third parties as an alternative source of financing in the event that such programs are unable to access commercial paper markets, or in limited circumstances, when predetermined performance measures of the financial assets acquired or financed by these programs are not met. We also provide backstop liquidity facilities to certain third-party commercial mortgage securitization vehicles. The average remaining term of these liquidity facilities is approximately four years.
The terms of the backstop liquidity facilities do not require us to advance money to these programs in the event of bankruptcy or insolvency and generally do not require us to purchase non-performing or defaulted assets.
Credit enhancements
We provide partial credit enhancement to multi-seller ABCP programs administered by us to protect commercial paper investors in the event that the collections on the underlying assets together with the transaction-specific credit enhancements or the liquidity facilities prove to be insufficient to pay for maturing commercial paper. Each of the asset pools is structured to achieve a high investment grade credit profile through credit enhancements required to be provided by the third-party sellers related to each transaction. The average remaining term of these credit facilities is approximately three years.
Documentary and commercial letters of credit
Documentary and commercial letters of credit, which are written undertakings by us on behalf of a client authorizing a third party to draw drafts on us up to a stipulated amount under specific terms and conditions, where some are collateralized based on the underlying agreement with the client and others are collateralized by cash deposits or other assets of the client.
Other commitments to extend credit
Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, reverse repurchase agreements, bankers’ acceptances or letters of credit where we do not have the ability to unilaterally withdraw the credit extended to the borrower.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            221

Note 24    Guarantees, commitments, pledged assets and contingencies
(continued)
 
Other credit-related commitments
Securities lending indemnifications
In securities lending transactions, we act as an agent for the owner of a security, who agrees to lend the security to a borrower
fo
r a fee, under the terms of a pre-arranged contract. The borrower must fully collateralize the security loaned at all times. As part of this custodial business, an indemnification may be provided to securities lending customers to ensure that the fair value of securities loaned will be returned in the event that the borrower fails to return the borrowed securities and the collateral held is insufficient to cover the fair value of those securities. These indemnifications normally terminate without being drawn upon. The term of these indemnifications varies, as the securities loaned are recallable on demand. Collateral held for our securities lending transactions typically includes cash, securities that are issued or guaranteed by the Canadian government, U.S. government or other OECD countries or high quality debt or equity instruments.
Performance guarantees
Performance guarantees represent irrevocable assurances that we will make payments to third-party beneficiaries in the event that a client fails to perform under a specified non-financial contractual obligation. Such obligations typically include works and service contracts, performance bonds, and warranties related to international trade. The term of these guarantees can range up to three to seven years.
Our policy for requiring collateral security with respect to these instruments and the types of collateral security held is generally the same as for loans. When collateral security is taken, it is determined on an account-by-account basis according to the risk of the borrower and the specifics of the transaction. Collateral security may include cash, securities and other assets pledged.
Sponsored member guarantees
For certain overnight repurchase and reverse repurchase transactions, we act as a sponsoring member to eligible clients to clear transactions through the Fixed Income Clearing Corporation (FICC). We also provide a guarantee to FICC for the prompt and full payment and performance of our sponsored member clients’ respective obligations under the FICC rules. The guarantees are fully collateralized by cash and securities issued or guaranteed by the U.S. government.
Indemnifications
In the normal course of our operations, we provide indemnifications which are often standard contractual terms to counterparties in transactions such as purchase and sale contracts, fiduciary, agency, licensing, custodial and service agreements, clearing system arrangements, participation as a member of exchanges, director/officer contracts and leasing transactions. These indemnification agreements may require us to compensate the counterparties for costs incurred as a result of changes in laws and regulations (including tax legislation) or as a result of litigation claims or statutory sanctions that may be suffered by the counterparty as a consequence of the transaction. The terms of these indemnification agreements vary based on the contract. The nature of the indemnification agreements prevents us from making a reasonable estimate of the maximum potential amount we could be required to pay to counterparties. Historically, we have not made any significant payments under such indemnifications.
Uncommitted amounts
Uncommitted amounts represent undrawn credit facilities for which we have the ability to unilaterally withdraw the credit extended to the borrower at any time. These include both retail and commercial commitments. As at October 31, 2023, the total balance of uncommitted amounts was $398 billion (October 31, 2022 – $363 billion).
Other commitments

We invest in private companies, directly or through third-party investment funds, including venture capital funds, private equity funds, Small Business Investment Companies, real estate funds and Low Income Housing Tax Credit funds. These funds are generally structured as closed-end limited partnerships wherein we hold a limited partner interest. For the year ended October 31, 2023, we have unfunded commitments of $1,832 million (October 31, 2022 – $1,421 million) representing the aggregate amount of cash we are obligated to contribute as capital to these partnerships under the terms of the relevant contracts.
Pledged assets and collateral
In the ordinary course of business, we pledge assets and enter into collateral agreements with terms and conditions that are usual and customary to our regular lending, borrowing and trading activities recorded on our Consolidated Balance Sheets. The following are examples of our general terms and conditions on pledged assets and collateral:
   
The risks and rewards of the pledged assets reside with the pledgor.
   
The pledged asset is returned to the pledgor when the necessary conditions have been satisfied.
   
The right of the pledgee to sell or re-pledge the asset is dependent on the specific agreement under which the collateral is pledged.
   
If there is no default, the pledgee must return the comparable asset to the pledgor upon satisfaction of the obligation.
We are also required to provide intraday pledges to the Bank of Canada when we use a real-time electronic wire transfer system that
continuously
processes all Canadian dollar large-value or time-critical payments throughout the day. The pledged assets earmarked for our Canadian dollar large-value or time-critical payments are normally released back to us at the end of the settlement cycle each day. Therefore, the pledged assets amount is not included in the following table. For the year ended October 31, 2023, we had on average $1 billion of assets pledged intraday to the Bank of Canada on a daily basis (October 31, 2022 – $2 billion). There are infrequent occasions where we are required to take an overnight advance from the Bank of Canada to cover a settlement requirement, in which case an equivalent value of the pledged assets would be used to secure the advance. There were no overnight advances taken on October 31, 2023 and October 31, 2022.
 
222            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Assets pledged against liabilities and collateral assets held or re-pledged
 
   
       As at        
     
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
 
Sources of pledged assets and collateral
               
Bank assets
               
Loans
 
$
102,944
 
  $ 97,178  
Securities
 
 
107,122
 
    70,334  
Other assets
 
 
28,953
 
    40,318  
 
 
 
239,019
 
    207,830  
Client assets
(1)
               
Collateral received and available for sale or re-pledging
 
 
502,109
 
    465,484  
Less: not sold or re-pledged
 
 
(6,876
    (9,192
 
 
 
495,233
 
    456,292  
 
 
$
734,252
 
  $ 664,122  
Uses of pledged assets and collateral
               
Securities borrowing and lending
 
$
168,681
 
  $ 158,748  
Obligations related to securities sold short
 
 
46,260
 
    45,288  
Obligations related to securities lent or sold under repurchase agreements
 
 
331,784
 
    274,392  
Securitization
 
 
38,686
 
    40,438  
Covered bonds
 
 
69,802
 
    62,905  
Derivative transactions
 
 
40,352
 
    49,556  
Foreign governments and central banks
 
 
9,111
 
    9,503  
Clearing systems, payment systems and depositories
 
 
10,709
 
    8,263  
Other
 
 
18,867
 
    15,029  
 
 
$
 734,252
 
  $  664,122  
 
(1)   Primarily relates to Obligations related to securities lent or sold under repurchase agreements, Securities lent and Derivative transactions.
 
Note 25    Legal and regulatory matters
We are a large global institution that is subject to many different complex legal and regulatory requirements that continue to evolve. We are and have been subject to a variety of legal proceedings, including civil claims and lawsuits, regulatory examinations, investigations, audits and requests for information by various governmental regulatory agencies and law enforcement authorities in various jurisdictions. Some of these matters may involve novel legal theories and interpretations and may be advanced under criminal as well as civil statutes, and some proceedings could result in the imposition of civil, regulatory enforcement or criminal penalties. We review the status of all proceedings on an ongoing basis and will exercise judgment in resolving them in such manner as we believe to be in our best interest. In many proceedings, it is inherently difficult to determine whether any loss is probable or to reliably estimate the amount of any loss. This is an area of significant judgment and uncertainty and the extent of our financial and other exposure to these proceedings after taking into account current provisions could be material to our results of operations in any particular period though we do not believe that the ultimate resolution of any such matter will have a material effect on our consolidated financial condition. The following is a description of our significant legal proceedings. Based on the facts currently known, except as may otherwise be noted, it is not possible at this time for us to predict the ultimate outcome of these proceedings or the timing of their resolution.
London interbank offered rate (LIBOR) litigation
Royal Bank of Canada and other U.S. dollar panel banks have been named as defendants in private lawsuits filed in the U.S. with respect to the setting of U.S. dollar LIBOR including a number of class action lawsuits which have been consolidated before the U.S. District Court for the Southern District of New York. The complaints in those private lawsuits assert claims against us and other panel banks under various U.S. laws, including U.S. antitrust laws, the U.S. Commodity Exchange Act, and state law. On December 30, 2021, the U.S. Court of Appeals for the Second Circuit issued an opinion affirming in part and reversing in part certain district court rulings that had dismissed a substantial portion of the consolidated class action on jurisdictional grounds and lack of standing. The Second Circuit remanded the matter to the district court for further proceedings consistent with its decision.
On July 21, 2023, Royal Bank of Canada and several other defendants executed a settlement agreement resolving one of the LIBOR class actions brought on behalf of certain plaintiffs that purchased U.S. dollar LIBOR-based instruments. The settlement was preliminarily approved on August 1, 2023 and remains subject to final court approval.
Royal Bank of Canada Trust Company (Bahamas) Limited proceedings
On April 13, 2015, a French investigating judge notified Royal Bank of Canada Trust Company (Bahamas) Limited (RBC Bahamas) of the issuance of an
ordonnance de renvoi
referring RBC Bahamas and other unrelated persons to the French
tribunal correctionnel
to face the charge of complicity in estate tax fraud relating to actions taken relating to a trust for which RBC Bahamas serves as trustee. RBC Bahamas believes that its actions did not violate French law and contested the charge in the French court. On January 12, 2017, the French court acquitted all parties including RBC Bahamas and on June 29, 2018, the French appellate court affirmed the acquittals. The acquittals were appealed and on January 6, 2021, the French Supreme Court issued a judgment reversing the decision of the French Court of Appeal and sent the case back to the French Court of Appeal for rehearing. The retrial before the Court of Appeal commenced on September 18, 2023 and has concluded. The Court of Appeal’s decision is expected to be issued on March 5, 2024.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            223

Note 25    Legal and regulatory matters
(continued)
 
On October 28, 2016, Royal Bank of Canada was granted an exemption by the U.S. Department of Labor that allows Royal Bank of Canada and its current and future affiliates to continue to qualify for the Qualified Professional Asset Manager (QPAM) exemption under the Employee Retirement Income Security Act despite any potential conviction of RBC Bahamas in the French proceeding for a temporary one year period from the date of conviction. We expect the Department of Labor to publish a technical correction to the prior one-year exemption in advance of the Court of Appeals decision. The anticipated technical correction will reflect the fact that the decision will be rendered by an appellate court, and not the district court. In addition, the Department of Labor has proposed amendments to the QPAM exemption. If the amendments are finalized as proposed, it is unclear how they would affect Royal Bank of Canada’s ability to obtain relief beyond the one-year temporary exemption period.
RBC Bahamas continues to review the trustee’s and the trust’s legal obligations, including liabilities and potential liabilities under applicable tax and other laws.
Foreign exchange matters
Beginning in 2015, putative class actions were brought against Royal Bank of Canada and/or RBC Capital Markets, LLC in the U.S., Canada, the United Kingdom and Brazil. These actions were each brought against multiple foreign exchange dealers and alleged, among other things, collusive behaviour in global foreign exchange trading. By May 2023 all of the U.S., Canadian and U.K. actions were settled or dismissed, and while the Brazilian actions have not been resolved, our exposure to these actions is de minimis to Royal Bank of Canada.
U.S. communications recordkeeping inquiry
In October 2022, our subsidiary RBC Capital Markets, LLC received a request for information and documents from the Securities and Exchange Commission (SEC) concerning compliance with records preservation requirements relating to business communications exchanged on electronic channels that have not been approved by RBC Capital Markets, LLC. RBC Capital Markets, LLC is cooperating with the SEC’s inquiry. As has been publicly reported, the SEC is conducting similar inquiries into recordkeeping practices at multiple other financial institutions.
U.K. Competition and Markets Authority investigation
In November 2018, the U.K. Competition and Markets Authority (CMA) started an investigation of Royal Bank of Canada and RBC Europe Limited relating to alleged anti-competitive conduct between 2009 and 2013, involving U.K. government bonds and related derivatives. In May 2023, the CMA issued a statement of objections to Royal Bank of Canada and RBC Europe Limited, and certain other financial institutions. Royal Bank of Canada and RBC Europe Limited are contesting the CMA’s case.
In June 2023, RBC Europe Limited and RBC Capital Markets, LLC, among other financial institutions, were named as defendants in a putative class action filed in the U.S. by plaintiffs alleging anti-competitive conduct in the U.K. government bonds market. In September 2023, the defendants filed a motion to dismiss the complaint.
Vacation pay class action
On December 29, 2022, the Ontario Superior Court of Justice certified a class in an action against RBC Dominion Securities Limited and RBC Dominion Securities Inc. (together, RBC DS). The action commenced in July 2020, asserting claims relating to statutory vacation pay and public holiday pay for investment advisors, associates and assistants in our Canadian Wealth Management business, with the exception of those employed in Alberta and British Columbia.
Other matters
We are a defendant in a number of other actions alleging that certain of our practices and actions were improper. The lawsuits involve a variety of complex issues and the timing of their resolution is varied and uncertain. Management believes that we will ultimately be successful in resolving these lawsuits, to the extent that we are able to assess them, without material financial impact to the Bank. This is, however, an area of significant judgment and the potential liability resulting from these lawsuits could be material to our results of operations in any particular period.
Various other legal proceedings are pending that challenge certain of our other practices or actions. While this is an area of significant judgment and some matters are currently inestimable, we consider that the aggregate liability, to the extent that we are able to assess it, resulting from these other proceedings will not be material to our consolidated financial position or results of operations.
 
Note 26    Related party transactions
Related parties
Related parties include associated companies over which we have direct or indirect control or have significant influence and post-employment benefit plans for the benefit of our employees. Related parties also include key management personnel (KMP), the Board of Directors (Directors), close family members of KMP and Directors, and entities which are, directly or indirectly, controlled by or jointly controlled by KMP, Directors or their close family members.
Key management personnel and Directors
KMP are defined as those persons having authority and responsibility for planning, directing and controlling our activities, directly or indirectly. They include the senior members of our organization called the Group Executive (GE). The GE is comprised of the President and Chief Executive Officer, and the Chief Officers and Group Heads, who report directly to him. The Directors do not plan, direct, or control the activities of the entity; they oversee the management of the business and provide stewardship.
 
224            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Compensation of Key management personnel and Directors
 
   
    For the year ended  
     
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022 
(1)
 
Salaries and other short-term employee benefits
(2)
 
$
23
 
  $ 27  
Post-employment benefits
(3)
 
 
2
 
    2  
Share-based payments
 
 
39
 
    40  
 
 
$
64
 
  $ 69  
 
(1)   During the year ended October 31, 2022 certain executives, who were members of the Bank’s GE as at October 31, 2021, left the Bank and therefore were no longer part of KMP. Compensation for the year ended October 31, 2022 attributable to the former executives, including benefits and share-based payments relating to awards granted in prior years was $14 million.
(2)   Includes the portion of the annual variable short-term incentive bonus that certain executives elected to receive in the form of DSUs. Refer to Note 21 for further details. Directors receive retainers but do not receive salaries and other short-term employee benefits.
(3)   Directors do not receive post-employment benefits.
Stock options,
share-based
awards and shares held by Key management personnel, Directors and their close family members
 
     As at              
   
October 31, 2023
(1)
        October 31, 2022 (2)  
           
(Millions of Canadian dollars, except number of units)
 
No. of
units held
   
Value
         No. of
units held
    Value  
Stock options
(3)
 
 
2,805,471
 
 
$
26
 
        2,409,294     $ 59  
Other non-option share-based awards
(3)
 
 
991,909
 
 
 
110
 
        914,496       115  
RBC common and preferred shares
 
 
181,648
 
 
 
20
 
 
 
    170,312       22  
 
 
 
3,979,028
 
 
$
156
 
 
 
    3,494,102     $ 196  
 
(1)   During the year ended October 31, 2023, certain directors, who were members of the Board of Directors as at October 31, 2022, retired. Total shareholdings held upon their retirement was 32,958 units with a value of $4 million.
(2)   During the year ended October 31, 2022 certain executives, who were members of the Bank’s GE as at October 31, 2021, left the Bank and therefore were no longer KMP. Total shareholdings and options held upon their departure was 569,470 units with a value of $34 million.
(3)   Directors do not receive stock options or any other non-option share-based awards.
Transactions, arrangements and agreements involving Key management personnel, Directors and their close family members
In the normal course of business, we provide certain banking services to KMP, Directors, and their close family members. These transactions were made on substantially the same terms, including interest rates and security, as for comparable transactions with persons of a similar standing and did not involve more than the normal risk of repayment or present other unfavourable features.
As at October 31, 2023, total loans to KMP, Directors and their close family members were $18 million (October 31, 2022 – $14 million). We have no Stage 3 allowance or provision for credit losses relating to these loans as at and for the years ended October 31, 2023 and October 31, 2022. No guarantees, pledges or commitments have been given to KMP, Directors or their close family members.
Joint ventures and associates
In the normal course of business, we provide certain banking and financial services to our joint ventures and associates, including loans, interest and non-interest bearing deposits. These transactions meet the definition of related party transactions and were made on substantially the same terms as for comparable transactions with third parties.
As at October 31, 2023, loans to joint ventures and associates were $217 million (October 31, 2022 – $251 million) and deposits from joint ventures and associates were $77 million (October 31, 2022 – $20 million). We have no stage 3 allowance or provision for credit losses relating to loans to joint ventures and associates as at and for the years ended October 31, 2023 and October 31, 2022. $1 million of guarantees have been given to joint ventures and associates for the year ended October 31, 2023 (October 31, 2022 – $1 million).
Other transactions, arrangements or agreements involving joint ventures and associates
 
   
    As at or for the year ended  
     
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
 
Commitments and other contingencies
 
$
1,089
 
  $ 829  
Other fees received for services rendered
 
 
55
 
    50  
Other fees paid for services received
 
 
108
 
    107  
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            225

Note 27    Results by business segment

Composition of business segments
For management purposes, based on the products and services offered, we are organized into four business segments: Personal & Commercial Banking, Wealth Management, Insurance, and Capital Markets. Effective the first quarter of 2023, we simplified our reporting structure by eliminating the Investor & Treasury Services segment and moving its former businesses to existing segments. We moved our Investor Services business to our Wealth Management segment, and our Treasury Services and Transaction Banking businesses to our Capital Markets segment. Effective the fourth quarter of 2023, we moved the Investor Services lending business from our Wealth Management segment to our Capital Markets segment. From a reporting perspective, there were no changes to our Personal & Commercial Banking and Insurance segments. Comparative results have been revised to conform to our new basis of segment presentation.
Personal & Commercial Banking provides a broad suite of financial products and services to individual and business clients for their day-to-day banking, investing and financing needs through two businesses: Canadian Banking and Caribbean & U.S. Banking. In Canada, we provide a broad suite of financial products and services through our large branch network, ATMs, and mobile sales network. In the Caribbean and the U.S., we offer a broad range of financial products and services in targeted markets. Non-interest income in Personal & Commercial Banking mainly comprises Service charges, Mutual fund revenue and Card service revenue.
Wealth Management serves high net worth and ultra-high net worth individual and institutional clients with a comprehensive suite of advice-based solutions and strategies as well as personalized banking relationships through our lines of businesses in Canada, the U.S., the U.K., Europe and Asia, including Canadian Wealth Management, U.S. Wealth Management (including City National), Global Asset Management, International Wealth Management, and Investor Services. Non-interest income in Wealth Management mainly comprises Investment management and custodial fees, Mutual fund revenue and Securities brokerage commissions.
Insurance has operations in Canada and globally, operating under two business lines: Canadian Insurance and International Insurance, providing a wide range of advice and solutions for individual and business clients including life, health, wealth, property & casualty, travel, group benefits, annuities, and reinsurance. In Canada, we offer our products and services through a wide variety of channels, comprised of mobile advisors, advice centres, RBC Insurance
®
stores, and digital platforms as well as through independent brokers and partners. Outside Canada, we operate in reinsurance and retrocession markets globally offering life, critical illness, disability and longevity reinsurance products. Non-interest income in Insurance is comprised of Insurance premiums, and investment and fee income.
Capital Markets provides expertise in advisory & origination, sales & trading, lending & financing and transaction banking to corporations, institutional clients, asset managers, private equity firms and governments globally in our two main business lines: Corporate & Investment Banking and Global Markets. In North America, we offer a full suite of products and services which include equity and debt origination and distribution, advisory services, and sales & trading. Outside North America, we have a targeted strategic presence in the U.K. & Europe, Australia, Asia & other markets aligned to our global expertise. In the U.K. & Europe, we offer a diversified set of capabilities in key industry sectors of focus. In Australia and Asia, we compete with global and regional investment banks in targeted areas aligned to our global expertise, including fixed income distribution and currencies trading, secured financing, as well as corporate and investment banking. Non-interest income in Capital Markets mainly includes Trading revenue, Underwriting and other advisory fees and Credit fees.
All other enterprise level activities that are not allocated to these four business segments, such as certain treasury and liquidity management activities, including amounts associated with unattributed capital, and consolidation adjustments, including the elimination of the Taxable equivalent basis (Teb) gross-up amounts, are included in Corporate Support. Teb adjustments gross up income from certain tax-advantaged sources from Canadian taxable corporate dividends and U.S. tax credit investments recorded in Capital Markets to their effective tax equivalent value with the corresponding offset recorded in the provision for income taxes. Management believes that these Teb adjustments are necessary for Capital Markets to reflect how it is managed and enhances the comparability of revenue across our taxable and tax-advantaged sources. Our use of Teb adjustments may not be comparable to similarly adjusted amounts at other financial institutions. The Teb adjustment for the year ended October 31, 2023 was $559 million (October 31, 2022 – $572 million). Gains (losses) on economic hedges of our U.S. Wealth Management (including City National) share-based compensation plans, which are reflected in revenue, and related variability in share-based compensation expense driven by changes in the fair value of liabilities relating to these plans are also included in Corporate Support as this presentation more closely aligns with how we view business performance and manage the underlying risks.
Geographic segments
For geographic reporting, our segments are grouped into Canada, the U.S. and Other International. Transactions are primarily recorded in the location that best reflects the risk due to negative changes in economic conditions and prospects for growth due to positive economic changes. This location frequently corresponds with the location of the legal entity through which the business is conducted and the location of our clients. Transactions are recorded in the local currency and are subject to foreign exchange rate fluctuations with respect to the movement in the Canadian dollar.
Management reporting framework
Our management reporting framework is intended to measure the performance of each business segment as if it were a stand-alone business and reflects the way that the business segment is managed. This approach is intended to ensure that our business segments’ results include all applicable revenue and expenses associated with the conduct of their business and depicts how management views those results. We regularly monitor these segment results for the purpose of making decisions about resource allocation and performance assessment. These items do not impact our consolidated results.
 
226            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

The expenses in each business segment may include costs or services directly incurred or provided on their behalf at the enterprise level. For other costs not directly attributable to one of our business segments, we use a management reporting framework that uses assumptions and methodologies for allocating overhead costs and indirect expenses to our business segments and that assists in the attribution of capital and the transfer pricing of funds to our business segments in a manner that consistently measures and aligns the economic costs with the underlying benefits and risks of that specific business segment. Activities and business conducted between our business segments are generally at market rates. All other enterprise level activities that are not allocated to our four business segments are reported under Corporate Support.
Our assumptions and methodologies used in our management reporting framework are periodically reviewed by us to ensure that they remain valid. The capital attribution methodologies involve a number of assumptions that are revised periodically.
 
    
For the year ended October 31, 2023
 
                   
(Millions of Canadian dollars)  
Personal &
Commercial
Banking
   
Wealth
Management
   
Insurance
   
Capital
Markets 
(1)
   
Corporate
Support 
(1)
   
Total
   
Canada
   
United
States
   
Other
International
 
Net interest income
(2)
 
$
16,074
 
 
$
4,495
 
 
$
 
 
$
3,379
 
 
$
1,181
 
 
$
25,129
 
 
$
18,752
 
 
$
5,065
 
 
$
1,312
 
Non-interest income
 
 
6,046
 
 
 
13,049
 
 
 
5,675
 
 
 
7,672
 
 
 
(1,442
 
 
31,000
 
 
 
14,851
 
 
 
8,563
 
 
 
7,586
 
Total revenue
 
 
22,120
 
 
 
17,544
 
 
 
5,675
 
 
 
11,051
 
 
 
(261
 
 
56,129
 
 
 
33,603
 
 
 
13,628
 
 
 
8,898
 
Provision for credit losses
 
 
1,579
 
 
 
328
 
 
 
 
 
 
561
 
 
 
 
 
 
2,468
 
 
 
1,648
 
 
 
784
 
 
 
36
 
Insurance policyholder benefits, claims and acquisition expense
 
 
 
 
 
 
 
 
4,022
 
 
 
 
 
 
 
 
 
4,022
 
 
 
2,161
 
 
 
 
 
 
1,861
 
Non-interest expense
 
 
9,215
 
 
 
14,128
 
 
 
653
 
 
 
6,509
 
 
 
668
 
 
 
31,173
 
 
 
15,319
 
 
 
11,177
 
 
 
4,677
 
Net income (loss) before income taxes
 
 
11,326
 
 
 
3,088
 
 
 
1,000
 
 
 
3,981
 
 
 
(929
 
 
18,466
 
 
 
14,475
 
 
 
1,667
 
 
 
2,324
 
Income taxes (recoveries)
 
 
3,060
 
 
 
661
 
 
 
197
 
 
 
(158
 
 
(160
 
 
3,600
 
 
 
4,770
 
 
 
(1,103
 
 
(67
Net income
 
$
8,266
 
 
$
2,427
 
 
$
803
 
 
$
4,139
 
 
$
(769
 
$
14,866
 
 
$
9,705
 
 
$
2,770
 
 
$
2,391
 
Non-interest expense includes:
                                                                       
Depreciation and amortization
 
$
961
 
 
$
1,234
 
 
$
58
 
 
$
509
 
 
$
 
 
$
2,762
 
 
$
1,570
 
 
$
836
 
 
$
356
 
Impairment of other intangibles
 
 
13
 
 
 
81
 
 
 
1
 
 
 
2
 
 
 
11
 
 
 
108
 
 
 
28
 
 
 
65
 
 
 
15
 
                   
Total assets
 
$
636,046
 
 
$
179,227
 
 
$
22,591
 
 
$
1,100,172
 
 
$
66,956
 
 
$
2,004,992
 
 
$
    1,042,663
 
 
$
    639,296
 
 
$
323,033
 
Total assets include:
                                                                       
Additions to premises and equipment and intangibles
 
$
463
 
 
$
1,008
 
 
$
53
 
 
$
311
 
 
$
639
 
 
$
2,474
 
 
$
1,334
 
 
$
700
 
 
$
440
 
                   
Total liabilities
 
$
635,952
 
 
$
177,389
 
 
$
23,355
 
 
$
1,099,893
 
 
$
(49,357
 
$
1,887,232
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                                         
     For the year ended October 31, 2022  
                   
(Millions of Canadian dollars)   Personal &
Commercial
Banking
    Wealth
Management (3)
    Insurance     Capital
Markets (1), (3)
    Corporate
Support (1)
    Total     Canada     United States     Other
International
 
Net interest income
(2)
  $ 14,019     $ 3,886     $     $ 4,944     $ (132   $ 22,717     $ 15,761     $ 5,423     $ 1,533  
Non-interest income
    6,124       12,357       3,510       5,005       (728     26,268       13,508       6,364       6,396  
Total revenue
    20,143       16,243       3,510       9,949       (860     48,985       29,269       11,787       7,929  
Provision for credit losses
    463       33             (13     1       484       600       60       (176
Insurance policyholder benefits, claims and acquisition expense
                1,783                   1,783       (466           2,249  
Non-interest expense
    8,437       12,015       588       5,816       (247     26,609       13,648       9,006       3,955  
Net income (loss) before income taxes
    11,243       4,195       1,139       4,146       (614     20,109       15,487       2,721       1,901  
Income taxes (recoveries)
    2,873       985       282       778       (616     4,302       3,615       452       235  
Net income
  $ 8,370     $ 3,210     $ 857     $ 3,368     $ 2     $ 15,807     $ 11,872     $ 2,269     $ 1,666  
Non-interest expense includes:
                                                                       
Depreciation and amortization
  $ 942     $ 1,109     $ 57     $ 514     $ 12     $ 2,634     $ 1,617     $ 776     $ 241  
Impairment of other intangibles
    11       2       2       3             18       11       5       2  
                   
Total assets
  $ 602,824     $ 198,380     $ 21,918     $ 1,033,978     $ 60,119     $ 1,917,219     $ 992,485     $ 570,255     $ 354,479  
Total assets include:
                                                                       
Additions to premises and equipment and intangibles
  $ 394     $ 2,347     $ 49     $ 258     $ 630     $ 3,678     $ 1,263     $ 666     $ 1,749  
                   
Total liabilities
  $ 602,741     $ 198,329     $ 22,588     $     1,033,689     $     (48,303   $     1,809,044    
 
 
 
 
 
 
 
 
 
 
 
 
(1)   Taxable equivalent basis.
(2)   Interest revenue is reported net of interest expense as we rely primarily on net interest income as a performance measure.
(3)   Amounts have been revised from those previously presented to conform to our new basis of segment presentation.
 
Note 28    Nature and extent of risks arising from financial instruments
We are exposed to credit, market and liquidity and funding risks as a result of holding financial instruments. Our risk measurement and objectives, policies and methodologies for managing these risks are disclosed in the shaded text along with those tables specifically marked with an asterisk (*) in the Credit risk section of Management’s Discussion and Analysis. These shaded text and tables are an integral part of these Consolidated Financial Statements.
Concentrations of credit risk exist if a number of our counterparties are engaged in similar activities, are located in the same geographic region or have comparable economic characteristics such that their ability to meet contractual obligations would be similarly affected by changes in economic, political or other conditions.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            227

Note 28    Nature and extent of risks arising from financial instruments
(continued)
 

Concentrations of credit risk indicate the relative sensitivity of our performance to developments affecting a particular industry or geographic location. The amounts of credit exposure associated with certain of our on- and off-balance sheet financial instruments are summarized in the following tables.
 
    
As at October 31, 2023
 
                   
(Millions of Canadian dollars,
except percentage amounts)
 
Canada
   
%
   
United
States
   
%
   
Europe
   
%
   
Other
International
   
%
   
Total
 
On-balance sheet assets other than derivatives
(1)
 
$
798,259
 
 
 
66%
 
 
$
294,670
 
 
 
24%
 
 
$
76,637
 
 
 
6%
 
 
$
50,147
 
 
 
4%
 
 
$
  1,219,713
 
Derivatives before master netting agreements
(2), (3)
 
 
27,221
 
 
 
19%
 
 
 
36,698
 
 
 
25%
 
 
 
67,406
 
 
 
46%
 
 
 
14,470
 
 
 
10%
 
 
 
145,795
 
 
 
$
825,480
 
 
 
60%
 
 
$
331,368
 
 
 
24%
 
 
$
  144,043
 
 
 
11%
 
 
$
64,617
 
 
 
5%
 
 
$
1,365,508
 
Off-balance sheet credit instruments
(4)
                                                                       
Committed and uncommitted
(5)
 
$
427,849
 
 
 
56%
 
 
$
252,071
 
 
 
33%
 
 
$
51,393
 
 
 
8%
 
 
$
23,183
 
 
 
3%
 
 
$
754,496
 
Other
 
 
85,222
 
 
 
61%
 
 
 
30,737
 
 
 
22%
 
 
 
21,428
 
 
 
15%
 
 
 
2,731
 
 
 
2%
 
 
 
140,118
 
 
 
$
  513,071
 
 
 
57%
 
 
$
  282,808
 
 
 
32%
 
 
$
72,821
 
 
 
8%
 
 
$
25,914
 
 
 
3%
 
 
$
894,614
 
 
 
     As at October 31, 2022  
                   
(Millions of Canadian dollars,
except percentage amounts)
  Canada     %     United
States
    %     Europe     %     Other
International
    %     Total  
On-balance sheet assets other than derivatives
(1)
  $ 759,037       65%     $ 263,736       23%     $ 87,671       8%     $ 48,991       4%     $ 1,159,435  
Derivatives before master netting agreements
(2), (3)
    32,434       20%       35,921       23%       72,885       46%       17,439       11%       158,679  
 
  $   791,471       60%     $   299,657       23%     $   160,556       12%     $ 66,430       5%     $   1,318,114  
Off-balance sheet credit instruments
(4)
                                                                       
Committed and uncommitted
(5)
  $ 398,719       57%     $ 223,624       32%     $ 52,669       8%     $ 20,857       3%     $ 695,869  
Other
    79,110       66%       13,847       12%       24,476       20%       2,485       2%       119,918  
 
  $ 477,829       59%     $ 237,471       29%     $ 77,145       9%     $ 23,342       3%     $ 815,787  
 
(1)   Includes Assets purchased under reverse repurchase agreements and securities borrowed, Loans and Customers’ liability under acceptances. The largest concentrations in Canada are Ontario at 57% (October 31, 2022 – 56%), the Prairies at 15% (October 31, 2022 – 15%), British Columbia and the territories at 14% (October 31, 2022 – 15%) and Quebec at 10% (October 31, 2022 – 10%). No industry accounts for more than 20% (October 31, 2022 – 20%) of total on-balance sheet credit instruments, with the exception of Banking, which accounted for 25% (October 31, 2022 – 26%), and Government, which accounted for 28% (October 31, 2022 – 32%). The classification of our sectors aligns with our view of credit risk by industry.
(2)   A further breakdown of our derivative exposures by risk rating and counterparty type is provided in Note 9.
(3)   Excludes valuation adjustments determined on a pooled basis.
(4)   Balances presented are contractual amounts representing our maximum exposure to credit risk.
(5)  
Represents our maximum exposure to credit risk. Retail and wholesale commitments respectively comprise 44% and 56% of our total commitments (October 31, 2022 – 45% and 55%).
The largest concentrations in the wholesale portfolio relate to Financial
s
ervices at
15% (October 31, 2022 – 15%),
Real estate
and
related
at 12% (October 31, 2022 – 12%), Utilities at 11% (October 31, 2022 – 11%),
Other services
at 8% (October 31, 2022 – 7%), and
Investmen
ts
 at 6% (October 31, 2022 – 6%). The classification of our sectors aligns with our view of credit risk by industry.
 
Note 29    Capital management
Regulatory capital and capital ratios
OSFI formally establishes risk-based capital and leverage minimums and Total Loss Absorbing Capacity (TLAC) ratios for deposit-taking institutions in Canada. We are required to calculate our capital ratios using the Basel III framework. Under Basel III, regulatory capital includes Common Equity Tier 1 (CET1), Tier 1 and Tier 2 capital. CET1 capital mainly consists of common shares, retained earnings and other components of equity. Regulatory adjustments under Basel III include deductions of goodwill and other intangibles, certain deferred tax assets, defined benefit pension fund assets, investments in banking, financial and insurance entities, the shortfall of provisions to expected losses, prudential valuation adjustments, prepaid portfolio insurance assets, non payment and non delivery of trades and equity investment in funds subject to the fall-back approach. Tier 1 capital comprises predominantly CET1 and Additional Tier 1 items including non-cumulative preferred shares and LRCNs that meet certain criteria. Tier 2 capital includes subordinated debentures that meet certain criteria, certain loan loss allowances and non-controlling interests in subsidiaries’ Tier 2 instruments. Total capital is the sum of Tier 1 and Tier 2 capital. External TLAC instruments comprise predominantly senior bail-in debt, which includes eligible senior unsecured debt with an original term to maturity of greater than 400 days and remaining term to maturity of greater than 365 days. TLAC available is defined as the sum of Total capital and external TLAC instruments.
Regulatory capital ratios are calculated by dividing CET1, Tier 1, Total capital and TLAC available by risk-weighted assets. The leverage ratio is calculated by dividing Tier 1 capital by an exposure measure. The exposure measure consists of total assets (excluding items deducted from Tier 1 capital) and certain off-balance sheet items converted into credit exposure equivalents. Adjustments are also made to derivatives and secured financing transactions to reflect credit and other risks. The TLAC leverage ratio is calculated by dividing TLAC available by the leverage ratio exposure.
 
228            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

During 2023 and 2022, we complied with all applicable capital, leverage and TLAC requirements, including the domestic stability buffer, imposed by OSFI.
 
    
      As at  
 
     
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
 
October 31
2023
   
October 31
2022
 
Capital
(1)
               
CET1 capital
 
$
86,611
 
  $ 76,945  
Tier 1 capital
 
 
93,904
 
    84,242  
Total capital
 
 
104,952
 
    93,850  
Risk-weighted assets (RWA) used in calculation of capital ratios
(1)
               
Credit risk
 
$
475,842
 
  $ 496,898  
Market risk
 
 
40,498
 
    35,342  
Operational risk
 
 
79,883
 
    77,639  
Total RWA
 
$
596,223
 
  $ 609,879  
Capital ratios and Leverage ratio
(1)
               
CET1 ratio
 
 
14.5%
      12.6%  
Tier 1 capital ratio
 
 
15.7%
      13.8%  
Total capital ratio
 
 
17.6%
      15.4%  
Leverage ratio
 
 
4.3%
      4.4%  
Leverage ratio exposure (billions)
 
$
2,180
 
  $ 1,898  
TLAC available and ratios
(2)
               
TLAC available
 
$
184,916
 
  $ 160,961  
TLAC ratio
 
 
31.0%
      26.4%  
TLAC leverage ratio
 
 
8.5%
      8.5%  
 
(1)   Capital, RWA, and capital ratios are calculated using OSFI’s Capital Adequacy Requirements (CAR) guideline and the Leverage ratio is calculated using OSFI’s Leverage Requirements (LR) guideline. Both the CAR guideline and LR guideline are based on the Basel III framework. The results for the year ended October 31, 2023 reflect our adoption of the revised CAR and LR guidelines that came into effect in Q2 2023 as part of OSFI’s implementation of the Basel III reforms.
(2)   TLAC available and TLAC ratios are calculated using OSFI’s TLAC guideline. The TLAC standard is applied at the resolution entity level which for us is deemed to be Royal Bank of Canada and its subsidiaries. A resolution entity and its subsidiaries are collectively called a resolution group. Both the TLAC ratio and TLAC leverage ratio are calculated using the TLAC available as percentage of total RWA and leverage exposure, respectively.
 
Note 30    Offsetting financial assets and financial liabilities
Offsetting within our Consolidated Balance Sheets may be achieved where financial assets and liabilities are subject to master netting arrangements that provide the currently enforceable right of offset and where there is an intention to settle on a net basis, or realize the assets and settle the liabilities simultaneously. For derivative contracts and repurchase and reverse repurchase arrangements, this is generally achieved when there is a market mechanism for settlement (e.g., central counterparty exchange or clearing house) which provides daily net settlement of cash flows arising from these contracts. Margin receivables and margin payables are generally offset as they settle simultaneously through a market settlement mechanism.
Amounts that do not qualify for offsetting include master netting arrangements that only permit outstanding transactions with the same counterparty to be offset in an event of default or occurrence of other predetermined events. Such master netting arrangements include the International Swaps and Derivatives Association Master Agreement or certain derivative exchange or clearing counterparty agreements for derivative contracts, global master repurchase agreement and global master securities lending agreements for repurchase, reverse repurchase and other similar secured lending and borrowing arrangements.
The amount of financial collateral received or pledged subject to master netting arrangements or similar agreements
that
do not qualify for offsetting refers to the collateral received or pledged to cover the net exposure between counterparties by enabling the collateral to be realized in an event of default or the occurrence of other predetermined events. Certain amounts of collateral are restricted from being sold or re-pledged unless there is an event of default or the occurrence of other predetermined events.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            229

Note 30    Offsetting financial assets and financial liabilities
(continued)
 
The following tables provide the financial instrument amounts that have been offset on the Consolidated Balance Sheets and the amounts that do not qualify for offsetting but are subject to enforceable master netting arrangements or similar agreements. The amounts presented are not intended to represent our actual exposure to credit risk.
Financial instruments subject to enforceable master netting arrangements or similar agreements
 
    
As at October 31, 2023
 
   
Amounts subject to enforceable netting arrangements
             
                     
Related amounts not
offset on the Consolidated
Balance Sheets
(1)
                   
                 
(Millions of Canadian dollars)  
Gross amounts
of recognized
financial
instruments
   
Gross amounts
offset on the
Consolidated
Balance Sheets
   
Net amounts
presented in the
Consolidated
Balance Sheets
   
Impact of
master
netting
agreements
   
Financial
collateral 
(2)
   
Net amounts
   
Amounts not
subject to
enforceable
netting
arrangements
   
Net amounts
presented
on the
Consolidated
Balance Sheets
 
Financial assets
                                                               
Assets purchased under reverse repurchase agreements and securities borrowed
 
$
436,617
 
 
$
96,676
 
 
$
339,941
 
 
$
201
 
 
$
336,112
 
 
$
3,628
 
 
$
250
 
 
$
340,191
 
Derivative assets
 
 
138,318
 
 
 
1,544
 
 
 
136,774
 
 
 
89,889
 
 
 
22,310
 
 
 
24,575
 
 
 
5,676
 
 
 
142,450
 
Other financial assets
 
 
3,306
 
 
 
443
 
 
 
2,863
 
 
 
19
 
 
 
421
 
 
 
2,423
 
 
 
 
 
 
2,863
 
 
 
$
578,241
 
 
$
98,663
 
 
$
479,578
 
 
$
90,109
 
 
$
358,843
 
 
$
30,626
 
 
$
5,926
 
 
$
485,504
 
Financial liabilities
                                                               
Obligations related to assets sold under repurchase agreements and securities loaned
 
$
427,330
 
 
$
96,676
 
 
$
330,654
 
 
$
201
 
 
$
325,674
 
 
$
4,779
 
 
$
4,584
 
 
$
335,238
 
Derivative liabilities
 
 
132,770
 
 
 
1,544
 
 
 
131,226
 
 
 
89,889
 
 
 
17,340
 
 
 
23,997
 
 
 
11,403
 
 
 
142,629
 
Other financial liabilities
 
 
1,475
 
 
 
443
 
 
 
1,032
 
 
 
19
 
 
 
 
 
 
1,013
 
 
 
 
 
 
1,032
 
 
 
$
561,575
 
 
$
98,663
 
 
$
462,912
 
 
$
90,109
 
 
$
343,014
 
 
$
29,789
 
 
$
15,987
 
 
$
478,899
 
 
 
(Millions of Canadian dollars)   As at October 31, 2022  
  Amounts subject to enforceable netting arrangements              
                    Related amounts not
offset on the Consolidated
Balance Sheets (1)
                   
  Gross amounts
of recognized
financial
instruments
    Gross amounts
offset on the
Consolidated
Balance Sheets
    Net amounts
presented in the
Consolidated
Balance Sheets
    Impact of
master
netting
agreements
    Financial
collateral (2)
    Net amounts     Amounts not
subject to
enforceable
netting
arrangements
    Net amounts
presented
on the
Consolidated
Balance Sheets
 
Financial assets
                                                               
Assets purchased under reverse repurchase agreements and securities borrowed
  $ 411,937     $ 94,203     $ 317,734     $ 293     $ 314,602     $ 2,839     $ 111     $ 317,845  
Derivative assets
    146,479       2,185       144,294       98,610       21,412       24,272       10,145       154,439  
Other financial assets
    1,638       304       1,334       11       83       1,240             1,334  
 
  $ 560,054     $ 96,692     $ 463,362     $ 98,914     $ 336,097     $ 28,351     $ 10,256     $ 473,618  
Financial liabilities
                                                               
Obligations related to assets sold under repurchase agreements and securities loaned
  $ 360,722     $ 94,203     $ 266,519     $ 293     $ 265,822     $ 404     $ 7,428     $ 273,947  
Derivative liabilities
    141,137       2,185       138,952       98,610       19,758       20,584       14,539       153,491  
Other financial liabilities
    825       304       521       11             510             521  
 
  $ 502,684     $ 96,692     $ 405,992     $ 98,914     $ 285,580     $ 21,498     $ 21,967     $ 427,959  
 
(1)   Financial collateral is reflected at fair value. The financial instrument amounts and financial collateral disclosed are limited to the net balance sheet exposure, and any over-collateralization is excluded from the table.
(2)   Includes cash collateral of $17 billion (October 31, 2022 – $20 billion) and non-cash collateral of $342 billion (October 31, 2022 – $316 billion) received for financial assets and cash collateral of $15 billion (October 31, 2022 – $19 billion) and non-cash collateral of $328 billion (October 31, 2022 – $267 billion) pledged for financial liabilities.
 
230            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Note 31    Recovery and settlement of on-balance sheet assets and liabilities
The table below presents an analysis of assets and liabilities recorded on our Consolidated Balance Sheets by amounts to be recovered or settled within one year and after one year, as at the balance sheet date, based on contractual maturities and certain other assumptions outlined in the footnotes below. As warranted, we manage the liquidity risk of various products based on historical behavioural patterns that are often not aligned with contractual maturities. Amounts to be recovered or settled within one year, as presented below, may not be reflective of our long-term view of the liquidity profile of certain balance sheet categories.
 
    
           As at           
 
 
October 31, 2023
       
October 31, 2022
 
(Millions of Canadian dollars)
 
Within one
year
   
After one
year
   
Total
        
Within one
year
   
After one
year
    Total  
Assets
                                                   
Cash and due from banks
(1)
 
$
59,793
 
 
$
2,196
 
 
$
61,989
 
        $       71,081     $ 1,316     $ 72,397  
Interest-bearing deposits with banks
 
 
71,086
 
 
 
 
 
 
71,086
 
        108,011             108,011  
Securities
                                                   
Trading
(2)
 
 
180,929
 
 
 
9,222
 
 
 
190,151
 
        139,810       8,395       148,205  
Investment, net of applicable allowance
 
 
33,363
 
 
 
186,216
 
 
 
219,579
 
        26,540       143,478       170,018  
Assets purchased under reverse repurchase agreements and
securities borrowed
 
 
336,437
 
 
 
3,754
 
 
 
340,191
 
        316,714       1,131       317,845  
Loans
                                                   
Retail
 
 
120,247
 
 
 
449,704
 
 
 
569,951
 
        113,965       435,786       549,751  
Wholesale
 
 
76,249
 
 
 
211,577
 
 
 
287,826
 
        70,374       203,593       273,967  
Allowance for loan losses
                 
 
(5,004
)
                        (3,753
Segregated fund net assets
 
 
 
 
 
2,760
 
 
 
2,760
 
              2,638       2,638  
Other
                                                   
Customers’ liability under acceptances
 
 
21,690
 
 
 
5

 
 
 
21,695
 
        17,827             17,827  
Derivatives
(2)
 
 
140,261
 
 
 
2,189
 
 
 
142,450
 
        151,928       2,511       154,439  
Premises and equipment
 
 
65
 
 
 
6,684
 
 
 
6,749
 
        59       7,155       7,214  
Goodwill
 
 
 
 
 
12,594
 
 
 
12,594
 
              12,277       12,277  
Other intangibles
 
 
 
 
 
5,907
 
 
 
5,907
 
              6,083       6,083  
Other assets
 
 
62,555
 
 
 
14,513
 
 
 
77,068
 
 
 
    66,071       14,229       80,300  
 
 
$
1,102,675
 
 
$
907,321
 
 
$
2,004,992
 
 
 
    $  1,082,380     $ 838,592     $ 1,917,219  
Liabilities
                                                   
Deposits
(3)
 
$
991,484
 
 
$
240,203
 
 
$
1,231,687
 
        $  1,023,324     $ 185,490     $ 1,208,814  
Segregated fund net liabilities
 
 
 
 
 
2,760
 
 
 
2,760
 
              2,638       2,638  
Other
                                                   
Acceptances
 
 
21,740
 
 
 
5

 
 
 
21,745
 
        17,872             17,872  
Obligations related to securities sold short
 
 
32,602
 
 
 
1,049
 
 
 
33,651
 
        34,105       1,406       35,511  
Obligations related to assets sold under repurchase
agreements and securities loaned
 
 
334,959
 
 
 
279
 
 
 
335,238
 
        273,001       946       273,947  
Derivatives
(2)
 
 
131,352
 
 
 
11,277
 
 
 
142,629
 
        140,808       12,683       153,491  
Insurance claims and policy benefit liabilities
 
 
1,898
 
 
 
10,068
 
 
 
11,966
 
        1,904       9,607       11,511  
Other liabilities
 
 
69,187
 
 
 
26,983
 
 
 
96,170
 
        71,689       23,546       95,235  
Subordinated debentures
 
 
 
 
 
11,386
 
 
 
11,386
 
 
 
    110       9,915       10,025  
 
 
$
  1,583,222
 
 
$
 304,010
 
 
$
   1,887,232
 
 
 
    $  1,562,813     $     246,231     $
 
 
  1,809,044  
 
(1)   Cash and due from banks are assumed to be recovered within one year, except for cash balances not available for use by the Bank.
(2)   Trading securities classified as FVTPL and trading derivatives are presented as within one year as this best represents in most instances the short-term nature of our trading activities. Trading securities designated as FVTPL are generally presented based on contractual maturity. Non-trading derivatives are presented according to the recovery or settlement of the hedging transaction.
(3)   Demand deposits of $511 billion (October 31, 2022 – $562 billion) are presented as within one year due to their being repayable on demand or at short notice on a contractual basis. In practice, these deposits relate to a broad range of individuals and customer-types which form a stable base for our operations and liquidity needs.
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            231

Note 32    Parent company information
 
The following table presents information regarding the legal entity of Royal Bank of Canada with its subsidiaries presented on an equity accounted basis.
Condensed Balance Sheets
 
     As at       
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
 
Assets
               
Cash and due from banks
 
$
41,770
 
  $ 48,062  
Interest-bearing deposits with banks
 
 
61,256
 
    84,680  
Securities
 
 
217,490
 
    174,615  
Investments in bank subsidiaries and associated companies
(1)
 
 
55,082
 
    49,841  
Investments in other subsidiaries and associated companies
 
 
105,070
 
    88,260  
Assets purchased under reverse repurchase agreements and securities borrowed
 
 
150,207
 
    132,829  
Loans, net of allowance for loan losses
 
 
709,635
 
    679,580  
Net balances due from bank subsidiaries
(1)
 
 
 
    7,172  
Other assets
 
 
214,145
 
    227,767  
 
 
$
1,554,655
 
  $ 1,492,806  
Liabilities and shareholders’ equity
               
Deposits
 
$
1,006,284
 
  $ 955,978  
Net balances due to bank subsidiaries
(1)
 
 
10,132

 
     
Net balances due to other subsidiaries
 
 
6,866
 
    36,701  
Other liabilities
 
 
402,326
 
    382,099  
 
 
 
1,425,608
 
    1,374,778  
Subordinated debentures
 
 
11,386
 
    9,964  
Shareholders’ equity
 
 
117,661
 
    108,064  
 
 
$
1,554,655
 
  $ 1,492,806  
 
(1)   Bank refers primarily to regulated deposit-taking institutions and securities firms.
Condensed Statements of Income and Comprehensive Income
 
     For the year ended  
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
 
Interest and dividend income
(1)
 
$
     56,495
 
  $      27,791  
Interest expense
 
 
44,174
 
    12,846  
Net interest income
 
 
12,321
 
    14,945  
Non-interest income
(2)
 
 
5,390
 
    5,425  
Total revenue
 
 
17,711
 
    20,370  
Provision for credit losses
 
 
2,002
 
    579  
Non-interest expense
 
 
11,780
 
    10,175  
Income before income taxes
 
 
3,929
 
    9,616  
Income taxes
 
 
1,874
 
    2,276  
Net income before equity in undistributed income of subsidiaries
 
 
2,055
 
    7,340  
Equity in undistributed income of subsidiaries
 
 
12,804
 
    8,454  
Net income
 
$
14,859
 
  $ 15,794  
Other comprehensive income (loss), net of taxes
 
 
251
 
    5,810  
Total comprehensive income
 
$
15,110
 
  $ 21,604  
 
(1)   Includes dividend income from investments in subsidiaries and associated c
ompanies
of $25 million (October 31, 2022 – $11 million).
(2)   Includes a nominal share of 
income
(loss) from associated c
ompanies
 (October 31, 2022 – nominal).
 
232            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

Condensed Statements of Cash Flows
 
     For the year ended  
(Millions of Canadian dollars)
 
October 31
2023
   
October 31
2022
 
Cash flows from operating activities
               
Net income
 
$
14,859
 
  $ 15,794  
Adjustments to determine net cash from operating activities:
               
Change in undistributed earnings of subsidiaries
 
 
(12,804
)
    (8,454
Change in deposits, net of securitizations
 
 
50,306
 
    101,145  
Change in loans, net of securitizations
 
 
(30,055
)
    (78,288
Change in trading securities
 
 
(12,832
)
    (10,348
Change in obligations related to assets sold under repurchase agreements and securities loaned
 
 
21,954
 
    24,133  
Change in assets purchased under reverse repurchase agreements and securities borrowed
 
 
(17,378
)
    (7,239
Change in obligations related to securities sold short
 
 
(819
)
    3,024  
Other operating activities, net
 
 
5,000
 
    2,385  
Net cash from (used in) operating activities
 
 
18,231
 
    42,152  
Cash flows from investing activities
               
Change in interest-bearing deposits with banks
 
 
23,424
 
    (27,784
Proceeds from sales and maturities of investment securities
 
 
127,965
 
    59,304  
Purchases of investment securities
 
 
(153,099
)
    (71,509
Net acquisitions of premises and equipment and other intangibles
 
 
(2,075
)
    (1,180
Change in cash invested in subsidiaries
 
 
(3,802
)
    (2,514
Change in net funding provided to subsidiaries
 
 
(12,531
)
    (36,981
Net cash from (used in) investing activities
 
 
(20,118
)
    (80,664
Cash flows from financing activities
               
Issuance of subordinated debentures
 
 
1,500
 
    1,000  
Repayment of subordinated debentures
 
 
(110
)
     
Issue of common shares, net of issuance costs
 
 
65
 
    51  
Common shares purchased for cancellation
 
 
 
    (5,426
Issue of preferred shares and other equity instruments, net of issuance costs
 
 
 
    749  
Redemption of preferred shares and other equity instruments
 
 
 
    (155
Dividends paid on shares and distributions paid on other equity instruments
 
 
(5,549
)
    (6,960
Repayment of lease liabilities
 
 
(311
)
    (302
Net cash from (used in) financing activities
 
 
(4,405
)
    (11,043
Net change in cash and due from banks
 
 
(6,292
)
    (49,555
Cash and due from banks at beginning of year
 
 
48,062
 
    97,617  
Cash and due from banks at end of year
 
$
41,770
 
  $ 48,062  
Supplemental disclosure of cash flow information
               
Amount of interest paid
 
$
35,104
 
  $ 7,801  
Amount of interest received
 
 
49,098
 
    21,332  
Amount of dividends received
 
 
2,628
 
    2,618  
Amount of income taxes paid
 
 
2,604
 
    4,641  
 
Consolidated Financial Statements            Royal Bank of Canada: Annual Report 2023            233

Note 33    Principal subsidiaries
 
(Millions of Canadian dollars)
  
  
  
 
As at October 31, 2023
 
Principal subsidiaries
(1)
  
Principal office address
(2)
  
 

Carrying value of
voting shares owned
by the Bank 
(3)
 
 
 
Royal Bank Holding Inc.
  
Toronto, Ontario, Canada
  
$
85,823
 
RBC Direct Investing Inc.
  
Toronto, Ontario, Canada
  
RBC Insurance Holdings Inc.
  
Mississauga, Ontario, Canada
  
RBC Life Insurance Company
  
Mississauga, Ontario, Canada
  
Investment Holdings (Cayman) Limited
  
George Town, Grand Cayman, Cayman Islands
  
RBC (Barbados) Funding Ltd.
  
St. James, Barbados
  
Capital Funding Alberta Limited
  
Calgary, Alberta, Canada
  
RBC Global Asset Management Inc.
  
Toronto, Ontario, Canada
  
RBC Investor Services Trust
  
Toronto, Ontario, Canada
  
RBC (Barbados) Trading Bank Corporation
  
St. James, Barbados
  
 
 
 
RBC US Group Holdings LLC
(2)
  
Toronto, Ontario, Canada
  
 
32,278
 
RBC USA Holdco Corporation
(2)
  
New York, New York, U.S.
  
RBC Capital Markets, LLC
(2)
  
New York, New York, U.S.
  
City National Bank
(2)
  
Los Angeles, California, U.S.
  
 
 
 
RBC Dominion Securities Limited
  
Toronto, Ontario, Canada
  
 
15,290
 
RBC Dominion Securities Inc.
  
Toronto, Ontario, Canada
  
 
 
 
Royal Bank Mortgage Corporation
  
Toronto, Ontario, Canada
  
 
6,277
 
RBC Europe Limited
  
London, England
  
 
2,977
 
The Royal Trust Company
  
Montreal, Quebec, Canada
  
 
1,367
 
Royal Trust Corporation of Canada
  
Toronto, Ontario, Canada
  
 
553
 
 
(1)
 
The Bank directly or indirectly controls each subsidiary.
(2)
 
Each subsidiary is incorporated or organized under the laws of the state, province or country in which the principal office is situated, except for RBC US Group Holdings LLC and RBC USA Holdco Corporation which are incorporated under the laws of the State of Delaware, U.S., RBC Capital Markets, LLC, which is organized under the laws of the State of Minnesota, U.S., and City National Bank which is a national bank, chartered under the laws of the United States of America.
(3)
 
The carrying value of voting shares is stated as the Bank’s equity in such investments.
Certain of our subsidiaries, joint ventures and associates are subject to regulatory requirements of the jurisdictions in which they operate. When these subsidiaries, joint ventures and associates are subject to such requirements, they may be restricted from transferring to us our share of their assets in the form of cash dividends, loans or advances. As at October 31, 2023, restricted net assets of these subsidiaries, joint ventures and associates were $50 billion (October 31, 2022 – $44 billion).
 
234            Royal Bank of Canada: Annual Report 2023            Consolidated Financial Statements

EX-3 4 d519293dex3.htm EX-3 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EX-3 Consent of Independent Registered Public Accounting Firm

Exhibit 3

Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference in this Annual Report on Form 40-F for the year ended October 31, 2023 of Royal Bank of Canada of our Report of Independent Registered Public Accounting Firm dated November 29, 2023, relating to the consolidated financial statements and the effectiveness of internal control over financial reporting, which appears in Exhibit 2 to this Annual Report on Form 40-F.

We also consent to the incorporation by reference in the Registration Statements on Form S-8 Nos.333-12036, 333-12050, 333-13052, 333-13112, 333-117922, 333-207754, 333-207750, 333-207748, 333-252536 and 333-268715, and on Form F-3 No.333-259205 of Royal Bank of Canada of our Report of Independent Registered Public Accounting Firm dated November 29, 2023 referred to above.

We also consent to the reference to us under the heading “Experts” in the Annual Information Form, filed as Exhibit 1 to this Annual Report on Form 40-F, which is incorporated by reference in such Registration Statements.

 

 

 

 

 

 

/s/ PricewaterhouseCoopers LLP

Chartered Professional Accountants, Licensed Public Accountants

Toronto, Canada

November 30, 2023

EX-4 5 d519293dex4.htm EX-4 CODE OF CONDUCT EX-4 Code of Conduct

Exhibit 4

RBC Code of Conduct

A Message from David McKay

President and CEO

Building trust by speaking up and doing the right thing

At RBC, holding ourselves to the highest standards of integrity plays a critical role in achieving our Purpose to help clients thrive and communities prosper, and our Vision to be among the world’s most trusted and successful financial institutions.

In short, how we do things is just as important as what we do.

Our Values and our Code of Conduct guide us and set expectations for our behaviour and decision-making. Our Code is the roadmap we follow to serve our clients with the highest standards of integrity. It also lays the foundation for how we work together in a respectful, transparent and fair environment.

Guided by our Leadership Model, we are each responsible for speaking up and doing the right thing to protect and enhance RBC’s reputation and put our clients first. We all have a duty to report actual or possible misconduct and the right to be treated with dignity and respect when we do. And that includes speaking up, challenging and reporting unethical behaviour when it occurs, without fear of retaliation.

Together, we can foster a culture that’s built on trust, dignity and respect for all.

Please read the Code carefully, discuss what it means with your manager and colleagues, and ask questions to ensure you understand it and what it requires of you.

Our success depends on these principles. And it starts with each one of us.

David McKay, President and CEO

 

i


Our Vision and Values

RBC’s Values define what we stand for everywhere we do business. They are reflected in our behaviour and the way we build relationships and deliver value to all our clients, employees, shareholders, communities and others we deal with. Guided by our shared Values and united in a common purpose, we can achieve our strategic goals and accomplish great results.

We demonstrate our Vision – To be Among the World’s Most Trusted and Successful Financial Institutions – by living our Values in the decisions and actions we take every day. These five Values set the tone for our culture and unify us across geographies and businesses:

CLIENT FIRST: We will always earn the right to be our clients’ first choice.

•     Put client needs above our own whatever our role, to build lasting relationships

•     Listen with empathy, understand client needs to offer the right advice and solutions

•     Bring the best of RBC to deliver excellent value and differentiated client experiences

COLLABORATION: We win as One RBC.

•     Believe in each other and trust in teamwork and colleagues’ intentions

•     Share knowledge, listen and teach to learn and achieve more together

•     Look beyond ourselves to see the bigger picture for opportunities and solutions

ACCOUNTABILITY: We take ownership for personal and collective high performance.

•     Be bolder, reach higher, act with courage to realize potential and make a difference

•     Own it; seek out accountability and empowerment to grow and excel

•     Be curious and learn continuously to build skills and careers

DIVERSITY & INCLUSION: We embrace diversity for innovation and growth.

•     Speak up for inclusion and empower people to grow and achieve more

•     Seek out and respect different perspectives to challenge conventional approaches

•     Identify and act on the opportunities and needs that client diversity brings

INTEGRITY: We hold ourselves to the highest standards to build trust.

•     Be respectful, transparent and fair in all relationships

•     Stand up for what we believe; speak with candour; constructively challenge

•     Build trust of clients, colleagues and community partners by listening to and understanding their interests and needs

At RBC we bring these Values to life every day – continuing to earn the trust of RBC’s clients and each other and ensuring our strong reputation for doing what’s right.

 

ii


Table of Contents

 

1. LIVING OUR VALUES

     1  

1.1 ACTING WITH INTEGRITY – DOING WHAT’S RIGHT

     1  

1.2 OUR SHARED COMMITMENT AND ACCOUNTABILITY

     2  

1.2.1 APPROVAL OF THE CODE

     2  

1.2.2 WAIVERS

     2  

2. SPEAKING UP

     3  

2.1 SPEAKING UP, ASKING QUESTIONS AND CONSTRUCTIVELY CHALLENGING

     3  

2.2 REPORTING MISCONDUCT

     3  

2.3 INVESTIGATIONS, INQUIRIES AND REVIEWS

     4  

2.4 RBC’S COMMITMENT TO NON-RETALIATION

     4  

2.5 WHAT WE EXPECT OF OUR PEOPLE MANAGERS

     5  

3. INTEGRITY IN DEALING WITH RBC CLIENTS, COMMUNITIES AND OTHERS

     6  

3.1 PROTECTING RBC CLIENT INFORMATION

     6  

3.2 PROTECTING RBC BUSINESS INFORMATION

     6  

3.3 PROTECTING RBC EMPLOYEE INFORMATION

     7  

3.4 PROTECTING RBC’S REPUTATION IN OUR COMMUNITIES

     7  

4. INTEGRITY IN WORKING TOGETHER AT RBC

     10  

4.1 RESPECTFUL WORKPLACE

     10  

4.2 EQUITABLE OPPORTUNITIES, FAIR WORKPLACE, ACCESSIBILITY AND HUMAN RIGHTS

     11  

4.3 WORKPLACE HEALTH AND SAFETY

     12  

5. INTEGRITY IN HOW WE DO BUSINESS

     13  

5.1 MANAGING BUSINESS DEALINGS

     13  

5.2 AVOIDING AND MANAGING CONFLICTS OF INTEREST

     13  

5.2.1 MANAGING OUR CLOSE PERSONAL RELATIONSHIPS IN RBC DEALINGS

     14  

5.2.2 MANAGING CLOSE PERSONAL RELATIONSHIPS AT WORK

     15  

5.2.3 MANAGING OUTSIDE ACTIVITIES AND EXTERNAL DIRECTORSHIPS

     15  

5.2.4 MANAGING GIFTS AND ENTERTAINMENT

     16  

5.2.5 MANAGING INSIDE INFORMATION AND SECURITIES TRADING

     17  

5.2.6 ACCEPTING APPOINTMENTS OR INHERITANCES

     18  

5.3 PREVENTING FINANCIAL CRIME

     18  

5.4 MANAGING COMPLIANCE WITH GLOBAL ECONOMIC SANCTIONS

     19  

5.5 ENSURING FAIR COMPETITION

     20  

 

iii


6. INTEGRITY IN SAFEGUARDING ENTRUSTED ASSETS

     21  

6.1 PROTECTING RBC CLIENT PROPERTY

     21  

6.2 PROTECTING RBC PROPERTY

     21  

6.3 KEEPING ACCURATE BOOKS AND RECORDS

     24  

7. CONCLUSION

     25  

Publication date: January 1, 2023

 

iv


1. Living Our Values

1.1 Acting with Integrity – Doing What’s Right

RBC is a values-based organization. Our respect for and our commitments to our clients, shareholders, communities and each other are rooted in our Values. RBC’s Code of Conduct (the “Code”) incorporates RBC’s Values, and in particular our Value of Integrity, to guide our day-to-day actions and decisions so we can always do the right thing.

 

Throughout the Code, “RBC” means Royal Bank of Canada and all its subsidiaries.

Every day our actions demonstrate not only our Value of always earning the right to be our clients’ first choice, but also our personal commitments. We each have a responsibility to be truthful, respect others and comply with applicable laws and regulations and RBC’s policies (in the Code, the word “policy” includes policies, procedures, standards, standing orders and frameworks). Over many years RBC has earned trust and a reputation for doing what’s right through the actions of those who work here. A continued strong focus on doing what’s right will sustain and build on that trust – the cornerstone of the financial services industry and our relationships with clients and communities.

We do business across the globe, and each one of us has a responsibility to behave with integrity so that we can continue to serve clients and generate value for RBC’s shareholders. More than simply being aware of our Values and following our Code, we need to make them an integral part of how we operate day to day. This will ensure we tell the truth, respect others, uphold the law, speak up to challenge what we believe is wrong, and comply with policies and practices. Our foundation is based on acting with integrity and doing what’s right.

 

For resources and information, visit Doing What’s Right on RBCNet.

Tell the truth

Our work places us in a position of trust. RBC clients, shareholders, communities and our colleagues rely on us to be honest and do business responsibly. We do what we say we will do and earn the trust and loyalty of our clients, shareholders, communities and colleagues.

Respect others and treat them fairly

Showing respect for everyone we work with and the clients we serve, treating them fairly and taking personal responsibility for high performance enable us to achieve RBC’s strategic goals. By living our Values and following the Code, we show others we honour the trust they place in us – making RBC a great place to work and do business.

Uphold the law

RBC is subject to the laws of the countries where we do business. RBC’s policies are designed to comply with its legal and regulatory obligations, including the intent and spirit of the laws that apply to it. By doing so, RBC maintains its reputation for acting with integrity. To this end, each of us must understand and comply with RBC’s policies and practices that apply to the way we do our jobs. Keep in mind that breaking the law could result in disciplinary action up to and including termination of our employment, civil, criminal and regulatory penalties, including fines, for RBC and the individual involved, as well as damage to both RBC’s and the individual’s reputation.

Speak up to challenge and do what’s right

Constructively challenging decisions and behaviour helps ensure we continue to live our Values in our work at RBC. Seeking out constructive challenge when we make business decisions helps ensure those decisions are right for RBC – and clients, colleagues, shareholders and communities.

 

1


Comply with policies and instructions

We are each responsible for knowing and following the RBC policies that apply to us. We must also comply with managers’ instructions unless they are inconsistent with the Code, RBC Values or policies, are against the law or result in health and safety risks. In these circumstances, or if we are unsure about the right thing to do, we should raise our concerns with one of the Key Contacts.

We must always be aware of both enterprise and local policies specific to business or geographic areas and work within the boundaries of what we have been authorized to do.

1.2 Our Shared Commitment and Accountability

The Code applies to all RBC employees, contract workers and members of the boards of directors of Royal Bank of Canada and all its subsidiaries.

Understanding and complying with the Code is a condition of our work at RBC, and critical to earning each other’s trust, as well as the trust of our clients and communities. The Code helps to protect our personal integrity and reputation as well as the integrity and reputation of RBC and the financial services industry as a whole.

Any one of us who breaches, or fails to report an actual or possible breach of, the Code will be subject to corrective or disciplinary action.

Corrective or disciplinary action is RBC’s response to unacceptable behaviour, including breaches of the Code, and can range from reprimands and impact on performance ratings and compensation, to termination of our working relationship with RBC.

We also expect RBC third party suppliers to follow similar principles and share our commitment to ethics and integrity as set out in our Supplier Code of Conduct.

1.2.1 Approval of the Code

The Board of Directors of Royal Bank of Canada approves the Code.

1.2.2 Waivers

Waivers of the Code, or any of its provisions, are seldom granted. If a waiver is necessary to accommodate exceptional circumstances, it must be approved by RBC’s Chief Human Resources Officer and RBC’s Chief Risk Officer. A waiver of the Code for Royal Bank of Canada directors, executive officers or specified officers must be approved by Royal Bank of Canada’s Board of Directors (or a designated Board committee) and disclosed publicly, as required by applicable laws and RBC policies.

 

2


2. Speaking Up

Acting with integrity involves more than just personally complying with the Code. It also means we speak up for the good of RBC and that all concerns are heard.

2.1 Speaking Up, Asking Questions and Constructively Challenging

While the Code and RBC policies outline the ethical behaviour expected of us, they cannot anticipate every situation we encounter. By speaking up and asking questions, we help ensure RBC does the right thing and we protect our clients’ interests and assets, RBC’s reputation and each other. If we need guidance, have questions or are unsure about the right thing to do, we should speak with our manager, senior management or one of the Key Contacts.

 

Doing What’s Right

I notice that it’s common for the team I work with to circulate emails with inappropriate material, like GIFs. I think some might find some of the material offensive, and it might not be aligned to our Code of Conduct. But, given everyone seems to do it, including my manager, what do I do?

If you see someone doing something that breaches the Code of Conduct a discussion with the person is encouraged. If the conduct continues you have an obligation to raise your concern with a manager or one of the Key Contacts, without the fear of retaliation.

2.2 Reporting Misconduct

We have a duty to report actual, or possible, misconduct that we become aware of, even our own. This includes speaking up about conduct that is, or may be, in violation of the Code, policies and laws, or is otherwise unethical and could put RBC at risk of loss or harm. There are a number of reporting channels we can use to report misconduct. We can notify our managers, senior management, Human Resources, Compliance, or we can report through the Conduct Hotline. The Conduct Hotline also provides us with the option to report anonymously.

Those of us who receive a report of misconduct are expected to promptly engage other Key Contacts and Human Resources, as appropriate, to assist with the review and investigation of the report.

All reports of misconduct are taken seriously and investigated promptly and thoroughly, as appropriate. RBC keeps the identity of the person making the report and the details confidential, and will only disclose this information to the extent necessary to investigate and address the situation or as legally required.

Refer to RBC Standards on Reporting Misconduct and the Speak Up! webpage for further details.

 

Some examples of misconduct are:

deliberate failure to comply with policies, management instructions or the law

disrespectful behaviour, discrimination, harassment, racism and actual or threatened violence

misappropriation (including fraud, theft and kiting), improper use of company or client assets or systems, and improper sales reporting

promoting products and services to clients inappropriately

 

3


inappropriate client referrals, failing to report unusual client transactions and inappropriate use or disclosure of client information

inappropriate social media use

failing to disclose, manage and, if necessary, eliminate conflicts of interest, and

insider trading.

2.3 Investigations, Inquiries and Reviews

At times we may be asked to participate in an internal or external investigation, inquiry or review of concerns or possible misconduct. We have a duty to cooperate and provide honest, accurate, complete and timely information. We may receive an inquiry from government authorities or regulators regarding RBC business. When approached for information by an external party, we must follow the procedures established for our business unit. This includes escalating the inquiry to our manager and local Compliance group or Law Group, as appropriate, for response.

2.4 RBC’s Commitment to Non-Retaliation

There will be no retaliation for asking questions, speaking up and making a truthful report of actual or possible misconduct, participating in an investigation or exercising our legal rights. Retaliation can include behaviour or actions that punish or deter someone from speaking up, which we have a duty to and must report. If you believe you or someone else has encountered any form of retaliation, contact one of the channels listed on the Speak Up! webpage to ensure the situation is addressed promptly.

 

Our commitment to non-retaliation means RBC:

investigates every claim of retaliation

in appropriate cases, periodically follows up with employees who raise concerns to identify actions or behaviours that could be found to be retaliatory

reviews performance ratings and compensation decisions made in relation to those who report misconduct to address potential retaliation, if applicable

provides education and coaching on retaliation to managers of employees who raise concerns, and

takes disciplinary action to address retaliation.

 

Some examples of retaliation are:

an unjustified decision affecting someone’s compensation, job security, career mobility or performance rating

excluding someone from meetings or team events, or

withholding work-related information.

 

Some examples of activities that are not retaliation are:

appropriate disciplinary action for misconduct

managing performance, and

routine coaching.

 

4


2.5 What We Expect of Our People Managers

While we are all held to the high ethical standards set out in our Values and the Code, those of us who are people managers are accountable for leading by example. This includes:

 

   

promoting our teams’ awareness and understanding of RBC’s Values, the Code and our policies to ensure ongoing compliance

 

   

demonstrating RBC’s high standards for integrity by behaving in a way that reflects our Values, both in and outside the workplace

 

   

actively listening to employees and fostering an environment where employees feel comfortable and safe to speak up

 

   

being respectful, transparent and fair in all relationships

 

   

maintaining an environment that prohibits retaliation, where everyone feels safe to ask questions, raise concerns and report misconduct, and respecting the privacy of those who do, and

 

   

promptly escalating concerns and reports of possible or actual misconduct as required, and following up to ensure they are addressed.

 

Simple questions are useful tools to test decisions and identify potential risks and issues. Ask yourself:

 

Do you feel this situation might violate RBC policies or our Code of Conduct?

Could this situation be viewed as unethical, dishonest or discriminatory?

Does this situation conflict with RBC’s culture and values?

Could this situation negatively impact RBC clients, colleagues, third parties or the community?

Could there be possible consequences of our actions or inaction?

Could this situation damage RBC’s reputation?

Could this situation be damaging to you if it became public?

If you cannot confidently answer “No” to any of the questions, you should do the right thing and speak up.

 

5


3. Integrity in Dealing with RBC Clients, Communities and Others

We are committed to promoting fairness in our dealings with our clients, communities, shareholders, third parties and others, carefully weighing our responsibilities to all.

We are in a relationship business and we pride ourselves on the quality of the service, advice and products we provide RBC clients. Integrity and trust help us better serve RBC clients, and we make sure we put their interests above our own. The same applies to the communities where we live and work, making us a company that people want to do business with and work for.

3.1 Protecting RBC Client Information

Clients care deeply about the privacy of the information they share with us. Protecting their information and keeping their trust is integral to the financial services industry. It’s also central to our culture of doing what’s right. We each have a duty to keep RBC client information confidential and secure from the risk of theft, loss, misuse, and/or improper access or disclosure. We do this by complying with the RBC Enterprise Privacy Risk Management Policy. Unless legally required, we must also never share client information — accidentally or intentionally — with a third party or colleague who does not have a business need to know. We are responsible for and trusted with keeping RBC client information private, even after we leave RBC’s service. This includes returning all paper and digital client information in our possession to RBC upon departure.

In the event of a privacy breach, we must follow established procedures. We must immediately report a potential or actual privacy breach in our “Privacy Incident Reporting” tool to engage our local Privacy Officer, and we must never share any details about the breach with others who do not have a business need to know. For more information, please refer to the RBC Enterprise Privacy Risk Management Policy.

3.2 Protecting RBC Business Information

RBC’s business information is one of our most important assets, so we have a duty to safeguard it by complying with RBC information security policies.

For more information, please refer to the RBC Enterprise Information Security Policy and “Proprietary information” in section 6.2 below.

 

What can I do to protect RBC business or client information?

 

Never access or use RBC business or client information to benefit ourselves, our families, our friends, or for any purpose unrelated to the performance of our duties.

Operate on a “need to know” rather than “nice to know” basis, and share RBC business or client information only with those who need it for an appropriate business purpose.

Always use proper procedures to share information securely.

Avoid working in public places.

When working from home or off-site, ensure RBC business or client information is not overheard, visible or left behind.

Minimize off-site printing and dispose of confidential information securely as soon as it’s no longer needed.

Never use your non-RBC personal email address or other non-approved tools, platforms or applications to receive, forward, upload or send business or client information.

Immediately report any potential or actual privacy or information security incidents or breaches.

 

6


3.3 Protecting RBC Employee Information

Those of us who work at RBC have a right to privacy. Personal information about each of us is confidential. Keeping information private and confidential is a matter of personal integrity, honouring the trust others place in us. Collection, use and disclosure of this information must be relevant to our working relationship with RBC, and compliant with relevant laws, the Code and RBC’s policies. For more information, please refer to RBC’s Employee Privacy Notice.

 

Some examples of personal information RBC maintains as confidential are:

information required to verify credentials and education

date of birth

employment-related credit and other background checks

home address

home phone number and personal cell phone number

government-issued identification numbers

diversity data

compensation

performance reviews

corrective/disciplinary actions, and

health and benefit information and insurance records.

3.4 Protecting RBC’s Reputation in Our Communities

Individual character and personal activities

We must avoid any conduct or association which could bring our honesty, integrity or judgment into question. It’s important to understand how closely our clients, shareholders, communities and colleagues associate us with RBC, even when we are off-duty, and how our off-duty conduct impacts RBC’s reputation and brand. We are required to disclose immediately to our manager or Human Resources when we are charged with, and again if we are convicted of, any criminal offence, unless prohibited by local law. Managers should contact Human Resources to seek further guidance. We are held to RBC’s Values and the standards set out in the Code, both on- and off-duty, and our duty to report actual or possible misconduct applies equally when we’re off-duty.

 

“Off-duty” conduct can become an issue when it:

 

damages RBC’s reputation (e.g. you post a disparaging social media comment about your colleague’s abilities)

impedes our ability to perform our duties (e.g. a mobile employee has their driver’s licence revoked and cannot drive to see clients), or

brings our integrity and Values into question (e.g. cyber-bullying or harassing a colleague off hours).

Communication and external representation

Our Values and the Code provide a foundation for our behaviour when we represent RBC at work and in our communities. Our integrity and trust must be beyond reproach.

 

   

Business and corporate use of external social media

One of the ways RBC communicates is through social media. To ensure our business and corporate social media use is appropriate and consistent with RBC’s general communication strategy, only employees specifically approved for business use may participate in the external social media channels approved by their RBC unit. Refer to the RBC Enterprise Policy on the Use of External Social Media, which includes links to additional business-specific documents and definitions of business and corporate use.

 

7


   

Personal use of social media

When we participate in social media in a personal capacity, we must consider the potential impact our personal posts may have on RBC’s reputation, and be guided by our Values and the standards set out in the Code. While social media can be used to create greater awareness and promote RBC’s brand, it is not an appropriate venue to express concerns about RBC, our clients, colleagues or the competition which could be resolved more constructively through one of the channels listed on RBC’s Speak Up! webpage. Confidential, non-public information relating to RBC and its clients must never be shared in our public or private social media conversations. For more guidance on personal use of social media, refer to the RBC Enterprise Guidelines for Personal Use of Social Media.

 

When using any social media platform, remember that our comments are public and permanent. We should follow the practices below when using social media.

Do:

identify yourself as an RBC employee when posting about RBC on your personal social media accounts; for example #RBCemployee or #MyCompany

follow your business segment’s or functional unit’s Social Media Standard (where applicable) and the RBC Enterprise Guidelines for Personal Use of Social Media, and

contact socialmedia@rbc.com if you have questions or concerns or for guidance when using personal social media accounts to promote RBC products or services.

Do Not:

post on social media if our personal and professional reputations, or the reputation of RBC, may be negatively impacted

post content about our colleagues or other individuals without prior consent

include confidential, non-public information relating to RBC and/or RBC clients, employees, contract workers, third parties or other people in digital public forums, such as social media platforms, chat rooms and blogs. Some examples include RBC’s financial information, client and employee personal information, business plans or strategies, pending product launches, partnerships with third parties and employment relationships

try to address an issue involving RBC unfolding in social media, or speak on RBC’s behalf, unless authorized by Corporate Communications and our manager

use third party content without permission, or

use RBC’s trademarks without prior approval.

 

8


   

RBC public endorsements and influencer marketing

An influencer is anyone who publicly talks or posts about RBC (e.g. including products, services, promotions and charitable events) through any channel (e.g. including personal social media or online channels) and has a connection with RBC. A connection can include an employment relationship, receipt of an incentive (e.g. payment, gift or benefit) or a family or close personal relationship with an employee. It is misleading if an influencer does not disclose their connection to RBC because it can change a viewer’s perception of an endorsement. For more guidance, refer to the RBC Enterprise Endorsement and Influencer Marketing Policy.

 

Some examples of influencers:

Employees

Members of the board of directors of RBC or any of its subsidiaries

Endorsers (e.g. celebrities, athletes or other third parties)

Reviewers

Bloggers

Those who have a family or a close personal relationship with an employee

 

   

Media interactions and public statements

Our Corporate Communications team manages and protects RBC’s reputation and ensures consistency and accuracy in responding to media inquiries. Only those of us who have been authorized to do so may communicate with the media on RBC’s behalf. If contacted by a reporter, or receive requests for a third party testimonial/endorsement, employees must immediately reach out to their Corporate Communications representatives. For more information, refer to the RBC Media and Communications Standards.

Supporting our communities

Creating positive social impact is integral to how we do business and core to RBC’s purpose of helping clients thrive and communities prosper. We support the communities where we live, work and do business. We also accept accountability for the social and economic effects of our business decisions. We take pride in the value of our contributions and encourage employee involvement in the community.

We must obtain our manager’s permission to solicit for or promote causes or issues, including charitable ones, in RBC workplaces. Personal involvement in our communities must be at our own expense and must not interfere with our work at RBC or RBC’s operations, and may require manager permission depending on the activity. Refer to the RBC Conflicts of Interest Control Standards for Outside Business Activities and External Directorships for more information.

Environmental sustainability

RBC promotes environmental sustainability. This means minimizing our environmental footprint and offering products and services that support environmental responsibility. We believe fulfilling our goals in these areas will lead to short- and long-term benefits for RBC shareholders, clients, colleagues and the communities where we live and do business.

Political involvement and contributions

We support participation in general political processes and respect our colleagues’ diverse opinions.

We must not use RBC time or resources to promote political candidates or causes, either inside or outside the workplace. If we choose to participate in political activity, we do so on our own behalf, at our own expense, and not as representatives of RBC. We must never use our affiliation with RBC to market our political activities.

 

It is important to note that certain jurisdictions impose restrictions on political contributions and/or engagement, including volunteer activities and lobbying, by corporations and/or employees of companies. Employees should review various jurisdictional laws, regulations, and/or policies before making a political contribution. If we have any questions, we should ask our manager and/or Compliance.

 

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4. Integrity in Working Together at RBC

At RBC, we have a strong and capable global team serving our clients, working together to deliver on our strategy, and creating value and growth for our clients, communities and shareholders. We believe in each other and have confidence and trust in the capabilities and intentions of our colleagues. Our integrity, diversity & inclusiveness, and collaboration help make RBC a great place to work, belong and thrive.

4.1 Respectful Workplace

We all have a right to work in an environment that is respectful and professional. Mutual respect and dignity ensure an environment that is healthy and productive for RBC employees, clients and others we interact with.

We must all behave in a way that contributes to a workplace free from discrimination, disrespectful and inappropriate behaviour, harassment, sexual harassment, violence and retaliation. Inappropriate in-person or online behaviours of any kind, whether intentional or unintentional, are not tolerated at RBC.

Harassment is any course of action, behaviour or comments that, because of their nature or persistence, are known, or would reasonably be considered, to interfere with an individual’s professionalism or create an offensive, hostile or intimidating workplace. We must ensure that an individual’s physical and mental well-being is not impacted negatively while also not undermining the integrity of our relationship with RBC and one another.

Maintaining a respectful workplace also requires us to behave professionally while using RBC systems. We must not use RBC networks, systems, devices or access to the Internet to view or communicate inappropriate material.

Keep in mind, respecting confidences and refraining from gossiping about our colleagues is a matter of personal integrity. However, if we become aware of information regarding a possible Code breach, we have a duty to Speak Up! and must report any misconduct.

Refer to RBC’s Respectful Workplace Policy for additional information.

 

Examples of harassment include:

 

intimidating, threatening or coercing another individual

bullying, which is a persistent pattern of mistreatment of others that causes harm (e.g. spreading rumours, humiliating, ostracizing or negatively using influence to control another person’s conduct)

unwelcome physical contact

intruding on an individual’s privacy, including speculating or outing someone on any grounds of discrimination, and

offensive or demeaning statements or behaviour (e.g. micro-aggressions, stereotypes, social marginalization) about a person or group, related to any grounds of discrimination.

 

Sexual harassment is a specific form of harassment that includes unwelcome behaviour such as:

 

unwelcome advances, flirtation, propositions, invitations for sexual favours

sexual physical contact

verbal comments, actions or gestures of a sexual nature

sexist behaviour that represents a belief that one gender is inferior to the other

disseminating or displaying sexually suggestive or explicit pictures, cartoons, objects or jokes

conversations or inquiries about sexual exploits or desires, or using lewd language

explicitly or implicitly making submission to sexual behaviour a term or condition of employment, or

using the submission to, or rejection of, sexual behaviour as a basis for employment decisions.

 

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Not all negative interactions are harassment, discrimination or retaliation. For example,

 

minor conflicts that arise because of differences in work or communication styles, and general disagreements are not harassment

managing performance and other manager activities that are part of their responsibilities and performed for legitimate business purposes are not harassment, discrimination or retaliation, and

constructive challenge that encourages the exchange of ideas is not harassment.

 

Examples of disrespectful and inappropriate behaviour are:

 

excessive swearing or shouting

swearing or shouting directed at others

circulating, posting or making demeaning comments, gestures, pranks or jokes

circulating or posting derogatory or offensive pictures, posters or communications, and

conduct that embarrasses or degrades another based on personal characteristics (e.g. body shaming, socio-economic status shaming).

 

Speak Up!

 

If you witness or experience inappropriate behaviour, you have a responsibility to report it in a timely manner to a manager, your Human Resources contact or through the Conduct Hotline.

Early, informal and direct communication with the person whose behaviour you feel is inappropriate is encouraged where you feel comfortable doing so. Oftentimes, this is a helpful way to address the conduct quickly and effectively.

If you decide not to talk directly to the person, or the conduct continues, you must raise your concern with a manager or one of the Key Contacts. Refer to Doing What’s Right.

The duty to report does not prevent you from pursuing other processes available by law to report concerns.

4.2 Equitable Opportunities, Fair Workplace, Accessibility and Human Rights

Equitable opportunities

RBC promotes equitable opportunities in all dealings with RBC employees, contract workers, clients and others we deal with. In addition, RBC enables equitable development and career opportunities in the workplace by staffing vacant positions based on business needs, candidates’ merits and RBC Values.

Fair workplace

We treat all employees and contract workers fairly, pay fair compensation and provide respectful work environments. All employees are encouraged to raise concerns with their manager or any of the Key Contacts.

Accessibility

At RBC, we are committed to removing barriers to promote dignity, independence and equal opportunity in the workplace and in the products and services we offer. We must always take steps to ensure that clients, employees, contract workers, job applicants and members of the boards of directors of Royal Bank of Canada or any of its subsidiaries are treated fairly and with dignity and respect, taking into account their feedback and accessibility needs. Contact Human Resources for guidance as needed. Refer to the Enterprise Accessibility Guidelines or visit Accessibility at RBC for more information.

 

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How can we ensure we provide an inclusive environment for persons with accessibility needs?

 

Speak appropriately and respectfully with and about any person with a disability (whether visible or non-visible), emphasizing the person first, not the disability.

Seek to understand the potential needs of others.

Provide accessible premises, equipment, technology and services, where reasonable or required by applicable legislation.

Human rights

We comply with all applicable laws and relevant international guiding principles regarding non-discrimination and human rights in the jurisdictions where we operate. We strive to avoid causing or contributing to adverse human rights impacts through our own business activities, and aim to prevent and mitigate adverse impacts that we may be directly linked to, by taking appropriate action. We also expect our employees, contract workers, suppliers and other third parties with whom RBC has a business relationship to share our commitment to respect human rights. Our Human Rights Position Statement is adopted at the highest levels of our organization and sets out our commitment.

RBC prohibits harassment and discrimination on the grounds of age, national origin, citizenship, ethnicity, colour, religion or creed, race and ancestry (which is inclusive of those who identify as Indigenous), physical or mental disability, veteran status, family status, pregnancy, marital status, civil or same sex union, biological sex (including intersex), sexual orientation, gender identity/expression or any other characteristic protected by law.

RBC is committed to fostering diversity and inclusion and to respecting and appreciating our differences. Even where laws allow for discrimination on these grounds, RBC operates in a way that treats people fairly.

4.3 Workplace Health and Safety

RBC is committed to providing a healthy and safe workplace and complying with applicable health and safety laws. Maintaining such a workplace is a shared responsibility of RBC and its employees and contract workers.

All employees and contract workers are to take every reasonable and necessary precaution to ensure their health and safety as well as those of their colleagues. A workplace includes all RBC premises and any other place where work related activity occurs, including work related social events and business travel.

To ensure our workplaces are healthy and safe, we understand and follow RBC’s health and safety policies and procedures. We also:

 

   

do not have weapons of any kind in our possession while on RBC premises, and

 

   

obtain management approval and any required permits before arranging events or serving alcohol on RBC premises.

 

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5. Integrity in How We Do Business

Ethical behaviour governs every aspect of our business, from day-to-day transactions to special projects.

5.1 Managing Business Dealings

As representatives of RBC, we have a duty to never mislead others – even by omission – about products or services we offer. We must be mindful in our communications to provide information that is clear, simple and not misleading in any way. We must make every reasonable effort to provide full and fair information and correct errors or ambiguity in any statement made on RBC’s behalf. This is especially important with regard to our sales representations, marketing and advertising.

We ensure our sales practices are fair and not misleading by ensuring that we:

 

   

are knowledgeable about the products and services we recommend to clients

 

   

recommend products and services based on an understanding of a client’s needs and never for personal gain or to meet performance incentive goals or other targets

 

   

clearly and accurately explain the terms and conditions outlined, and give appropriate disclosures about a product or service in clear, simple and not misleading language

 

   

are not pressuring or coercing our clients for any reason, and

 

   

obtain proper and informed consent from our clients in line with RBC’s policies.

5.2 Avoiding and Managing Conflicts of Interest

By acting in a way that puts RBC and our clients’ interests above our personal interests, we can assure RBC stakeholders of our integrity. This means that the decisions we make in our work with RBC must be made independently of our own interests.

Obligations arising from our other business, family and social relationships must not play a role in our work for RBC. A conflict of interest – actual, potential or perceived – is a situation that could cause others to doubt our ability to perform our jobs effectively and objectively. Keep in mind that a conflict of interest can exist even where we have behaved properly and ethically. Even the impression of a conflict of interest can affect RBC’s reputation and our own. We must think about how our actions would look to others. Just because we don’t perceive our situation to be a conflict, doesn’t mean others share the same view.

Conflicts often arise where there is a personal interest that could compromise our objectivity (i.e. a personal conflict), but also where there may be conflicting interests between RBC and third parties (i.e. a corporate conflict). Even where there is no opportunity for personal gain in a situation, we must consider whether RBC’s interest may conflict with a client’s. Irrespective of the type, we have an ongoing responsibility to identify, disclose, manage and, if necessary, eliminate conflicts of interest in relation to RBC, its employees, its clients and its third parties.

 

What are some scenarios that present actual, potential or perceived conflicts of interest?

 

Borrowing money from or lending money (including co-signing or being a guarantor of loans) to other RBC employees, contract workers or clients, unless the amount is nominal

Using your position at RBC to promote an outside organization or business

Using your position at RBC to inappropriately influence any employees or transactions

Working on behalf of RBC in any transaction or business relationship where you, your family or someone you have a close personal relationship with has a personal or financial interest

Processing a transaction for another employee without exercising the same due diligence as you would for any other RBC client

Excessive or irresponsible gambling that could place an employee in financial difficulty

 

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What are some examples of corporate conflicts?

 

An RBC analyst conducts securities research on a company that is intended to provide an objective opinion on those securities, while also being in possession of inside information about another client that could influence their opinion

An employee offers entertainment to a regulatory agency that has oversight of RBC

Some conflicts arise by virtue of certain types of relationships we have, while others are a result of engaging in certain activities. Common conflicts of interest are described in the following sections. Note that in these sections “family” includes:

 

   

a spouse, common-law partner or domestic partner

   

children and step-children

   

parents and siblings

   

grandparents and grandchildren, and

   

other relatives by blood or marriage.

We must make sure we read and understand the RBC Enterprise Conflicts of Interest Policy and related control standards as well as the RBC Enterprise Anti-Bribery Anti-Corruption Policy. These resources explain how to disclose actual, potential or perceived conflicts with external parties. Where we are unsure about a potential conflict or need more information, we should check with our local Compliance group. Where the conflict relates to another RBC employee, we should speak with our manager or contact Human Resources for guidance as needed. Directors of Royal Bank of Canada should check with the Corporate Secretariat. Non-employee directors of subsidiaries should check with the Subsidiary Governance Office.

5.2.1 Managing Our Close Personal Relationships in RBC Dealings

It is important that we handle our financial dealings responsibly, with integrity and in compliance with RBC policies.

We often use RBC products and services ourselves, as do many of our friends and family members. We must make sure all our personal, family and friend dealings with RBC are handled at arm’s length – independent of their relationship to us and our relationship with RBC – by following relevant procedures for the business we work in.

Likewise, our loyalties can become conflicted if friends or family members work for a company that does or seeks to do business with RBC as an RBC client or third party. This is especially likely to be a problem if it happens to those of us who are involved in the approval or selection process, contract negotiations or relationship management with RBC clients or third parties. In these cases, we must inform our manager or local Compliance group so the conflict can be addressed.

 

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5.2.2 Managing Close Personal Relationships at Work

It is possible for our close personal relationships to have an effect on our work at RBC. We must understand the actual or perceived effects that close personal relationships may have in order to avoid situations that would reflect negatively on RBC.

It’s important to identify and disclose immediately if we will be working with family or others who we are in a close personal relationship with so conflicts can be appropriately managed or avoided.

Remember, there is no substitute for good judgment and common sense. If we are ever in doubt about a relationship that may put us in a conflict of interest, we should speak with our manager or Human Resources.

 

What are some examples of “close personal relationships”?

 

Family

Romantic or intimate relationships

Household members such as roommates

Close friends

Persons with whom we have a significant financial relationship (e.g. business partner or co-investor)

 

What types of close personal relationships could cause a conflict of interest and must be disclosed so they can be appropriately managed or avoided?

 

A supervisory relationship with a family member or someone we are in a close personal relationship with

Any working relationship with a family member or someone we are in a close personal relationship with where we may have, or be perceived to have, the ability to impact compensation, work or promotion prospects

5.2.3 Managing Outside Activities and External Directorships

Some of us take on additional activities or roles outside of our work at RBC. For example, we may work part-time elsewhere, run a personal business from home or take on a directorship, officer position or similar role at another company, organization, club, association or foundation. No matter the activity or role, it must not be with one of RBC’s competitors. It must also not compromise our ability to do our best work and fulfill our responsibilities to RBC or its clients.

We must be aware of actual, potential or perceived conflicts of interest and potential reputational issues related to outside activities and external directorships, and must comply with the Code and RBC policies on disclosure and approval. Doing so allows us to maintain our commitment to integrity while maximizing our business and relationships.

 

The following may be considered competitors of RBC:

 

Banks

Credit unions

Asset management firms

Insurance companies

Mortgage companies

 

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Trust companies

Certain financial technology companies (i.e. FinTech)

Other companies that provide financial services

Even if an outside activity or external directorship is not with a direct competitor of RBC, conflicts of interest may still arise if the activity or role directly relates to, interferes with or overlaps with our work at RBC (for example, subject matter, job function, technical expertise or using RBC time/systems/resources).

For more information on managing outside activities or work and managing external directorships, refer to the RBC Enterprise Conflicts of Interest Policy and the RBC Conflicts of Interest Control Standards for Outside Business Activities and External Directorships for the required process and approvals.

 

Directors of Royal Bank of Canada should refer to the Policies and procedures – Conflicts of interest section in the Royal Bank of Canada Director’s Guide and consult the Corporate Secretariat.

Non-employee directors of subsidiaries should refer to the RBC Policy on the Legal Governance of Subsidiaries and consult the Corporate Secretary of the relevant subsidiary.

5.2.4 Managing Gifts and Entertainment

In business, it is common to foster relationships and show appreciation by exchanging courtesies such as meals, gifts and entertainment. However, we must ensure that the gifts and entertainment we accept are not intended or designed to influence our business judgment on behalf of RBC. Likewise, we must never give gifts or entertainment intended to inappropriately influence or create a sense of obligation to those we have a business relationship with. To keep our purposes clear, all gifts and entertainment we accept or give must comply with RBC policies and be customary and consistent with usual business practices.

RBC policies and business practices require that all gifts and entertainment given or received, with certain exceptions (such as gifts and entertainment of a nominal value or promotional gifts), be disclosed and approved by the appropriate Approval Authority. We must take extra caution when the intended recipient of a gift or entertainment is a public official.

Gifts are anything of value given or received in relation to RBC business. We may only give or accept gifts that are customary, modest and culturally sensitive. We must never accept or give cash, cash equivalents, bonds or negotiable securities, although gift certificates or gift cards are allowed as long as their intended purpose is for the purchase of what would otherwise be considered a gift.

 

Key things to remember when considering gifts or entertainment:

 

Cash, bonds and negotiable securities are never acceptable gifts regardless of the amount.

The RBC Conflicts of Interest Control Standards for Gifts and Entertainment sets out limits for gifts, as set out below. Note that the annual cumulative limits that an employee may give to (or receive from) the same client or third party recipient should not exceed:

$100 CAD in Canada

$100 USD in the United States

£100 GBP in the United Kingdom

€100 Euro in Europe, and

in all other jurisdictions, the local currency equivalent to 100 Canadian dollars.

 

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Entertainment must not seem excessive or inappropriate; if unsure, seek guidance from your manager or Compliance before accepting an invitation.

You must seek guidance from your local Money Laundering Reporting Officer (MLRO) or designated compliance officer before providing a gift or entertainment to, or accepting any gifts or entertainment from, a public official.

Gifts and entertainment must not create a sense of obligation for either party – it’s never wrong to question the motive behind business gifts and entertainment.

Follow your RBC policies and business practices regarding gifts or entertainment, including recordkeeping.

Gifts or entertainment between employees must never be given in exchange for a business referral, to influence or to gain another form of business advantage now or in the future.

Entertainment includes any event we host or attend for business related purposes. Common examples include meals, sporting events, theatrical performances and educational events. Entertainment should always be in good taste and consistent with usual business practice. As with gifts, we must avoid entertainment that is lavish or too expensive because it may also be seen to influence our judgment.

If only one party attends the event, it is considered a gift rather than entertainment. For example, if a third party gives us tickets to an event, but does not attend, we must follow our process for gifts received from a third party. The same would be true if RBC offers entertainment to a third party, but no one from RBC attends the event. Employees who are invited by a supplier to attend an RBC sponsored event as a gift may be subject to a different approval process and requirements. Refer to the RBC Conflicts of Interest Control Standards for Gifts and Entertainment or consult with your local Compliance group.

RBC has restrictions on payment and acceptance of payment of travel or lodging expenses. These apply to situations where RBC is providing entertainment or where we are accepting travel or lodging expenses from a third party.

In all cases, we must comply with the RBC Enterprise Conflicts of Interest Policy, the RBC Conflicts of Interest Control Standards for Gifts and Entertainment and the RBC Enterprise Anti-Bribery Anti-Corruption Policy. Your RBC unit may also have more specific rules; for further information you should contact your local Compliance group.

5.2.5 Managing Inside Information and Securities Trading

From time to time, we may have access to material, non-public information (“inside information”) about a company, including RBC, or its clients. As a rule, inside information can reasonably be expected to affect the market value or price of a company’s securities, or considered important to a reasonable investor’s investment decision. Having inside information offers an unfair advantage when deciding whether to buy, sell or hold onto a security. As a result, many of the countries where we do business have laws regarding when we can trade in securities issued by any company.

When we have inside information about a company, we must notify Compliance immediately to ensure that the potential conflict is managed appropriately. In addition, we must not trade in the securities of that company. Doing so is called “insider trading” – which is illegal and subject to fines and penalties. It is also illegal to provide inside information to another (this is usually called “tipping”) unless it is necessary to accomplish a legitimate business purpose. Employees should be familiar with information barriers and other tools outlined in RBC policies, which are used to manage conflicts.

 

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Many of our investment activities, even where they are not illegal, may still pose personal conflicts that must be managed or eliminated in accordance with RBC policies. Regardless of whether we have access to or possess inside information, we are all subject to the requirements of RBC personal trading policies. Before trading in the securities of RBC, its clients or any other company, we must familiarize ourselves with these requirements, as well as the effect that the perception of wrongdoing may have.

For more information, refer to the RBC Conflicts of Interest Control Standards for Personal Trading and the RBC Conflicts of Interest Control Standards for Inside Information and Information Barriers, as well as applicable local or business-specific policies.

Directors of Royal Bank of Canada should refer to the Insider Trading and Reporting Policy and Procedures for Directors of Royal Bank of Canada.

Non-executive directors of Royal Bank of Canada’s subsidiaries who are not officers, employees or directors of Royal Bank of Canada should refer to the RBC Policy on the Legal Governance of Subsidiaries.

 

Key things to remember when engaging in securities transactions and trading:

 

All employees need pre-approval for personal investments in private companies, be it a small family business or a larger company.

Never accept favoured share allotments for initial public offerings that are a result of a relationship you have with a company through RBC.

It doesn’t matter how you come to possess inside information, you are always obligated to protect it in accordance with RBC policies and applicable laws.

Be particularly mindful when trading in RBC securities, as there might be additional restrictions.

5.2.6 Accepting Appointments or Inheritances

RBC’s clients look to us for advice on their financial matters. Clients may ask or appoint us to represent them or their interests in a variety of situations. These appointments include our acting as attorneys, mandataries, trustees, executors, administrators, liquidators, protectors, and in other appointments or fiduciary roles. In some instances, clients wish to show their appreciation for the value of our services by giving us a gift effective on their death. These can be made in the client’s will, by designation as beneficiary under a client’s policy, plan or account, or by joint ownership of an asset.

To make sure there is no actual, potential or perceived conflict of interest, we and our families must not accept these requests, appointments, gifts or benefits unless they arise independently of the client relationship. If a request, appointment, gift or benefit does not arise independently of the client relationship, but we believe that special circumstances apply, we must follow established procedures before we or our families accept it. Management and local Compliance approvals, appropriate for the business we work in, are required. When acceptance of certain appointments is part of our role (such as being a discretionary investment manager), we must also follow RBC policies.

5.3 Preventing Financial Crime

Money laundering, terrorist financing, bribery and corruption, activities that may violate applicable economic sanctions and tax evasion are serious crimes that have damaging effects on global economies, countries, communities and businesses. Global efforts to prevent these crimes receive significant attention from regulators, governments, international organizations and law enforcement agencies.

RBC is committed to doing business based on the quality of our reputation and the services we provide, and not because we have gained any dishonest or unfair advantage. RBC supports efforts to detect and prevent these financial crimes through our commitment to operate with integrity. It is very important that we know and comply with all applicable laws and RBC policies designed to prevent and detect these crimes.

 

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Reporting financial crimes

We must be vigilant and exercise good judgment when dealing with unusual or suspicious transactions or activities. If we know of or suspect or have any concerns relating to money laundering, terrorist financing, bribery and corruption, activities that may violate applicable economic sanctions, tax evasion or criminal activity, we must Speak Up! and report them as soon as possible to our manager or one of the Key Contacts. We must also never advise (“tip-off”) anyone we suspect of committing these crimes.

For more information or guidance, please refer to the RBC Enterprise Control Standards on Anti-Money Laundering and Anti-Terrorist Financing and the RBC Enterprise Anti-Bribery Anti-Corruption Policy.

 

What can I do to identify and prevent money laundering or terrorist financing?

 

Obtain current and adequate Know Your Client information for all client relationships.

Be aware of AML risks and report concerns every time you observe unusual or suspicious activity.

Never knowingly assist anyone to transfer the proceeds of crime or alter, remove or disguise information to facilitate a transaction that would otherwise be prohibited under the law.

 

What can I do to prevent bribery and corruption?

 

Never knowingly facilitate any transaction associated with the proceeds of bribery and corruption.

Never solicit, give, receive or promise anything of value, either directly or indirectly, with the intent of helping RBC obtain an inappropriate advantage. This includes offering, providing or receiving excessive or inappropriate gifts and entertainment.

Never make facilitation payments. These are typically small payments made to government officials to obtain or speed up routine actions or services such as obtaining licences or permits.

 

What can I do to prevent tax evasion?

 

Follow RBC’s Know Your Client procedures to understand the source and use of a client’s funds and affairs. If you suspect tax evasion or inappropriate tax reporting, escalate the matter to your manager and AML Compliance contact. Refer to the RBC Enterprise Control Standards on Anti-Money Laundering and Anti-Terrorist Financing for more information on when and how to escalate.

Do not knowingly facilitate or ignore tax evasion, either in connection with RBC’s corporate tax affairs or in servicing our clients. If you are aware of any such behaviour at RBC, report it through one of the channels listed on RBC’s Speak Up! webpage.

5.4 Managing Compliance with Global Economic Sanctions

As a regulated financial institution, RBC must comply with economic sanctions in Canada and other jurisdictions where we operate. We must be aware of any economic sanctions that may apply and their impact to RBC and RBC clients. Further, we must not knowingly avoid sanction regulations, either personally or in servicing our clients. Contact the RBC Law Group or Global Economic Sanctions team for advice if you are unsure of the right course of action.

For more information, please refer to RBC’s Enterprise Economic Sanctions Policy.

 

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5.5 Ensuring Fair Competition

RBC seeks to ensure fair business practices are followed wherever we do business. Many countries where we do business have laws to promote fair competition and reduce monopolistic (or anti-competitive) activity.

At RBC, each of us has a responsibility to know and comply with applicable competition and anti-trust laws. We need to be able to recognize and avoid situations that may conflict with these laws. To ensure we comply with these laws, we must be especially careful when dealing with competitors of RBC or other third parties. Never agree or arrange with a competitor to do any of the following directly or indirectly:

 

   

fix, maintain, increase or try to control the price of a product or service

   

divide or allocate sales, clients, suppliers or markets for the supply, or acquisition of, products or services, or

   

fix, maintain, increase, lessen, prevent, eliminate or otherwise try to control the production or supply of a product or service.

We must take great care at industry association meetings or other events where we may interact with competitors or other third parties. If a discussion appears to be leading into prohibited areas, we must voice our concern, withdraw from the discussion and immediately advise local Compliance or the RBC Law Group. While industry associations can provide excellent opportunities for networking and business development, they pose challenges as well. When attending events, we must be careful to avoid even the appearance that RBC participates in or endorses unfair or manipulative business conduct.

 

Other examples of activities where competition issues arise:

 

Bid-rigging or secretly making agreements with other bidders when submitting bids or tenders

Tied selling or making the availability of a product or service conditional on the purchase of another product or service

Communications that could be interpreted to show an anti-competitive intent or behaviour, such as advertisements that are misleading, unfair or inaccurate when they compare RBC products with those of our competitors

Benchmarking or exchanging information with competitors, particularly where the information could raise possible concerns relating to conspiracy, bid-rigging, illegal trade practices or anti-competitive agreements

Entering into agreements with another company to set or fix employee compensation or benefits (e.g. wage-fixing agreements)

Improper agreements with another company not to hire or solicit its employees

Any other act that is likely to harm competition substantially if done in circumstances where RBC is an important participant in a market or a class of business

For more information, please refer to RBC’s Enterprise Anti-Trust and Competition Law Policy and Enterprise Compliance Control Standards for Anti-Trust and Competition Law.

 

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6. Integrity in Safeguarding Entrusted Assets

As a financial institution, we manage the assets in our care responsibly and ethically to earn and maintain our stakeholders’ trust.

6.1 Protecting RBC Client Property

In order to earn RBC clients’ trust, we must safeguard their property. This property should be used only in accordance with their directions, relevant RBC policy and the law. Using client property inappropriately or for personal gain is a violation of this trust.

6.2 Protecting RBC Property

Fraud, misappropriation and misuse

Many of us have access to premises, systems and information about RBC processes that are not available to RBC clients or the general public. We must never use this access or information to benefit ourselves, our families or our friends, or for any purpose unrelated to the performance of our duties. Fraud, misappropriation of property or corporate opportunities and other types of misuse are never tolerated.

Acts of fraud may include intentionally concealing or misrepresenting facts for the purpose of inducing, deceiving or misleading others.

 

Some examples of fraud are:

 

improper financial reporting (such as improper revenue recognition and over- or understating assets or liabilities)

deliberate failure to fulfill our disclosure obligations, and

falsifying records (such as forging client or management signatures).

“Misappropriation” includes theft or other intentional misuse of RBC assets, systems, processes or RBC client funds. Misuse can include any purpose not related to the performance of our duties.

 

Some examples of misappropriation and misuse are:

 

intentional personal use of RBC expense accounts or corporate credit cards — expense accounts and corporate credit cards must be used only for expenses eligible for reimbursement under RBC’s expense guidelines

unauthorized “borrowing” and “kiting” (taking advantage of the time delay required for an item to clear)

obtaining funds through false pretences such as depositing a cheque known to be NSF (Non- Sufficient Funds) or making an “empty envelope deposit” in an automated banking machine

allowing others to benefit from opportunities only available to RBC employees

making unauthorized changes to a client profile, and

submitting false benefit claims.

 

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Proprietary information

RBC proprietary information includes non-public or undisclosed information we withhold from general knowledge. This information is critical to our business, and could be useful to our competitors or harmful to RBC if disclosed.

 

Some examples of proprietary information are:

 

RBC client lists and trade secrets

technical and statistical information

RBC developed program source code

financial documents

contract documentation

legal, regulatory or business matters

business processes, and

corporate strategies and plans.

Data protection and protecting against data misuse is a shared responsibility and we all have a role to play. We must be diligent at all times, particularly when sending information outside of RBC, receiving information from outside of RBC or even when sharing data internally across legal entities and jurisdictions. It’s important to remember that any loss or misuse of data could impact RBC’s reputation and client confidence, and may have legal, regulatory and financial impacts. For more detail on how to protect proprietary information, please refer to the “Protecting RBC Business Information” in section 3.2 above.

 

Keep in mind:

 

Never send work-related material to your personal email.

Take caution and check for correct email addresses before emailing any RBC information.

Never upload RBC business information to external file sharing or online storage sites, without authorization from the appropriate parties.

Ensure that sharing of information with another party (internal or external) is supported by legitimate business reasons or otherwise authorized.

Adhere to a clear desk policy for all your work environments.

Additional examples of how to protect RBC business or client information can be found in section 3.2.

RBC’s proprietary information may be disclosed to outside parties only if required by law or if properly authorized. Authorization can often be obtained through a confidentiality agreement. Our responsibility to safeguard RBC’s proprietary information continues, even after we leave RBC’s service. This includes returning all paper and digital proprietary information in our possession to RBC upon departure.

Trademarks, copyright and other intellectual property

RBC intellectual property has important commercial value and is crucial to RBC’s effective competition in the marketplace. It includes any of the following that we create while working for RBC:

 

   

inventions, improvements, works of authorship, developments, concepts or ideas

   

data, processes, online websites or applications, computer software programs, or discoveries, and

   

trade secrets, trademarks, brand names, copyrights or logos.

 

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Any intellectual property we generate in our RBC work belongs to RBC and remains with RBC after we leave RBC’s service. We should use RBC intellectual property only as permitted in this Code and RBC policies.

RBC intellectual property must not be used by a third party without RBC’s prior approval. Similarly, we may use a third party’s intellectual property only with the third party’s prior approval. For example, all original musical, artistic and literary works, computer software, performances and sound recordings are protected by copyright laws. We must not download, install or copy any such material to our RBC-issued computers or devices without first obtaining the owner’s permission.

We should seek guidance from the RBC Law Group if we suspect RBC intellectual property has been infringed upon or otherwise misused, or if we have any questions on the use of intellectual property.

Proper use of RBC networks, systems software, devices, applications and the Internet

We must comply with the Code, RBC policies and any terms and conditions governing the use of RBC equipment, systems, computer networks, applications, software, computers and portable devices, as well as the messages communicated within them. Where RBC policies permit us to use our personal equipment for RBC work, we must follow the policies associated with that use.

When sending communications through RBC networks, we must always maintain a professional tone and comply with the Code and RBC policies, including the Respectful Workplace Policy. We must follow these requirements whether we are using RBC equipment or our own.

In addition, when we conduct work for RBC on any device or network, we must only use electronic messaging channels approved and provided by RBC and the applicable RBC units.

 

Doing What’s Right

My client, who is a friend of mine, often sends me business-related emails or will text me on my personal device. Given they initiate the message, and we have a personal relationship, is this ok?

If contacted by any client or business associate through non-approved electronic messaging channels, it is important to always redirect them to an RBC approved electronic communication channel (e.g. RBC email address) for business-related communications, and to forward or copy the electronic message into an RBC approved electronic communication channel so that there is a record of the electronic communication within RBC systems. Using non-approved electronic communication channels for work related purposes is prohibited.

RBC reserves the right to monitor, audit and inspect our use of RBC systems and technology, including internet usage, audio recordings of conversations conducted by telephone and electronic messages using email, instant messaging or other electronic means. For more information on the purpose and ways in which RBC monitors the use of RBC systems and technology, please refer to the appendix of RBC’s Employee Privacy Notice.

While we may use RBC equipment, systems and technology for personal reasons, we must always comply with the Code and RBC policies, including the Respectful Workplace Policy, and our personal use must be reasonable. In line with this policy, we must not use these systems to view or communicate inappropriate material. These systems also must not be used to do work on behalf of another business or organization, unless authorized by RBC.

 

Some examples of inappropriate material are:

 

sexually explicit material

gambling websites

derogatory jokes, and

offensive or demeaning statements or images about a person or group, including those that relate to race, religion, disability, sexual orientation or gender.

 

23


Some examples of electronic messaging channels, all of which need to be approved and provided by RBC before using for RBC work, are:

 

email

instant messaging/chat, including chats in deal rooms or other third party applications

mobile SMS

any application that can be downloaded and installed from an app store, and

social media communication tools like LinkedIn, Facebook and YouTube.

6.3 Keeping Accurate Books and Records

RBC’s credibility depends on the integrity of its books, records and accounting. Clients rely on us to maintain and provide accurate records of their dealings with us – a duty RBC takes seriously. We must ensure RBC’s books and records are accurate, timely and complete, and reflect RBC’s business, operations, earnings and financial status.

To maintain accurate books and records, we follow internal processes and procedures. This includes capturing information in the proper system and labelling it correctly so it is complete and accurate.

We are expected to act honestly and with integrity in handling RBC accounts at all times. For instance, overstating an amount on an expense report or falsifying a sales record in order to exceed a target would be a serious violation of RBC’s trust in us and the Code. We must also never mischaracterize a payment in order to hide its true purpose (such as disguising a bribe as a “sales fee” or legitimate expense). False statements such as these are never tolerated, no matter how small the amount or the reason behind the action.

We all provide information that RBC uses to prepare financial statements, regulatory reports and publicly filed documents. This means we all play a role in ensuring that the information we record complies with all applicable accepted accounting principles and RBC internal controls.

You must know that falsifying financial or business records (including client documentation) or making false statements to our auditors is against the law. Likewise, we must not make a payment or establish an account on RBC’s behalf under false pretenses.

 

24


7. Conclusion

Our Code of Conduct is integral to the way we do business at RBC. As employees, contract workers, and members of the boards of directors of RBC and all its subsidiaries, it is our duty to read and understand the Code. That said, there will be times when complex and sensitive issues arise that may cause confusion. Don’t hesitate to speak up, ask questions and seek help.

“We are all responsible for protecting and enhancing RBC’s reputation by following our Code of Conduct. It’s also important that we support one another in doing what’s right, including feeling empowered to challenge situations we believe are wrong.”

David McKay, President and CEO, RBC

 

25

EX-5 6 d519293dex5.htm EX-5 RETURN ON EQUITY AND ASSETS RATIOS EX-5 Return on Equity and Assets Ratios

Exhibit 5

Return on Equity and Assets Ratios

 

     For the Year-Ended
October 2023
    For the Year-Ended
October 2022
    For the Year-Ended
October 2021
 

Return on Assets

     0.74     0.84     0.96

Return on Equity

     14.2     16.4     18.6

Dividend Payout Ratio

     51     45     39
  

 

 

   

 

 

   

 

 

 
EX-31.1 7 d519293dex311.htm EX-31.1 RULE 13A-14(A)/15D-14(A) CFO CERTIFICATION EX-31.1 Rule 13a-14(a)/15d-14(a) CFO Certification

Exhibit 31.1

SOX 302 CERTIFICATION

I, David McKay, certify that:

 

1.

I have reviewed this annual report on Form 40-F of Royal Bank of Canada;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

 

4.

The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:

 

  (a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c)

Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d)

Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

 

5.

The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):

 

  (a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and

 

  (b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

November 30, 2023

 

/s/ David McKay

Name:   David McKay
Title:   President and Chief Executive Officer
EX-31.2 8 d519293dex312.htm EX-31.2 RULE 13A-14(A)/15D-14(A) CFO CERTIFICATION EX-31.2 Rule 13a-14(a)/15d-14(a) CFO Certification

Exhibit 31.2

SOX 302 CERTIFICATION

I, Nadine Ahn, certify that:

 

1.

I have reviewed this annual report on Form 40-F of Royal Bank of Canada;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

 

4.

The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:

 

  (a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c)

Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d)

Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

 

5.

The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):

 

  (a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and

 

  (b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

November 30, 2023

 

/s/ Nadine Ahn

Name:   Nadine Ahn
Title:   Chief Financial Officer
EX-32.1 9 d519293dex321.htm EX-32.1 SECTION 1350 CEO CERTIFICATION EX-32.1 Section 1350 CEO Certification

Exhibit 32.1

CERTIFICATIONS

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of Royal Bank of Canada, a Canadian chartered Bank (the “Bank”), hereby certifies, to such officer’s knowledge, that:

The annual report on Form 40-F for the year ended October 31, 2023 (the “Report”) of the Bank fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Bank.

 

Dated: November 30, 2023      

/s/ David McKay

      Name: David McKay
      Title:   President and Chief Executive Officer
EX-32.2 10 d519293dex322.htm EX-32.2 SECTION 1350 CFO CERTIFICATION EX-32.2 Section 1350 CFO Certification

Exhibit 32.2

CERTIFICATIONS

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of Royal Bank of Canada, a Canadian chartered Bank (the “Bank”), hereby certifies, to such officer’s knowledge, that:

The annual report on Form 40-F for the year ended October 31, 2023 (the “Report”) of the Bank fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Bank.

 

Dated: November 30, 2023      

/s/ Nadine Ahn

      Name: Nadine Ahn
      Title:   Chief Financial Officer
EX-97 11 d519293dex97.htm EX-97 EX-97

Exhibit 97

ROYAL BANK OF CANADA POLICY FOR THE

RECOVERY OF ERRONEOUSLY AWARDED INCENTIVE-BASED COMPENSATION FROM

EXECUTIVE OFFICERS

I. BACKGROUND

Royal Bank of Canada (“RBC”) has adopted this policy (this “Policy”) to provide for the recovery or “clawback” of certain incentive compensation in the event of a Restatement (as defined below). This Policy is intended to comply with, and will be interpreted to be consistent with, the requirements of Section 303A.14 of the New York Stock Exchange (“NYSE”) Listed Company Manual.

II. STATEMENT OF POLICY

RBC shall recover reasonably promptly the amount of erroneously awarded Incentive-Based Compensation (as defined below) in the event that RBC is required to prepare an accounting restatement due to the material noncompliance of RBC with any financial reporting requirement under applicable securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (a “Restatement”).

RBC shall recover erroneously awarded Incentive-Based Compensation in compliance with this Policy except to the extent provided under the section entitled “V. Exceptions” herein.

III. SCOPE OF POLICY

A. Covered Persons and Recovery Period. This Policy applies to all Incentive-Based Compensation received by a person:

 

   

after beginning service as an Executive Officer (as defined below),

   

who served as an Executive Officer at any time during the performance period for that Incentive-Based Compensation,

   

while RBC has a class of securities listed on NYSE, and

   

during the three completed fiscal years immediately preceding the date that RBC is required to prepare a Restatement (the “Recovery Period”).

Notwithstanding this look-back requirement, RBC is only required to apply this Policy to Incentive-Based Compensation received on or after October 2, 2023.

For purposes of this Policy, Incentive-Based Compensation shall be deemed “received” in RBC’s fiscal period during which the Financial Reporting Measure (as defined herein) specified in the Incentive-Based Compensation award is attained, even if the payment or grant of the Incentive-Based Compensation occurs after the end of that period.

B. Transition Period. In addition to the Recovery Period, this Policy applies to any transition period (that results from a change in RBC’s fiscal year) within or immediately following the Recovery Period (a “Transition Period”), provided that a Transition Period between the last day of RBC’s previous fiscal year end and the first day of RBC’s new fiscal year that comprises a period of nine to 12 months will be deemed a completed fiscal year. For clarity, RBC’s obligation to recover erroneously awarded Incentive-Based Compensation under this Policy is not dependent on if or when a Restatement is filed.

C. Determining Recovery Period. For purposes of determining the relevant Recovery Period, the date that RBC is required to prepare the Restatement is the earlier to occur of:


   

the date the board of directors of RBC (the “Board”), a committee of the Board, or the officer or officers of RBC authorized to take such action if Board action is not required, concludes, or reasonably should have concluded, that RBC is required to prepare a Restatement, and

   

the date a court, regulator, or other legally authorized body directs RBC to prepare a Restatement.

IV. AMOUNT SUBJECT TO RECOVERY

A. Recoverable Amount. The amount of Incentive-Based Compensation subject to recovery under this Policy is the amount of Incentive-Based Compensation received that exceeds the amount of Incentive-Based Compensation that otherwise would have been received had it been determined based on the restated amounts, computed without regard to any taxes paid.

B. Covered Compensation Based on RBC’s Common Share Price or TSR. For Incentive-Based Compensation based on the price of RBC’s common shares or total shareholder return (“TSR”), where the amount of erroneously awarded Incentive-Based Compensation is not subject to mathematical recalculation directly from the information in a Restatement, the recoverable amount shall be based on a reasonable estimate of the effect of the Restatement on the share price or TSR upon which the Incentive-Based Compensation was received. In such event, RBC shall maintain documentation of the determination of that reasonable estimate and provide such documentation to the NYSE.

V. EXCEPTIONS

RBC shall recover erroneously awarded Incentive-Based Compensation in compliance with this Policy except to the extent that the conditions set out below are met and the Human Resources Committee of RBC’s Board of Directors (the “Committee”) has made a determination that recovery would be impracticable:

A. Direct Expense Exceeds Recoverable Amount. The direct expense paid to a third party to assist in enforcing this Policy would exceed the amount to be recovered; provided, however, that before concluding it would be impracticable to recover any amount of erroneously awarded Incentive-Based Compensation based on the anticipated expense of enforcement, RBC shall make a reasonable attempt to recover such erroneously awarded Incentive-Based Compensation, document such reasonable attempt(s) to recover, and provide that documentation to the NYSE.

B. Violation of Home Country Law. Recovery would violate applicable Canadian federal or provincial law (“Canadian law”) where that law was adopted prior to November 28, 2022; provided, however, that before concluding it would be impracticable to recover any amount of erroneously awarded Incentive-Based Compensation based on violation of Canadian law, RBC shall obtain an opinion of Canadian counsel, acceptable to the NYSE, that recovery would result in such a violation, and shall provide such opinion to NYSE.

C. Recovery from Certain Tax-Qualified Retirement Plans. Recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of RBC, to fail to meet the requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder.

VI. PROHIBITION AGAINST INDEMNIFICATION

RBC shall not indemnify any Executive Officer or former Executive Officer against the loss of erroneously awarded Incentive-Based Compensation.

VII. DISCLOSURE

RBC shall file all disclosures with respect to recoveries under this Policy in accordance with the requirements of all applicable Canadian and U.S. Federal securities laws, including the disclosure required to be included in applicable Securities and Exchange Commission (“SEC”) filings.

VIII. DEFINITIONS

Unless the context otherwise requires, the following definitions apply for purposes of this Policy:


“Executive Officer” means RBC’s president, principal financial officer, principal accounting officer (or if there is no such accounting officer, the controller), any vice-president of RBC in charge of a principal business unit, division, or function (such as sales, administration, or finance), any other officer who performs a policy-making function, or any other person who performs similar policymaking functions for RBC. Executive officers of RBC’s subsidiaries are deemed Executive Officers of RBC if they perform such policy making functions for RBC. Policy-making function is not intended to include policymaking functions that are not significant. Identification of an Executive Officer for purposes of this Policy will include at a minimum executive officers identified pursuant to 17 CFR 229.401(b).

“Financial Reporting Measures” means any of the following: (i) measures that are determined and presented in accordance with the accounting principles used in preparing RBC’s financial statements, and any measures that are derived wholly or in part from such measures, (ii) stock price and (iii) TSR. A Financial Reporting Measure need not be presented within RBC’s financial statements or included in a filing with the SEC.

“Incentive-Based Compensation” means any compensation that is granted, earned, or vested based wholly or in part upon the attainment of a Financial Reporting Measure.

IX. APPROVAL AUTHORITY; REVIEW SCHEDULE.

This Policy is reviewed for approval by the Committee, following review by the Compensation Risk Management Oversight Committee and Group Risk Committee, every three years and reviewed by the Compensation Sub-Group annually. This Policy should be reviewed more frequently if required by changes to applicable laws or regulations or to ensure the effectiveness of this Policy and RBC’s adherence to best practices. This Policy was last approved by the Committee on October 18, 2023.

X. NON-SUBSTANTIVE CHANGES

Non-substantive changes to this Policy will be approved by the SVP, Compensation and Benefits.

XI. EFFECTIVENESS; OTHER RECOUPMENT RIGHTS

This Policy shall be effective as of October 18, 2023. Any right of recoupment under this Policy is in addition to, and not in lieu of, any other remedies or rights of recoupment that may be available to RBC and its subsidiaries and affiliates under applicable law or pursuant to the terms of any similar policy or similar provision in any employment agreement, equity award agreement or similar agreement.

XII. MONITORING FOR EFFECTIVENESS AND/OR REPORTING REQUIREMENTS

Human Resources, Financial & Regulatory Reporting and the Accounting Policy Group, and Law Group are responsible for monitoring and interpreting the application of this Policy.

XIII. OWNERSHIP / RESPONSBILITY FOR THIS POLICY

This document is the responsibility of Human Resources, Compensation and Benefits.