1 royal bank of canada first quarter 2007 report to ... · first quarter 2007 highlights compared...
TRANSCRIPT
Tableofcontents1 Firstquarterhighlights2 President&ChiefExecutiveOfficer’s
message4 Management’sDiscussionand Analysis4 AboutRoyalBankofCanada4 Cautionregardingforward-looking
statements5 Selectedfinancialhighlights6 Executivesummary10 Consolidatedresults
14 Quarterlyresultsandtrendanalysis15 Accountingmattersandcontrols16 Businesssegmentresults16 Howwemeasureandreportour
businesssegments16 Impactofforeignexchangerateson ourbusinesssegments17 Keyperformanceandnon-GAAP measures19 RBCCanadianPersonalandBusiness21 RBCU.S.andInternationalPersonal
andBusiness
23 RBCCapitalMarkets24 CorporateSupport25 Balancesheetdataandanalysis26 Capitalmanagement29 Off-balancesheetarrangements29 Relatedpartytransactions29 Riskmanagement34 InterimConsolidatedFinancial
Statements38 NotestotheInterimConsolidated
FinancialStatements51 Shareholderinformation
ThefinancialinformationinthisdocumentisinCanadiandollarsandbasedonfinancialstatementspreparedinaccordancewithCanadiangenerallyacceptedaccountingprinciples(GAAP),unlessotherwisenoted.
Firstquarter2007highlightscomparedwiththefirstquarterof2006(1):• Netincomeof$1,494million,up27.6%• Dilutedearningspershare(EPS)of$1.14,up28.1%• Returnoncommonequity(ROE)of27.3%,up 340basispoints• Revenueof$5,698million,up$738million,or15%• Non-interestexpenseof$3,067million,up$316million, or11%• Announceda$.06,or15%,increasetoourquarterly dividend
TORONTO,March2,2007–RoyalBankofCanada(RYonTSX&NYSE)reportedrecordnetincomeof$1,494millionforthefirstquarterendedJanuary31,2007,up$323million,or27.6%,fromayearago.DilutedEPSwere$1.14,up28.1%.ROEwas27.3%,comparedto23.9%ayearago.Thisgrowthwaslargelyattribut-abletostrongearningsacrossallourbusinesssegmentsincludinganincreaseof31%inRBCCanadianPersonalandBusiness,27%inRBCCapitalMarketsand48%inRBCU.S.andInternationalPersonalandBusiness.
Commentingontheresults,GordonM.Nixon,President&CEO,said,“Wehavestarted2007withoutstandingresultsthatreflectcontinuedinvestmentsinallourbusinesssegments.ExecutionofourstrategicinitiativesishelpingusimprovemarketshareinCanadaandexpandourbusinessesglobally.”
Totalrevenueincreased$738million,or15%,fromayearagoprimarilyduetosolidgrowthinourwealthmanagementandbankingbusinessesdrivenbyexpansion,targetedacquisitionsandthesuccessfulexecutionofourstrategicinitiatives.Strongerequityanddebttradingresultsduetosignificanttransactionsandincreasedrevenuefromcertainequitytradingstrategiesalsocontributedtotheincrease.Thesefactorswerepartiallyoffsetbylowerinsurance-relatedrevenuemainlyduetothenegativeimpactoftheimplementationofthenewfinancialinstrumentsaccountingstandardswhichwaslargelyoffsetininsurancepolicyholderbenefits,claimsandacquisitionexpense.
(1) EffectiveNovember1,2006,resultsreportedonatotalconsolidatedbasisarecomparabletoresultsreportedasfromcontinuingoperationsforthecorrespondingpriorperiods.
RoyalBankofCanadareportsrecordresultsforthefirstquarterof2007
1Reporttoshareholders
Royal Bank of Canada First Quarter 2007
2RoyalBankofCanadaFirstQuarter2007
Ourearningsthisquarterof$1.49billionweredrivenbyrevenuegrowthinmostbusinesslinesaswecontinuedtoexecutegrowthinitiativesinCanadaandabroad.Thisperformancereflectedthestrengthofourdiversegroupofbusinessesglobally.
InCanada,wehaveexpandedoursalesforceandopenedbranchestoextendourdistributionnetworkandbuildcapacityaroundclientrelationships.IntheU.S.,wehavecompletedkeyacquisitionsandarecontinuingtoexpandourdistributionnetworktohelpuspursueourgrowthinitiatives.Globally,wecontinuedtointroducenewproductsandsolutionstomeetourclients’needs.Wealsocontinuedtoinvestintechnologiestomakedoingbusinesswithuseveneasier.TheseeffortshavehelpedimproveourmarketshareinCanadaandgrowourbusi-nessesglobally.Wehavedeployedcapitalthroughassetgrowthinourbusinesses,targetedacquisitions,dividendsandsharebuybacks,allofwhicharehelpingtogeneratestrongreturnsforourshareholders.
Our2007annualobjectiveswereestablishedattheendof2006basedonoureconomicandbusinessoutlooks.Ourfirstquarterresultsaretrackingwelltotheseobjectives:
Non-interestexpenseincreased$316million,or11%,fromayearagoprimarilyduetohighervariablecompensationonimprovedbusinessperformance.Highercostsinsupportofourgrowth,includingincreasedstaffinglevelsinourdistributionnetworkandadditionalbranches,alsocontributedtotheincrease.
Totalprovisionforcreditlossesincreased$115millionfromayearago,primarilyreflectinga$50millionreversalofthegeneralallowanceintheprioryearandlowercorporaterecover-iesthisquarter.Higherprovisionsinourpersonalunsecuredcreditline,smallbusinessandcreditcardportfoliosinthecurrentperiodalsocontributedtotheincrease.
Insurancepolicyholderbenefits,claimsandacquisitionexpensedecreased$136million,or21%,fromtheprioryear.Thedecreasemainlyreflectedthepositiveimpactoftheimple-mentationofthenewfinancialinstrumentsaccountingstandards,andtheprioryearhurricane-relatedcharge.ThesefactorswerepartiallyoffsetbygrowthinourEuropeanlifereinsuranceanddomesticbusinesses.
Incometaxexpenseincreased$103million,or31%,overtheprioryearlargelycommensuratewithhigherearningsbeforeincometaxes.Theeffectiveincometaxrateof22.3%inthecurrentquartercomparesto22.0%ayearago.
RBCCanadianPersonalandBusinessnetincomeincreased$208million,or31%,fromayearago.Thiswaslargelyduetostronggrowthacrossallbusinesslines,reflectingtheongoingsuccessfulexecutionofourgrowthinitiatives.Theimprovementinourresultsalsoreflectedtheprioryearhurricane-related
chargeandafavourableadjustmentrelatedtothereallocationofforeigninvestmentcapitalinthecurrentquarter.
RBCU.S.andInternationalPersonalandBusinessnetincomeincreased$48million,or48%,fromtheprioryear.InU.S.dollars,netincomewasupUS$40million,or45%,largelydrivenbythesuccessfulexecutionofourgrowthinitiativesincludingtheacqui-sitionofFlagFinancialCorporation(Flag).
RBCCapitalMarketsnetincomeincreased$90million,or27%,fromayearagolargelydrivenbybroad-basedgrowthacrossmostbusinessesandproductcategories.
Comparedtothefourthquarterof2006,ourconsolidatednetincomeincreased$232million,or18%,anddilutedEPSrose$.18,or19%.ThisincreaselargelyreflectedhighertradingresultsinRBCCapitalMarkets,strongearningsgrowthacrossallbusi-nesslinesinRBCCanadianPersonalandBusinessandsolidbusi-nessgrowthinRBCU.S.andInternationalPersonalandBusinessduetothesuccessfulexecutionofourgrowthinitiativesinclud-ingtheacquisitionofFlag.ThesefactorswerepartiallyoffsetbyhighervariablecompensationprimarilyinRBCCapitalMarketsduetostrongerbusinessperformance.
AsatJanuary31,2007,theTier1capitalratioof9.2%wasdownfrom9.5%ayearago,anddownfrom9.6%attheendofthepreviousquarterastheincreaseinrisk-adjustedassetsrelatedtoourlendingandtradingactivitiesexceededourstronginternalcapitalgeneration.TheTotalcapitalratioof11.2%wasdown160basispoints(bps)from12.8%ayearago,anddown70bpsfrom11.9%lastquarter.
President&ChiefExecutiveOfficer’smessage
2007 Q1 2007 Objectives Performance
1.Dilutedearningspersharegrowth 10%+ 28.1% 2. Operatingleverage(1) >3% 6% 3.Returnoncommonequity(ROE) 20%+ 27.3% 4.Tier1capitalratio(2) 8%+ 9.2%5.Dividendpayoutratio 40–50% 35%
(1) Ouroperatingleverageisdefinedasthedifferencebetweenourrevenuegrowthrate(asadjusted)andnon-interestexpensegrowthrate(asadjusted).Revenueisbasedonatax-ableequivalentbasisandexcludesconsolidatedvariableinterestentities(VIEs),accountingadjustmentsrelatedtothenewfinancialinstrumentsaccountingstandardsandGlobalInsurancerevenue.Non-interestexpenseexcludesGlobalInsurance-relatedexpense.Thisisanon-GAAPmeasure.Forfurtherinformationincludingareconciliation,refertotheKeyperformanceandnon-GAAPmeasuressection.
(2) CalculatedusingguidelinesissuedbytheOfficeoftheSuperintendentofFinancial InstitutionsCanada(OSFI).
OurdilutedEPSgrowthof28.1%andROEof27.3%comparefavourablywithourEPSgrowthobjectiveofmorethan10%andROEobjectiveofmorethan20%.Ourthree-monthoperatingleverageof6%compareswithourobjectiveofgreaterthan3%.Wehavemaintainedasolidcapitalposition,withaTier1capitalratioof9.2%,whichremainscomfortablyaboveourtargetofgreaterthan8%.Inlightofourcontinuingstrongearnings,weareraisingourquarterlycommonsharedividendby$.06,or15%,to$.46inthesecondquartertohelpusachieveour2007divi-dendpayoutobjectiveof40–50%.
RoyalBankofCanadaFirstQuarter20073
Wecontinuedtomakeprogressonourstrategicgoalsthisquarter.
1. TobetheundisputedleaderinfinancialservicesinCanada• RBCopened4newbankbranchesandbegantoupgrade
55branches.Wealsocelebrated10yearsofonlinebankingandtodayserveover3millioncustomersonline.
• OurinstallationofFraudulentDeviceInhibitorsinourATMnetworkishelpinguscombatillegalactivityandmaximizeclientsecurity.
• RBCAssetManagementlaunchedanumberofnewproductsincludingtheRBCSelectAggressiveGrowthFundandtwonewRBCO’Shaughnessyfunds.
• Aspartofourcommitmenttocontinuouslyimprovethevalueweprovidetoretailinvestors,wereducedmanage-mentfeesoninternationalandglobalequitymutualfunds.
• RBCAssetManagementwasthefirstfundcompanyinCanadatoimplementthenewsecuritiesregulationrequiringindependentoversightofmutualfunds,continuingitslead-ershipintheareaoffundgovernance.
• RBCInsuranceopened3newbranches,bringingthetotalto13.
• RBCCapitalMarketswasnamedTopDealmakerin2006(National Post).
• RBCCapitalMarketsledCanadaHousingTrust’s$8.1billionbondissue,whichwasthelargestbondissueinCanadianhistory.
2. Tobuildonourstrengthsinbanking,wealthmanagement andcapitalmarketsintheUnitedStates• RBCCenturacompletedtheacquisitionofFlagFinancial
Corporation(Flag).• RBCDainRauscher’sapprovedlinesundertheRBCPremier
LineofCreditprogram,whichisofferedthroughRBCGlobalPrivateBanking,grewinthequartertoreachUS$950million,upfromUS$500millionayearago.
• RBCCapitalMarketscompletedtheacquisitionsofCarlinFinancialGroupandDaniels&Associates,L.P.
• RBCCapitalMarketsexpandeditscapabilitiestoservemin-ingsectorclientsbycreatingabasemetalsdeskinNewYorktocomplementtheteamestablishedinLondonayearago.
3. Tobeapremierproviderofselectedglobalfinancial services• RBCCapitalMarketsled2007’sfirsttwoUS$1billion
Eurobondissues.• RBCCapitalMarketscontinueditsdominanceoftheMaple
bondmarket,asjoint-leadandbookrunnerforthelargestfixed-ratesingletrancheMaplebondinthesovereigns,supranationalsandagenciessector.
• RBCCapitalMarketscompleteditsfirstAIMtransactionbyadvisingAustralian-baseduraniumminingcompany,BerkeleyResourcesLtd.,onitsnewlistingontheLondonexchange.
• GlobalPrivateBankingwasnamedthetopprovideroftrustservicesintheU.K.(Euromoney).
AnewWealthManagementsegmentStartingnextquarter,wewillreportourresultsunderournewbusinessstructurethatincludesournewlycreatedWealthManagementsegment.Thisnewsegmentwillconsistofbusi-nessesthatdirectlyservethegrowingneedsofaffluentandhighnetworthclientsglobally,andbusinessesthatprovideassetmanagementandtrustproducts.
Webelievethatglobaldemandforwealthmanagementproductsandserviceswillcontinuetoriseasglobaleconomiesdevelopanddemographicsshift.Thisorganizationalrealign-mentpositionsuswelltogrowourwealthmanagementpresenceaggressivelyoverthenextseveralyears.
OurCorporateResponsibilityWeknowthatacompany’svaluecannotbejudgedsolelyonitscurrentfinancialresultsandunderstandthattoday’sinvestorsdemandtopperformingcompaniesincludealonger-termviewofhowthoseresultswereachieved.Whenmakingbusinessdecisions,weconsiderthepresentandfutureinterestsofallourstakeholders,includingourclients,employees,investorsandcommunities.Ibelievethisholisticapproachhascontributedsignificantlytoourlong-termsuccess.
Werecentlyreleasedour2006CorporateResponsibilityReportandPublicAccountabilityStatement,whichprovidesanoverviewofRBC’ssocial,economicandenvironmentalcommit-mentsandourimpactonthecommunitiesandcountriesinwhichwedobusiness.Italsosummarizesourbusinessandworkplacepractices,whichwetakeseriouslytoachievesustainableprosperityforallstakeholders.WehavebeenoneofCanada’sleadersincorporateresponsibilityandthereporthighlightsglobalhonoursthatweareprivilegedtohavereceived.Forexam-ple,RBCwasagainnamedoneoftheworld’stop100sustainablecompanies(Innovest, Corporate Knights, BusinessWeek),andwecontinuetobeincludedontheDowJonesSustainabilityIndex,FTSE4GoodIndexandJantziSocialIndex.
WewerealsoprivilegedtohaverankednumbertwoforCanada’sMostAdmiredCorporateCultures(Waterstone Human Capital,Canadian Business),andasoneoftheTop100BrandsinBanking(Brand Finance,The Banker)andthemostvaluablebrandinCanada(Interbrand).
Weintendtocontinuetodemonstratesustainabilityprinciplesthroughourbusinesspracticesandperformance,andprovideleadershipinselectsocialandenvironmentalareaswherewecanmakeadifference.
Finally,Iwouldliketoacknowledgeouremployeesfortheirout-standingperformance,whichbenefitsallourstakeholders,andthankourclientsforcontinuingtoprovideuswiththeirbusiness.
GordonM.NixonPresident&ChiefExecutiveOfficer
Management’sDiscussionandAnalysis(MD&A)isprovidedtoenableareadertoassessourresultsofoperationsandfinancialconditionforthethreemonthsendedJanuary31,2007,comparedtothecorrespondingperiodinthepriorfiscalyearandthethree-monthperiodendedOctober31,2006.ThisMD&AshouldbereadinconjunctionwithourunauditedInterimConsolidatedFinancialStatementsandrelatednotesandour2006AnnualReporttoShareholders(2006AnnualReport).ThisMD&AisdatedMarch2,2007.AllamountsareinCanadiandollars,unlessotherwisespecified,andarebasedonfinancialstatementspreparedinaccordancewithCanadiangenerallyacceptedaccountingprinciples(GAAP).EffectiveOctober31,2006,RBCMortgageCompanyhaddisposedofsubstantiallyallofitsremainingassetsandobligationsandwenolongerseparatelyclassifyitsresultsinourunauditedInterimConsolidatedFinancialStatements.Resultsreportedonatotalconsolidatedbasisarecomparabletoresultsfromcontinuingoperationsforthecorrespondingpriorperiods.
Additionalinformationaboutus,includingour2006AnnualInformationFormisavailablefreeofchargeonourwebsiteatrbc.com/investorrelations,ontheCanadianSecuritiesAdministrators’websiteatsedar.comandontheEDGARsectionoftheUnitedStatesSecuritiesandExchangeCommission’s(SEC)websiteatsec.gov.
4RoyalBankofCanadaFirstQuarter2007
RoyalBankofCanada(RYonTSXandNYSE)anditssubsidiariesoperateunderthemasterbrandnameofRBC.WeareCanada’slargestbankasmeasuredbyassetsandmarketcapitalizationandoneofNorthAmerica’sleadingdiversifiedfinancialservicescompanies.Weprovidepersonalandcommercialbanking,wealthmanagementservices,insurance,corporateandinvestment
bankingandtransactionprocessingservicesonaglobalbasis.Weemployapproximately70,000full-andpart-timeemployeeswhoservemorethan14millionpersonal,business,publicsectorandinstitutionalclientsthroughofficesinNorthAmericaand34countriesaroundtheworld.
Fromtimetotime,wemakewrittenororalforward-lookingstate-mentswithinthemeaningofcertainsecuritieslaws,includingthe“safeharbour”provisionsoftheUnited States Private Securities Litigation Reform Act of 1995andanyapplicableCanadiansecuritieslegislation.Wemaymakesuchstatementsinthisdocument,inotherfilingswithCanadianregulatorsortheUnitedStatesSecuritiesandExchangeCommission(SEC),inreportstoshareholdersorinothercommunications.Theseforward-lookingstatementsinclude,amongothers,statementswithrespecttoourmedium-termand2007objec-tives,andstrategiestoachieveourobjectives,aswellasstatementswithrespecttoourbeliefs,outlooks,plans,objectives,expectations,anticipations,estimatesandintentions.Thewords“may,”“could,”“should,”“would,”“suspect,”“outlook,”“believe,”“plan,”“anticipate,”“estimate,”“expect,”“intend,”“forecast,”“objective”andwordsandexpressionsofsimilarimportareintendedtoidentifyforward-lookingstatements.
Bytheirverynature,forward-lookingstatementsinvolvenumerousfactorsandassumptions,andaresubjecttoinherentrisksanduncertainties,bothgeneralandspecific,whichgiverisetothepossibilitythatpredictions,forecasts,projectionsandotherforward-lookingstatementswillnotbeachieved.Wecautionreadersnottoplaceunduerelianceonthesestatementsasanumberofimportantfactorscouldcauseouractualresultstodiffermateriallyfromtheexpectationsexpressedinsuchforward-lookingstatements.Thesefactorsincludecredit,market,operationalandotherrisksidentifiedanddiscussedundertheRiskmanagementsection;generalbusinessandeconomicconditionsinCanada,theUnitedStatesandothercountriesinwhichweconductbusiness;theimpactofthemove-mentoftheCanadiandollarrelativetoothercurrencies,particularlytheU.S.dollarandBritishpound;theeffectsofchangesingovern-mentmonetaryandotherpolicies;theeffectsofcompetitioninthemarketsinwhichweoperate;theimpactofchangesinlawsandregulationsincludingtaxlaws;judicialorregulatoryjudgmentsandlegalproceedings;theaccuracyandcompletenessofinformationconcerningourclientsandcounterparties;successfulexecutionof
ourstrategy;ourabilitytocompleteandintegratestrategicacquisi-tionsandjointventuressuccessfully;changesinaccountingstan-dards,policiesandestimates,includingchangesinourestimatesofprovisionsandallowances;andourabilitytoattractandretainkeyemployeesandexecutives.Otherfactorsthatmayaffectfutureresultsinclude:thetimelyandsuccessfuldevelopmentofnewprod-uctsandservices;thesuccessfulexpansionandnewdevelopmentofourdistributionchannelsandrealizingincreasedrevenuefromthesechannels;globalcapitalmarketsactivity;technologicalchangesandourrelianceonthirdpartiestoprovidecomponentsofourbusinessinfrastructure;unexpectedchangesinconsumerspendingandsavinghabits;thepossibleimpactonourbusinessfromdiseaseorillnessthataffectslocal,nationalorglobaleconomies;disruptionstopublicinfrastructure,includingtransportation,communication,powerandwater;thepossibleimpactonourbusinessesofinternationalcon-flictsandotherpoliticaldevelopmentsincludingthoserelatingtothewaronterrorism;andoursuccessinanticipatingandmanagingtheassociatedrisks.
Wecautionthattheforegoinglistofimportantfactorsthatmayaffectfutureresultsisnotexhaustive.Whenrelyingonourforward-lookingstatementstomakedecisionswithrespecttous,investorsandothersshouldcarefullyconsidertheforegoingfactorsandotheruncertaintiesandpotentialevents.Wedonotundertaketoupdateanyforward-lookingstatement,whetherwrittenororal,thatmaybemadefromtimetotimebyusoronourbehalf.
AdditionalinformationaboutthesefactorscanbefoundundertheRiskmanagementsectionandinour2006AnnualReportundertheRiskmanagementandAdditionalrisksthatmayaffectfutureresultssections.
Informationcontainedinorotherwiseaccessiblethroughtheweb-sitesmentioneddoesnotformapartofthisdocument.Allreferencesinthisdocumenttowebsitesareinactivetextualreferencesandareforyourinformationonly.
Management’sDiscussionandAnalysis
AboutRoyalBankofCanada
Cautionregardingforward-lookingstatements
RoyalBankofCanadaFirstQuarter20075
Change Asatorforthethreemonthsended January31,2007vs.
January 31 October31 January31 October31 January31
(C$millions,exceptpershare,numberofandpercentageamounts) 2007 2006 2006 2006 2006
Totalrevenue $ 5,698 $ 5,349 $ 4,960 $ 349 $ 738 Non-interestexpense 3,067 2,955 2,751 112 316 Provisionforcreditlosses 162 159 47 3 115 Insurancepolicyholderbenefits,claimsandacquisitionexpense 516 611 652 (95) (136) Netincomebeforeincometaxesandnon-controllinginterest insubsidiaries 1,953 1,624 1,510 329 443 Netincomefromcontinuingoperations 1,494 1,263 1,172 231 322 Netlossfromdiscontinuedoperations – (1) (1) 1 1Net income $ 1,494 $ 1,262 $ 1,171 $ 232 $ 323
Selected information Earningspershare(EPS)–basic $ 1.16 $ .97 $ .90 $ .19 $ .26 Earningspershare(EPS)–diluted $ 1.14 $ .96 $ .89 $ .18 $ .25 Returnoncommonequity(ROE)(1) 27.3% 23.9% 23.9% 340bps 340bps Returnonriskcapital(RORC)(2) 41.6% 37.3% 37.9% 430bps 370bps Netinterestmargin(3) 1.33% 1.31% 1.39% 2bps (6)bpsCapital ratios(4) Tier1capitalratio 9.2% 9.6% 9.5% (40)bps (30)bps Totalcapitalratio 11.2% 11.9% 12.8% (70)bps (160)bpsSelected balance sheet and other information Totalassets $ 571,615 $ 536,780 $ 487,874 $ 34,835 $ 83,741 Securities 196,851 184,869 165,658 11,982 31,193 Consumerloans 151,867 148,732 138,581 3,135 13,286 Businessandgovernmentloans 67,851 61,207 55,615 6,644 12,236 Deposits 365,606 343,523 314,872 22,083 50,734 Averagecommonequity(1) 21,450 20,500 19,300 950 2,150 Averageriskcapital(2) 14,100 13,150 12,150 950 1,950 Risk-adjustedassets(4) 242,290 223,709 204,247 18,581 38,043 Assetsundermanagement 157,700 143,100 128,500 14,600 29,200 Assetsunderadministration–RBC 561,200 525,800 486,000 35,400 75,200 –RBCDexiaIS(5) 2,050,000 1,893,000 1,738,100 157,000 311,900Common share information Sharesoutstanding(000s)–averagebasic 1,274,354 1,274,697 1,284,333 (343) (9,979) –averagediluted 1,293,085 1,293,864 1,304,378 (779) (11,293) –endofperiod 1,275,950 1,280,890 1,290,983 (4,940) (15,033) Dividendsdeclaredpershare $ .40 $ .40 $ .32 $ – $ .08 Dividendyield 3.0% 3.3% 2.9% (30)bps 10bps Commonshareprice(RYonTSX)–close,endofperiod $ 54.60 $ 49.80 $ 44.54 $ 4.80 $ 10.06 Marketcapitalization(TSX) 69,667 63,788 57,494 5,879 12,173Business information (number of) Employees(full-timeequivalent) 62,755 60,858 59,429 1,897 3,326 Bankbranches 1,467 1,443 1,421 24 46 Automatedbankingmachines 4,273 4,232 4,268 41 5
PeriodaverageUSDequivalentofC$1.00(6) $ .861 $ .897 $ .865 $ (.04) $ (.00)Period-endUSDequivalentofC$1.00 .850 .890 .878 (.04) (.03)
(1) AveragecommonequityandReturnoncommonequityarecalculatedusingmonth-endbalancesfortheperiod.(2) Averageamountsarecalculatedusingmethodsintendedtoapproximatetheaverageofthedailybalancesfortheperiod.AverageriskcapitalandtheReturnonriskcapitalarenon-GAAPfinancial
measures.Forfurtherdiscussionandreconciliation,refertotheKeyperformanceandnon-GAAPmeasuressection.(3) Netinterestmargin(NIM)iscalculatedasNetinterestincomedividedbyAverageassets.Averageassetsarecalculatedusingmethodsintendedtoapproximatetheaverageofthedailybalancesfor
theperiod.(4) CalculatedusingguidelinesissuedbytheOfficeoftheSuperintendentofFinancialInstitutionsCanada(OSFI).(5) Assetsunderadministration–RBCDexiaISrepresentsthetotalassetsunderadministration(AUA)asatDecember31,2006,ofthejointventure,ofwhichwehavea50%ownershipinterest.(6) Averageamountsarecalculatedusingmonth-endspotratesfortheperiod.
Selectedfinancialhighlights
6RoyalBankofCanadaFirstQuarter2007
Wereportedrecordnetincomeof$1,494millionforthefirstquarterendedJanuary31,2007,up$323million,or27.6%,fromayearago.DilutedEPSwere$1.14,up28.1%.ROEwas27.3%,comparedto23.9%ayearago.Thisgrowthwaslargelyattrib-utabletosolidvolumegrowthinourwealthmanagementandbankingoperationsandstrongertradingresultsandoriginationactivity.Thesefactorswerepartiallyoffsetbyhighervariablecompensationduetoimprovedbusinessperformance.
Totalrevenueincreased$738million,or15%,fromayearagoprimarilyduetosolidgrowthinourwealthmanagementandbankingbusinessesdrivenbyexpansion,targetedacquisitionsandthesuccessfulexecutionofourstrategicinitiatives.Strongerequityanddebttradingresultsduetosignificanttransactionsandincreasedrevenuefromcertainequitytradingstrategiesalsocontributedtotheincrease.Thecurrentquarterwasalsofavour-ablyimpactedbytheinclusionofafullquarterofresultsfromRBCDexiaIScomparedtothetwomonthsofresultsfromourformerbusinessInstitutional & Investor Services (IIS)recordedinthepriorperiodandbyafavourableadjustmentrelatedtothereallocationofforeigninvestmentcapitalinthecurrentperiod.Thesefactorswerepartiallyoffsetbylowerinsurance-relatedrevenuemainlyduetothenegativeimpactoftheimplementa-tionofthenewfinancialinstrumentsaccountingstandardswhichwaslargelyoffsetininsurancepolicyholderbenefits,claimsandacquisitionexpense.
Non-interestexpenseincreased$316million,or11%,fromayearagoprimarilyduetohighervariablecompensationonimprovedbusinessperformance.Highercostsinsupportofourgrowth,includingincreasedstaffinglevelsinourdistributionnet-workandadditionalbranches,alsocontributedtotheincrease.TheincreasealsoreflectedhighercostsatRBCDexiaIS,primarily
duetotheinclusionofanadditionalmonthofresults,andtheinclusionofrecentacquisitions.
Totalprovisionforcreditlossesincreased$115millionfromayearago,primarilyreflectinga$50millionreversalofthegeneralallowanceintheprioryearandlowercorporaterecoveriesthisquarter.Higherprovisionsinourpersonalunsecuredcreditline,smallbusinessandcreditcardportfoliosinthecurrentperiodalsocontributedtotheincrease.
Insurancepolicyholderbenefits,claimsandacquisitionexpensedecreased$136million,or21%,fromtheprioryear.Excludingthepositiveimpactoftheimplementationofthenewfinancialinstrumentsaccountingstandardsandtheprioryearhurricane-relatedcharge,insurancepolicyholderbenefits,claimsandacquisitionexpensedecreased$6million,or1%,fromtheprioryear.ThedecreasewaslargelyattributabletolowerU.S.annuitysalesandahigherleveloffavourablenetactuarialliabilityadjustmentsthisquarter.Thecurrentquarterincludeda$38millioncumulativevaluationadjustmentrelatingtopriorperiods,whiletheprioryearincludedasimilaramount.ThesefactorswerepartiallyoffsetbygrowthinourEuropeanlifereinsuranceanddomesticbusinesses.ForareconciliationofInsurancepolicyholderbenefits,claimsandacquisitionexpenseexcludingtheimpactoftheitemsnotedabove,refertotheKeyperformanceandnon-GAAPmeasuressection.
Incometaxexpenseincreased$103million,or31%,overtheprioryearlargelycommensuratewithhigherearningsbeforeincometaxes.Theeffectiveincometaxrateof22.3%inthecurrentquartercomparesto22.0%,ayearago.Thecurrentquarterwasfavourablyimpactedbyhigherearningsreportedbyourinterna-tionalsubsidiariesoperatinginjurisdictionswithlowerincometaxratesandahigherlevelofincomefromtax-efficientsources.
ThepaceofgrowthintheCanadianeconomywasmodest,pri-marilyreflectingthesofteninghousingmarketandslowingcon-sumerspending.Nevertheless,thereexistedencouragingsignsfromrenewedstrengthinretailsales,manufacturingshipmentsandexportgrowthinthelatterpartofthequarter.TheBankofCanadaheldtheovernightratesteadyat4.25%fortheperiod,withinflationlargelyinlinewiththeBankofCanada’starget.
TheU.S.economyrecordedstronger-than-expectedgrowthintheperioddespitetheweakeninghousingmarket.Strongconsumerspendingwasthedominantdriverofeconomicgrowthintheperiodasbusinessinvestmentwaned.TheU.S.FederalReservealsokeptthefederalfundsrateunchangedat5.25%fortheperiodtakingintoaccountmoderatedinflationarypressure,firmereconomicgrowthandsignsofastabilizationoftheslow-downinthehousingmarket.
Globaleconomicgrowthremainedbuoyantintheperiod,providingfavourableconditionsforthefinancialindustry.StronggrowthintheEurozoneandtheUnitedKingdomsupportedby
lowunemploymentrateshadraisedinflationaryconcerns.Asaresult,theEuropeanCentralBankandtheBankofEnglandincreasedinterestratesintheperiodtocontaininflationarypressures.Chinaalsocontinuedtogrowatarapidpace,largelyunderpinnedbysolidexportgrowthparticularlytotheU.S.,givenitscompetitiveadvantagesonlabour-intensivemanufacturingindustries.
InNorthAmerica,creditgrowthremainedstrong,thoughcreditqualityweakenedslightlyintheperiod.ChangestotheincometrustregulationsinCanadaresultedinasurgeinper-sonaldepositbalancesandmutualfundsales.
Globalcapitalmarketconditionsweregenerallyrobust,characterizedbystrongtradingvolumesandimprovedequityanddebtoriginationactivities.InCanada,therewereanumberofnotableequityoriginationdealsthisquarterandtheM&Amarketremainedstronginthecurrentperiod,withaveragedealvaluesincreasing.IntheU.S.andglobally,M&Aactivityremainedvibrantsupportedbyfavourablemarketconditions.
Theseresultswerealsounderpinnedbythegenerallyfavour-ableeconomicconditionsreflectingstableinterestrates,strongemploymentlevelsandhigherwages,despitetheslowinghous-ingmarkets.
Weachievedstrongearningsthisquarterreflectingpositivemomentumacrossourdiversebusinessesandgeographies.Ourresultsareattributabletocontinuedgrowthinourwealthmanagement,capitalmarketsandinsurancebusinessesandthestrengtheningofourproductofferingsinourbankingoperations.
Executivesummary
Economicandmarketreview
Financialperformance
RoyalBankofCanadaFirstQuarter20077
bankingbusinessesandstrongerequityanddebtoriginationactivity.Thesefactorswerepartiallyoffsetbyhighervariablecompensationduetostrongerbusinessperformance.
NetincomeinourU.S.geographicoperationswasdown$22million,or9%,comparedtothepreviousquarter.Thedecreaselargelyrelatedtoyear-endadjustmentstovariablecompensationrecordedinourcapitalmarketsbusinessesinthepriorquarter.
CapitalratiosAsatJanuary31,2007,theTier1capitalratioof9.2%wasdownfrom9.5%ayearago,anddownfrom9.6%attheendofthepre-viousquarterastheincreaseinrisk-adjustedassetsrelatedtoourlendingandtradingactivitiesexceededthefavourableimpactofourstronginternalcapitalgeneration.TheTotalcapitalratioof11.2%wasdown160basispoints(bps)from12.8%ayearago,anddown70bpsfrom11.9%lastquarter.
ImpactofU.S.vs.CanadiandollarOurU.S.dollar-denominatedconsolidatedresultsareimpactedbyfluctuationsintheU.S./Canadiandollarexchangerate.
TheaverageCanadiandollarexchangerateremainedrelativelystablecomparedtoayearago,resultingina$5millionincreaseinthetranslatedvalueofourU.S.dollar-denominatednetincomeandhadnoimpactonourcurrentquarter’sdilutedEPS.
TheaverageCanadiandollarexchangeratedepreciated4%comparedtothepriorquarterresultingina$10millionincreaseinthetranslatedvalueofourU.S.dollar-denominatednetincomeandanincreaseof$.01onourdilutedEPSforthecurrentquarter.
Theeffectiveincometaxrateintheprioryearwasfavourablyimpactedbya$70millionreversalofamountsaccruedinprioryearsduetoafavourableresolutionofanincometaxaudit.
RBCCanadianPersonalandBusinessnetincomeincreased$208million,or31%,fromayearago.Thiswaslargelyduetostronggrowthacrossallbusinesslines,reflectingtheongoingsuccessfulexecutionofourgrowthinitiatives.Werecordeddouble-digitrevenuegrowthinourPersonal Banking andWealth Managementbusinesses,andexperiencedsolidgrowthinourBusiness Financial Services andCards and Payment Solutionsbusinesses.Theimprovementinourresultsalsoreflectedtheprioryearhurricane-relatedchargeandafavourableadjustmentrelatedtothereallocationofforeigninvestmentcapitalinthecur-rentperiod.Thesefactorswerepartiallyoffsetbyincreasedvari-ablecompensationresultingfromstrongerbusinessperformanceandhighercostsinsupportofbusinessgrowth.
RBCU.S.andInternationalPersonalandBusinessnetincomeincreased$48million,or48%,fromtheprioryear.InU.S.dollars,netincomewasupUS$40million,or45%,largelydrivenbystronggrowthreflectingthesuccessfulexecutionofourgrowthinitiativesincludingtheacquisitionofFlagFinancialCorporation(Flag).ThesefactorswerepartiallyoffsetbyhigherstaffingcostsinsupportofourgrowthinitiativesincludingtheacquisitionofFlagandincreasedvariablecompensationprimarilyinWealth Management onstrongerrevenue.
RBCCapitalMarketsnetincomeincreased$90million,or27%,fromayearagolargelydrivenbybroad-basedgrowthacrossmostbusinessesandproductcategoriesandalowereffectivetaxrate.Theincreaseinrevenueprimarilyreflectedhighertradingresultsandstrongerequityanddebtoriginationactivity.ThecurrentquarterwasalsofavourablyimpactedbytheinclusionofafullquarterofresultsfromRBCDexiaIScomparedtothetwomonthsofresultsfromourformerbusinessInstitutional & Investor Services (IIS)recordedinthepriorperiod.Thesefactorswerepartiallyoffsetbyhighervariablecompensationonstrongerbusinessperformanceanda$50milliongeneralallowancerever-salrecordedintheprioryear.
CorporateSupportnetincomeof$48millioninthequartermainlyreflectedincometaxamountswhichwerelargelyrelatedtoenter-prisefundingactivitiesnotallocatedtothebusinesssegments.Thegainrelatedtosecuritizationactivityandinterestearnedontaxoverpaymentsalsocontributedtotheincrease.Thesefactorswerepartiallyoffsetbyacumulativeadjustmentforlossesresult-ingfromthefairvaluingofcertainderivativesthatdidnotqualifyforhedgeaccounting.
Comparedtothefourthquarterof2006,ourconsolidatednetincomeincreased$232million,or18%,anddilutedEPSrose$.18,or19%.ThisincreaselargelyreflectedhighertradingresultsinRBCCapitalMarkets,strongearningsgrowthacrossallbusinesslinesinRBCCanadianPersonalandBusinessandsolidbusinessgrowthinRBCU.S.andInternationalPersonalandBusinessduetothesuccessfulexecutionofourgrowthinitiativesincludingtheacquisitionofFlag.ThesefactorswerepartiallyoffsetbyhighervariablecompensationprimarilyinRBCCapitalMarketsduetostrongerbusinessperformance.
U.S.geographicoperations(1)NetincomeinourU.S.geographicoperationswas$225millionforthethreemonthsendedJanuary31,2007,up$54million,or32%,comparedtoayearago.Theincreasemainlyreflectedstrongtradingresults,growthinourwealthmanagementand
Our2007annualobjectiveswereestablishedattheendof2006basedonoureconomicandbusinessoutlooks.Ourfirstquarterresultsaretrackingwellagainsttheseobjectives.OurdilutedEPSgrowthof28.1%andROEof27.3%areontargettomeetourobjectiveswhichare:DilutedEPSgrowthofmorethan10%andROEofmorethan20%.Operatingleverageof6%alsoexceededourobjectiveofgreaterthan3%.WealsomaintainedoursolidcapitalpositionwithaTier1capitalratioof9.2%,whichremainssignificantlyaboveourtargetofgreaterthan8%.Ourdividendpayoutratioof35%forthecurrentquarterfellshortofourtargetpayoutratio,despitea24%increaseindividendsfromayearago,duetoourstrongperformancethisquarter.Inlightofourcontinuingstrongresults,weannouncedanincreaseof$.06,or15%,inourquarterlycommonsharedividendto$.46,effectivethesecondquarter,tohelpusachieveour2007dividendpayoutobjectiveof40–50%.
(1) Forgeographicreporting,oursegmentsaregroupedintoCanada,UnitedStatesandOtherInternational.Transactionsareprimarilyrecordedinthelocationthatbestreflectstherisksandgrowthopportunitiesduetochangesineconomicconditions.Thislocationfrequentlycorrespondswiththelocationofthelegalentitythroughwhichthebusinessisconductedandthelocationofourclients.
Performancevs.objectives
2007 Q1 2007 Objectives Performance
1.Dilutedearningspersharegrowth 10%+ 28.1% 2.Operatingleverage(1) >3% 6% 3.Returnoncommonequity(ROE) 20%+ 27.3% 4.Tier1capitalratio(2) 8%+ 9.2%5.Dividendpayoutratio 40–50% 35%
(1) Ouroperatingleverageisdefinedasthedifferencebetweenourrevenuegrowthrate(asadjusted)andnon-interestexpensegrowthrate(asadjusted).Revenueisbasedonatax-ableequivalentbasisandexcludesconsolidatedvariableinterestentities(VIEs),accountingadjustmentsrelatedtothenewfinancialinstrumentsaccountingstandardsandGlobalInsurancerevenue.Non-interestexpenseexcludesGlobalInsurance-relatedexpense.Thisisanon-GAAPmeasure.Forfurtherinformationincludingareconciliation,refertotheKeyperformanceandnon-GAAPmeasuressection.
(2) CalculatedusingguidelinesissuedbytheOSFI.
8 RoyalBankofCanada FirstQuarter2007
AmSouth Bank branches: OnNovember1,2006,RBCCenturaannounceditsintentiontoacquire39branchesinAlabamaownedbyAmSouthBank,expandingRBCCentura’sfootprintinthefast-growingSoutheasternU.S.ThetransactionissubjecttonormalclosingconditionsandisexpectedtocloseinMarch2007.
Flag Financial Corporation (Flag):OnDecember8,2006,RBCCenturacompletedtheacquisitionofFlag,expandingRBCCentura’sbranchnetworktomorethan50branchesinthestateofGeorgia,akeygrowthmarket.
Carlin Financial Group:OnJanuary3,2007,RBCCapitalMarketscompletedtheacquisitionofCarlinFinancialGroupandrenameditasRBCCarlin.RBCCarlinprovidesRBCCapitalMarketsanadvancedtechnologyplatformtoassisthedgefundmanagers,pro-fessionaltradersandfinancialinstitutions.
Daniels & Associates, L.P.: OnJanuary10,2007,RBCCapitalMarketscompletedtheacquisitionofDaniels&Associates,L.P.,aleadingU.S.M&Aadvisortothecable,telecom,broadcastandInternetservicesindustries,buildingonourpresenceintheU.S.andglobally.ThisgroupwilloperateunderthebrandnameRBCDaniels.
New Wealth Management segment: OnFebruary7,2007,weannouncedthecreationofanewWealthManagementbusi-nesssegmentconsistingoftheWealth ManagementlinesofbusinessescurrentlyincludedinourRBCCanadianPersonalandBusinessandRBCU.S.andInternationalPersonalandBusinesssegments.Wewillbeginreportingfinancialresultsaccordingtothisnewstructureasofoursecondquarter.
Keyeventsof2007
Impactofthenewfinancialinstrumentsaccountingstandards
OnNovember1,2006,weadopted,onaprospectivebasis,threenewaccountingstandardsrelatedtofinancialinstrumentsthatwereissuedbytheCanadianInstituteofCharteredAccountants(CICA).ThestandardsrequireagreaterportionoftheConsolidatedBalanceSheettobemeasuredatfairvalue.WiththeexceptionofInvestmentsecuritiesandderivativesdesignatedincashflowhedgesorhedgesofnetinvestmentsinforeignoperations,changesinthefairvaluesoverthereportingperiodofimpactedbalancesheetitemsarereportedinincome.ThechangesinfairvaluesofInvestmentsecuritiesandderivativesdesignatedincashflowhedgesorhedgesofnetinvestmentsinforeignoperationsarereportedinAccumulatedothercomprehensiveincome(AOCI),anewcomponentofShareholders’equity.
Thestandardsalsoprovidenewguidanceontheaccountingforderivativesinhedgingrelationships.InadditiontorequiringallderivativestobefairvaluedontheConsolidatedBalanceSheets,thestandardsrequiretheeffectivenessofthehedgingrelationshipsforthereportingperiodtobequantified.Theinef-fectiveportionofanyhedgingrelationshipmustnowbereportedinincomefortheperiod.Forfurtherdetails,refertoNote1toourunauditedInterimConsolidatedFinancialStatements.
Uponadoptionofthesestandards,ourtotalassetsincreasedby$434millionasanumberoffinancialinstrumentspreviouslymeasuredatamortizedcostarenowreportedatfairvalue.Thebalancesheetitemsmostsignificantlyimpactedontransitionaresetoutinthetablebelow.ThefavourableimpactonnetincomeforthethreemonthsendedJanuary31,2007,was$22million.
Securities Uponadoptionofthenewstandards,Securitiesincreased$338million,primarilyreflectingthefairvalueofthe$10.6billionofsecuritiesdesignatedandreclassifiedasTradingsecurities.Thesesecurities,whichwerepreviouslyclassifiedasInvestmentsecuritiesandmeasuredatamortizedcost,include$6.7billionrelatedtothesecuritiesbackingthelifeandhealthinsurancebusinesses,$2.5billioninRBCCapitalMarketsprimarilyrelatedtomoneymarketsecurities,and$1.4billionofmortgage-backedsecuritiesheldinCorporateSupport.
DerivativesThetransitionadjustmentof$268millionreflectedthefairvalueofderivativesthatqualifyforhedgeaccounting.Previously,thesederivativeswerereportedonanaccrualbasiswithinterestreceivableandpayableanddeferredgainsandlossesrecorded
inOtherassetsorOtherliabilities,asappropriate,ontheConsolidatedBalanceSheet.
Other assets Thetransitionadjustment,adecreaseof$200million,largelyreflectedamountsassociatedwithderivativespreviouslyreportedonanaccrualbasisthatarenowreportedatfairvalueinDerivativesassetsorliabilities,asappropriate,ontheConsolidatedBalanceSheet.
Insurance claims and policy benefit liabilities Asnotedearlier,securitiesbackingthelifeandhealthinsurancebusinessesarenowbeingmeasuredattheirfairvalue.Asaresult,therewasacorrespondingincreaseof$420millionintheinsuranceliabilities,whicharevaluedinaccordancewithactu-arialstandards.
ImpactofthetransitionadjustmentonselectedConsolidatedBalanceSheetlineitems
Transition adjustment
(C$millions) as at November 1, 2006
Trading $ 10,950 Investment (10,612)
Securities $ 338Derivatives 268Otherassets (200)Insuranceclaimsandpolicybenefitliabilities 420 Subordinateddebentures 189 Retainedearnings (86)Accumulatedothercomprehensiveincome(loss) (45)
RoyalBankofCanadaFirstQuarter20079
ImpactonselectedConsolidatedStatementofIncomelineitems
Forthethree monthsended
January 31
(C$millions) 2007 SignificantlyImpactedSegments
Non-interestincome Insurancepremiums,investmentandfeeincome $ (70) RBCCanadianPersonalandBusiness Tradingrevenue 8 RBCCapitalMarkets Other 25 RBCU.S.andInternationalPersonal andBusinessandCorporateSupport
Totalrevenue $ (37)Insurancepolicyholderbenefits,claimsandacquisitionexpense $ (69) RBCCanadianPersonalandBusinessNetincome $ 22
ThemainimpactsonourConsolidatedStatementsofIncomearisingfromtheimplementationofthenewstandardsinclude:
RBC Canadian Personal and Business Aspreviouslydiscussed,thesecuritiesbackingourlifeandhealthinsurancebusinessesarenowbeingmeasuredontheConsolidatedBalanceSheetattheirfairvalues.Inordertomini-mizethenetincomevolatilitythatarisesfromthemeasurementoftheinsuranceliabilities,wechosetodesignatethesesecuri-tiesasTradingsecuritieswithchangesintheirfairvaluesnowrecordedinInsurancepremiums,investmentandfeeincome.
ForthethreemonthsendedJanuary31,2007,werecordedanunrealizedlossof$70millioninInsurancepremiums,invest-mentandfeeincomerelatedtothechangesinthefairvaluesofthelifeandhealthinsuranceinvestments.Thislosswaslargelyoffsetbyacorresponding$69millionreductioninInsurancepolicyholderbenefits,claimsandacquisitionexpense.
RBC Capital MarketsAnumberofportfolioswerepreviouslyclassifiedasInvestmentsecuritiesandmeasuredatamortizedcost.Underthenewstan-dards,theseportfolioshavebeenreclassifiedasTradingsecuritiesandarenowreportedonafairvaluebasiswithchangesinfairvaluerecordedinTradingrevenue.
ForthethreemonthsendedJanuary31,2007,werecognizedagainof$8millioninTradingrevenueasaresultofthenetincreaseinfairvaluesinvarioustradingportfoliospreviouslymeasuredatamortizedcost.
RBC U.S. and International Personal and Business CertainInvestmentsecuritiesdenominatedinforeigncurrenciesarefundedbydepositsdenominatedinthesamecurrencyinordertominimizeexposuretochangesinforeignexchangerates.Theforeignexchangetranslationforbothoftheseitemswaspreviouslyrecordedinrevenue,effectivelyminimizingaccountingvolatilityassociatedwithforeignexchangetranslation.Upontheadoptionofthenewstandards,theforeignexchangetranslationassociatedwiththedepositscontinuestoberecordedinrevenue,whiletheforeigncurrencytranslationadjustmentfortherelatedInvestmentsecuritiesisnowrecordedinAOCI.Althoughourforeignexchangeexposureinthesetransactionscontinuestobeeconomicallyhedged,thenewstandardsgiverisetoaccountingvolatility.
ForthethreemonthsendedJanuary31,2007,werecordeda$17millionforeigncurrencytranslationgaininNon-interestincome–Otherrelatedtothesedeposits,whilethecorrespondingforeigncurrencytranslationlossontherelatedInvestmentsecuri-tieswasrecordedinAOCI.
Corporate Support Certainstructurednotesweredesignatedasheld-for-tradingliabilitiesunderthenewstandards.ForthethreemonthsendedJanuary31,2007,wereporteda$21millionunrealizedgaininNon-interestincome–Other.
Inaddition,werecordedunrealizedlossesof$13milliononderivativehedgingandotheractivities.
TheCanadianeconomyisnowexpectedtogrowatamoderatepaceof2.5%in2007.Domesticdemandisanticipatedtoremaintheprimarydriverofeconomicgrowth.Consumerspendingshouldbenefitfromasolidlabourmarket,goodhouseholdbal-ancesheetconditionsandrelativelystableinterestrates,whilebusinessinvestmentincapitalgoodsshouldcontinuetobesup-portedbystrongcorporatebalancesheets.WeexpecttheBankofCanadatoholdinterestratessteadythroughouttheremainderoftheyearontheexpectationthatinflationwillfallinlinewiththeBankofCanada’starget.WeforecastthattheCanadiandollarwillmarginallydepreciateagainsttheU.S.dollarinresponsetoeasingenergyandcommodityprices,ongoingnegativeinterestratespreadsversustheU.S.market,theresilientU.S.economy,andthestabilizationoftheU.S.fiscalandtradedeficits.
TheU.S.economyisprojectedtoexpandatamoderaterateof2.6%in2007.Weexpectgrowthtobeslowerinthefirsthalfof2007duetothecoolinghousingmarket,andthelaggedeffectsofhigherinterestrates.Growthisthenexpectedtoimproveinthesecondhalfoftheyear,reflectingresilientconsumerspend-ingsupportedbylowerenergyprices,stronghouseholdliquid-ity,atightlabourmarketandrisingwages.Businessinvestmentshouldalsoremainstrong,aidedbyhealthycorporatebalancesheets.DuetotherecentimprovementinU.S.economiccondi-tions,weanticipatetheU.S.FederalReservewillonlycutitsrateby25bpslateinthesecondquarterinordertoensurethattheeconomytransitionstoafirmergrowthpath.
Globaleconomicgrowthisexpectedtoremainstrong.How-ever,thisgrowthwillcontinuetobeunevenlydivided,withChinaandIndialeadingthegrowthchartsandmostindustrialized
2007Outlook
Subordinated debenturesThetransitionadjustmentreflectedthecumulativechangeinfairvalueattributedtointerestrateriskforoursubordinated
debenturesinhedgingrelationships.Thesewerepreviouslyreportedatamortizedcost.
TotalrevenueThefollowingtablepresentsourrevenuebykeyproductsandservices:
Forthethreemonthsended
January 31 October31 January31
(C$millions) 2007 2006 2006
Interestincome $ 6,444 $ 6,120 $ 4,978 Interestexpense 4,577 4,389 3,296
Netinterestincome $ 1,867 $ 1,731 $ 1,682
Investments(1) $ 1,047 $ 978 $ 878 Insurance(2) 820 863 858 Trading 803 620 547 Banking(3) 649 642 591 Underwritingandotheradvisory 288 293 219 Other(4) 224 222 185
Non-interestincome $ 3,831 $ 3,618 $ 3,278
Total revenue $ 5,698 $ 5,349 $ 4,960
Totaltradingrevenue: Netinterestincome–relatedtotradingactivities (151) (173) (82) Non-interestincome–Tradingrevenue 803 620 547
Total trading revenue $ 652 $ 447 $ 465
Totaltradingrevenuebyproduct: Fixedincomeandmoneymarkets $ 375 $ 255 $ 264 Equity 201 130 125 Foreignexchangecontracts 76 62 76
Total trading revenue $ 652 $ 447 $ 465
(1) Includesbrokerage,investmentmanagementandmutualfunds.(2) Includesinsurancepremiums,investmentandfeeincome.(3) Includesservicecharges,foreignexchangeotherthantrading,cardservicesandcreditfees.(4) Includesothernon-interestincome,gain/lossonsecuritiessalesandsecuritization.
ThefollowingprovidesadiscussionofourreportedresultsforthethreemonthsendedJanuary31,2007.Factorsthatprimarily
10RoyalBankofCanadaFirstQuarter2007
Effectivethefirstquarterof2007,wenolongerclassifyamountsasspecifieditems.For2006,theitemspreviouslynotedasspeci-fieditemsareasfollows:
Q12006Income tax reduction:Werealizedafavourableresolutionofanincometaxauditrelatedtoprioryears,resultingina$70millionreductioninincometaxexpenseinCorporateSupport.
General allowance reversal: Wereversed$50millionofthegeneralallowancerelatedtoourcorporateloanportfolioinRBCCapitalMarkets,inlightofthecontinuedfavourablecreditconditionsandthestrengtheningofthecreditqualityofthecorporateloanportfolio.
Hurricane-related charges: Werecordeda$61million(before-andafter-tax)chargeinourinsurancebusiness,whichwasincludedinourRBCCanadianPersonalandBusinesssegment,
foradditionalestimatednetclaimsfordamagespredominatelyrelatedtoHurricaneWilmawhichoccurredinlateOctober2005.
Amounts related to the transfer of Institutional & Investor Services (IIS) toRBC Dexia IS:OnJanuary2,2006,wecombinedour Institutional & Investor Services (IIS)business,previouslypartofRBCCapitalMarkets,withtheDexiaFundServicesbusinessofDexiaBanqueInternationaleàLuxembourg(Dexia)inreturnfora50%jointventureinterestinthenewcompany,RBCDexiaInvestorServices(RBCDexiaIS).NetchargesincurredassociatedwiththetransferofourIISbusinesstoRBCDexiaISwere$16mil-lionbefore-tax($19millionafter-taxwhichincludedawrite-offofdeferredtaxes).Asthereisaone-monthlaginreportingofearn-ingsfromRBCDexiaIS,October1,toDecember31,2006earningswerereportedinthefirstquarterof2007,andnoearningsfromRBCDexiaISwerereportedforthefirstquarterof2006.
relatetoaspecificsegmentarediscussedindetailintherespec-tivesegmentresultssection.
Consolidatedresults
Specifieditems
economiesexperiencingslowergrowthcomparedto2006.Inpar-ticular,growthintheEurozoneandtheUnitedKingdomisexpectedtomoderatein2007.However,duetoinflationaryconcernsweexpecttheEuropeanCentralBanktocontinuetoincreaseinterestrates,andtheBankofEnglandtoholditspolicyrateatitshighestlevelinfiveandahalfyears.Japanisexpectedtocontinuetoedgeitspolicyratehigherin2007aslongasinflationremainspositiveandtheeconomycontinuestogrowatitscurrenttrendrate.
InNorthAmerica,consumerlendingisexpectedtorecordmodestgrowthduringtheyear,largelyreflectingsomewhat
slowerconsumerspendingandweakerhousingmarkets.Weexpectbusinesslendingtoremainrobustdrivenbyinvestmentininventories,machineryandequipment,albeitwithlendinginpartconstrainedbythereallocationofhighlevelsofcorporateliquid-ity.Businessandhouseholdcreditqualitywilllikelydeterioratemoderatelyfromthecurrentstronglevel,butshouldremainsolidduetohealthycashflowpositions.Theoutlookforglobalcapitalmarketsisexpectedtoremainrelativelyfavourablewithmoder-atelyhigherinterestrates,healthyequitymarketsandcontinuedstrengthintheglobalM&Amarket.
RoyalBankofCanadaFirstQuarter200711
Q12007vs.Q12006Totalrevenueincreased$738million,or15%,fromayearagoprimarilyduetosolidgrowthinourwealthmanagementandbankingbusinessesdrivenbyexpansion,targetedacquisitionsandthesuccessfulexecutionofourstrategicinitiatives.Strongerequityanddebttradingresultsduetosignificanttransactionsandincreasedrevenuefromcertainequitytradingstrategiesalsocontributedtotheincrease.Thecurrentquarterwasalsofavour-ablyimpactedbytheinclusionofafullquarterofresultsfromRBCDexiaIScomparedtothetwomonthsofresultsfromourformerbusinessInstitutional & Investor Services (IIS)recordedinthepriorperiodandafavourableadjustmentrelatedtothereallocationofforeigninvestmentcapitalinthecurrentperiod.Thesefactorswerepartiallyoffsetbylowerinsurance-relatedrevenuemainlyduetothenegativeimpactoftheimplementa-tionofthenewfinancialinstrumentsaccountingstandardswhicharelargelyoffsetininsurancepolicyholderbenefits,claimsandacquisitionexpense.
Net interest incomeincreased$185million,or11%,largelyduetostrongloananddepositgrowth.Thesefactorswerepartiallyoffsetbyincreasedfundingcostsrelatedtocertainequitytradingstrategies.Netinterestmarginof1.33%wasdown6bpscomparedtotheprioryear.Thedecreasewaslargelyattrib-utabletohighergrowthandactivityinlower-yieldingandnon-interestearningassetsincludingTradingsecuritiesandAssetspurchasedunderreverserepurchaseagreementsandsecuritiesborrowedlargelyinsupportofourtradingbusinesseswhichgen-eratenon-interestincome.
Investments-relatedrevenueincreased$169million,or19%,mainlyduetocontinuedgrowthinfee-basedaccountsandclientassetsandvolumesreflectingstrongequitymarketsandtheresultofaggressiverecruitingofhigh-performingfinancialadvisors.Strongnetsalesandcapitalappreciationinourmutualfundbusinesses,theinclusionofanadditionalmonthofRBCDexiaISresultsandhighervolumesinourbrokeragebusinessesalsocontributedtotheincrease.
Insurance-relatedrevenuewasdown$38million,or4%,fromtheprioryear.Excludingthenegativeimpactrelatedtotheimplementationofthenewfinancialinstrumentsaccountingstandards,Insurance-relatedrevenueincreased$32million,or4%,fromtheprioryear.TheincreasewasprimarilyduetogrowthinourEuropeanlifereinsuranceanddomesticbusinesses.ThesefactorswerepartiallyoffsetbylowerU.S.annuitysalesduetotherelativelylowinterestrateenvironment,andlowerrevenuefromourpropertycatastrophereinsuranceoperationswherewehaveceasedunderwritingnewbusiness.ForareconciliationofInsurance-relatedrevenueexcludingtheimpactoftheitemsnotedabove,refertotheKeyperformanceandnon-GAAPmeasuressection.
Banking revenueincreased$58million,or10%.ThisincreaseprimarilyreflectedtheinclusionofanadditionalmonthofRBCDexiaISresults.Higherservicefeesandincreasedforeignexchangerevenueduetoimprovedtransactionvolumesalsocontributedtotheincrease.
Trading revenueincreased$256million,or47%,fromayearago.Totaltradingrevenue(includingNetinterestincomeandNon-interestincomerelatedtotrading)was$652million,up$187million,or40%,fromayearagomainlyduetohigherequityanddebttradingresultsdrivenlargelybysignificanttransactionsandincreasedrevenuefromcertainequitytradingstrategies.
Underwriting and other advisoryrevenueincreased$69million,or32%,fromayearagomainlyduetoincreasedequityandU.S.debtoriginationactivity.ThiswaspartiallyoffsetbylowerM&Afeesastheprioryearincludedseveralnotabledealswhichwerenotrepeatedthisquarter.
Otherrevenueincreased$39million,or21%,primarilyduetoafavourableadjustmentrelatedtothereallocationofforeigninvestmentcapitalandhigherdistributionsfromprivateequityinvestments.Thesefactorswerepartiallyoffsetbyacumulativeadjustmentforlossesresultingfromthefairvaluingofcertainderivativesthatdidnotqualifyforhedgeaccounting.
Q12007vs.Q42006Totalrevenueincreased$349million,or7%,comparedtothepreviousquarterprimarilyduetostrongtradingresultsreflectingseveralsignificanttransactions,improvedclientactivityandfavourablemarketconditions.Solidvolumegrowthinourwealthmanagementandbankingbusinessesalsocontributedtotheincrease.Thesefactorswereprimarilyoffsetbylowerinsurance-relatedrevenuemainlyduetothenegativeimpactoftheimple-mentationofthenewfinancialinstrumentsaccountingstandardswhicharelargelyoffsetininsurancepolicyholderbenefits,claimsandacquisitionexpense.
Net interest incomeincreased$136million,or8%,largelyreflectinghigherloansanddepositvolumesandimprovedspreadsinpersonalproducts.Lowerfundingcostsonpositionsrelatedtocertainequitytradingstrategiesalsocontributedtotheincrease.
Investments-relatedrevenueincreased$69million,or7%,mainlyduetostronggrowthinfee-basedclientassets,highervolumesinourbrokeragebusinessesandsolidnetsalesandcapitalappreciationinourmutualfundbusinesses.
Insurance-relatedrevenuewasdown$43million,or5%,fromthepriorquarter.Excludingthenegativeimpactrelatedtotheimplementationofthenewfinancialinstrumentsaccountingstandards,Insurance-relatedrevenueincreased$27million,or3%,fromthepriorquarter.Theincreaseprimarilyreflectedgrowthinourdomesticoperations.ThiswaspartiallyoffsetbyafavourableadjustmentrelatingtoCanadianlifereinsurancepremiumsinthepriorquarter,lowerU.S.annuitysalesandlowerrevenuefromourpropertycatastrophereinsuranceoperations.
Bankingrevenueincreased$7million,or1%.ThisincreaseprimarilyreflectedhigherforeignexchangerevenueduetostrongervolumesandimprovedresultsatRBCDexiaIS.Thesefactorswerepartiallyoffsetbylowerservicefees.
Tradingrevenueincreased$183million,or30%,fromthepre-viousquarter.Totaltradingrevenue(includingNetinterestincomeandNon-interestincomerelatedtotrading)was$652million,up$205million,or46%,fromthepriorquarterprimarilyreflect-ingsignificanttransactionsandimprovedclientactivity.
Underwriting and other advisoryrevenuedecreased$5million,or2%,fromthepreviousquarter.LowerM&AfeesmainlyinCanadaandweakerdebtoriginationactivityreflectinglowernewissuanceswerelargelyoffsetbyhigherequityorigina-tionactivitybothintheU.S.andCanada.
Otherrevenueincreased$2million,or1%.Theincreasewaspartiallyattributedtoafavourableadjustmentrelatedtothereal-locationofforeigninvestmentcapital,higherdistributionsfromprivateequityinvestmentsandaforeignexchangetranslationgainoncertaindeposits.Thesefactorswerelargelyoffsetbyacumulativeadjustmentforlossesresultingfromthefairvaluingofcertainderivativesthatdidnotqualifyforhedgeaccounting,alossonthesaleofcertaininvestmentportfoliosecuritiesandalowergainonthefairvaluingofcertainsecuritiesheldtoeconomicallyhedgethestock-basedcompensationplanatRBCDainRauscher.
12RoyalBankofCanadaFirstQuarter2007
Non-interestexpenseThefollowingtablepresentsthemaincomponentsofnon-interestexpense:
Forthethreemonthsended
January 31 October31 January31
(C$millions) 2007 2006 2006
Salaries $ 890 $ 853 $ 782 Variablecompensation 791 698 662 Benefitsandretentioncompensation 294 243 281 Stock-basedcompensation 58 35 68
Humanresources $ 2,033 $ 1,829 $ 1,793 Equipment 244 257 231 Occupancy 198 225 182 Communications 156 200 146 Professionalandotherexternalservices 215 251 210 Otherexpenses 199 171 175 Amortizationofintangibles 22 22 14
Non-interest expense $ 3,067 $ 2,955 $ 2,751
Q12007vs.Q12006Non-interestexpenseincreased$316million,or11%,fromayearagoprimarilyduetohighervariablecompensationonimprovedbusinessperformance.Highercostsinsupportofourgrowthincludingincreasedstaffinglevelsinourdistributionnetworkandanadditionalnumberofbranchesresultingfromde novoexpan-sionandtheacquisitionofFlagalsocontributedtotheincrease.TheincreasealsoreflectedhighercostsatRBCDexiaIS,primarilyduetotheinclusionofanadditionalmonthofresultsandtheinclusionofrecentacquisitions.
Q12007vs.Q12006Totalprovisionforcreditlossesincreased$115million,or245%,fromayearago,primarilyreflectinga$50millionreversalofthegeneralallowanceintheprioryearandlowercorporaterecoveriesthisquarter.Higherprovisionsinourpersonalunsecuredcreditline,smallbusinessandcreditcardportfoliosinthecurrentperiod,inpartduetoloangrowth,alsocontributedtotheincrease.
Specificprovisionforcreditlossesforconsumerloansincreased$21million,or17%,fromlastyear.Theincreasewaslargelyattributabletohigherprovisionsinourpersonalunse-curedcreditlineandcreditcardportfoliosprimarilyreflectingportfoliogrowth.
Specificprovisionforcreditlossesforbusinessandgovern-mentloansincreased$39millioncomparedtotheprioryear.Theincreasemainlyreflectedhigherprovisionsinoursmallbusi-nessportfolioandlowercorporaterecoveriesastheprioryearincludeda$25millionrecoveryofEnron-relatedloanspreviouslywrittenoff.ThesefactorswerepartiallyoffsetbylowerprovisionsinourU.S.loanportfolioreflectingcontinuedstrongcreditquality.
Therewasnogeneralprovisioninthecurrentperiod.Thepriorperiodrecoveryof$55millionprimarilyreflecteda$50millionreversalofthegeneralallowanceinlightofthestrengtheningofourcorporateloanportfolioonfavourablecreditconditions.
Q12007vs.Q42006Totalprovisionforcreditlossesincreased$3million,or2%,comparedtothepreviousquarter.Theincreaseprimarilyreflectedhigherprovisionsinourcreditcardportfoliowhichwerelargelyoffsetbyincreasedrecoveriesinourcorporateportfolio.
Specificprovisionforcreditlossesforconsumerloansincreased$14million,or11%,fromthepriorquarter.Theincreasewaslargelyattributabletohigherprovisionsincreditcardspartiallyreflectingportfoliogrowth.
Businessandgovernmentspecificprovisionforcreditlossesdecreased$9million,or31%,comparedtothepriorquarter.Thedecreasewaslargelyaresultofhighercorporaterecoveriesandlowerprovisionsinoursmallbusinessandcommercialloanportfolios.ThiswaspartlyoffsetbyhigherprovisionsinourCaribbeanportfolio.
Provisionfor(recoveryof)creditlosses
Forthethreemonthsended
January 31 October31 January31
(C$millions) 2007 2006 2006
Residentialmortgages $ 2 $ 2 $ 2Personal 91 86 75Creditcards 49 40 44
Consumer $ 142 $ 128 $ 121Businessandgovernment 20 29 (19)
Specificprovision $ 162 $ 157 $ 102Generalprovision – 2 (55)
Provision for credit losses $ 162 $ 159 $ 47
Q12007vs.Q42006Non-interestexpenseincreased$112million,or4%,comparedtothepreviousquarterlargelyreflectinghighervariablecompensa-tion,primarilyinRBCCapitalMarketsduetostrongerbusinessperformance.Highersalariesandbenefitcostsreflectinghigherstaffinglevelsinsupportofgrowthandtheimpactofcertainsea-sonalemployee-relatedpayoutsandaccruals,alsocontributedtotheincrease.Thesefactorswerepartiallyoffsetbyseasonallylowermarketingandadvertisingcostsandthepriorquarteraccrualrelatedtoaleasedspacewhichwewillnotoccupy.
RoyalBankofCanadaFirstQuarter200713
Q12007vs.Q12006Insurancepolicyholderbenefits,claimsandacquisitionexpensedecreased$136million,or21%,fromtheprioryear.Excludingthepositiveimpactoftheimplementationofthenewfinancialinstrumentsaccountingstandardsandtheprioryearhurricane-relatedcharge,insurancepolicyholderbenefits,claimsandacqui-sitionexpensedecreased$6million,or1%,fromtheprioryear.ThedecreasewaslargelyattributabletolowerU.S.annuitysalesandahigherleveloffavourablenetactuarialliabilityadjustmentsthisquarter.Thecurrentquarterincludeda$38millioncumulativevaluationadjustmentrelatingtopriorperiods,whiletheprioryearincludedasimilaramount.ThesefactorswerepartiallyoffsetbygrowthinourEuropeanlifereinsuranceanddomesticbusinesses.ForareconciliationofInsurancepolicyholderbenefits,claimsandacquisitionexpenseexcludingtheimpactoftheitemsnotedabove,refertotheKeyperformanceandnon-GAAPmeasuressection.
Q12007vs.Q42006Insurancepolicyholderbenefits,claimsandacquisitionexpensedecreased$95million,or16%,fromthepriorquarter.Excludingthepositiveimpactrelatedtotheimplementationofthenewfinancialinstrumentsaccountingstandards,insurancepolicy-holderbenefits,claimsandacquisitionexpensedecreased$26million,or4%,fromthepriorquarter.Thedecreasewaslargelyattributabletoafavourablenetactuarialliabilityadjust-mentthisquarterwhichincludeda$38millioncumulativevaluationadjustmentrelatedtopriorperiods.ImprovedclaimsexperienceandlowerU.S.annuitysalesalsocontributedtothedecrease.Thesefactorswerepartiallyoffsetbygrowthinourdomesticbusiness.
Incometaxes
Forthethreemonthsended
January 31 October31 January31
(C$millions,exceptpercentageamounts) 2007 2006 2006
Netincomebeforeincometaxes $ 1,953 $ 1,624 $ 1,510Incometaxexpense 435 342 332
Effectiveincometaxrate(1) 22.3% 21.1% 22.0%
(1) Incometaxesasapercentageofnetincomebeforeincometaxes.
Q12007vs.Q12006Incometaxexpenseincreased$103million,or31%,overtheprioryearlargelycommensuratewithhigherearningsbeforeincometaxes.Theeffectiveincometaxrateof22.3%inthecurrentquartercomparesto22.0%,ayearago.Thecurrentquarterwasfavourablyimpactedbyhigherearningsreportedbyourinterna-tionalsubsidiariesoperatinginjurisdictionswithlowerincometaxratesandahigherlevelofincomefromtax-efficientsources.Theeffectiveincometaxrateintheprioryearwasfavourablyimpacted
bya$70millionreversalofamountsaccruedinprioryearsduetoafavourableresolutionofanincometaxaudit.
Q12007vs.Q42006Incometaxesincreased$93million,or27%,overthepriorquarterduelargelytohigherearningsbeforeincometaxes.Theeffectiveincometaxrateinthecurrentperiodwas22.3%com-paredto21.1%inthepriorquarter,withtheincreasebeingduetothemixofincomereportedinvariousinternationalsubsidiaries.
Comprehensiveincome
Forthethree monthsended
January 31
(C$millions) 2007
Net income $ 1,494 Othercomprehensiveincome,netoftaxes Netunrealizedgains(losses)onavailable-for-salesecurities 26 Reclassificationof(gains)lossesonavailable-for-salesecuritiestoincome 13
39
Unrealizedforeigncurrencytranslationgains(losses) 879 Reclassificationof(gains)lossesonforeigncurrencytranslationtoincome (40) Netforeigncurrencytranslationgains(losses)fromhedgingactivities (623)
216
Netgains(losses)onderivativesdesignatedascashflowhedges 17 Reclassificationtoincomeof(gains)lossesonderivativesdesignatedascashflowhedges 17
34
Other comprehensive income 289
Total comprehensive income $ 1,783
Insurancepolicyholderbenefits,claimsandacquisitionexpense
Forthethreemonthsended
January 31 October31 January31
(C$millions) 2007 2006 2006
Insurancepolicyholderbenefits,claimsandacquisitionexpense $ 516 $ 611 $ 652
14RoyalBankofCanadaFirstQuarter2007
Ourquarterlyearnings,revenueandexpenseareimpactedbyanumberoftrendsandrecurringfactorswhichincludeseasonality,generaleconomicandmarketconditions.
SeasonalitySeasonalfactorsimpactourresults,inmostquarters,tovaryingdegrees.Thesecondquarterhasfewerdaysthantheotherthreequarters,resultinginadecreaseinindividualrevenueandexpenseitems.Thethirdandfourthquartersincludethesummermonths,duringwhichmarketactivityfrequentlyslows,nega-tivelyimpactingtheresultsofourcapitalmarkets,brokerageandinvestmentmanagementbusinesses.
ImpactofeconomicandmarketconditionsIngeneral,economicconditionsremainedfavourableoverthepastninequarters,positivelyimpactingourbusinessperfor-mance.Arelativelysolidhousingmarket,alowbutrisinginter-estrateenvironment,stronglabourmarketsconditions,aswellassolidconsumerandbusinessspendingsupportedloanand
depositgrowthandstrongdemandforourwealthmanagementproductsovertheperiod.Thesefavourablefactors,alongwithourcontinuedriskmanagementefforts,contributedtoageneralimprovementinourportfoliocreditquality.Ingeneral,capitalmarketconditionsweremorefavourablein2006comparedto2005,characterizedbyhigherequitymarketvolatility,nearrecordhighM&AactivityandsolidcashequitiesbusinesswhichbenefitedfromhealthyforeigndemandforCanadiannaturalresource-basedequities.Partlyoffsettingthesefavourablefac-torswasthestrengtheningoftheCanadiandollarduring2006,whichresultedinalowertranslatedvalueofourU.S.dollar-andBritishpound(GBP)-denominatedearnings,primarilyinourwholesaleandU.S.retailoperations.Duringtheperiod,therehasbeenincreasedcompetitioninwholesalebanking,asU.S.-basedinvestmentbanksexpandedtheirpresenceinCanadaaftertheeliminationofforeigncontentrestrictionsonCanadianregisteredretirementproducts.
Thefollowingtablesummarizesourresultsfortheninemostrecentlycompletedquarters.
2007 2006 2005
(C$millions,exceptpershareamounts) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Netinterestincome $ 1,867 $ 1,731 $ 1,766 $ 1,617 $ 1,682 $ 1,763 $ 1,663 $ 1,668 $ 1,699 Non-interestincome 3,831 3,618 3,440 3,505 3,278 3,033 3,266 3,018 3,074
Total revenue $ 5,698 $ 5,349 $ 5,206 $ 5,122 $ 4,960 $ 4,796 $ 4,929 $ 4,686 $ 4,773 Non-interestexpense 3,067 2,955 2,861 2,928 2,751 3,310 2,732 2,661 2,654 Provisionforcreditlosses 162 159 99 124 47 103 128 116 108 Insurancepolicyholderbenefits, claimsandacquisitionexpense 516 611 627 619 652 740 681 622 582 Businessrealignmentcharges – – – – – 40 1 2 2
Netincomebeforeincometaxesand non-controllinginterestinsubsidiaries$ 1,953 $ 1,624 $ 1,619 $ 1,451 $ 1,510 $ 603 $ 1,387 $ 1,285 $ 1,427 Incometaxes 435 342 381 348 332 90 392 353 443 Non-controllinginterestinnetincome ofsubsidiaries 24 19 44 (25) 6 (30) (6) 16 7
Netincomefromcontinuingoperations $ 1,494 $ 1,263 $ 1,194 $ 1,128 $ 1,172 $ 543 $ 1,001 $ 916 $ 977Netincomefrom discontinuedoperations – (1) (17) (10) (1) (21) (22) (9) 2
Net income $ 1,494 $ 1,262 $ 1,177 $ 1,118 $ 1,171 $ 522 $ 979 $ 907 $ 979
Earningspershare –basic $ 1.16 $ .97 $ .91 $ .86 $ .90 $ .40 $ .75 $ .70 $ .76 –diluted $ 1.14 $ .96 $ .90 $ .85 $ .89 $ .39 $ .74 $ .69 $ .75
Net income (loss) RBCCanadianPersonalandBusiness $ 877 $ 775 $ 742 $ 608 $ 669 $ 504 $ 679 $ 524 $ 597 RBCU.S.andInternational PersonalandBusiness 149 126 111 106 101 132 80 82 93 RBCCapitalMarkets 420 315 329 433 330 (57) 255 294 268 CorporateSupport 48 47 12 (19) 72 (36) (13) 16 19 Discontinuedoperations(1) – (1) (17) (10) (1) (21) (22) (9) 2
Net income $ 1,494 $ 1,262 $ 1,177 $ 1,118 $ 1,171 $ 522 $ 979 $ 907 $ 979
PeriodaverageUSDequivalent ofC$1.00(2) $ .861 $ .897 $ .896 $ .877 $ .865 $ .850 $ .810 $ .811 $ .827Period-endUSDequivalentofC$1.00 .850 .890 .884 .894 .878 .847 .817 .795 .806
(1) Representsdiscontinuedoperations(RBCMortgageCompany)oftheRBCU.S.andInternationalPersonalandBusinesssegment.(2) Averageamountsarecalculatedusingmonth-endspotratesfortheperiod.
Quarterlyresultsandtrendanalysis
OthercomprehensiveincomerepresentschangesinShareholders’equityduringaperiodandincludesunrealizedgainsandlossesonfinancialassetsclassifiedasavailable-for-sale,unrealizedforeigncurrencytranslationgainsorlossesnetofhedgingactivities,arisingfromself-sustainingforeign
operations,andchangesinthefairvalueoftheeffectiveportionofcashflowhedginginstruments.ForthethreemonthsendedJanuary31,2007,Othercomprehensiveincomewas$289million.Thisamountlargelycompriseda$216millionunrealizedgainonforeigncurrencytranslationnetofhedgingactivities.
RoyalBankofCanadaFirstQuarter200715
TrendanalysisOverviewOverthelastninequarters,ourresultswereaffectedbyanumberoffavourableandunfavourablespecifieditems.Inthefirstquarterof2006andthefourthquarterof2005,ourinsurancebusinessresultswerenegativelyimpactedbyhurricane-relatedchargesof$61million(before-andafter-tax)and$203million(before-andafter-tax),respectively.Inthefourthquarterof2005,werecordeda$591million($326millionafter-tax)provisionforEnronCorp.(Enron)litigation-relatedmatters.A$50millionreversalofthegeneralallowancewasrecordedinthefirstquarterof2006inlightofthestrongcreditqualityofourcorporateloanportfoliowhichpartiallyreflectedthefavourablecreditconditions.Ourresultswerealsoimpactedbytheacquisitionanddisposi-tionofcertainbusinesses.Werecordedanadditional$40millionbusinessrealignmentchargeforcontinuingoperationsinthefourthquarterof2005.Inaddition,RBCMortgagewasclassifiedasdiscontinuedoperationsinthesecondquarterof2005andcertainassetsofRBCMortgageweresoldinthefourthquarterof2005.
ConsolidatedresultsOurconsolidatednetincomehasconsistentlyexceeded$1billionoverthelastfivequarters.Thislargelyreflectedageneralincreaseinrevenueacrossallourbusinesssegments.Thisposi-tivetrendwaspartiallyoffsetbythelowertranslatedvalueofforeigncurrency-denominatedrevenueandearningsasaresultofthestrengtheningoftheCanadiandollarduring2006relativeto2005.TheCanadiandollarexchangerateweakenedinthefirstquarterof2007.
Non-interestexpenseincreasedovertheperiod,largelyreflectingincreasedvariablecompensationonimprovedbusinessperformanceandhighercostsinsupportofourgrowth,exceptforthefourthquarterof2005,whenwerecordedaprovisionforEnronlitigation-relatedmatters.
Provisionforcreditlosseshavebeenrelativelystablebutincreasingovertheperiodprimarilycommensuratewithloangrowth.Thedecreaseinprovisionsinthefirstquarterof2006wasprimarilyduetothe$50millionreversalofthegeneralallowance.Themostrecentquartershaveexperiencedanincreasedueto
higherprovisionsforpersonalandsmallbusinessloanspartiallyduetoloangrowthandlowercorporaterecoveriesreflectingfewerproblemloans.
Incometaxeshavegenerallytrendeddownwardovertheperiod,despitehigherearningsbeforeincometaxesfromcontinuingoperations.Thislargelyreflectedhigherearningsreportedbyourinternationalsubsidiariesoperatinginlowerincometaxjurisdictionsandhigherincomefromtax-advantagedsources(Canadiantaxablecorporatedividends)andthefavour-ableresolutionofanincometaxauditinthefirstquarterof2006.Thesefactorscontributedtoareductioninoureffectiveincometaxrateoverthelastninequartersfrom31.0%to22.3%.
Non-controllinginterestinnetincomeofsubsidiariesfluctu-atedovertheperiod,whichdependsonthenetincomeattributedtothirdpartyinvestorsinentitiesinwhichwedonothave100%ownership,butarerequiredtoconsolidate.
BusinesssegmentresultsRBCCanadianPersonalandBusinessnetincomegenerallyincreasedoverthelastninequarters.Thisreflectedstrongvolumegrowthacrossmostbusinesslinesandgenerallystablemargins,despitestrongmarketcompetitionandashiftinclientprefer-encestowardslowerspreadproducts.Ourresultsinthefourthquarterof2005andthefirstquarterof2006werenegativelyimpactedbyhurricane-relatedcharges.
RBCU.S.andInternationalPersonalandBusinessresultslargelytrendedupwardovertheperiod.Thiswasprimarilydrivenbysolidrevenuegrowth,albeitpartlyrestrainedbythenegativeimpactonthetranslatedvalueofU.S.dollar-denominatedearningsduetothegenerallystrongerCanadiandollar.
RBCCapitalMarketsrecordedageneralimprovementinearningsovertheperiod,withtheexceptionofthefourthquarterof2005,whichincludedthe$591million($326millionafter-tax)provisionforEnronlitigation-relatedmatters.Ourdiversebusi-nessandproductofferings,togetherwithbusinessexpansionsandgrowingglobaldistributioncapabilities,contributedtothispositivetrend.However,thesefactorswerepartiallyoffsetbythelowertranslatedvalueofU.S.dollar-andGBP-denominatedearningsresultingfromthestrongerCanadiandollar.
CriticalaccountingpoliciesandestimatesOurunauditedInterimConsolidatedFinancialStatementshavebeenpreparedinaccordancewithCanadianGAAP.ThesignificantaccountingpoliciesaredescribedinNote1toourunauditedInterimConsolidatedFinancialStatementsandNote1onpages106to110ofour2006AnnualReport.Certainoftheseaccountingpolicies,aswellasestimatesmadebymanagementinapplyingsuchpolicies,arerecognizedascriticalbecausetheyrequiremanagementtomakesubjectiveorcomplexjudgmentsaboutmattersthatareinherentlyuncertain.Ourcriticalaccountingpoliciesandestimatesrelatetotheallowanceforcreditlosses,fairvalueoffinancialinstruments,securitization,variableinterestentities,pensionsandotherpost-employmentbenefits,incometaxesandother-than-temporaryimpairmentofinvestmentsecurities.Forfurtherdetails,refertopages33to37ofour2006AnnualReport.
ChangesinaccountingpoliciesorestimatesFinancial Instruments OnNovember1,2006,weadopted,onaprospectivebasis,threenewaccountingstandardsthatwereissuedbytheCICA:HandbookSection1530,Comprehensive Income,HandbookSection3855,Financial Instruments – Recognition and Measurement,andHandbookSection3865,Hedges.Thesestandards,andtheimpactonourfinancialpositionandresultsofoperations,arediscussedintheImpactofthenewfinancialinstrumentsaccountingstandardssectionandinNote1toourunauditedInterimConsolidatedFinancialStatements.
FuturechangesinaccountingpoliciesorestimatesCanadian GAAPVariableInterestEntities(VIEs)OnSeptember15,2006,theEmergingIssuesCommitteeissuedAbstractNo.163,Determining the Variability to be Considered in Applying AcG-15(EIC-163).EIC-163providesadditionalclarifica-tiononhowtoanalyzeandconsolidateVIEs.EIC-163becameeffectiveforusonFebruary1,2007anditsimplementationwillresultinthedeconsolidationofcertaininvestmentfunds.TheimpactofEIC-163isnotexpectedtobematerialtoourconsoli-datedfinancialpositionorresultsofoperations.
Accountingmattersandcontrols
16RoyalBankofCanadaFirstQuarter2007
Ourmanagementreportingframeworkisintendedtomeasuretheperformanceofeachbusinesssegmentasifitwasastand-alonebusinessandreflectthewaythebusinesssegmentsaremanaged.
Thisapproachisintendedtoensurethatourbusinesssegments’resultsreflectallrelevantrevenueandexpensesassociatedwiththeconductoftheirbusinessanddepictshowmanagementviewstheirresults.
Thekeymethodologiesandassumptionsusedinourman-agementreportingframeworkareexpenseallocation,capitalattribution,fundstransferpricingandtaxableequivalentbasis(teb),andareoutlinedintheHowwemanageourbusinesssegmentssectionofour2006AnnualReport.Managementperi-odicallyreviewsthesekeymethodologiesandassumptionstoensurethattheyremainvalid.
Wealsouseandreportcertainnon-GAAPfinancialmeasures,consistentwithourmanagementframework.ThesemeasuresdonothavestandardizedmeaningsunderGAAPandarenotneces-sarilycomparablewithsimilarinformationreportedbyotherfinancialinstitutions.
Changesmadeinthefirstquarterof2007WithinRBCCanadianPersonalandBusiness,certainamountsrelatedtotrusteeserviceshavebeenreclassifiedfromNon-interestincome–InvestmentmanagementandcustodialfeestoNetinterestincometobetterreflecttheirnature.Allcomparativeamountshavebeenrestatedtoreflectthisreclassification.
WealthManagementcomprisesbusinessesthatdirectlyserveourclients’growingwealthmanagementneedsincludingthoseofaffluentandhighnetworthclientsglobally,andbusinessesthatprovideassetmanagementandtrustproducts.
U.S.&InternationalBankingcomprisesourbankingbusi-nessesoutsideCanada,includingRBCCenturaintheU.S.,andRBC’sCaribbeanbankingoperations.Inaddition,thissegmentincludesour50%ownershipinRBCDexiaIS.
CapitalMarketscontinuesasourglobalwholesalebankingsegmentprovidingawiderangeofcorporateandinvestmentbanking,salesandtrading,researchandrelatedproductsandservicestocorporations,publicsectorandinstitutionalclientsinNorthAmericaandspecializedproductsandservicesinselectglobalmarkets.
Wewillreportourresultsbasedonthesenewbusinessseg-mentsstartingthesecondquarterof2007.
Thefollowingsectionprovidesanoverviewofhowwemeasuretheperformanceandreporttheresultsofourbusinesssegments.
Periodically,certainbusinessesand/orsubsidiariesaretransferredbetweensegmentstoalignmorecloselywithourorganizationalstructureandstrategicpriorities.Wherethesetransfersaredeemedmaterial,comparativeamountsarerestated.
Newbusinesssegmentseffectivesecondquarter2007EffectiveFebruary7,2007,ourpreviousthreebusinesssegments(RBCCanadianPersonalandBusiness,RBCU.S.andInternationalPersonalandBusinessandRBCCapitalMarkets)werereorga-nizedintofournewbusinesssegmentsandrenamed:
CanadianBankingcomprisesourdomesticpersonalandbusinessbankingoperations,certainretailinvestmentbusinessesandourglobalinsuranceoperations.
Businesssegmentresults
Howwemeasureandreportourbusinesssegments
PersonalandBusinessnetincomeincreased$1millionandRBCCapitalMarketsnetincomeincreased$15millionasaresultoftheimpactofthechangeintheCanadiandollarexchangerates.
TheCanadiandollardepreciated4%onaverageand8%onaveragerelativetotheU.S.dollarandGBP,respectively,comparedtothepreviousquarter.RBCU.S.andInternationalPersonalandBusinessnetincomeincreased$5millionandRBCCapitalMarketsnetincomeincreased$10million,asaresultoftheimpactofthechangeintheCanadiandollarexchangerates.
ThetranslatedvalueofRBCU.S.andInternationalPersonalandBusinessU.S.dollar-denominatedresultsisimpactedbyfluctua-tionsintheU.S./Canadiandollarexchangerate.ThetranslatedvalueofRBCCapitalMarketsU.S.dollar-andGBP-denominatedresultsisalsoimpactedbyfluctuationsintherespectiveexchangeratestotheCanadiandollar.
TheCanadiandollarremainedrelativelystableonaveragerelativetotheU.S.dollaranddepreciated13%onaveragerelativetotheGBP,comparedtoayearago.RBCU.S.andInternational
Impactofforeignexchangeratesonourbusinesssegments
U.S. GAAPThefollowingnewguidancewillbeeffectiveforourU.S.GAAPfinancialstatementsinthefuture:(i)FinancialAccountingStandardsBoard(FASB)InterpretationNo.48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109;(ii)FASBStatementNo.158,Employers’ Accounting for Defined Benefit Pension and Other Post-retirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R);(iii)FASBStatementNo.157,Fair Value Measurement; and(iv)FASBStatementNo.159,The Fair Value Option for
Financial Assets and Liabilities.Forfurtherdetails,refertoourReconciliationofCanadianandUnitedStatesgenerallyacceptedaccountingprinciplesinNote15toourunauditedInterimConsolidatedFinancialStatements.
InternalcontroloverfinancialreportingNochangesweremadeinourinternalcontroloverfinancialreportingduringtheinterimperiodendedJanuary31,2007,thathavemateriallyaffected,orarereasonablylikelytomateriallyaffect,ourinternalcontroloverfinancialreporting.
RoyalBankofCanadaFirstQuarter200717
Wemeasureandevaluatetheperformanceofourconsolidatedoperationsandeachbusinesssegmentusinganumberoffinancialmetricssuchasnetincome,returnonaveragecommonequity(ROE)andreturnonaverageriskcapital(RORC).WhilenetincomeisinaccordancewithGAAP,theothersareconsiderednon-GAAPfinancialmeasureswhichdonothavestandardizedmeaningsunderGAAPandmaynotbecomparabletosimilarmeasuresusedbyotherfinancialinstitutions.Forfurtherdetails,refertotheHowwemanageourbusinesssegmentsandKeyfinancialmeasures(non-GAAP)sectionsinour2006AnnualReport.
ReturnonequityandReturnonriskcapitalWeuseROEandRORC,atboththeconsolidatedandsegmentlevels,asameasureofreturnontotalcapitalinvestedinourbusinesses.
OurquarterlyconsolidatedROEcalculationisbasedonannu-alizedquarterlynetincomeavailabletocommonshareholders
dividedbytotalaveragecommonequityfortheperiod,whichexcludespreferredshares.OurquarterlybusinesssegmentROEcalculationsarebasedonnetincomeavailabletocommonshare-holdersdividedbyaverageattributedcapitalfortheperiod.Foreachsegment,averageattributedcapitalisbasedonattributedriskcapitalandamountsinvestedingoodwillandintangibles.
OurquarterlyRORCcalculationsarebasedonnetincomeavailabletocommonshareholdersdividedbyattributedriskcapi-tal(whichexcludesgoodwillandintangiblesandunattributedcapital).ThebusinesssegmentROEandRORCmeasuresareviewedbymanagementasusefulmeasuresforsupportinginvestmentandresourceallocationdecisionsbecausetheyadjustforcertainitemsthatmayaffectcomparabilitybetweenbusinesssegmentsandcertaincompetitors.
ThefollowingtableprovidesareconciliationoftheROEandRORCcalculations.
Keyperformanceandnon-GAAPmeasures
ReturnonequityandReturnonriskcapital
Forthethreemonthsended Forthethreemonthsended
January 31 October31 January31
2007 2006 2006
RBC U.S. RBC Canadian International Personal and Personal and RBC Corporate(C$millions)(1),(2) Business Business Capital Markets Support Total Total Total
Netincomefromcontinuingoperations $ 877 $ 149 $ 420 $ 48 $ 1,494 $ 1,263 $ 1,172Netlossfromdiscontinuedoperations – – – – – (1) (1)
Netincome $ 877 $ 149 $ 420 $ 48 $ 1,494 $ 1,262 $ 1,171 less:Preferreddividends (7) (3) (4) (2) (16) (26) (10)
Netincomeavailabletocommonshareholders $ 870 $ 146 $ 416 $ 46 $ 1,478 $ 1,236 $ 1,161
Averageequity $ 9,400 $ 3,800 $ 5,400 $ 2,850 $ 21,450 $ 20,500 $ 19,300 less:Unattributedcapital – – – 1,950 1,950 2,650 2,700 less:Goodwillandintangiblecapital 2,600 1,650 1,150 – 5,400 4,700 4,450Averageriskcapital(2) $ 6,800 $ 2,150 $ 4,250 $ 900 $ 14,100 $ 13,150 $ 12,150
Returnonequity(ROE) 36.7% 15.3% 30.5% 6.4% 27.3% 23.9% 23.9%Returnonriskcapital(RORC) 50.8% 26.7% 38.7% n.m. 41.6% 37.3% 37.9%
(1) Theaverageriskcapital,goodwillandintangiblecapital,averageattributedequityandaverageequityfiguresshownaboveandthroughoutthisdocumentrepresentroundedfigures.Theseamountsarecalculatedusingmonth-endbalancesfortheperiod.TheROEandRORCmeasuresshownaboveandthroughoutthisdocumentarebasedonactualbalancesbeforerounding.
(2) AverageriskcapitalincludesCredit,Market(tradingandnon-trading),Insurance,OperationalandBusinessandfixedassetriskcapital.ForfurtherdetailsrefertoEconomicCapitalintheCapitalmanagementsection.
n.m. notmeaningful
RBCCapitalMarketstotalrevenue(teb)excludingrevenuerelatedtoConsolidatedVariableInterestEntities(VIEs)WeconsolidatecertainentitiesinaccordancewithCICAAcG-15,Consolidation of Variable Interest Entities(VIEs).ConsolidationofaVIEisbasedonourexposuretovariabilityintheVIE’sassetsandnotonwhetherwehavevotingcontrol.RevenueandexpensesfromcertainoftheseVIEshavebeenincludedinRBCCapitalMarketsresults.However,theamountsthathavebeenconsolidated,whichareattributabletootherequityinvestorsintheseVIEsareoffsetinNon-controllinginterestinnetincomeofsubsidiariesandhavenoimpactonourreported
netincome.Astheamountsattributabletootherequityinvestorsdonothaveanimpactonourreportednetincome,managementbelievesthatadjustingfortheseitemsenhancesthecomparabilityofRBCCapitalMarketsresultsandrelatedratiosandenablesamoremeaningfulcomparisonofourfinancialperformancewithcertainotherfinancialinstitutions.Astheexpensesarenotviewedasmaterial,wehaveonlyadjustedfortherevenueattrib-utedtootherequityinvestors.
Thefollowingtableprovidesareconciliationoftotalrevenue(teb)excludingVIEsforRBCCapitalMarkets.
Forthethreemonthsended
January 31 October31 January31
(C$millions) 2007 2006 2006
Total revenue (teb)(1) $ 1,400 $ 1,160 $ 1,013RevenuerelatedtoVIEsoffsetinNon-controllinginterest(2) 11 4 (8)
Total revenue (teb) excluding VIEs $ 1,389 $ 1,156 $ 1,021
(1) Taxableequivalentbasis.Forfurtherdiscussion,refertotheHowwemanageourbusinesssegmentssectionofour2006AnnualReport.(2) RepresentsrevenueattributedtootherequityinvestorsofconsolidatedVIEs.
18RoyalBankofCanadaFirstQuarter2007
RBCCanadianPersonalandBusinessrevenueandInsurance-relatedresultsexcludingtheimpactsofthenewfinancialinstrumentsaccountingstandardsandcertainitemsInthefirstquartersof2007and2006,therewerecertainitemsthatimpactedtheinsurancepremiums,investmentandfeeincome,theinsurancepolicyholderbenefits,claimsandacqui-sitionexpenseincomestatementlines,andtheassociatedbusinesslineandsegmentresultsunderwhichtheyarealsoreported.Managementbelievesthatadjustingfortheseitemsenhancesthecomparabilityofourresults,andenablesamoremeaningfulcomparisonofourfinancialperformancewithcertainotherfinancialinstitutions.Thefollowingprovidesthedetailsoftheitemsthatmanagementbelievesshouldbeexcludedfromtherespectiveresults.
Impact of the new financial instruments accounting standards ForthethreemonthsendedJanuary31,2007,werecordedanunrealizednetlossof$70millionrelatedtotheimpactofchangesininterestratesonthefairvaluationofthesecuritiesbackingourlifeandhealthinsuranceliabilities.Thisnetlosswasrecordedininsurance-relatedrevenue,andwaslargelyoffsetbyacorre-spondingchangeintheunderlyingliabilitiesthatwasrecordedininsurancepolicyholderbenefitsclaimsandacquisitionexpense.Thenewfinancialinstrumentsaccountingstandardshavebeen
implementedprospectively,andthenetamounthadnosignifi-cantimpactonourreportednetincome.
Results excluding a favourable adjustment related to the reallocation of foreign investment capitalDuringthequarter,wereallocatedcertainforeigninvestmentcapitalfromourinternationalinsuranceoperations,whichhadsupportedourpropertycatastrophereinsurancebusiness,aswehavestrategicallyexitedthislineofbusiness.Accordingly,werecognizedafavourableforeigncurrencytranslationadjust-mentof$40million(before-andafter-tax)associatedwiththiscapital.ThisamountwaspreviouslyrecordedinShareholders’equityandhasbeenreclassifiedtoincomeintheperiod.
Results excluding hurricane-related chargesWerecordeda$61million(before-andafter-taxcharge)inourinsurancebusinessinthefirstquarterof2006foradditionalestimatednetclaimsfordamagespredominantlyrelatedtoHurricaneWilmawhichoccurredinlateOctober2005.
ThefollowingtableprovidesareconciliationofRBCCanadianPersonalandBusinessrevenueandInsurance-relatedresultsexcludingtheimpactsofthenewfinancialinstrumentsaccountingstandardsandtheitemsnotedabove.
Forthethreemonthsended
January 31 January31
2007 2006 Insurance Insurance RBC Canadian Insurance policyholder policyholder Personal and Global premiums, benefits, claims benefits,claims Business Insurance investment and and acquisition andacquisition(C$millions) revenue (1) revenue (1) fee income (2) expense(2) expense
GAAPreportedamounts $ 3,546 $ 860 $ 820 $ 516 $ 652Exclude:Impactofthenewfinancialinstrumentsaccountingstandards 70 70 70 69 – Impactofforeigncurrencytranslationadjustment (40) (40) – – – Hurricane-relatedcharges – – – – (61)
Amountsexcludingtheimpactofthenewfinancialinstrumentsaccounting standardsandcertainitemsnotedabove $ 3,576 $ 890 $ 890 $ 585 $ 591
(1) Forfurtherdetails,refertotheRBCCanadianPersonalandBusinesssection.(2) Forfurtherdetails,refertotheConsolidatedresultssection.
Operatingleverageratiocalculation
Forthethreemonthsended
Q1 2007 vs. (C$millions,exceptpercentageamounts) Q1 2007 Q12006 Q1 2006
Total revenue $ 5,698 $ 4,960 add:tebadjustment 70 37 less:RevenuerelatedtoVIEs 11 (8) less:GlobalInsurancerevenue 860 858 less:Impactofthenewfinancialinstrumentsaccountingstandards(1) 33 –
Total revenue (adjusted) $ 4,864 $ 4,147 17.3%
Non-interest expense $ 3,067 $ 2,751 less:GlobalInsurance-relatednon-interestexpense 128 116
Non-interest expense (adjusted) $ 2,939 $ 2,635 11.5%
Q1 2007 Operating leverage 5.8%
(1) ExcludestheimpactofthenewfinancialinstrumentsaccountingstandardsrelatedtoGlobalInsurance.
OperatingleverageOuroperatingleverageisdefinedasthedifferencebetweenourrevenuegrowthrate(asadjusted)andnon-interestexpensegrowthrate(asadjusted).Revenueisbasedonataxableequiva-lentbasis,whiletheimpactofconsolidatedVIEsisexcludedastheyhavenomaterialimpactonourearnings.GlobalInsurancerevenueandaccountingadjustmentsrelatedtothenewfinancialinstrumentsaccountingstandardsarealsoexcludedfromrevenue.Non-interestexpenseexcludesGlobalInsurance-relatedexpense.
GlobalInsuranceresultsareexcludedascertainchangesinrev-enuecanbelargelyoffsetininsurancepolicyholderbenefits,claimsandacquisitionexpensewhichisnotcapturedinouroperatingleveragecalculation.Theimpactofthenewfinancialinstrumentsaccountingstandardsisexcludedasitgivesrisetoaccountingvolatilityandisnotviewedasameasureofeconomicperformance.
ThefollowingtableshowstheQ12007operatingleverageratiocalculation.
RoyalBankofCanadaFirstQuarter200719
Asatorforthethreemonthsended
January 31 October31 January31
(C$millions,exceptpercentageandnumberofamounts) 2007 2006(1) 2006(1)
Netinterestincome $ 1,588 $ 1,567 $ 1,443 Non-interestincome 1,958 1,918 1,855Total revenue $ 3,546 $ 3,485 $ 3,298 Non-interestexpense $ 1,575 $ 1,566 $ 1,502 Provisionforcreditlosses(PCL) 182 173 142 Insurancepolicyholderbenefits,claimsandacquisitionexpense 516 611 652Net income before income taxes and non-controlling interest in subsidiaries $ 1,273 $ 1,135 $ 1,002Net income $ 877 $ 775 $ 669
Revenue by business line PersonalBanking $ 969 $ 946 $ 869 BusinessFinancialServices 555 559 526 CardsandPaymentSolutions 429 425 404 WealthManagement 733 692 641 GlobalInsurance 860 863 858
Key ratios Returnonequity(2) 36.7% 34.2% 30.0% Returnonriskcapital(2) 50.8% 46.3% 41.5% Netinterestmargin(3) 3.26% 3.30% 3.26% Operatingleverage(excludingGlobalInsurance)(4) 5.7% 4.6% 3.6%Selected average balance sheet and other information (5) Totalassets (6) $ 213,900 $ 207,800 $ 194,600 Totalearningassets (6) 193,500 188,300 175,800 Loansandacceptances(6) 192,400 188,200 173,300 Deposits 152,900 149,500 142,700 Attributedcapital(2) 9,400 8,950 8,750 Riskcapital(2) 6,800 6,600 6,350 Assetsunderadministration 221,900 213,200 195,400 Assetsundermanagement 96,800 89,700 79,300 Insurancepremiumsanddeposits 895 864 860Credit information Grossimpairedloansasa%ofaverageloansandacceptances .33% .31% .30% SpecificPCLasa%ofaverageloansandacceptances .38% .36% .33%Other information Numberofemployees(full-timeequivalent) 28,997 28,271 27,662
(1) Inthequarter,wereclassifiedamountsfromnon-interestincometonetinterestincomeduetochangesincertaintrusteeservicesagreements.Our2006resultshavebeenrestatedtoreflectthesechanges.
(2) AverageattributedcapitalandReturnonequityarecalculatedusingmethodsintendedtoapproximatetheaverageofthedailybalancesfortheperiod.SegmentReturnonequity,AverageriskcapitalandReturnonriskcapitalarenon-GAAPfinancialmeasures.Forfurtherdiscussionandreconciliation,refertotheKeyperformanceandnon-GAAPmeasuressection.
(3) Netinterestmargin(NIM)iscalculatedasNetinterestincomedividedbyAverageearningassets.Averageearningassetsarecalculatedusingmethodsintendedtoapproximatetheaverageearningsassetbalancesfortheperiod.
(4) Definedasthedifferencebetweenrevenuegrowthrateandnon-interestexpensegrowthrateforthesegment,excludingGlobalInsuranceduetothenatureofitsbusiness.(5) Averageamountsarecalculatedusingmethodsintendedtoapproximatetheaverageofthedailybalancesfortheperiod.(6) Totalassets,totalearningassets,andloansandacceptancesincludeaveragesecuritizedresidentialmortgagesandcreditcardsforthethreemonthsendingJanuary31,2007of$18billionand
$3.7billion,respectively.
RBCCanadianPersonalandBusinesssegmentconsistsofourpersonalandbusinessbankingandwealthmanagementbusi-nessesinCanadaaswellasourglobalinsurancebusiness.
ThissegmentcomprisesPersonal Banking, Business Financial Services, Cards and Payment Solutions, Wealth ManagementandGlobal Insurance.
Q12007vs.Q12006Netincomeincreased$208million,or31%,fromayearago.Thiswaslargelyduetostronggrowthacrossallbusinesslines,reflectingtheongoingsuccessfulexecutionofourgrowthinitia-tives.Werecordeddouble-digitrevenuegrowthinour Personal Banking andWealth Management businesses,andexperiencedsolidgrowthinourBusiness Financial ServicesandCards and Payment Solutionsbusinesses.Theimprovementinourresultsalsoreflectedtheprioryearhurricane-relatedchargeandafavourableadjustmentrelatedtothereallocationofforeigninvestmentcapitalinthecurrentquarter.Thesefactorswerepartiallyoffsetbyincreasedvariablecompensationresultingfromstrongerbusinessperformanceandhighercostsinsupportofbusinessgrowth.
Totalrevenueincreased$248million,or8%,fromayearago.Excludingthenegativeimpactrelatedtotheimplementationofthenewfinancialinstrumentsaccountingstandardsandafavour-ableadjustmentrelatedtothereallocationofforeigninvestmentcapital,totalrevenueincreased$278million,or8%.Theincreaseprimarilyreflectedstrongvolumegrowthinourbanking,wealthmanagementandinsuranceoperations.ForareconciliationofRBCCanadianPersonalandBusinessrevenueexcludingtheimpactoftheitemsnotedabove,refertotheKeyperformanceandnon-GAAPmeasuressection.
Netinterestmarginremainedstableat3.26%,asimprovedspreadsonpersonaldepositswereoffsetbylowerspreadsonbusinessdepositsandcreditcards.
RBCCanadianPersonalandBusiness
20RoyalBankofCanadaFirstQuarter2007
Personal Bankingrevenuewasup$100million,or12%,largelyreflectingstronggrowthinhomeequitylendingandimprovedlendinganddepositspreadsacrossallproducts.
Business Financial Services revenueincreased$29million,or6%,primarilyasaresultofsolidloananddepositgrowth,partiallyoffsetbylowerspreadsondeposits.
Cards and Payment Solutionsrevenuewasup$25million,or6%,mainlyreflectingincreasedbalancesandimprovedtransac-tionvolumes.Theincreasewaspartlyoffsetbyhighercustomerloyaltyrewardprogramcostsandspreadcompression.
Wealth Managementrevenueincreased$92million,or14%,reflectingstrongercontributionsfrommostproductlines.Inpar-ticular,theincreasewasdrivenbystrongernetsalesandcapitalappreciationinmutualfunds.Continuedgrowthinfee-basedaccountsandhighervolumesinourbrokeragebusinessesalsocontributedtotheincrease.
Global Insurance revenuewasup$2millionfromtheprioryear.Excludingthenegativeimpactrelatedtotheimplementa-tionofthenewfinancialinstrumentsaccountingstandards,andafavourableadjustmentrelatedtothereallocationofforeigninvestmentcapital,Global Insurancerevenueincreased$32mil-lion,or4%,fromtheprioryear.TheincreasewasprimarilyduetogrowthinourEuropeanlifereinsuranceanddomesticbusi-nesses.ThesefactorswerelargelyoffsetbylowerU.S.annuitysalesduetotherelativelylowinterestrateenvironment,andlowerrevenuefromourpropertycatastrophereinsuranceopera-tionswherewehaveceasedunderwritingnewbusiness.ForareconciliationofGlobal Insurance revenueexcludingtheimpactoftheitemsnotedabove,refertotheKeyperformanceandnon-GAAPmeasuressection.
Non-interestexpensewasup$73million,or5%,reflectingincreasedvariablecompensationonstrongerwealthmanage-mentrevenue,aswellasincreasedsalespersonnelandhigherinfrastructure,marketingandadvertisingcostsinsupportofbusinessgrowth.
Totalprovisionforcreditlossesincreased$40million,or28%.Theincreasewasaresultofhigherprovisionsinpersonalunsecuredcreditlinesreflectingportfoliogrowthandahigherlossrate,andincreasedprovisionsinsmallbusinessloansduetohigherimpairment.Higherprovisionsincreditcardscommen-suratewithportfoliogrowthalsocontributedtotheincrease.
Insurancepolicyholderbenefits,claimsandacquisitionexpensedecreased$136million,or21%,fromtheprioryear.Excludingthepositiveimpactoftheimplementationofthenewfinancialinstrumentsaccountingstandardsandtheprioryearhurricane-relatedcharge,insurancepolicyholderbenefits,claimsandacquisitionexpensedecreased$6million,or1%,fromtheprioryear.ThedecreasewaslargelyattributabletolowerU.S.annuitysalesandahigherleveloffavourablenetactuarialliabilityadjustmentsthisquarter.Thecurrentquarterincludeda$38millioncumulativevaluationadjustmentrelatingtopriorperi-ods,whiletheprioryearincludedasimilaramount.Thesefactors
werepartiallyoffsetbygrowthinourEuropeanlifereinsuranceanddomesticbusinesses.ForareconciliationofInsurancepolicy-holderbenefits,claimsandacquisitionexpenseexcludingtheimpactoftheitemsnotedabove,refertotheKeyperformanceandnon-GAAPmeasuressection.
Averageassetsincreased$19billion,or10%,overtheprioryear,reflectingstronggrowthinhomeequitylending,businessloansandcreditcardbalances.Depositswereup$10billion,or7%,overtheprioryearreflectinggrowthinbusinessdepositsandpersonalGICs.
Q12007vs.Q42006Netincomeincreased$102million,or13%,comparedtothepriorquarter.TheincreasewaslargelyduetostrongresultsinourGlobal Insurancebusiness,reflectingthefavourableimpactsofanadjustmentrelatedtothereallocationofforeigninvestmentcapitalandanetactuarialliabilityadjustmentthisquarter,aswellasimprovedclaimsexperienceacrossmostproductlines.StrongrevenuegrowthinWealth Managementalsocontributedtotheincrease.Thesefactorswerepartiallyoffsetbyhigherprovisionsforcreditlossesincreditcardspartiallyreflectingportfoliogrowthandincreasedstaffingcosts.
Totalrevenueincreased$61million,or2%,fromtheprevi-ousquarter.Excludingthenegativeimpactrelatedtotheimple-mentationofthenewfinancialinstrumentsaccountingstandards,andafavourableadjustmentrelatedtothereallocationofforeigninvestmentcapital,totalrevenueincreased$91million,or3%.Theincreasewasprimarilyduetostrongvolumegrowthinourwealthmanagementanddomesticinsurancebusinesses.
Netinterestmargindeclined4bpsto3.26%,mainlyduetolowerspreadsonbusinessdepositsandcreditcards.
Non-interestexpensewasup$9million,or1%,largelyasaresultofaseasonalincreaseinbenefits,andhighervariablecom-pensationonstrongerwealthmanagementrevenue.Theincreasewasmainlyoffsetbylowermarketingandadvertisingcostsduetoseasonalfactors.
Totalprovisionforcreditlossesincreased$9million,or5%,largelyreflectinghigherprovisionsincreditcardsinpartreflect-ingportfoliogrowth.Theincreasewaspartlyoffsetbylowerprovisionsinoursmallbusinessandcommercialloanportfolios.
Insurancepolicyholderbenefits,claimsandacquisitionexpensedecreased$95million,or16%,fromthepriorquarter.Excludingthepositiveimpactrelatedtotheimplementationofthenewfinancialinstrumentsaccountingstandards,insurancepolicyholderbenefits,claimsandacquisitionexpensedecreased$26million,or4%,fromthepriorquarter.Thedecreasewaslargelyattributabletoafavourablenetactuarialliabilityadjust-mentthisquarter,whichincludeda$38millioncumulativevaluationadjustmentrelatedtopriorperiods.ImprovedclaimsexperienceandlowerU.S.annuitysalesalsocontributedtothedecrease.Thesefactorswerepartiallyoffsetbygrowthinourdomesticbusiness.
RoyalBankofCanadaFirstQuarter200721
RBCU.S.andInternationalPersonalandBusinessconsistsofourpersonalandbusinessbankingandretailbrokeragebusinessesintheU.S.,bankingintheCaribbean,andprivatebankinginter-nationally.ThissegmentcomprisesWealth Management,whichincludesGlobalPrivateBankingandcertainactivitiesofRBCDain
Rauscher,andBanking,whichincludesourRBCCenturaandCaribbeanbankingoperations.
OnDecember8,2006,weacquiredFlag,expandingourBanking business.
Asatorforthethreemonthsended
January 31 October31 January31
(C$millions,exceptnumberofandpercentageamounts)(1) 2007 2006 2006
Netinterestincome $ 302 $ 279 $ 279 Non-interestincome 501 461 431Total revenue $ 803 $ 740 $ 710 Non-interestexpense 611 575 567 Provisionforcreditlosses(PCL) 10 5 10 Businessrealignmentcharges – 1 –Net income before income taxes and non-controlling interest in subsidiaries $ 182 $ 159 $ 133Net income $ 149 $ 126 $ 101
Revenue by business line WealthManagement $ 527 $ 466 $ 446 Banking 276 274 264
Key ratios Returnonequity(ROE)(2) 15.3% 14.8% 13.3% Returnonriskcapital(RORC)(2) 26.7% 24.0% 21.6%Selected average balance sheet and other information (3) Totalassets $ 43,700 $ 40,100 $ 36,800 Loansandacceptances 23,000 21,000 20,600 Deposits 37,100 34,200 31,900 Attributedcapital(2) 3,800 3,350 3,000 Riskcapital(2) 2,150 2,050 1,850 Assetsunderadministration 333,900 307,900 287,300 Assetsundermanagement 60,900 53,400 49,200Credit information Grossimpairedloansasa%ofaverageloansandacceptances .81% .89% .81%Other information Numberofemployees(full-timeequivalent) 11,660 11,238 11,020
(US$millions)
Netinterestincome $ 262 $ 250 $ 241 Non-interestincome 431 413 374Total revenue $ 693 $ 663 $ 615 Non-interestexpense 526 517 490 Provisionforcreditlosses(PCL) 9 4 9 Businessrealignmentcharges – 1 –Net income before income taxes and non-controlling interest in subsidiaries $ 158 $ 141 $ 116Net income $ 128 $ 114 $ 88
Revenue by business line WealthManagement $ 454 $ 417 $ 387 Banking $ 239 $ 246 $ 228
(1) Inpriorquarters,resultsofthissegmentwerereportedonacontinuingoperationsbasis.(2) AverageattributedcapitalandReturnonequityarecalculatedusingmethodsintendedtoapproximatetheaverageofthedailybalancesfortheperiod.SegmentReturnonequity,Averageriskcapital
andReturnonriskcapitalarenon-GAAPfinancialmeasures.Forfurtherdiscussionandreconciliation,refertotheKeyperformanceandnon-GAAPmeasuressection.(3) Averageamountsarecalculatedusingmethodsintendedtoapproximatetheaverageofthedailybalancesfortheperiod.
Q12007vs.Q12006Netincomeincreased$48million,or48%,fromtheprioryear.InU.S.dollars,netincomewasupUS$40million,or45%,largelydrivenbystronggrowthreflectingthesuccessfulexecutionofourgrowthinitiativesincludingtheacquisitionofFlag.ThesefactorswerepartiallyoffsetbyhigherstaffingcostsinsupportofourgrowthinitiativesincludingtheacquisitionofFlagandincreasedvariablecompensationprimarilyinWealth Management onstron-gerrevenue.
Revenueincreased$93million,or13%,overtheprioryear.InU.S.dollars,revenuewasupUS$78million,or13%,primarilyduetostronggrowthinfee-basedclientassetsandhigherclienttransactionvolumesinWealth Managementandimprovedvol-umegrowthinloansanddepositsacrossallbusinesses.
Wealth Managementrevenueimproved$81million,or18%.InU.S.dollars,Wealth ManagementrevenuewasupUS$67mil-lion,or17%.Theimprovementwasmainlyduetocontinuedstronggrowthinfee-basedclientassets,reflectingbothstrongequitymarketgrowthandaggressiverecruitmentofhigh-performing
RBCU.S.andInternationalPersonalandBusiness
22RoyalBankofCanadaFirstQuarter2007
financialconsultants.TheincreasealsoreflectedaUS$14millionforeignexchangetranslationgainoncertaindeposits,theinclu-sionofanadditionalmonthofresultsrelatedtotheacquisitionofAbacusFinancialGroupLimited(Abacus)andhigherclienttransactionvolumesandstronggrowthinloansanddeposits.Thesefactorswerepartlyoffsetbyalowergainresultingfromthefairvaluingofcertainsecuritiesheldtoeconomicallyhedgethestock-basedcompensationplanatRBCDainRauscher(whichisoffsetbylowerstock-basedcompensationnotedinnon-interestexpensebelow).
Bankingrevenueincreased$12million,or5%.InU.S.dollars,BankingrevenueincreasedUS$11million,or5%,duetosolidgrowthinloananddepositvolumesprimarilyreflectingouracquisitionofFlag,growthinfee-basedactivitiesandhighermortgageoriginationactivity.ThesefactorswerepartiallyoffsetbyaUS$18millionlossonthesaleofcertaininvestmentsecuri-tiesduetothestrategicrestructuringofRBCCentura’sinvest-mentportfoliototakeadvantageofmarketopportunitiesandgrowthinourbalancesheet.
Non-interestexpenseincreased$44million,or8%,overtheprioryear.InU.S.dollars,non-interestexpenseincreasedUS$36million,or7%,largelyreflectinghigherstaffingandoccu-pancycostsinsupportofourgrowthinitiatives,includingtheacquisitionofFlagand17additionalde novobranchesinRBCCenturaandCaribbeancomparedtotheprioryear.Theinclusionofanadditionalmonthofcostsrelatedtotheacquisi-tionofAbacusandhighervariablecompensation,primarilyinWealth Management,commensuratewithstrongerrevenuealsocontributedtotheincrease.Thesefactorswerepartiallyoffsetbylowerstock-basedcompensationinRBCDainRauscher.Allotherexpensecategorieswerelargelyunchangedcomparedtotheprioryearreflectingcontinuedcostmanagementefforts.
Provisionforcreditlossesof$10millionwasflatcomparedtotheprioryear.InU.S.dollars,theprovisionofUS$9millionwasunchangedfromayearagoaslowerprovisionsinourRBCCenturaloanportfolioreflectingstrongcreditqualitywereoffsetbyincreasedprovisionsinourCaribbeanportfolio.
Averageassetsincreased$7billion,or19%.InU.S.dollarsaverageassetsgrewUS$6billion,or18%,largelyreflectinggrowthatGlobalPrivateBankingduemainlytotheacquisitionofAbacus.StrongloangrowthatRBCCentura,includingtheacquisi-tionofFlag,alsocontributedtotheincrease.
Q12007vs.Q42006Netincomeincreased$23million,or18%,fromthepreviousquarter.InU.S.dollars,netincomewasupUS$14million,or12%.Theimprovedresultsweredrivenbyrevenuegrowthprimarilyinourwealthmanagementbusinessesandthereversalrecordedthisquarterofincometaxesexpensedinpriorperiods.ThiswaspartiallyoffsetbytheUS$18millionlossonthesaleofcertaininvestmentsecurities.
Revenueincreased$63million,or9%,overthepriorquarter.InU.S.dollars,revenuewasupUS$30million,or5%.Theincreasewasmainlyduetohigherclienttransactionvolumesandcontin-uedgrowthinfee-basedclientassetsinWealth Management.AUS$14millionforeignexchangetranslationgainandvolumegrowthinloansanddepositsalsocontributedtotheincrease.ThesefactorswerepartiallyoffsetbytheUS$18millionlossonthesaleofcertaininvestmentsecurities.
Non-interestexpenseincreased$36million,or6%,overthepriorquarter.InU.S.dollars,non-interestexpenseincreasedUS$9million,or2%,largelyreflectinghigherstaffingcosts,theinclusionofFlagandhigherstock-basedcompensationatRBCDainRauscher.Thesefactorswerepartiallyoffsetbylowervariablecompensation.
Provisionforcreditlosseswasup$5million.InU.S.dollars,theincreasewasUS$5million,reflectinghigherprovisionsinourCaribbeanloanportfolio.
RoyalBankofCanadaFirstQuarter200723
Asatorforthethreemonthsended
January 31 October31 January31
(C$millions,exceptpercentageamounts) 2007 2006 2006
Netinterestincome(teb)(1) $ 78 $ 14 $ 68 Non-interestincome 1,322 1,146 945Total revenue (teb) (1) $ 1,400 $ 1,160 $ 1,013 Non-interestexpense 877 770 686 Provisionfor(recoveryof)creditlosses(PCL) (8) – (85) Businessrealignmentcharges – (1) –Net income before income taxes (teb) and non-controlling interest in subsidiaries (1) $ 531 $ 391 $ 412Net income $ 420 $ 315 $ 330
Revenue by business line GlobalMarkets $ 804 $ 607 $ 574 GlobalInvestmentBankingandEquityMarkets 352 319 274 RBCDexiaInvestorServices(2) 170 155 84 Other 74 79 81
Key ratios Returnonequity(ROE)(3) 30.5% 25.8% 30.0% Returnonriskcapital(RORC)(3) 38.7% 33.4% 37.8%Selected average balance sheet and other information(4) Totalassets $ 306,900 $ 283,100 $ 252,800 Tradingsecurities 155,900 137,800 132,500 Loansandacceptances 29,300 26,200 20,500 Deposits 139,300 125,100 115,900 Attributedcapital(3) 5,400 4,750 4,300 Riskcapital(3) 4,250 3,700 3,400 Assetsunderadministration–RBC 5,400 4,700 3,300 Assetsunderadministration–RBCDexiaIS(5) 2,050,000 1,893,000 1,738,100Credit information Grossimpairedloansasa%ofaverageloansandacceptances .22% .23% .55% SpecificPCLasa%ofaverageloansandacceptances (.11%) .00% (.68%)Other information Numberofemployees(full-timeequivalent) 3,140 2,938 2,812
(1) Taxableequivalentbasis.Forfurtherinformation,refertotheHowwemeasureandreportourbusinesssegmentssection.(2) OnJanuary2,2006,wecombinedourInstitutional & Investor Services(IIS)businesswiththeinstitutionalinvestorservicebusinessofDexiaforminganewcompanyRBCDexiaInvestorServices.
Giventhesimilarityofthesebusinesses,wehavedisclosedrevenuefromourpriorbusiness,IIS,andour50%proportionateownershipofRBCDexiaISonthesamelineforcomparativepurposes.AsRBCDexiaISreportsonacalendarquarterthereisaonemonthlaginthereportingofitsearnings.ComparativeamountsforthethreemonthsendedJanuary31,2006onlyrepresenttwomonthsofrevenuefromIIS.
(3) AverageattributedcapitalandReturnonequityarecalculatedusingmethodsintendedtoapproximatetheaverageofthedailybalancesfortheperiod.SegmentReturnonequity,AverageriskcapitalandReturnonriskcapitalarenon-GAAPfinancialmeasures.Forfurtherdiscussionandreconciliation,refertotheKeyperformanceandnon-GAAPmeasuressection.
(4) Averageamountsarecalculatedusingmethodsintendedtoapproximatetheaverageofthedailybalancesfortheperiod.(5) Assetsunderadministration–RBCDexiaISrepresentsthetotalassetsunderadministration(AUA)ofthejointventure,ofwhichwehavea50%ownershipinterest.RBCDexiaISwascreatedon
January2,2006,andwecontributedAUAof$1,400billiontothejointventureatthattime.AsRBCDexiaISreportsonaone-monthlag,Assetsunderadministration–RBCDexiaISareasatDecember31,2006.
Q12007vs.Q12006Netincomeincreased$90million,or27%,fromayearagolargelydrivenbybroad-basedgrowthacrossmostbusinessesandproductcategoriesandalowereffectivetaxrate.Theincreaseinrevenueprimarilyreflectedhighertradingresultsandstrongerequityanddebtoriginationactivity.ThecurrentquarterwasalsofavourablyimpactedbytheinclusionofafullquarterofresultsfromRBCDexiaIScomparedtothetwomonthsofresultsfromourformerbusinessInvestment & Institutional Services(IIS)recordedinthepriorperiod.Thesefactorswerepartiallyoffsetbyhighervariablecompensationonstrongerbusinessperformanceanda$50milliongeneralallowancereversalrecordedintheprioryear.
Totalrevenue(teb)rose$387million,or38%,fromtheprioryearlargelyduetohigherequityanddebttradingresultsmainlyduetosignificanttransactionsinourInfrastructureFinancegroup,increasedrevenuefromcertainequitytradingstrategiesandtheinclusionofanadditionalmonthofRBCDexiaISresults.HigherCanadianandU.S.equityoriginationactivity,increaseddistributionsfromprivateequityinvestmentsandimprovedU.S.debtoriginationactivityalsocontributedtotheincrease.ThesefactorswerepartiallyoffsetbylowerM&Afees.Totalrevenue(teb)excludingVIEswas$1,389million,up$368million,or36%,fromayearago.ForareconciliationofTotalrevenue(teb)excludingVIEsrefertotheKeyperformanceandnon-GAAPmeasuressection.
RBCCapitalMarketsprovidesawiderangeofcorporateandinvestmentbanking,salesandtrading,researchandrelatedproductsandservicestocorporations,publicsectorandinstitu-tionalclientsinNorthAmericaandspecializedproductsandser-vicesinselectglobalmarkets.Thissegmentconsistsoftwomainbusinesses,GlobalMarketsandGlobalInvestmentBankingandEquityMarkets,andour50%ownershipinRBCDexiaIS.AllotherbusinessesaregroupedunderOther.
InJanuary2007,weacquiredCarlinFinancialGroup(RBCCarlin)andDaniels&Associates,L.P.(RBCDaniels),build-ingonourinvestmentbankingandtradingcapabilitiesintheU.S.andglobally.ThefinancialresultsofRBCCarlinandRBCDanielsarereportedinGlobal Investment Banking and Equity Markets.
RBCCapitalMarkets
24RoyalBankofCanadaFirstQuarter2007
Global Marketsrevenuewasup$230million,or40%,largelyduetohigherequityanddebttradingresultsmainlyduetosignif-icanttransactionsinourInfrastructureFinancegroup,increasedrevenuefromcertainequitytradingstrategiesandimproveddebtoriginationactivitymainlyintheU.S.
Global Investment Banking and Equity Marketsrevenueincreased$78million,or28%,mostlyduetoincreasedCanadianandU.S.equityorigination,higherdistributionsfromprivateequityinvestmentsandimprovedU.S.debtoriginationactivity,partiallyoffsetbylowerM&Afeesastheprioryearincludedseveralnotabledealswhichwerenotrepeatedthisquarter.
RBC Dexia ISrevenuewas$170million,whichreflectedhigherdepositbalancesandstrongbusinessactivity.Thiscom-paresto$84millionintheprioryearwhichreflectedonlytwomonthsofresultsfromourformerbusiness,IIS.
Otherdecreased$7million,or9%,fromayearagolargelyduetotheprioryeargainsfromthesaleofconvertibleassetsinourGlobalCreditbusinesscomparedtofairvaluelossesassociatedwithcreditprotectionderivativecontractsusedtoeconomicallyhedgeourcorelendingportfoliorecordedinthecurrentquarter.
Non-interestexpenseincreased$191million,or28%,fromayearagomainlyduetohighervariablecompensationonstrongerbusinessperformance,andtheinclusionofanadditionalmonthofcostsinRBCDexiaIS.
Recoveryofcreditlosseswas$8millioncomparedtoarecoveryof$85millionayearagowhichincludeda$50millionreversalofthegeneralallowanceanda$25millionrecoveryofEnron-relatedloanspreviouslywrittenoff.
Incometaxes(teb)wereup$10million,or11%,largelycommensuratewithhigherearningspartiallyoffsetbythecur-rentperiodreversalofincometaxespreviouslyexpensed,duetotheresolutionofcertaintaxaudits,andthewrite-offofdeferredtaxesrecordedinthepriorquarterduetothetransferoftheIISbusinesstoRBCDexiaIS.
Averageassetsincreased$54billion,or21%,comparedtoayearagolargelyresultingfromahigherleveloftradingsecuritiesrelatedtogrowthincertainequitytradingstrategiesandnewbusinessinitiatives,andgrowthincorporateloansprimarilyresultingfromimprovedinvestmentbankingactivityandgrowthintheU.S.
Q12007vs.Q42006Netincomeincreased$105million,or33%,comparedtothepriorquarterdrivenbyrevenuegrowthacrossmostbusinessesreflectinghighertradingrevenueduetosignificanttransactions,improvedclientactivityandfavourablemarketconditions.Thesefactorswerepartiallyoffsetbyhighervariablecompensationonstrongerbusinessperformance.
Totalrevenue(teb)rose$240million,or21%,fromthepriorquarterlargelyduetostrongerdebtandequitytradingresults,higherequityoriginationinboththeU.S.andCanada,andincreaseddistributionsfromprivateequityinvestments.ImprovedbusinessvolumesatRBCDexiaISalsocontributedtotheincrease.ThesefactorswerepartiallyoffsetbylowerM&AfeesmainlyinCanadaandweakerdebtoriginationactivity.Totalrevenue(teb)excludingVIEswas$1,389million,up$233million,or20%,fromthepriorquarter.
Non-interestexpenseincreased$107million,or14%,mainlyduetohighervariablecompensationonstrongerbusinessperformance.
Recoveryofcreditlosseswas$8millioninthecurrentquartercomparedtonorecoveryinthepriorquarter.
Incometaxes(teb)wereup$33millionoverthepriorquartercommensuratewiththehigherearningsbeforeincometaxesandbusinessmix.
Averageassetsincreased$24billion,or8%,comparedtothepriorquarterlargelyresultingfromahigherleveloftradingsecuritiesinsupportofgrowthincertainequitytradingstrategiesandhighercorporateloanvolumeslargelyonimprovedcapitalmarketsactivity.
CorporateSupportsegmentactivitiesincludeourGlobalTechnologyandOperationsGroup,CorporateTreasury,Finance,HumanResources,RiskManagement,InternalAuditandotherGlobalFunctions,thecostsofwhicharelargelyallocatedtothebusinesssegments.OurCorporateSupportteamsemployover18,000full-timeequivalentstaff.
ThereportedresultsfortheCorporateSupportsegmentmainlyreflectactivitiesthatareundertakenforthebenefitoftheorganizationthatarenotallocatedtothebusinesssegmentssuchasenterprisefunding,securitizationandthenetearnings
associatedwithunattributedcapital.TheresultsalsoincludeconsolidationadjustmentssuchastheeliminationofthetebadjustmentsrecordedinRBCCapitalMarketsrelatedtothegross-upofincomefromCanadiantaxablecorporatedividendstotheirtaxequivalentvalue.Theseadjustmentsarerecordedinnetinterestincomeandoffsetintheprovisionforincometaxes.
Duetothenatureofactivitiesandconsolidatedadjustmentsreportedinthissegment,webelievethataperiodoverperiodtrendanalysisisnotrelevant.Thefollowingidentifiesthesignifi-cantitemsaffectingthereportedresultsineachperiod.
CorporateSupport
RoyalBankofCanadaFirstQuarter200725
Asat
January 31 October31 January31
(C$millions) 2007 (1) 2006 2006
Interest-bearing deposits with banks $ 7,637 $ 10,502 $ 10,913Securities Trading $ 169,030 $ 147,237 $ 131,551 Investment 27,821 37,632 34,107Total securities $ 196,851 $ 184,869 $ 165,658Assets purchased under reverse repurchase agreements and securities borrowed $ 67,744 $ 59,378 $ 47,564Loans Residentialmortgages $ 98,527 $ 96,675 $ 91,776 Personal 45,787 44,902 41,337 Creditcards 7,553 7,155 5,468 Businessandgovernment 67,851 61,207 55,615Total loans $ 219,718 $ 209,939 $ 194,196Other assets $ 77,242 $ 69,100 $ 66,300Total assets $ 571,615 $ 536,780 $ 487,874Deposits $ 365,606 $ 343,523 $ 314,872Other liabilities $ 172,261 $ 160,575 $ 141,036Non-controlling interest in subsidiaries $ 1,799 $ 1,775 $ 1,916Shareholders’ equity $ 23,458 $ 22,123 $ 20,235
(1) TheamountsincludedthetransitionadjustmentrelatedtotheimplementationofthenewfinancialinstrumentsaccountingstandardseffectiveNovember1,2006.Forfurtherdetails,refertotheImpactofnewfinancialinstrumentsaccountingstandardssection.
Q12007Netincomeof$48millioninthequartermainlyreflectedincometaxamountswhichwerelargelyrelatedtoenterprisefundingactivitiesnotallocatedtothebusinesssegmentsandgainsrelatedtosecuritizationactivity.Interestearnedontaxoverpaymentsreceivedandthecurrentperiodnetfavourableimpactattributabletotheineffectiveportionofcertaincashflowhedgesarisingfromtheimplementationofthenewfinancialinstrumentsaccountingstandardsinthecurrentquarteralsocontributedtotheincrease.Thesefactorswerepartiallyoffsetbya$20millionafter-taxcumu-lativeadjustmentforlossesresultingfromthefairvaluingofcer-tainderivativesthatdidnotqualifyforhedgeaccounting.
Q42006Netincomeof$47millioninthequartermainlyreflectedincometaxamountswhichwerelargelyrelatedtoenterprisefundingactivitiesnotallocatedtothebusinesssegmentsandgainsresult-ingfromthefairvaluingofcertainderivativesrelatedtocertaineconomichedges.Thesefactorswerepartiallyoffsetbyanamountaccruedrelatedtoaleasedspacewhichwewillnotoccupyandexpecttosubleaseataratelowerthanourcontractedrate.
Q12006Netincomeof$72millionlargelyreflectedthefavourableresolu-tionofanincometaxauditrelatedtoprioryearswhichresultedina$70millionreversalofamountsaccruedinprioryears.
Asatorforthethreemonthsended
January 31 October31 January31
(C$millions) 2007 2006 2006
Netinterestincome(teb)(1) $ (101) $ (129) $ (108) Non-interestincome 50 93 47Total revenue (teb) (1) $ (51) $ (36) $ (61) Non-interestexpense 4 44 (4) Recoveryofcreditlosses (22) (19) (20)Net loss before income taxes and non-controlling interest in subsidiaries (teb) (1) $ (33) $ (61) $ (37)Net income $ 48 $ 47 $ 72
Selected average balance sheet and other information(2) Totalassets $ (5,600) $ (5,700) $ (4,500) Attributedcapital(3) 2,850 3,450 3,250Securitization Totalsecuritizationssoldandoutstanding(4) 18,732 17,781 15,172 Newsecuritizationactivityintheperiod(5) 1,438 2,059 2,733
(1) Taxableequivalentbasis.Forfurtherinformation,refertotheHowwemeasureandreportourbusinesssegmentssection.TheseamountsincludedtheeliminationoftheadjustmentsrecordedinRBCCapitalMarketsrelatedtothegross-upofcertaintax-advantagedincome(Canadiantaxablecorporatedividends).TheamountforthethreemonthsendedJanuary31,2007,was$70million(October31,2006–$50million;January31,2006–$37million).
(2) Averageamountsarecalculatedusingmethodsintendedtoapproximatetheaverageofthedailybalancesfortheperiod.(3) Averageattributedcapitalisanon-GAAPfinancialmeasure.Forfurtherdiscussionandreconciliation,refertotheKeyperformanceandnon-GAAPmeasuressection.(4) TotalsecuritizationssoldandoutstandingarecomprisedofCreditcardloansandResidentialmortgages.(5) NewsecuritizationactivitycomprisesResidentialmortgagesandCreditcardloanssecuritizedandsoldintheperiod.Forfurtherdetails,refertoNote6toourunauditedInterimConsolidatedFinancial
Statements.ThisamountdoesnotincludecommercialmortgagesecuritizationactivityofRBCCapitalMarkets.
Financialcondition
Balancesheetdataandanalysis
26RoyalBankofCanadaFirstQuarter2007
Q12007vs.Q12006Total assetsincreased$84billion,or17%,fromayearago.Theincreasewasbroad-basedacrossmostassetcategories,withthemajorityattributabletogrowthinourtradingandlendingactivities.
Interest-bearing deposits with banksdeclined$3billion,or30%,fromtheprioryear,largelyreflectingashiftinourportfoliomixtohigheryieldingassets.
Total securitieswereup$31billion,or19%,fromayearagoprimarilyresultingfroma$37billionincreaseinTradingsecurities.TheincreaseinTradingsecuritieslargelyreflectedgrowthofourtradingbusinesses.CertainsecuritiespreviouslyclassifiedasInvestmentsecuritiesarenowclassifiedasTradingsecuritieswiththeimplementationofthenewfinancialinstrumentsaccountingstandards.Forfurtherdetails,refertotheImpactofthenewfinancialinstrumentsaccountingstandardssection.
Assets purchased under reverse repurchase agreements and securities borrowedincreased$20billion,or42%,fromayearago.Theincreaseprimarilyreflectedhigherbalancesinsupportofcertainequityanddebttradingstrategies,andincreasedclientbalances.
Total loansincreased$26billion,or13%,fromayearagoasaresultofincreasesacrossallcategories.Thisreflectedstrongloandemanddrivenbythegenerallyfavourableeconomicconditions,andoursuccessfulexecutionofgrowthstrategies.
Residential mortgages wereup$7billion,or7%,despitetheoffsettingeffectof$13billionofsecuritizationsoverthelast12months.Theincreaselargelyreflectedgrowthinourdomesticbusiness.
Personal loansincreased$4billion,or11%,primarilyduetogrowthinourHomelineproducts.
Credit cards increased$2billion,or38%,largelyreflectingsuccessfulsaleseffortsandgrowthinclientspendingandbalances.Theincreasealsoreflected$650millionofpreviouslysecuritizedamountswhichmaturedovertheperiod,resultingintheloansbeingrecordedbackonourbalancesheet.
Business and government loansincreased$12billion,or22%,primarilyattributabletotheacquisitionofFlag,strongloangrowthinRBCCentura,increasedloansrelatedtoinvestmentbankingactivityandgeneralbusinessgrowth.
Other assetswereup$11billion,or17%.Theincreasewasmainlyattributabletoderivativeslargelyreflectingchangesinforeignexchangerates,andincreasedbusinessactivityinreceivablesfrombrokersanddealers,andcustomers’liabilityunderacceptances.
Depositsincreased$51billion,or16%,fromayearago.Thiswaslargelydrivenbyhigherbusinessandgovernmentdepositsinsupportofincreasedbusinessactivities.Theincreasealsoreflectedhigherbankdepositsinsupportoffundingrequirementsforourtradingandlendingactivities.Personaldepositsalsoincreasedprimarilyreflectingstrongersalesoffixed-termdepositproducts.
Other liabilitiesrose$31billion,or22%,fromlastyear,pri-marilyduetoincreasedbusinessactivitiesrelatedtorepurchaseagreementsandsecuritiessoldshort.
Shareholders’ equityincreased$3billion,or16%,overtheprioryear,largelyreflectingstrongearningsgrowth,netofdividends,anda$.9billionnetissuanceofpreferredsharesovertheperiod.
Q12007vs.Q42006Total assets increased$35billion,or6%,fromthepriorquarter.Theincreasewasbroad-basedacrossmostassetcategories,withthemajorityattributabletogrowthinourtradingandlendingactivities.
Interest-bearing deposits with banksdecreased$3billion,or27%,fromthepriorquarter.Thedecreaseprimarilyreflectedashiftinourportfoliomixtomoreliquidandhigheryieldingassets.
Total securitieswereup$12billion,or6%,fromthepriorquarter,primarilyreflectingahigherlevelofTradingsecuritiesinsupportofgrowthinourtradingbusinesses.CertainsecuritiespreviouslyclassifiedasInvestmentsecuritiesarenowclassifiedasTradingsecuritieswiththeimplementationofthenewfinan-cialinstrumentsaccountingstandards.
Assets purchased under reverse repurchase agreements and securities borrowedincreased$8billion,or14%,fromthepriorquarter,generallyinsupportofcertainequityanddebttradingstrategies,andincreasedclientbalances.
Total loans rose$10billion,or5%,fromthepriorquarterasaresultofincreasesacrossallcategories.Thiswaslargelyaresultofincreasedcorporateloansrelatedtoinvestmentbankingactivity,strongloangrowthinRBCCenturaincludingtheacquisi-tionofFlag.Higherdomesticresidentialmortgages(despitetheoffsettingeffectof$2.5billionofsecuritizationsthisquarter)andpersonalsecuredcreditlinesunderpinnedbyresilientdomestichousingmarketactivitiesalsocontributedtotheincrease.
Other assetswereup$8billion,or12%,fromthepriorquar-ter.Theincreasewasmainlyattributabletoderivativesprimarilyduetochangesinforeignexchangerates,andincreasedbusinessactivityinreceivablesfrombrokersanddealers,andcustomers’liabilityunderacceptances.
Depositsincreased$22billion,or6%,fromthepriorquarter,asaresultofgrowthacrossallcategories.Theincreasewaslargelydrivenbygrowthinbusinessandgovernmentdeposits,primarilyreflectingnewissuancesofdepositnotesinthequarter,theacquisitionofFlag,andbusinessgrowthinourU.S.andinternationaloperations.Higherbankandpersonaldepositsalsocontributedtotheincrease.
Other liabilities increased$12billion,or7%,fromthepriorquarter,primarilyreflectingincreasedbusinessactivitiesrelatedtosecuritiessoldshortandderivativesduetochangesinforeignexchangerates.
Shareholders’ equitywasup$1billion,or6%,overthepriorquarter,onstrongearningsgrowth,netofdividends.
Weactivelymanageourcapitaltobalancethedesiretomaintainstrongcapitalratiosandhighdebtratingswiththedesiretopro-videstrongreturnstoourshareholders.Instrivingtoachievethisbalance,weconsidertherequirementsofregulators,ratingagen-cies,depositorsandshareholders,aswellasourfuturebusinessplans,peercomparisonsandourpositionrelativetointernaltargetsforcapitalratios.Additionalconsiderationsincludethecostsandtermsofcurrentandpotentialcapitalissuancesandprojectedcapitalrequirements.Forfurtherdetails,refertopages64to68ofour2006AnnualReport.
Capitalmanagement
RegulatorycapitalandcapitalratiosCapitallevelsforCanadianbanksareregulatedpursuanttoguidelinesissuedbytheOSFI,basedonstandardsissuedbytheBankofInternationalSettlements.
OnNovember1,2006,weadopted,onaprospectivebasis,threenewaccountingstandardsthatwereissuedbythe CICArelatedtotheaccountingforfinancialinstruments.Forfurtherdetails,refertotheAccountingpoliciesandestimatessectionandNote1ofourunauditedInterimConsolidatedFinancialStatements.
RoyalBankofCanadaFirstQuarter200727
Asat
January 31 October31 January31
(C$millions,exceptpercentageamounts) 2007 2006 2006
Tier1capital $ 22,263 $ 21,478 $ 19,391 Totalcapital $ 27,035 $ 26,664 $ 26,103 Totalrisk-adjustedassets(1) $ 242,290 $223,709 $ 204,247Capital ratios Tier1capitalratio 9.2% 9.6% 9.5% Totalcapitalratio 11.2% 11.9% 12.8%
(1) CalculatedusingguidelinesissuedbytheOSFI.
Q12007vs.Q12006AsatJanuary31,2007,theTier1capitalratiowas9.2%andtheTotalcapitalratiowas11.2%.TheTier1capitalratiowasdown30bpsfromthesameperiodayearagoduetogrowthinrisk-adjustedassets,whichexceededtheimpactofstronginternalcapitalgeneration.TheTotalcapitalratiowasdown160bpsfromthesameperiodayearago,mainlyduetogrowthinrisk-adjustedassetsandnetcapitalredemption.Risk-adjustedassetsincreased$38billionfromthesameperiodayearagoprimarilyreflectingthegrowthinloans,commitmentstoextendcredit,marketriskandsecurities.
Q12007vs.Q42006TheTier1capitalratiowasdown40bpsfromthepreviousquar-ter,reflectingstronggrowthinrisk-adjustedassetsprimarilyattributabletobusinessgrowth.TheTotalcapitalratiowasdown70bpscomparedtotheendoflastquarter,primarilyduetogrowthinrisk-adjustedassetsandnetcapitalredemption.Theincreaseinrisk-adjustedassetsof$19billioncomparedtotheendoflastquarterwaslargelyduetogrowthinloans,marketriskandsecurities.
Sharedataanddividends
Asat
January 31 October31 January31
2007 2006 2006 Dividends Dividends Dividends Number of declared Numberof declared Numberof declared(C$millions,exceptnumberofsharesandpershareamounts) shares (000s) Amount per share shares(000s) Amount pershare shares(000s) Amount pershare
First Preferred Non-cumulativeSeriesN(1) 12,000 $ 300 $ .29 12,000$ 300 $ .29 12,000$ 300$ .29 Non-cumulativeSeriesO – – – 6,000 150 .34 6,000 150 .34 Non-cumulativeSeriesS – – – – – .18 10,000 250 .38 Non-cumulativeSeriesW(1) 12,000 300 .31 12,000 300 .31 12,000 300 .31 Non-cumulativeSeriesAA 12,000 300 .28 12,000 300 .28 – – Non-cumulativeSeriesAB 12,000 300 .29 12,000 300 .41 – – Non-cumulativeSeriesAC(2) 8,000 200 .36 – – – – Non-cumulativeSeriesAD(2) 10,000 250 – – – – – Non-cumulativeSeriesAE(2) 10,000 250 – – – – –
Total First Preferred $ 1,900 $ 1,350 $ 1,000
Common shares outstanding 1,275,950 $ 7,216 $ .40 1,280,890$ 7,196 $ .40 1,290,983$ 7,189$ .32Treasury shares – preferred (141) (3) (94) (2) (118) (3)Treasury shares – common (3,108) (114) (5,486) (180) (6,224) (199)Stock options Outstanding 31,261 32,243 36,296 Exercisable 26,541 26,918 30,858
(1) AsatJanuary31,2007,theaggregatenumberofcommonsharesissuableontheconversionoftheFirstPreferredSharesSeriesNwasapproximately5,840,000.AsatJanuary31,2007,theFirstPreferredSharesSeriesWwasnotyetconvertible.
(2) Thesepreferredsharesdonothaveconversionoptions.Forfurtherdetails,refertotheSelectedcapitalmanagementactivitysection.
AsatFebruary23,2007,thenumberofoutstandingcommonsharesandstockoptionswere1,274,339,000and30,747,000,
respectively.Forfurtherdetails,refertoNote8toourunauditedInterimConsolidatedFinancialStatements.
Theimpactoftheadoptionofthestandardsonregulatorycapitalandrisk-adjustedassetsisdiscussedbelow:
Regulatory capitalUponadoptionofthenewstandards,Shareholders’equitywasreducedthroughadjustmentstoRetainedearningsandthecreationofbalancesinAccumulatedothercomprehensiveincome(AOCI).DetailsonthesetransitionadjustmentsaresummarizedinNote1toourunauditedInterimConsolidatedFinancialStatements.
AsprescribedbytheOSFI,certaincomponentsofAOCIareincludedinthedeterminationofregulatorycapital.AccumulatednetforeigncurrencytranslationadjustmentsareincludedinTier1capital.Netunrealizedfairvaluelossesonavailable-for-sale(AFS)equitiesaredeductedinthedeterminationofTier1capitalwhilenetunrealizedfairvaluegainsonAFSequitiesareincludedinTier2Acapital.
Risk-adjusted assetsAsprescribedbytheOSFI,balancesheetvaluesareusedtodeterminerisk-adjustedassetswiththefollowingexceptions.ForAFSdebtandloanswhicharerecordedatfairvalueonthebalancesheet,amortizedcostisusedasthebasisfordetermin-ingrisk-adjustedassets.
Thefollowingtablepresentsourregulatorycapitalandourregulatorycapitalratios.
28RoyalBankofCanadaFirstQuarter2007
Q12007vs.Q12006AttributedEconomicCapitalincreased$2.9billionfromthesameperiodayearagolargelyduetoincreasesinCreditrisk,GoodwillandintangiblesandOperationalriskcapital.TheincreasesinCreditriskandOperationalriskcapitalwerelargelyduetobusi-nessgrowthandtheimpactofourjointventureRBCDexiaIS,whichwascompletedinJanuary2006.TheincreaseinGoodwillandintangibleswasmainlyduetotheacquisitionswecompletedoverthelastyear,includingFlag,AmericanGuaranty&TrustandAbacus.ThecreationofRBCDexiaISalsocontributedtotheincreaseingoodwillandintangibles.
Q12007vs.Q42006AttributedEconomicCapitalincreased$1.7billionfromtheprevi-ousquarterlargelyduetoincreasesinGoodwillandintangibles,CreditriskandOperationalriskcapital.TheincreaseinGoodwillandintangibleswasmainlyduetotheacquisitionofFlagandtheimpactofaweakerCanadiandollaronthetranslatedvalueofU.S.dollar-denominatedbalances.TheincreasesinCreditriskcapitalandOperationalriskcapitalwereprimarilyduetobusi-nessgrowth.
Economic Capital
Asat
January 31 October31 January31
(C$millionsaveragebalances) 2007 2006 2006
Creditrisk $ 6,550 $ 6,100 $ 5,500 Marketrisk(tradingandnon-trading) 2,650 2,550 2,400 Operationalrisk 2,750 2,550 2,300 Businessandfixedassetrisk 2,000 1,800 1,700 Insurancerisk 150 150 250
Riskcapital $ 14,100 $ 13,150 $ 12,150Goodwillandintangibles 5,400 4,700 4,450
Attributedcapital(EconomicCapital) $ 19,500 $ 17,850 $ 16,600Unattributedcapital(1) 1,950 2,650 2,700
Common equity $ 21,450 $ 20,500 $ 19,300
(1) UnattributedcapitalisreportedintheCorporateSupportsegment.
Selectedcapitalmanagementactivity
Forthethree monthsended
January31
(C$millions) 2007
Dividends Common $ 511 Preferred 16 Preferredsharesissued 700 Preferredsharesredeemed (150)Treasurysharesnetsales–common 66 Repurchaseofcommonshares–NCIB (414) Repurchaseandredemptionofdebentures (485)
Q12007Tier1EffectiveNovember1,2006,werenewedournormalcourseissuerbid(NCIB)foroneyear,topurchase,forcancellation,upto40millioncommonshares.Duringthequarter,wepurchased7.6millioncommonsharesfor$414millionunderourNCIB.
OnJanuary19,2007,weissued$250millionofNon-cumulativeFirstPreferredSharesSeriesAEat$25pershare.
OnDecember13,2006,weissued$250millionofNon-cumulativeFirstPreferredSharesSeriesADat$25pershare.
OnNovember24,2006,weredeemedalloftheissuedandoutstanding$150millionNon-cumulativeFirstPreferredSharesSeriesO.
OnNovember1,2006,weissued$200millionofNon-cumulativeFirstPreferredSharesSeriesACat$25pershare.
Tier2Duringthequarter,wepurchasedUS$24millionoftheoutstand-ingUS$300millionfloating-ratedebenturesmaturingin2085.
OnNovember8,2006,weredeemedallofouroutstandingUS$400millionfloatingratesubordinateddebenturesdueNovember8,2011,for100%oftheirprincipalamountplusaccruedinteresttotheredemptiondate.
SubsequenttoJanuary31,2007,weannouncedthefollowingcapital-relatedtransaction:
OnMarch2,2007,weannouncedourintentiontoredeemallofouroutstanding$500millionsubordinateddebenturesdueJune4,2012,atparvalueplusaccruedinterest.TheredemptionisexpectedtobecompletedonJune4,2007,andwillbefinancedoutofourgeneralcorporatefunds.
EconomicCapitalEconomicCapitalisourownquantificationofrisksassociatedwithbusinessactivities.EconomicCapitalisdefinedasthecapitalrequiredtoremainsolventandinbusinessevenunderextrememarketconditions,givenourdesiretomaintainanAAdebtrating.EconomicCapitalisattributedtoeachbusinesssegmentinproportiontotherisksinherentintherespectivebusinesssegmentanddrivestheoptimizationofreturnsintermsofriskandreward.ItallowsfordirectcomparableperformancemeasurementsthroughReturnonequity(ROE)andReturnonriskcapital(RORC)whicharedescribedindetailintheKeyperfor-manceandnon-GAAPmeasuressection.Accordingly,EconomicCapitalaidsseniormanagementinresourceallocationandservesasareferencepointfortheassessmentofouraggregateriskappetiteinrelationtoourfinancialposition,recognizingthatfactorsoutsidethescopeofEconomicCapitalmustalsobetakenintoconsideration.
EconomicCapitalisanon-GAAPmeasureanditscalculationandattributioninvolvesanumberofassumptionsandjudgments.Forfurtherdetails,refertopage68ofour2006AnnualReport.
RoyalBankofCanadaFirstQuarter200729
Inthenormalcourseofbusiness,weengageinavarietyoffinancialtransactionsthat,underGAAP,arenotrecordedonourbalancesheet.Off-balancesheettransactionsaregenerallyundertakenforriskmanagement,capitalmanagementand/orfundingmanagementpurposesforourbenefitandthebenefitofourclients.Thesetransactionsgiveriseto,amongotherrisks,varyingdegreesofmarket,creditandliquidityandfundingriskwhicharediscussedintheRiskmanagementsection.Foracompletediscussionofthesetypesofarrangements,includingtheirnature,businesspurposeandimportanceseepages69to71ofour2006AnnualReport.
DerivativefinancialinstrumentsOnNovember1,2006,weadopted,onaprospectivebasis,threenewaccountingstandardsthatwereissuedbytheCICArelatedtothefinancialinstruments.ThesestandardsandtheimpactonourfinancialpositionandresultsofoperationsarediscussedintheImpactofthenewfinancialinstrumentsaccountingstandardssectionandinNote1toourunauditedInterimConsolidatedFinancialStatements.
Withtheadoptionofthesestandards,allderivatives,includingcertainderivativesthatareusedtomanageourrisksandarespecificallydesignatedandqualifyforhedgeaccounting,arerecordedontheConsolidatedBalanceSheetsatfairvalue.PriortoNovember1,2006,derivativesthatqualifiedforhedgeaccountingwerenotcarriedatfairvalueontheConsolidatedBalanceSheetsandweredisclosedasoff-balancesheetitems.
SecuritizationsWeperiodicallysecuritizeourcreditcardloansandresidentialandcommercialmortgagesprimarilytodiversifyourfund-ingsourcesandenhanceourliquidityposition.ThefollowinghighlightsthesecuritizationactivitiesforthethreemonthsendedJanuary31,2007,thatimpactedourunauditedInterimConsolidatedBalanceSheets.
Duringthefirstquarterof2007,wesecuritized$2.5billionofresidentialmortgages,ofwhich$1.4billionweresoldandtheremaining$1.1billionwereretained.Weclassified$.9billionoftheretainedsecuritiesasTradingsecuritiesand$.2billionasInvestmentsecurities.Wealsosecuritizedandsold$.3billionofcommercialmortgages.Forfurtherdetails,refertoNote6toourunauditedInterimConsolidatedFinancialStatements.
GuaranteesInthenormalcourseofbusiness,weenterintonumerousagreementswiththirdpartiesthatmaycontainfeaturesdefinedasaguarantee,includingcreditderivatives,writtenputoptions,securitieslendingindemnifications,backstopliquidityfacilities,financialstandbylettersofcredit,performanceguarantees,stablevalueproducts,creditenhancements,mortgageloanssoldwithrecourseandcertainindemnificationagreements.RefertoNote10toourunauditedInterimConsolidatedFinancialStatementsfordetailsregardingsignificantguaranteeswehaveprovidedtothirdpartiesasatJanuary31,2007.
Off-balancesheetarrangements
Ourbusinessactivitiesexposeustoawidevarietyofrisks,whichareinherentinvirtuallyallaspectsofouroperations.Ourgoalinmanagingtheserisksistoprotecttheenterprisefromanunacceptablelevelofearningsvolatilitywhilesupportingandenablingbusinessopportunities.Wedothisbyensuringthattherisksarisingfrombusinessactivitiesandtransactionsprovideanappropriatebalanceofreturnfortheriskassumedandremainwithinourriskappetite.
Ourmanagementofriskissupportedbysoundriskmanage-mentpracticesandaneffectiveriskmanagementframework.Thecornerstoneofourriskmanagementframeworkisastrongriskmanagementculture,supportedbyarobustenterprise-widesetofpolicies,proceduresandlimits,whichinvolveourriskman-agementprofessionals,businesssegmentsandotherfunctionalteams.Thispartnershipisdesignedtoensuretheongoingalign-mentofbusinessstrategiesandactivitieswithourriskappetite.
Forfurtherdetails,refertopages72to90ofour2006AnnualReport.Ourapproachtothemanagementofriskhasnotchangedsignificantlyfromthatdescribedinour2006AnnualReport.
Ourpoliciesandproceduresforrelatedpartytransactionshavenotchangedmateriallyfromthosestatedonpage42ofour2006AnnualReport.
Intheordinarycourseofbusiness,weprovidenormalbank-ingservices,operationalservicesandenterintoothertransactionswithassociatedandotherrelatedcorporations,includingourjointventureentities,ontermssimilartothoseofferedtonon-
relatedparties.Wegrantloanstodirectors,officersandotheremployeesatratesnormallyaccordedtopreferredclients.Inaddition,weofferdeferredshareandotherplanstonon-employeedirectors,executivesandcertainotherkeyemployees.Forfurtherinformation,refertoNote4toourunauditedInterimConsolidatedFinancialStatementsandtoNotes9and21ofour2006AnnualReport.
Relatedpartytransactions
Riskmanagement
30RoyalBankofCanadaFirstQuarter2007
Q12007vs.Q12006GrossimpairedloansGrossimpairedloansincreased$76million,or10%,fromayearago,largelyreflectinghigherimpairmentinoursmallbusiness,commercialandresidentialmortgageportfolios.
Consumergrossimpairedloansincreased$2million,reflect-inghigherimpairmentinresidentialmortgagesandpersonalloansinpartreflectingportfoliogrowth,whichwaslargelyoffsetbyadecreaseinimpairmentinstudentloans.
Businessandgovernmentgrossimpairedloansincreased$74million,or17%,mainlyduetohigherimpairmentinoursmallbusiness,commercialandagriculturalportfolios,partiallyoffsetbytheresolutionofpreviouslyimpairedcorporateloans.
AllowanceforcreditlossesTotalallowanceforcreditlossesincreased$25million,or2%,fromayearago.TheincreaselargelyreflectedanincreaseingeneralallowanceduetotheinclusionofFlag,whichmorethanoffsetthereductioninspecificallowanceintheperiod.Thespe-cificallowanceforcreditlossesdecreased$4million,or1%,fromtheprioryear.Thereductionwaslargelyattributabletostudentloans,partiallyoffsetbyincreasedallowanceforoursmallbusi-nessportfolio.Thegeneralallowanceincreased$29million,or2%,primarilyasaresultoftheacquisitionofFlag.
ProvisionforcreditlossesTotalprovisionforcreditlossesincreased$115million,or245%,fromayearago,primarilyreflectinga$50millionreversalofthegeneralallowanceintheprioryearandlowercorporaterecoveriesthisquarter.Higherprovisionsinourpersonalunsecuredcreditline,smallbusinessandcreditcardportfoliosinthecurrentperiod,alsocontributedtotheincrease.
Specificprovisionforcreditlossesforconsumerloansincreased$21million,or17%,fromlastyear.Theincreasewaslargelyattributabletohigherprovisionsinourpersonalunsecuredcreditlineandcreditcardportfoliosprimarilyreflectingportfoliogrowth.
Specificprovisionforcreditlossesforbusinessandgovern-mentloansincreased$39millioncomparedtotheprioryear.Theincreasemainlyreflectedhigherprovisionsinoursmallbusi-nessportfolioandlowercorporaterecoveriesastheprioryearincludeda$25millionrecoveryofEnron-relatedloanspreviouslywrittenoff.ThesefactorswerepartiallyoffsetbylowerprovisionsinourU.S.loanportfolioreflectingcontinuedstrongcreditquality.
Therewasnogeneralprovisioninthecurrentperiod.Thepriorperiodrecoveryof$55millionprimarilyreflectedthe$50millionreversalofthegeneralallowanceinlightofthestrengtheningofourcorporateloanportfolioonfavourablecreditconditions.
Creditqualityperformance
Asatorforthethreemonthsended
January 31 October31 January31
(C$millions,exceptpercentageamounts) 2007 2006 2006
Gross impaired loans (GIL) Consumer $ 356 $ 344 $ 354 Businessandgovernment 520 490 446
Totalgrossimpairedloans $ 876 $ 834 $ 800
Allowance for credit losses (ACL) Consumer $ 105 $ 103 $ 117 Businessandgovernment 176 160 168
Specificallowance $ 281 $ 263 $ 285 Generalallowance 1,253 1,223 1,224
Totalallowanceforcreditlosses $ 1,534 $ 1,486 $ 1,509
Provision for credit losses (PCL) Consumer $ 142 $ 128 $ 121 Businessandgovernment 20 29 (19)
Specificprovision $ 162 $ 157 $ 102 Generalprovision – 2 (55)
Totalprovisionforcreditlosses $ 162 $ 159 $ 47
Key credit quality ratios GILasa%ofgrossloansandacceptances .38% .38% .40%SpecificPCLasa%ofaverageloansandacceptances .29% .29% .20%Totalnetwrite-offsasa%ofaverageloansandacceptances .27% .29% .21%
Creditriskistheriskoflossassociatedwithacounterparty’sinabilitytofulfillitspaymentobligations.Weincurcreditriskinourbusinesssegmentsthroughtheextensionofcreditandothertransactionswithvariouscounterparties,includingon-andoff-balancesheetitemssuchasloans,acceptances,lettersofcreditandguarantees.
OversightofcreditriskisprovidedbytheBoardofDirectorsthroughtheConductReviewandRiskPolicyCommittee(CR&RPC).Creditriskapprovalauthoritiesareestablishedbythe
BoardofDirectorsuponrecommendationoftheCR&RPC,anddelegatedtoseniormanagement.Anytransactionsexceedingmanagement’sauthoritiesmustbeapprovedbytheCR&RPC.
GroupRiskManagement(GRM)setsouttheenterprise-widerequirementsfortheidentification,assessment,monitoringandreportingofcreditrisk.Businesssegmentsareaccountableforthecreditriskswithintheirbusinesses,workinginpartnershipwithGRMontheproperalignmentbetweenriskappetiteandbusinessstrategies.
Creditrisk
RoyalBankofCanadaFirstQuarter200731
Marketriskistheriskoflossthatresultsfromchangesininterestandforeignexchangerates,equityandcommodityprices,andcreditspreads.Weareexposedtomarketriskinourtradingactivityandourassetliabilitymanagementactivities.Thelevelofmarketrisktowhichweareexposedvariesdependingonmarketconditions,expectationsoffuturepriceandyieldmovementsandthecompositionofourtradingportfolio.Forfurtherdetails,refertopages81to84ofour2006AnnualReport.TradingactivitiesTradingmarketriskencompassesvariousrisksassociatedwithcashandrelatedderivativeproductsthataretradedininterestrate,foreignexchange,equity,creditandcommoditymarkets.
Weconducttradingactivitiesoverthecounterandonexchangesinthespot,forward,futuresandoptionsmarkets,andweofferstructuredderivativetransactions.Marketrisksassociatedwithtradingactivitiesarearesultofmarket-making,positioning,andsalesandarbitrageactivitiesintheinterestrate,
foreignexchange,equity,commodities,andcreditmarkets.Ourtradingoperationsprimarilyactasamarketmaker,executingtransactionsthatmeetthefinancialrequirementsofourclientsandtransferringthemarketriskstothebroadfinancialmarket.WealsoactasprincipalandtakeproprietarymarketriskpositionswithintheauthorizedlimitsgrantedbytheBoardofDirectors.Thetradingbookconsistsofcashandderivativepositionsthatareheldforshort-termresale,takenonwiththeintentofbenefit-ingintheshorttermfromactualorexpecteddifferencesbetweentheirbuyingandsellingpricesortolockinarbitrageprofits.Forfurtherdetails,refertopages81to83ofour2006AnnualReport.Thesepolicies,processesandmethodologieshavenotchangedmateriallyfromthosestatedinthe2006AnnualReport.
ThefollowingtableshowsourglobalValue-at-Risk(VAR)fortotaltradingactivitiesbymajorriskcategoryandthediversifica-tionrisk,whichiscalculatedasthedifferencebetweentheglobalVARandthesumoftheseparateriskfactorVARs.
Marketrisk
CreditqualityratiosThegrossimpairedloansratiodecreasedfromayearago,largelyreflectingstrongportfoliogrowth.Theincreaseinthespecificprovisionforcreditlossesratiomainlyreflectedlowercorporaterecoveries,andhigherprovisionsinoursmallbusinessportfolio.Thetotalnetwrite-offsratiorosefromtheprioryearprimarilyduetolowercorporaterecoveriesinthecurrentperiod.
Q12007vs.Q42006GrossimpairedloansGrossimpairedloansincreased$42million,or5%,comparedtothepriorquarter,reflectinghigherimpairmentinbothbusinessandgovernment,andconsumerloanportfolios.
Consumergrossimpairedloansincreased$12million,or3%,largelyduetohigherimpairmentinourpersonalloansandresidentialmortgagesinpartduetoportfoliogrowth,whichwaspartlyoffsetbylowerimpairmentinstudentloans.
Businessandgovernmentgrossimpairedloansincreased$30million,or6%.Theincreaseprimarilyreflectedhigherimpairmentinoursmallbusinessandagricultureportfolios.
AllowanceforcreditlossesTotalallowanceforcreditlossesincreased$48million,or3%,fromthepriorquarter.Thisreflectedincreasesinbothgeneralallowanceandspecificallowance.Thespecificallowancefor
creditlossesincreased$18million,or7%,primarilyattributabletohigherimpairmentinsmallbusinessloans.Thegeneralallow-anceincreased$30million,or2%,largelyduetotheinclusionofFlagthisquarter.
ProvisionforcreditlossesTotalprovisionforcreditlossesincreased$3million,or2%,comparedtothepreviousquarter.Theincreaseprimarilyreflectedhigherprovisionsinourcreditcardportfoliowhichwerelargelyoffsetbyincreasedrecoveriesinourcorporateportfolio.
Specificprovisionforcreditlossesforconsumerloansincreased$14million,or11%,fromthepriorquarter.Theincreasewaslargelyattributabletohigherprovisionsincreditcardsinpartreflectingportfoliogrowth.
Businessandgovernmentspecificprovisionforcreditlossesdecreased$9million,or31%,comparedtothepriorquarter.Thedecreasewaslargelyaresultofhighercorporaterecoveriesandlowerprovisionsinoursmallbusinessandcommercialloanportfolios.ThiswaspartlyoffsetbyhigherprovisionsinourCaribbeanportfolio.
CreditqualityratiosOurportfoliocreditqualityremainedrelativelystablecomparedtothepriorquarter.
GlobalVAR
January 31, 2007 October31,2006 January31,2006
As at For the three months ended Asat Forthethreemonthsended Asat Forthethreemonthsended
(C$millions) January 31 High Average Low October31 High Average Low January31 High Average Low
Equity $ 9 $ 14 $ 9 $ 5 $ 7 $ 9 $ 7 $ 5 $ 7 $ 11 $ 8 $ 5Foreignexchange 1 3 1 – 2 3 1 1 1 4 2 1Commodities(1) 1 1 1 – 1 1 1 – 1 2 1 1Interestrate 16 19 16 13 13 17 14 13 16 20 12 9Creditspecific 2 3 2 2 3 4 3 2 3 4 2 2Diversification (10) n.m. (10) n.m. (9) n.m. (9) n.m. (9) n.m. (7) n.m.Global VAR $ 19 $ 22 $ 19 $ 15 $ 17 $ 20 $ 17 $ 14 $ 19 $ 25 $ 18 $ 13
(1) EffectiveMay2006,marketriskincommodities-tradingactivitieshasbeenincludedinbothourVARmeasurementandregulatorycapitalrequirementunderamodels-basedapproach.n.m. notmeaningful
32RoyalBankofCanadaFirstQuarter2007
Marketriskmeasures–Non-tradingbankingactivities
January 31 October31 January31
2007 2006 2006 Economic value Net interest Economicvalue Netinterest Economicvalue Netinterest(C$millions) of equity risk income risk ofequityrisk incomerisk ofequityrisk incomerisk
Before-taximpactof: 100bpincreaseinrates $ (508) $ 83 $ (496) $ 87 $ (376) $ 107 100bpdecreaseinrates 377 (143) 375 (153) 240 (188)Before-taximpactof:200bpincreaseinrates (1,078) 148 (1,044) 147 (789) 188 200bpdecreaseinrates 680 (287) 658 (319) 385 (407)
Q12007vs.Q12006AverageglobalVARforthequarterof$19millionwasupcomparedto$18millionayearagolargelyduetoanincreaseininterestrateriskreflectingthegrowthintradingactivity.Thiswaslargelyoffsetbyanincreaseinoveralldiversificationeffect,whichroseto34%comparedto28%ayearago.
Q12007vs.Q42006AverageglobalVARforthequarterof$19millionwasupcomparedto$17millioninthepreviousquarterlargelyduetoincreasesininterestrateandequityrisk.ThisincreaseinglobalVARislargelyduetogrowthintradingactivity.Theincreasewasslightlyoffsetbyamarginalimprovementintheoveralldiversifi-cationeffectinthecurrentquarter.
TradingrevenueDuringthequarter,therewasonedaywithnettradingrevenueof$45millionwhichincludedgainsrelatedtotheoriginationofcertainstructuredtransactionsandtherewerenodayswithanettradingloss.Thebreadthofourtradingactivityisdesignedtodiversifymarketrisktoanyparticularstrategy,andtoreducetradingrevenuevolatility.
60
50
40
30
20
0
(5)
(15)
6
0
-5
0 5 10 15
20
25 February 2006 October 2006
TOTAL TRADING REVENUE FOR THE QUARTER ENDED JANUARY 31, 2007 (1)(number of days)
Daily net trading revenue (C$ millions)
TOTAL TRADING REVENUE AND GLOBAL VAR (1)(C$ millions)
Daily net trading revenue Global trading VAR
0
Nov. 03 Oct. 04
GLOBAL VAR BY MAJOR RISK CATEGORY(C$ millions)
Daily equity VAR Daily foreign exchange VAR Daily interest rate VAR
4
2
(10)
(25)
(5)
(15)
(20)
Daily interest rate specific VAR
August 2006 January 2007May 2006
10
45
60
50
40
30
20
0
(5)
(15)
6
0
-5
0 5 10 15
20
25 February 2006 October 2006
TOTAL TRADING REVENUE FOR THE QUARTER ENDED JANUARY 31, 2007 (1)(number of days)
Daily net trading revenue (C$ millions)
TOTAL TRADING REVENUE AND GLOBAL VAR (1)(C$ millions)
Daily net trading revenue Global trading VAR
0
Nov. 03 Oct. 04
GLOBAL VAR BY MAJOR RISK CATEGORY(C$ millions)
Daily equity VAR Daily foreign exchange VAR Daily interest rate VAR
4
2
(10)
(25)
(5)
(15)
(20)
Daily interest rate specific VAR
August 2006 January 2007May 2006
10
45
Non-tradingmarketrisk(assetandliabilitymanagement)Traditionalnon-tradingbankingactivities,suchasdeposittakingandlending,exposeustomarketrisk,ofwhichinterestrateriskisthelargestcomponent.
Ourgoalistomanagetheinterestrateriskofthenon-tradingbalancesheettoatargetlevel.Wemodifytheriskprofileofthebalancesheetthroughproactivehedgingtoachieveourtargetlevel.WecontinuallymonitortheeffectivenessofourinterestrateriskmitigationactivitywithinCorporateTreasuryonavalueandearningsbasis.
Moreinformationaboutourmarketriskmanagementpoli-ciesandprocessesassociatedwithournon-tradingactivitiesisdetailedonpage83ofour2006AnnualReport.Thesepoliciesandprocedureshavenotchangedmateriallyfromthosestatedinour2006AnnualReport.
Thefollowingtableprovidesthepotentialbefore-taximpactofanimmediateandsustained100bpand200bpincreaseordecreaseininterestratesonnetinterestincomeandeconomicvalueofequityofournon-tradingportfolio,assumingthatnofurtherhedgingisundertaken.Thesemeasuresarebaseduponassumptionsmadebyseniormanagementandvalidatedbyempiricalresearch.Allinterestrateriskmeasuresarebaseduponinterestrateexposuresataspecifictimeandcontinuouslychangeasaresultofbusinessactivitiesandourriskmanage-mentinitiatives.Overtheperiod,ourinterestrateriskexposurewaswellwithinourtargetlevel.
(1) TradingrevenueonataxableequivalentbasisexcludingrevenuerelatedtoconsolidatedVIEs.
RoyalBankofCanadaFirstQuarter200733
Liquidityandfundingriskistheriskthataninstitutionisunabletogeneratesufficientcashoritsequivalentinatimelyandcost-effectivemannertomeetitscommitmentsastheycomedue.
Ourliquidityandfundingmanagementframeworkisdesignedtoensurethatreliableandcost-effectivesourcesofcashoritsequivalentsareavailabletosatisfyourcurrentandprospectivefinancialcommitmentsundernormalandcontem-platedstressconditions.Toachievethisgoal,wearededicatedtothepreservationofthefollowingkeyliquidityandfundingriskmitigationstrategies:• Alargebaseofcoreclientdeposits• Continualaccesstodiversifiedsourcesofwholesalefunding• Acomprehensiveandenterprise-wideliquiditycontingency plansupportedbyanearmarkedpoolofunencumbered marketablesecurities(referredtoas“contingencyliquidity assets”)thatprovideassuredaccesstocashinacrisis.
Ourliquidityandfundingmanagementpracticesandprocessesreinforcetheseriskmitigationstrategiesbyassigningprudentiallimitsortargetstometricsassociatedwiththeseactivitiesandregularlymeasuringandmonitoringvarioussourcesofliquidityriskunderbothnormalandstressedmarketconditions.
Duringthequarter,weoperatedundernormalconditionsandwereincompliancewiththeserequirements.Theseandotherelementsoftheliquidityandfundingmanagementframe-workarediscussedinmoredetailonpages85to87ofour2006AnnualReport.TherehavebeennomaterialchangestoourliquidityandfundingmanagementframeworkorlevelsofliquidityandfundingrisksinceOctober31,2006.
Weconsiderourliquidityandfundingpositiontobesoundandadequatetomeetourstrategy.Therearenoknowntrends,demands,commitments,eventsoruncertaintiesthatarepres-entlyviewedaslikelytomateriallychangeourcurrentliquidityandfundingposition.
CreditratingsThefollowingtablepresentsourmajorcreditratingsasatMarch2,2007.
AsatMarch2,2007
Senior long- Short-term debt term debt Outlook
Moody’sInvestorsService P-1 Aa2 stableStandard&Poor’s A-1+ AA- stableFitchRatings F1+ AA stableDBRS R-1(high) AA stable
OurmajorcreditratingsandoutlookremainunchangedfromOctober31,2006.Thesestrongcreditratingssupportourabilitytocompetitivelyaccessunsecuredfundingmarkets.Ourcollec-tiveratingscontinuetobethehighestcategoriesassignedbytherespectiveagenciestoaCanadianbank.
Creditratingsarenotrecommendationstopurchase,sellorholdoursecuritiesinasmuchastheydonotcommentonmarketpriceorsuitabilityforaparticularinvestor.Ratingsaresubjecttorevisionorwithdrawalatanytimebytheratingorganization.
ContractualobligationsInthenormalcourseofbusiness,weenterintocontractsthatgiverisetocommitmentsoffutureminimumpaymentsthataffectourshort-termandlong-termliquidity.Dependingonthenatureofthesecommitments,theobligationsmayberecordedon-andoff-balancesheet.Thefollowingtableprovidesasummaryofourprimaryfuturecontractualfundingcommitments.
January 31 October31
2007 2006
(C$millions)(1) Within 1 year 1 to 3 years Over 3 to 5 years Over 5 years Total Total
Unsecuredlong-termfunding $ 7,206 $ 21,782 $ 10,695 $ 5,347 $ 45,030 $ 33,361Subordinateddebentures – 147 – 6,660 6,807 7,103
$ 7,206 $ 21,929 $ 10,695 $ 12,007 $ 51,837 $ 40,464
(1) Amountsrepresentprincipalonlyandexcludeaccruedinterest.
Operationalriskistheriskoflossresultingfrominadequateorfailedinternalprocesses,peopleandsystemsorfromexternalevents.Operationalriskisembeddedinallouractivities,includ-ingthepracticesandcontrolsusedtomanageotherrisks.Failuretomanageoperationalriskcanleadtofailureinthemanagementofotherriskssuchascreditrisk,marketriskorregulatoryrisk.
Ouroperationalriskmanagementframeworksetsoutacommonlanguageforoperationalriskandtheprinciplesandpracticesbywhichwemanageoperationalrisk,includingriskidentification,measurement,mitigationandmonitoring.
Underthisframework,weconsideroperationalriskfromthreeperspectives:causes,eventsandimpacts.Detailedcategoriesanddefinitionsforeachoftheseareincludedintheframeworktosupporttheconsistentidentificationandassess-mentofrisks.
Forfurtherdetails,refertopages84to85ofour2006AnnualReport.Thesepolicies,processesandmethodologieshavenotchangedmateriallyfromthosestatedinthe2006AnnualReport.
Liquidityandfundingrisk
Operationalrisk
34RoyalBankofCanadaFirstQuarter2007
January 31 October31 January31
(C$millions) 2007 2006 2006
Assets
Cash and due from banks $ 3,878 $ 4,401 $ 4,682
Interest-bearing deposits with banks 7,637 10,502 10,913
Securities Trading 169,030 147,237 131,551 Investment 27,821 37,632 34,107
196,851 184,869 165,658
Assets purchased under reverse repurchase agreements and securities borrowed 67,744 59,378 47,564
Loans Residentialmortgage 98,527 96,675 91,776 Personal 45,787 44,902 41,337 Creditcards 7,553 7,155 5,468 Businessandgovernment 67,851 61,207 55,615
219,718 209,939 194,196 Allowanceforloanlosses (1,455) (1,409) (1,439)
218,263 208,530 192,757
Other Customers’liabilityunderacceptances 10,011 9,108 7,951 Derivatives 42,226 37,729 38,237 Premisesandequipment,net 1,917 1,818 1,736 Goodwill 4,932 4,304 4,157 Otherintangibles 699 642 704 Assetsofoperationsheldforsale – 82 178 Otherassets 17,457 15,417 13,337
77,242 69,100 66,300
$ 571,615 $ 536,780 $ 487,874
Liabilities and shareholders’ equity
Deposits Personal $ 117,867 $ 114,040 $ 111,880 Businessandgovernment 198,796 189,140 160,221 Bank 48,943 40,343 42,771
365,606 343,523 314,872
Other Acceptances 10,011 9,108 7,951 Obligationsrelatedtosecuritiessoldshort 46,361 38,252 35,856 Obligationsrelatedtoassetssoldunderrepurchaseagreementsandsecuritiesloaned 41,117 41,103 28,841 Derivatives 43,971 42,094 42,668 Insuranceclaimsandpolicybenefitliabilities 7,948 7,337 7,150 Liabilitiesofoperationsheldforsale – 32 37 Otherliabilities 22,853 22,649 18,533
172,261 160,575 141,036
Subordinated debentures 6,807 7,103 8,116
Trust capital securities 1,385 1,383 1,399
Preferred share liabilities 299 298 300
Non-controlling interest in subsidiaries 1,799 1,775 1,916
Shareholders’ equity Preferredshares 1,600 1,050 700 Commonshares(sharesissued–1,275,949,848;1,280,889,745;and1,290,982,576) 7,216 7,196 7,189 Contributedsurplus 255 292 299 Treasuryshares–preferred(sharesheld–141,300;93,700;and118,400) (3) (2) (3) –common(sharesheld–3,108,319;5,486,072;and6,223,880) (114) (180) (199) Retainedearnings 16,264 15,771 14,284 Accumulatedothercomprehensiveincome(loss) (1,760) – – Netforeigncurrencytranslationadjustments – (2,004) (2,035)
23,458 22,123 20,235
$ 571,615 $ 536,780 $ 487,874
InterimConsolidatedFinancialStatements(unaudited)
ConsolidatedBalanceSheets(unaudited)
RoyalBankofCanadaFirstQuarter200735
Forthethreemonthsended
January 31 October31 January31
(C$millions) 2007 2006 2006
Interest income Loans $ 3,547 $ 3,395 $ 2,970 Securities 1,861 1,650 1,451 Assetspurchasedunderreverserepurchaseagreementsandsecuritiesborrowed 875 909 485 Depositswithbanks 161 166 72
6,444 6,120 4,978
Interest expense Deposits 3,306 3,041 2,326 Otherliabilities 1,184 1,247 862 Subordinateddebentures 87 101 108
4,577 4,389 3,296
Net interest income 1,867 1,731 1,682
Non-interest income Insurancepremiums,investmentandfeeincome 820 863 858 Tradingrevenue 803 620 547 Investmentmanagementandcustodialfees 370 345 308 Mutualfundrevenue 354 337 261 Securitiesbrokeragecommissions 323 296 309 Servicecharges 318 326 294 Underwritingandotheradvisoryfees 288 293 219 Cardservicerevenue 149 147 145 Foreignexchangerevenue,otherthantrading 122 106 96 Securitizationrevenue 91 86 49 Creditfees 60 63 56 Gainonsaleofinvestmentsecurities 48 16 39 Other 85 120 97
Non-interest income 3,831 3,618 3,278
Total revenue 5,698 5,349 4,960
Provision for credit losses 162 159 47
Insurance policyholder benefits, claims and acquisition expense 516 611 652
Non-interest expense Humanresources 2,033 1,829 1,793 Equipment 244 257 231 Occupancy 198 225 182 Communications 156 200 146 Professionalfees 141 176 137 Outsourceditemprocessing 74 75 73 Amortizationofotherintangibles 22 22 14 Other 199 171 175
3,067 2,955 2,751
Income from continuing operations before income taxes 1,953 1,624 1,510Incometaxes 435 342 332
Netincomebeforenon-controllinginterest 1,518 1,282 1,178Non-controllinginterestinnetincomeofsubsidiaries 24 19 6
Netincomefromcontinuingoperations 1,494 1,263 1,172Netlossfromdiscontinuedoperations – (1) (1)
Net income $ 1,494 $ 1,262 $ 1,171Preferreddividends (16) (26) (10)
Netincomeavailabletocommonshareholders $ 1,478 $ 1,236 $ 1,161
Averagenumberofcommonshares(inthousands) 1,274,354 1,274,697 1,284,333Basic earnings per share(indollars) $ 1.16 $ .97 $ .90Basic earnings per share from continuing operations(indollars) $ 1.16 $ .97 $ .90Basic earnings (loss) per share from discontinued operations (indollars) $ – $ – $ –
Averagenumberofdilutedcommonshares(inthousands) 1,293,085 1,293,864 1,304,378Diluted earnings per share(indollars) $ 1.14 $ .96 $ .89Diluted earnings per share from continuing operations(indollars) $ 1.14 $ .96 $ .89Diluted earnings (loss) per share from discontinued operations(indollars) $ – $ – $ –
Dividends per share(indollars) $ .40 $ .40 $ .32
ConsolidatedStatementsofIncome(unaudited)
36RoyalBankofCanadaFirstQuarter2007
Forthethreemonthsended
January 31 October31 January31
(C$millions) 2007 2006 2006
Preferred shares Balanceatbeginningofperiod $ 1,050 $ 1,300 $ 700 Issued 700 – – Redeemedforcancellation (150) (250) –
Balanceatendofperiod 1,600 1,050 700
Common shares Balanceatbeginningofperiod 7,196 7,176 7,170 Issued 63 30 43 Purchasedforcancellation (43) (10) (24)
Balanceatendofperiod 7,216 7,196 7,189
Contributed surplus Balanceatbeginningofperiod 292 287 265 Renouncedstockappreciationrights (2) (1) – Stock-basedcompensationawards (39) 2 (11) Other 4 4 45
Balanceatendofperiod 255 292 299
Treasury shares – preferred Balanceatbeginningofperiod (2) (43) (2) Sales 2 44 1 Purchases (3) (3) (2)
Balanceatendofperiod (3) (2) (3)
Treasury shares – common Balanceatbeginningofperiod (180) (181) (216) Sales 102 48 96 Purchases (36) (47) (79)
Balanceatendofperiod (114) (180) (199)
Retained earnings Balanceatbeginningofperiod 15,771 15,120 13,704 Transitionadjustment–Financialinstruments(1) (86) – – Netincome 1,494 1,262 1,171 Preferredsharedividends (16) (26) (10) Commonsharedividends (511) (511) (412) Premiumpaidoncommonsharespurchasedforcancellation (371) (80) (169) Issuancecostsandother (17) 6 –
Balanceatendofperiod 16,264 15,771 14,284
Accumulated other comprehensive income (loss) Balanceatbeginningofperiod – Transitionadjustment–Financialinstruments(1) (45) Reclassificationfromnetforeigncurrencytranslationadjustments(2) (2,004) Netchangeinunrealizedgains(losses)onavailable-for-salesecurities 39 Netchangeinforeigncurrencytranslationadjustments,netofhedgingactivities 216 Netchangeingains(losses)onderivativesdesignatedascashflowhedges 34
Balanceatendofperiod (1,760)
Net foreign currency translation adjustments Balanceatbeginningofperiod (2,004) (2,112) (1,774) Reclassificationtoaccumulatedothercomprehensiveincome(2) 2,004 – – Unrealizedforeigncurrencytranslationgains(losses) – 91 (613) Foreigncurrencygains(losses)fromhedgingactivities – 17 352
Balanceatendofperiod – (2,004) (2,035)
Shareholders’ equity at end of period $ 23,458 $ 22,123 $ 20,235
Comprehensive income Netincome $ 1,494 Othercomprehensiveincome,netoftaxes Netunrealizedgains(losses)onavailable-for-salesecurities 26 Reclassificationof(gains)lossesonavailable-for-salesecuritiestoincome 13
39
Unrealizedforeigncurrencytranslationgains(losses) 879 Reclassificationof(gains)lossesonforeigncurrencytranslationtoincome (40) Netforeigncurrencytranslationgains(losses)fromhedgingactivities (623)
216
Netgains(losses)onderivativesdesignatedascashflowhedges 17 Reclassificationtoincomeof(gains)lossesonderivativesdesignatedascashflowhedges 17
34
Othercomprehensiveincome 289
Total comprehensive income $ 1,783
(1) Thetransitionadjustmentrelatestotheadoptionofthenewfinancialinstrumentsaccountingstandards.RefertoNote1.(2) Thereclassificationisinaccordancewiththenewfinancialinstrumentsaccountingstandards.RefertoNote1.
ConsolidatedStatementsofChangesinShareholders’EquityandComprehensiveIncome(unaudited)
RoyalBankofCanadaFirstQuarter200737
Forthethreemonthsended
January 31 October31 January31
(C$millions) 2007 2006 2006
Cash flows from operating activitiesNetincomefromcontinuingoperations $ 1,494 $ 1,263 $ 1,172Adjustmentstodeterminenetcashfrom(usedin)operatingactivities Provisionforcreditlosses 162 159 47 Depreciation 102 106 98 Businessrealignmentpayments (17) (17) (27) Futureincometaxes (161) (50) 21 Amortizationofotherintangibles 22 22 14 (Gain)lossonsaleofpremisesandequipment (4) (3) (5) (Gain)lossonloansecuritizations (37) (34) 11 (Gain)lossonsaleofinvestmentaccountsecurities (48) (16) (39) Changesinoperatingassetsandliabilities Insuranceclaimsandpolicybenefitliabilities 611 (15) 33 Netchangeinaccruedinterestreceivableandpayable 3 113 13 Currentincometaxes (41) 212 (35) Derivativeassets (4,497) (590) 597 Derivativeliabilities 1,877 1,255 76 Tradingsecurities (11,181) (9,565) (5,791) Netchangeinbrokersanddealersreceivableandpayable (1,684) 418 (616) Other (122) (1,054) 318
Netcashfrom(usedin)operatingactivitiesfromcontinuingoperations (13,521) (7,796) (4,113)Netcashfrom(usedin)operatingactivitiesfromdiscontinuedoperations – 22 13
Net cash from (used in) operating activities (13,521) (7,774) (4,100)
Cash flows from investing activities Changeininterest-bearingdepositswithbanks 2,865 928 (5,676) Changeinloans,netofloansecuritizations (11,136) (9,180) (6,651) Proceedsfromloansecuritizations 1,753 2,369 2,699 Proceedsfromsaleofinvestmentsecurities 2,301 5,754 3,678 Proceedsfrommaturityofinvestmentsecurities 3,841 5,231 7,043 Purchasesofinvestmentsecurities (5,595) (10,690) (8,415) Changeininvestmentsecurities – – 1 Netacquisitionsofpremisesandequipment (195) (209) (118) Changeinassetspurchasedunderreverserepurchaseagreementsandsecuritiesborrowed (8,366) 4,603 (4,591) Netcashfrom(usedin)acquisitions (573) (14) (242)
Netcashfrom(usedin)investingactivitiesfromcontinuingoperations (15,105) (1,208) (12,272)Netcashfrom(usedin)investingactivitiesfromdiscontinuedoperations – 58 68
Net cash from (used in) investing activities (15,105) (1,150) (12,204)
Cash flows from financing activities Changeindeposits 20,459 8,821 8,012 Repaymentofsubordinateddebentures (489) (685) – Issueofpreferredshares 700 – – Redemptionofpreferredsharesforcancellation (150) (250) – Issuancecosts (17) 6 – Issueofcommonshares 57 28 40 Purchaseofcommonsharesforcancellation (414) (90) (193) Salesoftreasuryshares 104 92 97 Purchaseoftreasuryshares (39) (50) (81) Dividendspaid (530) (486) (425) Dividends/distributionspaidbysubsidiariestonon-controllinginterests (31) (2) (15) Changeinobligationsrelatedtoassetssoldunderrepurchaseagreementsandsecuritiesloaned 14 3,073 5,460 Changeinobligationsrelatedtosecuritiessoldshort 8,109 (2,256) 3,465 Changeinshort-termborrowingsofsubsidiaries 228 1,317 (317)
Netcashfrom(usedin)financingactivitiesfromcontinuingoperations 28,001 9,518 16,043
Net cash from (used in) financing activities 28,001 9,518 16,043
Effectofexchangeratechangesoncashandduefrombanks 102 (7) (58)
Net change in cash and due from banks (523) 587 (319)Cashandduefrombanksatbeginningofperiod 4,401 3,814 5,001
Cash and due from banks at end of period $ 3,878 $ 4,401 $ 4,682
Supplemental disclosure of cash flow information Amountofinterestpaidinperiod $ 4,839 $ 4,035 $ 3,247 Amountofincometaxespaidinperiod $ 293 $ 123 $ 575
ConsolidatedStatementsofCashFlows(unaudited)
38RoyalBankofCanadaFirstQuarter2007
Notestotheinterimconsolidatedfinancialstatements(unaudited)(AlltabularamountsareinmillionsofCanadiandollars,exceptpershareamounts)
TheseunauditedInterimConsolidatedFinancialStatementshavebeenpreparedinaccordancewithCanadiangenerallyacceptedaccountingprinciples(CanadianGAAP)andfollowthesameaccountingpoliciesandmethodsdescribedinourauditedConsolidatedFinancialStatementsfortheyearendedOctober31,2006,exceptasdescribedbelow.UnderCanadianGAAP,additionaldisclosuresarerequiredinannualfinancialstatements;therefore,theseunauditedInterimConsolidatedFinancialStatementsshouldbereadinconjunctionwiththeauditedConsolidatedFinancialStatementsfortheyearendedOctober31,2006andtheaccompanyingnotesincludedonpages106to156inour2006AnnualReporttoshareholders(2006AnnualReport).Intheopinionofmanagement,alladjustmentsnecessaryforafairpresentationofresultsfortheperiodsreportedhavebeenincluded.Theseadjustmentsconsistonlyofnormalrecurringadjustments,exceptasotherwisedisclosed.Certaincomparativeamountshavebeenreclassifiedtoconformtothecurrentperiod’spresentation.
Note 1: Significant accounting policies
Significant accounting changesFinancial InstrumentsOnNovember1,2006,weadoptedthreenewaccountingstandardsthatwereissuedbytheCanadianInstituteofCharteredAccountants(CICA):HandbookSection1530,Comprehensive Income,HandbookSection3855,Financial Instruments – Recognition and Measurement,andHandbookSection3865,Hedges.Weadoptedthesestandardsprospectively;accordingly,comparativeamountsforpriorperiodshavenotbeenrestated.
Comprehensive IncomeSection1530introducesComprehensiveincome,whichconsistsofNetincomeandOthercomprehensiveincome(OCI).OCIrepresentschangesinShareholders’equityduringaperiodarisingfromtransactionsandothereventswithnon-ownersourcesandincludesunrealizedgainsandlossesonfinancialassetsclassifiedasavailable-for-sale,unrealizedforeigncurrencytranslationgainsorlossesarisingfromself-sustainingforeignoperations,netofhedgingactivities,andchangesinthefairvalueoftheeffectiveportionofcashflowhedginginstruments.WehaveincludedinourInterimConsolidatedFinancialStatementsaConsolidatedStatementofComprehensiveIncomeforthechangesintheseitemsduringthefirstquarterof2007,whilethecumulativechangesinOCIareincludedinAccumulatedothercomprehensiveincome(AOCI),whichispresentedasanewcategoryofShareholders’equityontheConsolidatedBalanceSheet.
Financial Instruments – Recognition and MeasurementSection3855establishesstandardsforrecognizingandmeasuringfinancialassets,financialliabilitiesandnon-financialderivatives.Itrequiresthatfinancialassetsandfinancialliabilities,includingderivatives,berecognizedontheConsolidatedBalanceSheetwhenwebecomeapartytothecontractualprovisionsofthefinancialinstrumentornon-financialderivativecontract.Underthisstan-dard,allfinancialinstrumentsarerequiredtobemeasuredatfairvalueoninitialrecognitionexceptforcertainrelatedpartytransactions.Measurementinsubse-quentperiodsdependsonwhetherthefinancialinstrumenthasbeenclassifiedasheld-for-trading,available-for-sale,held-to-maturity,loansandreceivables,orotherfinancialliabilities.Transactioncostsareexpensedasincurredforfinancialinstrumentsclassifiedordesignatedasheld-for-trading.Forotherfinancialinstru-ments,transactioncostsarecapitalizedoninitialrecognition.
Financialassetsandfinancialliabilitiesheld-for-tradingaremeasuredatfairvaluewithchangesinthosefairvaluesrecognizedinNon-interestincome.Financialassetsheld-to-maturity,loansandreceivables,andotherfinancialliabili-tiesaremeasuredatamortizedcostusingtheeffectiveinterestmethodofamorti-zation.Available-for-salefinancialassets,whichincludeloansubstitutesecurities,arepresentedasInvestmentsecuritiesonourConsolidatedBalanceSheetandmeasuredatfairvaluewithunrealizedgainsandlosses,includingchangesinforeignexchangerates,beingrecognizedinOCI.Investmentsinequityinstrumentsclassifiedasavailable-for-salethatdonothaveaquotedmarketpriceinanactivemarketaremeasuredatcost.
DerivativeinstrumentsarerecordedontheConsolidatedBalanceSheetatfairvalue,includingthosederivativesthatareembeddedinfinancialornon-financialcontractsthatarenotcloselyrelatedtothehostcontracts.ChangesinthefairvaluesofderivativeinstrumentsarerecognizedinNetincomewiththeexcep-tionofderivativesdesignatedineffectivecashflowhedgesorhedgesofforeigncurrencyexposureofanetinvestmentinaself-sustainingforeignoperation.RefertotheHedgessection.
Section3855alsoprovidesanentitytheoptiontodesignateafinancialinstrumentasheld-for-trading(thefairvalueoption)onitsinitialrecognitionoruponadoptionofthestandard,evenifthefinancialinstrument,otherthanloansandreceivables,wasnotacquiredorincurredprincipallyforthepurposeofsellingorrepurchasingitinthenearterm.Aninstrumentthatisclassifiedasheld-for-tradingbywayofthisfairvalueoptionmusthavereliablefairvaluesandsatisfyoneofthefollowingcriteriaestablishedbytheOfficeoftheSuperintendentofFinancialInstitutionsCanada(OSFI):(i)whendoingsoeliminatesorsignificantlyreducesameasurementorrecognitioninconsistencythatwouldotherwisearisefrommeasuringassetsorliabilities,orrecognizinggainsandlossesonthemonadifferentbasis;(ii)itbelongstoagroupoffinancialassets,financialliabilitiesorbothwhicharemanagedandevaluatedonafairvaluebasisinaccordancewithourriskmanagementorinvestmentstrategy,andarereportedtoseniormanagementpersonnelonthatbasis;or(iii)itisaderivativeinafinancialassetorfinancialliabilityandthederivativeisnotcloselyrelatedtothehostcontract.
Theprincipalcategoriesofourfinancialassetsdesignatedasheld-for-tradingunderthefairvalueoptioninclude(i)investmentssupportingthepolicybenefit
liabilitiesonlifeandhealthinsurancecontractsissuedbyourinsuranceopera-tions;(ii)investmentsusedtooffsetexposuresunderderivativecontractsinrela-tiontooursalesandtradingactivities;and(iii)certainloanstocustomerswhoserelatedderivativesaremeasuredatfairvalue.Financialliabilitiesdesignatedasheld-for-tradingaremainlydepositsandstructurednoteswithembeddedderiva-tivesthatarenotcloselyrelatedtothehostcontracts.Fairvaluedesignationforthesefinancialassetsandfinancialliabilitiessignificantlyreducesthemeasure-mentinconsistencies.
OthersignificantaccountingimplicationsarisingupontheadoptionofSection3855includetheuseoftheeffectiveinterestmethodofamortizationforanytransactioncostsorfees,premiumsordiscountsearnedorincurredforfinancialinstrumentsmeasuredatamortizedcost,andtherecognitionoftheinceptionfairvalueoftheobligationundertakeninissuingaguaranteethatmeetsthedefinitionofaguaranteepursuanttoAccountingGuideline14,Disclosure of Guarantees(AcG-14).Nosubsequentremeasurementatfairvalueisrequiredunlessthefinan-cialguaranteequalifiesasaderivative.Ifthefinancialguaranteemeetsthedefini-tionofaderivativeitisremeasuredatfairvalueateachbalancesheetdateandreportedasaderivativeinOtherassetsorOtherliabilities,asappropriate.
HedgesSection3865specifiesthecriteriathatmustbesatisfiedinorderforhedgeaccountingtobeappliedandtheaccountingforeachofthepermittedhedgingstrategies:fairvaluehedges,cashflowhedgesandhedgesofforeigncurrencyexposuresofnetinvestmentsinself-sustainingforeignoperations.Hedgeaccount-ingisdiscontinuedprospectivelywhenthederivativenolongerqualifiesasaneffectivehedge,orthederivativeisterminatedorsold,oruponthesaleorearlyterminationofthehedgeditem.
Inafairvaluehedgingrelationship,thecarryingvalueofthehedgeditemisadjustedforunrealizedgainsorlossesattributabletothehedgedriskandrec-ognizedinNetincome.Changesinthefairvalueofthehedgeditem,totheextentthatthehedgingrelationshipiseffective,areoffsetbychangesinthefairvalueofthehedgingderivative,whichisalsorecordedinNetincome.Whenhedgeaccount-ingisdiscontinued,thecarryingvalueofthehedgeditemisnolongeradjustedandthecumulativefairvalueadjustmentstothecarryingvalueofthehedgeditemareamortizedtoNetincomeovertheremainingtermoftheoriginalhedgingrelationship.
Inacashflowhedgingrelationship,theeffectiveportionofthechangeinthefairvalueofthehedgingderivativeisrecognizedinOCIwhiletheineffectiveportionisrecognizedinNetincome.Whenhedgeaccountingisdiscontinued,theamountspreviouslyrecognizedinAOCIarereclassifiedtoNetincomeduringtheperiodswhenthevariabilityinthecashflowsofthehedgeditemaffectsNetincome.GainsandlossesonderivativesarereclassifiedimmediatelytoNetincomewhenthehedgeditemissoldorearlyterminated.
Inhedgingaforeigncurrencyexposureofanetinvestmentinaself-sustainingforeignoperation,theeffectiveportionofforeignexchangegainsandlossesonthehedginginstrumentsisrecognizedinOCIandtheineffectiveportionisrecognizedinNetincome.TheamountspreviouslyrecognizedinAOCIarerecognizedinNetincomewhenthereisareductioninthehedgednetinvestmentasaresultofadilutionorsaleofthenetinvestment;orreductioninequityoftheforeignopera-tionasaresultofdividenddistributions.
Impact upon adoption of Sections 1530, 3855 and 3865Thetransitionadjustmentsattributabletotheremeasurementoffinancialassetsandfinancialliabilitiesatfairvalue,otherthanfinancialassetsclassifiedasavailable-for-saleandhedginginstrumentsdesignatedascashflowhedgesorhedgesofforeigncurrencyexposureofnetinvestmentinself-sustainingforeignoperations,wererecognizedinopeningRetainedearningsasatNovember1,2006.Adjustmentsarisingfromremeasuringfinancialassetsclassifiedasavailable-for-saleatfairvaluewererecognizedinopeningAOCIasatthatdate.
ForhedgingrelationshipsexistingpriortoadoptingSection3865thatcontinuetoqualifyforhedgeaccountingunderthenewstandard,thetransitionaccountingisasfollows:(i)Fairvaluehedges–anygainorlossonthehedginginstrumentwasrecognizedinopeningRetainedearningsandthecarryingamountofthehedgeditemwasadjustedbythecumulativechangeinfairvalueattribut-abletothedesignatedhedgedriskandwasalsoincludedinopeningRetainedearnings;(ii)Cashflowhedgesandhedgesofnetinvestmentsinself-sustainingforeignoperations–theeffectiveportionofanygainorlossonthehedginginstru-mentwasrecognizedinAOCIandthecumulativeineffectiveportionwasincludedinopeningRetainedearnings.
RoyalBankofCanadaFirstQuarter200739
WehaverecordedthefollowingtransitionadjustmentsinourConsolidatedFinancialStatements:(i)areductionof$86million,netoftaxes,toouropeningRetainedearnings,representingchangesmadetothevalueofcertainfinancialinstrumentsandtheineffectiveportionofqualifyinghedges,incompliancewiththemeasurementbasisunderthenewstandardsincludingthoserelatedtotheuseoffairvalueoption;(ii)recognitioninAOCIof$45million,netoftaxes,relatedtothenetlossesforavailable-for-salefinancialassetsandcumulativelossesontheeffectiveportionofourcashflowhedgesthatarenowrequiredtoberecognizedunderSections3855and3865.Inaddition,wehavereclassifiedtoAOCI,$2,004millionofnetforeigncurrencylossesthatwerepreviouslypresentedasaseparateiteminShareholders’equity.
Future accounting changesVariable Interest Entities (VIEs)OnSeptember15,2006,theEmergingIssuesCommitteeissuedAbstractNo.163,Determining the Variability to be Considered in Applying AcG-15(EIC-163).EIC-163providesadditionalclarificationonhowtoanalyzeandconsolidateVIEs.EIC-163becameeffectiveforusonFebruary1,2007,anditsimplementationwillresultinthe
deconsolidationofcertaininvestmentfunds.However,theimpactisnotexpectedtobematerialtoourconsolidatedfinancialpositionorresultsofoperations.
Capital Disclosures and Financial Instruments – Disclosures and PresentationOnDecember1,2006,theCICAissuedthreenewaccountingstandards:HandbookSection1535,Capital Disclosures,HandbookSection3862,Financial Instruments – Disclosures,andHandbookSection3863,Financial Instruments – Presentation.ThesenewstandardswillbeeffectiveforusonNovember1,2007.
Section1535specifiesthedisclosureof(i)anentity’sobjectives,policiesandprocessesformanagingcapital;(ii)quantitativedataaboutwhattheentityregardsascapital;(iii)whethertheentityhascompliedwithanycapitalrequirements;and(iv)ifithasnotcomplied,theconsequencesofsuchnon-compliance.
ThenewSections3862and3863replaceHandbookSection3861, Financial Instruments — Disclosure and Presentation,revisingandenhancingitsdisclosurerequirements,andcarryingforwardunchangeditspresentationrequirements.Thesenewsectionsplaceincreasedemphasisondisclosuresaboutthenatureandextentofrisksarisingfromfinancialinstrumentsandhowtheentitymanagesthoserisks.
Note 2: Fair values of financial instruments
Thefairvalueofafinancialinstrumentistheamountofconsiderationthatwouldbeagreeduponinanarm’s-lengthtransactionbetweenknowledgeable,willingpartieswhoareundernocompulsiontoact.Fairvaluesaredeterminedbyrefer-encetoquotedbidoraskingprices,asappropriate,inthemostadvantageousactivemarketforthatinstrumenttowhichwehaveimmediateaccess.Wherebidandaskpricesareunavailable,weusetheclosingpriceofthemostrecenttransactionofthatinstrument.Intheabsenceofanactivemarket,wedeterminefairvaluesbasedonprevailingmarketrates(bidandaskprices,asappropriate)forinstrumentswithsimilarcharacteristicsandriskprofilesorinternalorexternalvaluationmodels,suchasoptionpricingmodelsanddiscountedcashflowanaly-sis,usingobservablemarket-basedinputs.
Fairvaluesdeterminedusingvaluationmodelsrequiretheuseofassump-tionsconcerningtheamountandtimingofestimatedfuturecashflowsanddiscountrates.Indeterminingthoseassumptions,welookprimarilytoexternalreadilyobservablemarketinputsincludingfactorssuchasinterestrateyieldcurves,currencyrates,andpriceandratevolatilitiesasapplicable.Inlimitedcir-cumstances,weuseinputparametersthatarenotbasedonobservablemarketdataandwebelievethatusingpossiblealternativeassumptionswillnotresultinsignificantlydifferentfairvalues.
Accounting for changes in fair value of financial instruments during the period AsdescribedinNote1,financialinstrumentsclassifiedordesignatedasheld-for-tradingandInvestmentsecuritiesarecarriedatfairvalueontheConsolidatedBalanceSheetexceptforequityinstrumentsclassifiedasInvestmentsecuritiesthatdonothaveaquotedmarketprice,whicharecarriedatcost.Anychangesinthefairvaluesoffinancialinstrumentsclassifiedordesignatedasheld-for-tradingandInvestmentsecuritiesmeasuredatfairvaluearerecognizedinNetincomeandOCI,respectively.ThecumulativechangesinthefairvaluesofInvestmentsecurities
previouslyrecognizedinAOCIarereclassifiedtoNetincomewhentheyarederec-ognizedorthedeclineinvalueisconsideredtobeother-than-temporary.
Investmentsecuritiesmeasuredatfairvalueorcostareassessedforimpair-mentateachreportingdate.AsatJanuary31,2007,theunrealizedlossesforInvestmentsecuritiesmeasuredatfairvalueorcostamountedto$144millionand$1million,respectively.Unrealizedlossesfordebtsecuritiesareprimarilyduetoincreasinginterestratesandforequitysecurities,theyareduetothetimingofmarketprices,foreignexchangemovements,orbecausetheinvesteeisintheearlyyearsofitsbusinesscycle.Wedonotconsidertheseinvestmentstobeother-than-temporarilyimpairedasatJanuary31,2007,aswehavetheabilityandintenttoholdthemuntilthefairvaluerecovers.
Derivativesthatarenotdesignatedinhedgingrelationshipsareclassifiedasheld-for-tradingandchangesinthefairvaluesofsuchderivativeinstrumentsarerecognizedinNetincome.
BetweenNovember1,2006,andJanuary31,2007,thefairvalueofournetfinancialassetsclassifiedasheld-for-tradingincreasedby$792millionwhilethefairvalueofournetfinancialassetsdesignatedasheld-for-tradingdecreasedby$38million.Thefairvalueofthefinancialliabilitiesthatwedesignatedasheld-for-tradingincreasedby$3millionduetochangesinourowncreditrisk.
Carrying value and Fair value of selected Financial Instruments Asaresultoftheadoptionofthenewaccountingstandards,certainfinancialinstru-mentsarenowmeasuredatfairvaluewhichwerepreviouslyreportedatcostoramortizedcost.ThisisprimarilyduetothereclassificationofcertainsecuritiesasTradingsecurities,whichincludessecuritiesdesignatedasheld-for-tradingusingthefairvalueoption.ThefollowingtableprovidesacomparisonofcarryingvaluesasatJanuary31,2007,andOctober31,2006,forselectedfinancialinstruments:
As atJanuary 31, 2007 AsatOctober31,2006
Carrying value and fair value of financial instruments
Required to be Designated as Classified as Designated as classified as Designated as available- loans and available-for-sale Total carrying Total fair Totalfair held-for-trading held-for-trading for-sale receivables (1) recorded at cost value value value
Securities Trading $ 148,574 $ 20,456 $ – $ – $ – $ 169,030 $ 169,030 Investment(2),(3) – – 24,988 – 2,833 27,821 27,823
Totalsecurities $ 148,574 $ 20,456 $ 24,988 $ – $ 2,833 $ 196,851 $ 196,853 $ 185,239
Assetspurchasedunderreverse repurchaseagreementsand securitiesborrowed $ – $ 45,288 $ – $ 22,456 $ – $ 67,744 $ 67,744 $ 59,378
Loans $ – $ 3,071 $ – $ 215,192 $ – $ 218,263 $ 218,263 $ 208,638
AsatOctober31,2006
Carryingvalueoffinancialinstruments
Requiredtobe classifiedas Designatedas Designatedas held-for-trading held-for-trading available-for-sale
Securities Trading $ 139,491 $ 18,412 $ – Investment(2) – – 26,310 Loansubstitute(3) – – 656
Totalsecurities $ 139,491 $ 18,412 $ 26,966
(1) Thefairvalueandthecarryingvaluearenotmateriallydifferent.(2) IncludesthevalueofourHeld-to-maturityinvestmentswhichisnominal.(3) UponadoptionofSection3855,loansubstituteshavebeenclassifiedasInvestmentsecurities.
40 RoyalBankofCanada FirstQuarter2007
Employee- Premises- related related charges charges Total
BalanceasatOctober31,2006 $ 41 $ 16 $ 57Cashpayments (16) (1) (17)Foreignexchangetranslation – 1 1
TotalbalanceasatJanuary31,2007 $ 25 $ 16 $ 41
Note 3: Business realignment charges
During2005and2004,weimplementedcertaincost-reductioninitiatives.Themajorityoftheinitiativesweresubstantiallycompletedduring2006;however,theassociatedincome-protectionpaymentstoseveredemployeesandcertainleaseobligationsextendbeyondthattime.Ourbusinessrealignmentchargestobepaidinfutureperiodsareemployee-relatedchargesandpremises-relatedcharges.
ChangesinthesechargessinceOctober31,2006aresetoutinthetablebelow.AsatJanuary31,2007,thenumberofemployeepositionsidentifiedfortermina-tionwas2,030and1,999employeeshadbeenterminated(2,030and1,980,respectively,asatOctober31,2006).
Hedging activities Weusederivativesandnon-derivativefinancialinstrumentstomanageourexpo-surestointerest,currency,creditandothermarketrisks.Whenderivativesareusedtomanageourownexposures,wedetermineforeachderivativewhetherhedgeaccountingcanbeapplied.Wherehedgeaccountingcanbeapplied,ahedgerelationshipisdesignatedasafairvaluehedge,acashflowhedgeorahedgeofforeigncurrencyexposureofanetinvestmentinaself-sustainingforeignoperation.Thederivativemustbehighlyeffectiveinaccomplishingtheobjectiveofoffsettingeitherchangesinthefairvalueorcashflowsattributabletothehedgedriskbothatinceptionandoverthelifeofthehedge.Ifitisdeterminedthatthederivativeisnothighlyeffectiveasahedge,hedgeaccountingisdiscontinuedprospectively.
Fair value hedges Wepredominantlyuseinterestrateswapstohedgeourexposuretothechangesinafixedinterestrateinstrument’sfairvaluecausedbychangesininterestrate.
ForthequarterendedJanuary31,2007,theineffectiveportionoffairvaluehedgesrecognizedinNetincomeamountedtoapre-taxnetunrealizedlossof$1million.WedidnothedgeanycommitmentsforthequarterendedJanuary31,2007.
Cash flow hedgeWepredominantlyuseinterestrateswapstohedgethevariabilityincashflowsrelatedtoavariablerateassetorliability.Allcomponentsofeachderivative’schangeinfairvaluehavebeenincludedintheassessmentofcashflowhedgeeffectiveness.
ForthequarterendedJanuary31,2007,pre-taxnetunrealizedgainsof$26millionwererecordedinOCIfortheeffectiveportionofthecashflowhedges,andpre-taxunrealizedlossesof$25millionwerereclassifiedtoNetincome.Anetunrealizedlossof$11millionwasrecognizedinNon-interestincomefortheinef-fectiveportion.
Ofthe$34millionpre-taxlossdeferredinAOCIatJanuary31,2007,$33millionisexpectedtobereclassifiedtoNetincomeinthenext12months.WedidnothedgeanyforecastedtransactionsforthequarterendedJanuary31,2007.
Net investment hedgeWeuseforeignexchangecontractsandforeigncurrency-denominatedliabilitiestomanageourforeigncurrencyexposurestonetinvestmentsinself-sustainingforeignoperationshavingafunctionalcurrencyotherthantheCanadiandollar.ForthequarterendedJanuary31,2007,thenetgainof$216millionrelatingtoournetinvestmentinforeignoperationswasrecognizedinOCI.
Thefollowingtablepresentsthefairvaluesofthederivativesandnon-derivativefinancialinstrumentscategorizedbytheirhedgingrelationships,aswellasderivativesthatarenotdesignatedinhedgingrelationships.
Fair value of derivatives and non-derivative financial instruments as at January 31, 2007
Designated in a hedging relationship
Not designated Cash flow Fair value Net investment in a hedging hedges hedges hedges relationship
Financial assets Derivativefinancialinstruments $ 84 $ 173 $ 214 $ 41,755 Non-derivativefinancialinstruments – – – n.a. Financial liabilities Derivativefinancialinstruments $ 94 $ 58 $ 7 $ 43,812 Non-derivativefinancialinstruments – – 5,499 (1) n.a.
(1) Theamountreflectsthecarryingvalueofdepositswhichisnotmateriallydifferentfromthefairvalue.n.a. notapplicable.
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Note 4: RBC Dexia Investor Services joint venture
Weoperateourinstitutional&investorservicesbusinessthroughourjointventure,RBCDexiaInvestorServices(RBCDexiaIS),whichwasformedonJanuary2,2006.
Duringthequarter,RBCDexiaISfinalizedthenetassetscontributionrequire-mentasoutlinedinthejointventureagreement.Asaresult,itwasdeterminedthatwehadcontributed€27million($41million)ofnetassetsinexcessoftheamountrequired.Thisexcess,whichwillbesettledbyRBCDexiaISincash,hasbeenrecognizedbyusinthecurrentquarterasareductioninourinvestmentinthejointventure.
WereporttheresultsofRBCDexiaISonaone-monthlagbasisandhaveincludedinourquarterendedJanuary31,2007,ourproportionateshareofRBCDexiaISfinancialresultsfortheirthreemonthsendedDecember31,2006.AssetsandliabilitiesrepresentingourinterestinRBCDexiaISandourproportion-ateshareofitsfinancialresultsbeforeadjustingforrelatedpartytransactionsarepresentedinthefollowingtables:
WeprovidecertainservicestoRBCDexiaIS,whichincludeadministrativeandtechnologysupport,humanresources,creditandbankingfacilitiestosupportitsoperations.RBCDexiaISalsoprovidescertainservicestous,includingcustodyandtrusteeship,fundandinvestmentadministration,transferagencyandinvestorservices.Theseservicesandfacilitiesareprovidedbytherespectivepartiesinthenormalcourseofoperationsontermssimilartothoseofferedtonon-relatedpar-ties.TheamountsofincomeearnedandexpensesincurredbyRBCDexiaISrelatedtotransactionswithRBCareasfollows:
Asat
January 31 October31
2007 2006
ConsolidatedBalanceSheets Assets(1) $ 13,504 $ 12,354 Liabilities 12,572 11,396
(1) Includes$72millionofgoodwill(October31,2006–$69million)and$195millionofintangibleassets(October31,2006–$208million).
Forthethree monthsended
January 31
2007 (1)
ConsolidatedStatementofIncome Netinterestincome $ 27 Non-interestincome 132 Non-interestexpense 120 Netincome 29 ConsolidatedStatementofCashFlows Cashflowsfromoperatingactivities $ (18) Cashflowsfrominvestingactivities (1,154) Cashflowsfromfinancingactivities 1,172
(1) ForourquarterendedJanuary31,2006,wedidnotreportourproportionateshareofRBCDexiaISresultsasthejointventurewasformedonJanuary2,2006,andwereportitsresultsonaone-monthlagbasis.
Note 5: Significant acquisitions and disposition
InDecember2006,wecompletedtheacquisitionofAtlanta,Georgia-basedFlagFinancialCorporation(Flag)anditssubsidiary,FlagBank.Detailsofthisacquisitionareasfollows:
Forthethree monthsended
January 31
2007(1)
Netinterestincome $ 41Non-interestincome 6Non-interestexpense 8
(1) ForthequarterendedJanuary31,2006,wedidnotreporttheamountsofincomeearnedandexpensesincurredbyRBCDexiaISrelatedtotransactionswithRBCasthejointventurewasformedonJanuary2,2006,andwereportitsresultsonaone-monthlagbasis.
Flag
Acquisitiondate December 8, 2006
Businesssegment RBC U.S. and International Personal and Business
Percentageofsharesacquired 100%
Purchaseconsideration Cash payment of US$435
Fairvalueoftangibleassetsacquired $ 1,912 Fairvalueofliabilitiesassumed (1,870)
Fairvalueofidentifiablenettangibleassetsacquired 42 Coredepositintangiblesandotherintangibles(1) 50 Goodwill 406
Totalpurchaseconsideration $ 498
(1) Coredepositintangiblesof$43millionareamortizedonastraight-linebasisoveranestimatedaverageusefullifeofsevenyears.Otherintangiblesof$7millionrelatetonon-competeagreementsandareamortizedoverthetermoftheagreements,foramaximumofthreeyears.
InJanuary2007,wecompletedtwoacquisitionsinRBCCapitalMarkets:(i)thebroker-dealerbusinessandcertainotherassetsoftheCarlinFinancialGroup,aNewYork-basedboutiquebroker-dealerand(ii)Daniels&Associates,L.P.,aM&Aadvisortothecable,telecom,broadcastandInternetservicesindustries.Theacqui-sitionsincludetotalgoodwillof$121millionandarenotmaterialtoRBCCapitalMarkets.
Discontinued operationsRBCMortgageCompany(RBCMortgage)haddisposedofsubstantiallyallofitsremainingassetsandobligationsbytheendoffiscal2006andwenolongersepa-ratelyclassifyitsresultsinourInterimConsolidatedFinancialStatements.TheresidualbalancesofRBCMortgageareimmaterial;changesinthesebalancesarenowreportedinCorporateSupport.Forpriorperiods,theresultsofRBCMortgagecontinuetobepresentedseparatelyasdiscontinuedoperations.
42RoyalBankofCanadaFirstQuarter2007
ThekeyassumptionsusedtovaluetheretainedinterestsatthedateofsecuritizationforactivitiesduringthethreemonthsendedJanuary31,2007,aresummarizedbelow.Allratesareannualized.
Note 7: Pension and other post-employment benefits
Weofferanumberofbenefitplans,whichprovidepensionandotherpost-employmentbenefitstoeligibleemployees.Expensesforthesebenefitplansarepresentedinthefollowingtable:
Forthethreemonthsended
January 31 October31 January31
2007 2006 2006
Pensionbenefitexpense $ 91 $ 93 $ 99Otherpost-employmentbenefitexpense 27 21 33
Key assumptions
Residential mortgage loans
Variable rate Fixed rate
Expectedweightedaveragelifeofprepayablereceivables(inyears) 2.56 3.43Paymentrate 30.00% 15.52%Excessspread,netofcreditlosses 1.00 1.05Expectedcreditlosses n.a. n.a.Discountrate 4.15 4.23
n.a. notapplicable
Inadditiontotheabovesecuritizationtransactions,wesoldUS$109millionofparticipationinterestsincommercialmortgagemezzaninenotestothird-partyinvestorsattheirprincipalamountsduringthequarter.
Note 6: Securitizations
Securitization activity for the three months ended (1)
January 31 October31 January31
2007(2) 2006(2) 2006(3) Commercial Residential Commercial Residential Credit Residential mortgage mortgage mortgage mortgage card mortgage loans loans(4) loans loans(4) loans(5) loans(4)
Securitizedandsold $ 320 $ 1,438 $ 322 $ 2,059 $ 1,200 $ 1,533Netcashproceedsreceived 326 1,427 332 2,037 400 1,499Asset-backedsecuritiespurchased – – – – 794 –Retainedrightstofutureexcessinterest – 42 – 46 9 20Pre-taxgain(loss)onsale 6 31 10 24 3 (14)Securitiescreatedandretained(6) – 1,044 – 2,780 – 1,636
(1) Wedidnotrecognizeaservicingassetorservicingliabilityforourservicingrightswithrespecttothesecuritizedloansaswereceivedadequatecompensationforourservices.(2) Wedidnotsecuritizeanycreditcardloansduringtheperiod.(3) Wedidnotsecuritizeanycommercialmortgageloansduringtheperiod.(4) Allresidentialmortgageloanssecuritizedaregovernmentguaranteed.(5) Thenetcashproceedsreceivedrepresentgrosscashproceedsof$1,200millionlessfundsusedtopurchasenotesissuedbythetrustwithaprincipalvalueof$800million.(6) ForthethreemonthsendedJanuary31,2007,thetotalsecuritiescreatedandretainedconsistof$886millionclassifiedasTradingsecuritiesand$158millionclassifiedasInvestmentsecurities.
ForthepriorperiodsendedOctober31,2006andJanuary31,2006,allsecuritiescreatedandretainedwereclassifiedasInvestmentsecurities.
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Note 9: Earnings per share
Forthethreemonthsended
January 31 October31 January31
2007 2006 2006
Basic earnings per share Netincomefromcontinuingoperations $ 1,494 $ 1,263 $ 1,172 Netlossfromdiscontinuedoperations(1) – (1) (1)
Netincome 1,494 1,262 1,171 Preferredsharedividends (16) (26) (10)
Netincomeavailabletocommonshareholders $ 1,478 $ 1,236 $ 1,161
Averagenumberofcommonshares(inthousands) 1,274,354 1,274,697 1,284,333 Basicearningspershare Continuingoperations $ 1.16 $ .97 $ .90 Discontinuedoperations(1) – – –
Total $ 1.16 $ .97 $ .90
Diluted earnings per share Netincomeavailabletocommonshareholders $ 1,478 $ 1,236 $ 1,161
Averagenumberofcommonshares(inthousands) 1,274,354 1,274,697 1,284,333 Stockoptions(2) 14,581 14,339 14,375 Issuableunderotherstock-basedcompensationplans 4,150 4,828 5,670
Averagenumberofdilutedcommonshares(inthousands) 1,293,085 1,293,864 1,304,378 Dilutedearningspershare Continuingoperations $ 1.14 $ .96 $ .89 Discontinuedoperations(1) – – –
Total $ 1.14 $ .96 $ .89
(1) RefertoNote5.(2) Thedilutiveeffectofstockoptionswascalculatedusingthetreasurystockmethod.Forthethree-monthperiodendedJanuary31,2007,weexcludedfromthecalculationofdilutedearningspershare
994,391averageoptionsoutstandingwithanexercisepriceof$54.99,astheexercisepriceoftheseoptionswasgreaterthantheaveragemarketpriceofourcommonshares.Forthethree-monthperiodsendedOctober31,2006andJanuary31,2006,nooptionwasoutstandingwithanexercisepriceexceedingtheaveragemarketpriceofourcommonshares.
Note 8: Significant capital transactions
OnJanuary19,2007,weissued$250millionNon-cumulativeFirstPreferredSharesSeriesAEat$25pershare.Holdersareentitledtoreceivenon-cumulativepreferentialquarterlydividendsintheamountof$.28125persharetoyield4.5%annually.Subjecttoregulatoryapproval,wemayredeemthesesharesonorafterFebruary24,2012,inwholeorinpart,atadecliningpremium.
OnDecember13,2006,weissued$250millionNon-cumulativeFirstPreferredSharesSeriesADat$25pershare.Holdersareentitledtoreceivenon-cumulativepreferentialquarterlydividendsintheamountof$.28125persharetoyield4.5%annually.Subjecttoregulatoryapproval,wemayredeemthesesharesonorafterFebruary24,2012,inwholeorinpart,atadecliningpremium.
OnNovember24,2006,weredeemedallofouroutstandingsixmillionNon-cumulativeFirstPreferredSharesSeriesOat$25.50pershare,includinga$.50pershareredemptionpremium.
OnNovember8,2006,weredeemedallofouroutstandingUS$400millionsubordinateddebenturesdueNovember8,2011,atparvalueplusaccruedinterest.
OnNovember1,2006,weissued$200millionNon-cumulativeFirstPreferredSharesSeriesACat$25pershare.Holdersareentitledtoreceivenon-cumulative
preferentialquarterlydividendsintheamountof$.2875persharetoyield4.6%annually.Subjecttoregulatoryapproval,wemayredeemthesesharesonorafterNovember24,2011,inwholeorinpart,atadecliningpremium.
EffectiveNovember1,2006,werenewedournormalcourseissuerbidforoneyeartopurchaseforcancellationupto40millionofourcommonsharesthroughthefacilitiesofTorontoStockExchange.Duringthequarter,wepurchased7.6millioncommonsharesatanaveragecostof$54.14pershare.
OnMarch22,2005,weannouncedthatwemay,fromtimetotime,pur-chaseforcancellationsomeorallofouroutstanding$250millionFloating-RateDebenturesduein2083andUS$300millionFloating-RateDebenturesduein2085.Thetiming,priceandothertermsaredeterminedatoursolediscretion.Duringthecurrentquarter,wepurchased$nilmillionofFloating-RateDebenturesduein2083andUS$24million($28million)ofFloating-RateDebenturesduein2085.Sincetheannouncementdate,wehavepurchasedatotalof$26millionofFloating-RateDebenturesduein2083andUS$111million($132million)ofFloating-RateDebenturesduein2085.
44RoyalBankofCanadaFirstQuarter2007
Inadditiontotheaboveguarantees,wetransactsubstantiallyallofoursecuritieslendingactivitiesinwhichweactasanagentfortheownersofsecuritiesthroughourjointventure,RBCDexiaIS.AsatJanuary31,2007,RBCDexiaISsecuritieslendingindemnificationstotalled$46,944million(October31,2006–$45,614mil-lion;January31,2006–$36,124million);weareexposedto50%ofthisamount.
RefertoNote27ofour2006AnnualReportforfurtherinformationontheaboveguaranteesandadescriptionofourobligationsundercertainindemnifica-tionagreements.
Enron Corp. (Enron) litigationApurportedclassofpurchasersofEnronwhopubliclytradedequityanddebtsecu-ritiesbetweenJanuary9,1999,andNovember27,2001,hasnamedRoyalBankofCanadaandcertainrelatedentitiesasdefendantsinanactionentitledRegents of the University of Californiav.Royal Bank of CanadaintheUnitedStatesDistrictCourt,SouthernDistrictofTexas(HoustonDivision).Inaddition,RoyalBankofCanadaandcertainrelatedentitieshavebeennamedasdefendantsinseveralotherEnron-relatedcases,whicharefiledinvariouscourtsintheU.S.,assertingsimilarclaimsfiledbypurchasersofEnronsecurities.RoyalBankofCanadaisalsoathird-partydefendantincasesinwhichEnron’saccountants,ArthurAndersenLLP,filedthird-partyclaimsagainstanumberofparties,seekingcontributionifArthurAndersenLLPisfoundliabletoplaintiffsintheseactions.
Wereviewthestatusofthesemattersonanongoingbasisandwillexerciseourjudgmentinresolvingtheminsuchmanneraswebelievetobeinourbestinterests.Aswithanylitigation,therearesignificantuncertaintiessurroundingthetimingandoutcome.Uncertaintyisexacerbatedasaresultofthelargenumberofcases,themultipledefendantsinmanyofthem,thenovelissuespresented,andthecurrentdifficultlitigationenvironment.Althoughitisnotpossibletopredicttheultimateoutcomeoftheselawsuits,thetimingoftheirresolutionorourexposure,duringthefourthquarterof2005,weestablishedalitigationprovisionof$591million(US$500million)or$326millionaftertax(US$276million).Webelievetheultimateresolutionoftheselawsuitsandotherproceedings,whilenotlikelytohaveamaterialadverseeffectonourconsolidatedfinancialposition,maybemate-rialtoouroperatingresultsfortheparticularperiodinwhichtheresolutionoccurs,notwithstandingtheprovisionestablishedinthefourthquarterof2005.Wewillcontinuetovigorouslydefendourselvesinthesecases.
OtherVariousotherlegalproceedingsarependingthatchallengecertainofourpracticesoractions.Weconsiderthattheaggregateliabilityresultingfromtheseotherpro-ceedingswillnotbematerialtoourfinancialpositionorresultsofoperations.
Maximum potential amount of future payments
Asat
January 31 October31 January31
2007 2006 2006 Maximum potential Maximumpotential Maximumpotential amount of future Carrying amountoffuture Carrying amountoffuture Carrying payments amount (1) payments amount(1) payments amount(1)
Creditderivativesandwrittenputoptions(2) $ 48,802 $ 253 $ 54,723 $ 352 $ 26,505 $ 351Backstopliquidityfacilities 38,601 32 34,342 – 33,534 –Stablevalueproducts(2) 19,570 – 16,098 – 13,256 –Financialstandbylettersofcreditandperformanceguarantees 16,632 57 15,902 17 14,678 17Creditenhancements 4,809 26 4,155 – 3,692 –Mortgageloanssoldwithrecourse(3) 218 – 204 – 296 –
(1) AsdescribedinNote1,effectiveNovember1,2006,aliabilityisnowrecognizedontheConsolidatedBalanceSheetatinceptionofaguaranteeforthefairvalueoftheobligationundertakeninissuingtheguarantee.Forcreditderivativesandwrittenputoptions,thepriorperiodcomparativesrepresentthefairvaluesofthederivatives;forfinancialstandbylettersofcreditandperformanceguaran-tees,theyrepresentunamortizedpremiumsreceived.
(2) Thenotionalamountofthecontractapproximatesthemaximumpotentialamountoffuturepayments.(3) AsatOctober31andJanuary31,2006,mortgageloanssoldwithrecourserelatedtothediscontinuedoperationsamountedto$niland$82million,respectively.RefertoNote5.
Note 10: Guarantees and contingencies
GuaranteesInthenormalcourseofourbusiness,weenterintonumerousagreementsthatmaycontainfeaturesthatmeetthedefinitionofaguaranteepursuanttoAcG-14.Themaximumpotentialamountoffuturepaymentsrepresentsthemaximumriskoflossiftherewasatotaldefaultbytheguaranteedparties,withoutconsiderationof
possiblerecoveriesunderrecourseprovisions,insurancepoliciesorfromcollateralheldorpledged.
Thefollowingtablesummarizessignificantguaranteesthatwehaveprovidedtothirdparties:
Forthethreemonthsended
January 31 October31 January31
2007 2006 2006
Netinterestincome $ (151) $ (173) $ (82)Non-interestincome 803 620 547
Total $ 652 $ 447 $ 465
Note 11: Total trading revenue
Totaltradingrevenueincludesbothtrading-relatedNetinterestincomeandTradingrevenuereportedinNon-interestincome.Netinterestincomearisesfrominterestanddividendsrelatedtotradingassetsandliabilitiesandamortizationofpremiumsanddiscountsontheiracquisitionorissuance.Non-interestincome
includesrealizedandunrealizedgainsandlossesfromthepurchaseandsaleofsecurities,andrealizedandunrealizedgainsandlossesontradingderivativefinancialinstruments.
Note 12: Results by business segment
Quarterly earnings RBCCanadian RBCU.S.andInternational PersonalandBusiness PersonalandBusiness RBCCapitalMarkets
Q1/07 Q4/06 Q1/06 Q1/07 Q4/06 Q1/06 Q1/07 Q4/06 Q1/06
Netinterestincome $ 1,588 $ 1,567 $ 1,443 $ 302 $ 279 $ 279 $ 78 $ 14$ 68Non-interestincome 1,958 1,918 1,855 501 461 431 1,322 1,146 945
Totalrevenue 3,546 3,485 3,298 803 740 710 1,400 1,160 1,013Provisionfor(recoveryof)creditlosses 182 173 142 10 5 10 (8) – (85)Insurancepolicyholderbenefits,claimsandacquisitionexpense 516 611 652 – – – – – –Non-interestexpense 1,575 1,566 1,502 611 575 567 877 770 686Businessrealignmentcharges – – – – 1 – – (1) –
Netincome(loss)beforeincometaxes 1,273 1,135 1,002 182 159 133 531 391 412Incometaxes 396 360 333 31 32 30 103 70 93Non-controllinginterestinnetincomeofsubsidiaries – – – 2 1 2 8 6 (11)
Netincomefromcontinuingoperations 877 775 669 149 126 101 420 315 330Netlossfromdiscontinuedoperations(1) – – – – (1) (1) – – –
Net income $ 877 $ 775 $ 669 $ 149 $ 125 $ 100 $ 420 $ 315$ 330
RoyalBankofCanadaFirstQuarter200745
CompositionofbusinesssegmentsFormanagementreportingpurposes,ouroperationsandactivitiesareorganizedintothreebusinesssegments:RBCCanadianPersonalandBusiness,RBCU.S.andInternationalPersonalandBusiness,andRBCCapitalMarkets.RBCCanadianPersonalandBusinessconsistsofbankingandwealthmanagementbusinessesinCanadaandourglobalinsurancebusiness,anditsresultsreflecthowitisman-aged,inclusiveofsecuritizedassetsandrelatedamountsforincomeandprovisionforcreditlosses.RBCU.S.andInternationalPersonalandBusinessconsistsofourbankingandretailbrokeragebusinessesintheU.S.,bankingintheCaribbeanandinternationalprivatebanking.RBCCapitalMarketsprovidesawiderangeofcorporateandinvestmentbanking,salesandtrading,researchandrelatedprod-uctsandotherservices.Allotherenterpriselevelactivitiesthatarenotallocatedtothesethreebusinesssegments,suchassecuritizationandotheritemsandnetchargesassociatedwithunattributedcapital,arereportedunderCorporateSupport.Consolidationadjustments,includingtheeliminationofthetaxableequivalentbasis(teb)gross-upamounts,arealsoincludedinCorporateSupport.TebadjustmentsgrossupNetinterestincomefromcertaintax-advantagedsourcestotheireffectivetaxequivalentvaluewiththecorrespondingoffsetrecordedintheprovisionforincometaxes.ManagementbelievesthattheseadjustmentsarenecessaryforRBCCapitalMarketstoreflecthowitismanaged.Theuseofthetebadjustmentsenhancesthecomparabilityofrevenueacrossourtaxableandtax-advantagedsources.Theuseoftebadjustmentsandmeasuresmaynotbecom-parabletosimilarGAAPmeasuresorsimilarlyadjustedamountsatotherfinancialinstitutions.
CorporateSupport Total
Q1/07 Q4/06 Q1/06 Q1/07 Q4/06 Q1/06
Netinterestincome $ (101) $ (129)$ (108) $ 1,867 $ 1,731$ 1,682Non-interestincome 50 93 47 3,831 3,618 3,278
Totalrevenue (51) (36) (61) 5,698 5,349 4,960Provisionfor(recoveryof)creditlosses (22) (19) (20) 162 159 47Insurancepolicyholderbenefits,claimsandacquisitionexpense – – – 516 611 652Non-interestexpense 4 44 (4) 3,067 2,955 2,751Businessrealignmentcharges – – – – – –
Netincome(loss)beforeincometaxes (33) (61) (37) 1,953 1,624 1,510Incometaxes (95) (120) (124) 435 342 332Non-controllinginterestinnetincomeofsubsidiaries 14 12 15 24 19 6
Netincomefromcontinuingoperations 48 47 72 1,494 1,263 1,172Netlossfromdiscontinuedoperations(1) – – – – (1) (1)
Net income $ 48 $ 47 $ 72 $ 1,494 $ 1,262$ 1,171
(1) RefertoNote5.
Ourmanagementreportingframeworkisintendedtomeasuretheperfor-manceofeachbusinesssegmentasifitwasastand-alonebusinessandreflectthewaythatthebusinesssegmentismanaged.Thisapproachensuresourbusinesssegments’resultsreflectallrelevantrevenueandexpensesassociatedwiththeconductoftheirbusinessanddepictshowmanagementviewsthoseresults.Theseitemsdonotimpactourconsolidatedresults.
Theexpensesineachbusinesssegmentmayincludecostsorservicesdirectlyincurredorprovidedontheirbehalfattheenterpriselevel.Forothercostsnotdirectlyattributabletooneofourbusinesssegments,weuseamanagementreportingframeworkthatusesassumptions,estimatesandmethodologiesforallocatingoverheadcostsandindirectexpensestoourbusinesssegmentsandthatassistsintheattributionofcapitalandthetransferpricingoffundstoourbusinesssegmentsinamannerthatfairlyandconsistentlymeasuresandalignstheeconomiccostswiththeunderlyingbenefitsandrisksofthatspecificbusinesssegment.Activitiesandbusinessconductedbetweenourbusinesssegmentsaregenerallyatmarketrates.AllotherenterpriselevelactivitiesthatarenotallocatedtoourthreebusinesssegmentsarereportedunderCorporateSupport.
Ourassumptionsandmethodologiesusedinourmanagementreportingframeworkareperiodicallyreviewedbymanagementtoensuretheyremainvalid.Thecapitalattributionmethodologiesinvolveanumberofassumptionsandestimatesthatarerevisedperiodically.
Changes to comparativesWithinRBCCanadianPersonalandBusiness,wereclassifiedcertainamountsrelatedtotrusteeservicesfromNon-interestincometoNetinterestincomeasaresultofanewagreementbetweenthreeofourCanadianwealthmanagementlinesofbusiness.Thecomparativeresultsreflectthischange.
Note 13: Variable interest entities
Weadministersixmulti-sellerasset-backedcommercialpaperconduitprograms(multi-sellerconduits).Theseconduitsprimarilypurchasefinancialassetsfromcli-entsandfinancethosepurchasesbyissuingasset-backedcommercialpaper.Ourclientsprimarilyutilizemulti-sellerconduitstodiversifytheirfinancingsourcesandtoreducefundingcosts.Certainofthemulti-sellerconduitsalsofinancedassetsintheformofeithersecuritiesorinstrumentsthatcloselyresemblesecuritiessuchascredit-linkednotes.Inthesesituations,themulti-sellerconduitisoftenoneofmanyinvestorsinthesecuritiesorsecurity-likeinstruments.
Themulti-sellerconduitsarenotconsolidatedunderCICAAccountingGuideline15, Consolidation of Variable Interest Entities,aswearenotthePrimaryBeneficiary.However,wedoholdsignificantvariableinterestsinthesemulti-sellerconduitsresultingfromourprovisionofbackstopliquidityfacilities,partialcreditenhancementandourentitlementtoresidualfees.
Asaresultofincreasedactivitiesandchangesintheexchangerateduringthequarter,thetotalassetsofourmulti-sellerconduitsgrewto$39billionasatJanuary31,2007(October31,2006–$34billion),andourmaximumexposuretolossincreasedto$39billion(October31,2006–$35billion).
46RoyalBankofCanadaFirstQuarter2007
Note 15: Reconciliation of Canadian and United States generally accepted accounting principles
TheInterimConsolidatedFinancialStatementsarepreparedinaccordancewithSubsection308oftheBank Act(Canada),whichstatesthatexceptasotherwisespecifiedbytheOSFI,theInterimConsolidatedFinancialStatementsaretobepreparedinaccordancewithCanadianGAAP.AsrequiredbytheU.S.Securitiesand
ExchangeCommission(SEC),materialdifferencesbetweenCanadianandUnitedStatesGAAParequantifiedbelow.ForacompletediscussionofCanadianandU.S.GAAPdifferences,refertoNote31inour2006AnnualReport.
Condensed Consolidated Balance Sheets
As at January 31 AsatOctober31 AsatJanuary31
2007 2006 2006
Canadian U.S. Canadian U.S. Canadian U.S. GAAP Differences GAAP GAAP Differences GAAP GAAP Differences GAAP
AssetsCash and due from banks $ 3,878 $ (152) $ 3,726 $ 4,401 $ (101)$ 4,300 $ 4,682 $ (4)$ 4,678
Interest-bearing deposits with banks 7,637 (4,225) 3,412 10,502 (4,223) 6,279 10,913 (4,634) 6,279
Securities Trading 169,030 (14,387) 154,643 147,237 (282) 146,955 131,551 (1,722) 129,829 Investment 27,821 (27,821) – 37,632 (37,632) – 34,107 (34,107) – Available-for-sale – 38,150 38,150 – 37,535 37,535 – 33,877 33,877
196,851 (4,058) 192,793 184,869 (379) 184,490 165,658 (1,952) 163,706
Assets purchased under reverse repurchase agreements and securities borrowed 67,744 (2,641) 65,103 59,378 (2,148) 57,230 47,564 (926) 46,638
Loans (net of allowance for loan losses) 218,263 (741) 217,522 208,530 (111) 208,419 192,757 (868) 191,889
Other Customers’liabilityunderacceptances 10,011 – 10,011 9,108 – 9,108 7,951 – 7,951 Derivatives 42,226 (233) 41,993 37,729 717 38,446 38,237 1,055 39,292 Premisesandequipment,net 1,917 (96) 1,821 1,818 (86) 1,732 1,736 (70) 1,666 Goodwill 4,932 (58) 4,874 4,304 (61) 4,243 4,157 (70) 4,087 Otherintangibles 699 (197) 502 642 (211) 431 704 (10) 694 Reinsurancerecoverables – 1,210 1,210 – 1,182 1,182 – 1,181 1,181 Separateaccountassets – 118 118 – 111 111 – 115 115 Assetsofoperationsheldforsale – – – 82 – 82 178 – 178 Otherassets 17,457 28,032 45,489 15,417 24,893 40,310 13,337 32,268 45,605
77,242 28,776 106,018 69,100 26,545 95,645 66,300 34,469 100,769
$ 571,615 $ 16,959 $ 588,574 $ 536,780 $ 19,583 $ 556,363 $ 487,874 $ 26,085$ 513,959
Liabilities and shareholders’ equity
Deposits $ 365,606 $ (10,232) $ 355,374 $ 343,523 $ (9,466)$ 334,057 $ 314,872 $ (9,663)$ 305,209
Other Acceptances 10,011 – 10,011 9,108 – 9,108 7,951 – 7,951 Obligationsrelatedtosecuritiessoldshort 46,361 158 46,519 38,252 (1,188) 37,064 35,856 (1,094) 34,762 Obligationsrelatedtoassetssoldunderrepurchaseagreements andsecuritiesloaned 41,117 (1,519) 39,598 41,103 (1,141) 39,962 28,841 (922) 27,919 Derivatives 43,971 (410) 43,561 42,094 312 42,406 42,668 541 43,209 Insuranceclaimsandpolicybenefitliabilities 7,948 2,485 10,433 7,337 2,686 10,023 7,150 2,669 9,819 Separateaccountliabilities – 118 118 – 111 111 – 115 115 Liabilitiesofoperationsheldforsale – – – 32 – 32 37 – 37 Otherliabilities 22,853 26,127 48,980 22,649 27,877 50,526 18,533 34,210 52,743
172,261 26,959 199,220 160,575 28,657 189,232 141,036 35,519 176,555
Subordinated debentures 6,807 6 6,813 7,103 300 7,403 8,116 281 8,397
Trust capital securities 1,385 (1,385) – 1,383 (1,383) – 1,399 (1,399) –
Preferred share liabilities 299 (299) – 298 (298) – 300 (300) –
Non-controlling interest in subsidiaries 1,799 1,105 2,904 1,775 1,083 2,858 1,916 1,381 3,297
Shareholders’ equity 23,458 805 24,263 22,123 690 22,813 20,235 266 20,501
$ 571,615 $ 16,959 $ 588,574 $ 536,780 $ 19,583 $ 556,363 $ 487,874 $ 26,085$ 513,959
Forthethree monthsended
January 31
2007
Netunrealizedgains(losses)onavailable-for-salesecurities $ 18 Reclassificationof(gains)lossesonavailable-for-salesecuritiestoincome 8 Netforeigncurrencytranslationgains(losses)fromhedgingactivities (352) Netgains(losses)onderivativesdesignatedascashflowhedges 9 Reclassificationtoincomeof(gains)lossesonderivativesdesignatedascashflowhedges 8
Total income taxes (recovery) $ (309)
Note 14: Income taxes on components of Other comprehensive Income
TheincometaxexpenseorbenefitallocatedtoeachcomponentofOthercomprehensiveincomeispresentedinthetablebelow:
RoyalBankofCanadaFirstQuarter200747
Condensed Consolidated Statements of Income
Forthethreemonthsended
January 31 October31 January31
2007 2006 2006
Netincomefromcontinuingoperations,CanadianGAAP $ 1,494 $ 1,263 $ 1,172Differences:Netinterestincome Derivativeinstrumentsandhedgingactivities – (42) 7 Jointventures (27) (27) – Liabilitiesandequity 29 28 28Non-interestincome Insuranceaccounting (1) (116) (140) Derivativeinstrumentsandhedgingactivities (3) 2 (33) Reclassificationoffinancialinstruments(1) 44 7 3 Variableinterestentities 4 (10) – Limitedpartnerships – (6) (1) Jointventures (145) (150) (40) Reclassificationofforeigncurrencytranslation (40) – (4) Other (9) (8) (8)Provisionfor(recoveryof)creditlosses Jointventures 1 1 (1)Insurancepolicyholderbenefits,claimsandacquisitionexpense Insuranceaccounting (11) 89 102Non-interestexpense Stockappreciationrights 9 7 6 Insuranceaccounting 18 19 16 Jointventures 149 151 30 Variableinterestentities 2 2 – Other 9 8 8Incometaxesandnetdifferenceinincometaxesduetotheaboveitems – 38 22Non-controllinginterestinnetincomeofsubsidiaries Variableinterestentities (6) 8 – Jointventures – 3 – Liabilitiesandequity (25) (25) (25)
Netincomefromcontinuingoperations,U.S.GAAP $ 1,492 $ 1,242 $ 1,142
Netlossfromdiscontinuedoperations,CanadianGAAP(2) $ – $ (1) $ (1)Difference–Other – – –
Netlossfromdiscontinuedoperations,U.S.GAAP(2) $ – $ (1) $ (1)
Netincome,U.S.GAAP $ 1,492 $ 1,241 $ 1,141
Basicearningspershare(3) CanadianGAAP $ 1.16 $ .97 $ .90 U.S.GAAP $ 1.15 $ .95 $ .87Basicearningspersharefromcontinuingoperations CanadianGAAP $ 1.16 $ .97 $ .90 U.S.GAAP $ 1.15 $ .95 $ .87Basicearningspersharefromdiscontinuedoperations(2) CanadianGAAP $ – $ – $ – U.S.GAAP $ – $ – $ –Dilutedearningspershare(3) CanadianGAAP $ 1.14 $ .96 $ .89 U.S.GAAP $ 1.14 $ .93 $ .86Dilutedearningspersharefromcontinuingoperations CanadianGAAP $ 1.14 $ .96 $ .89 U.S.GAAP $ 1.14 $ .93 $ .86Dilutedearningspersharefromdiscontinuedoperations(2) CanadianGAAP $ – $ – $ – U.S.GAAP $ – $ – $ –
(1) Reclassificationoffinancialinstrumentsreflectsdifferencesinclassificationarisingfromtheuseofthefairvalueoption.Priortotheadoptionofthenewfinancialinstrumentsaccountingstandards,thisitemreflectedthereclassificationofsecuritiesonly.RefertothediscussionunderChangesinsignificantaccountingpoliciesaffectingCanadianandU.S.GAAPdifferences.
(2) RefertoNote5.(3) Two-classmethodofcalculatingearningspershare:Theimpactofcalculatingearningspershareusingthetwo-classmethodreducedU.S.GAAPbasicanddilutedearningspershareforallperiods
presentedbylessthanonecent.
Note 15: Reconciliation of Canadian and United States generally accepted accounting principles (continued)
48RoyalBankofCanadaFirstQuarter2007
Condensed Consolidated Statements of Cash Flows (1)
Forthethreemonthsended
January 31 October31 January31
2007 2006 2006
Cash flows from (used in) operating activities, Canadian GAAP $ (13,521) $ (7,774) $ (4,100)U.S.GAAPadjustmentfornetincome (2) (22) (30)Adjustmentstodeterminenetcashfrom(usedin)operatingactivities Provisionforcreditlosses (1) (1) – Depreciation (5) (6) (4) Futureincometaxes (2) 240 51 Amortizationofotherintangibles (6) (8) – Changesinoperatingassetsandliabilities Insuranceclaimsandpolicybenefitliabilities (201) 55 26 Netchangeinaccruedinterestreceivableandpayable 253 (183) 80 Derivativeassets 950 (3) 102 Derivativeliabilities (722) (136) (38) Tradingsecurities 3,493 1,177 745 Reinsurancerecoverable 28 27 (9) Netchangeinbrokersanddealersreceivableandpayable (4,563) 1,253 2,014 Other (691) (767) 2,868
Net cash from (used in) operating activities, U.S. GAAP (14,990) (6,148) 1,705
Cash flows from (used in) investing activities, Canadian GAAP (15,105) (1,150) (12,204) Changeininterest-bearingdepositswithbanks 2 (553) 4,602 Changeinloans,netofloansecuritizations 630 (102) 1,807 Proceedsfromsaleofinvestmentsecurities (2,301) (5,754) (3,678) Proceedsfrommaturityofinvestmentsecurities (3,841) (5,231) (7,043) Purchasesofinvestmentsecurities 5,595 10,690 8,415 Proceedsfromsaleofavailable-for-salesecurities 2,301 5,754 3,678 Proceedsfrommaturityofavailable-for-salesecurities 3,841 5,231 7,044 Purchasesofavailable-for-salesecurities (5,465) (11,078) (8,191) Changeininvestmentsecurities – – (1) Netacquisitionsofpremisesandequipment 15 20 41 Changeinassetspurchasedunderreverserepurchaseagreementsandsecuritiesborrowed 493 (376) 926
Net cash from (used in) investing activities, U.S. GAAP (13,835) (2,549) (4,604)
Cash flows from financing activities, Canadian GAAP 28,001 9,518 16,043 Changeindeposits (20,459) (8,821) (8,012) Changeindeposits–Canada 129 10,175 (6,267) Changeindeposits–International 19,564 (115) 4,588 Issueofcommonshares – 1 – Salesoftreasuryshares 1 – – Purchaseoftreasuryshares – (2) – Dividendspaid (4) (2) (4) Changeinobligationsrelatedtoassetssoldunderrepurchaseagreementsandsecuritiesloaned (378) (75) (922) Dividends/distributionspaidbysubsidiariestonon-controllinginterests (51) – (51) Changeinobligationsrelatedtosecuritiessoldshort 1,346 (1,324) (2,741)
Net cash from financing activities, U.S. GAAP $ 28,149 $ 9,355 $ 2,634
Effectofexchangeratechangesoncashandduefrombanks $ 102 $ (7) $ (58)
Net change in cash and due from banks (574) 651 (323)Cashandduefrombanksatbeginningofperiod $ 4,300 $ 3,649 $ 5,001
Cash and due from banks at end of period, U.S. GAAP $ 3,726 $ 4,300 $ 4,678
(1) Wedidnothavediscontinuedoperationsinthefirstquarterof2007.ForthethreemonthsendedOctober31,2006andJanuary31,2006,CanadianandU.S.GAAPcashflowreconcilingitemsrelatingtodiscontinuedoperationswerenotmaterial.RefertoNote5.
Accumulated other comprehensive income (loss), net of income taxes
Asat
January 31 October31 January31
2007 2006(1) 2006(1) Canadian U.S. GAAP Differences GAAP
Unrealizedgains(losses)onavailable-for-salesecurities $ 50 $ 155 $ 205 $ 191 $ 50Unrealizedforeigncurrencytranslationgains(losses),netofhedgingactivities (1,788) 44 (1,744) (2,000) (2,025)Gains(losses)onderivativesdesignatedascashflowhedges (22) 5 (17) (52) (82)Additionalpensionobligation – (62) (62) (62) (313)
Accumulatedothercomprehensiveincome(loss),netofincometaxes $ (1,760) $ 142 $ (1,618) $ (1,923) $ (2,370)
(1) TheconceptofAOCIwasintroducedunderCanadianGAAPupontheadoptionofSection1530onNovember1,2006(refertoNote1).Accordingly,thereisnoreconciliationforthepriorperiods.
Note 15: Reconciliation of Canadian and United States generally accepted accounting principles (continued)
RoyalBankofCanadaFirstQuarter200749
Material balance sheet reconciling itemsThefollowingtablespresenttheincreasesor(decreases)inassets,liabilitiesandshareholders’equitybymaterialdifferencesbetweenCanadianandU.S.GAAP.
As at January 31, 2007
As at October 31, 2006
Derivative
instrumentsand
hedgingactivities
Variableinterest
entities
Jointventures
Insurance
accounting
Reclassificationof
financial
instruments(1)
Limited
partnerships
Stock
appreciation
rights
Liabilities
andequity
Additional
pension
obligation
Tradedate
accounting
Non-cash
collateral
Rightofoffset
Guarantees,loan
commitmentsand
otherminoritems
Total
Consolidated Statements of Comprehensive Income
Forthethreemonthsended
January 31 October31 January31
2007 2006(1) 2006(1) Canadian U.S. GAAP Differences GAAP
Netincome $ 1,494 $ (2) $ 1,492 $ 1,241 $ 1,141Othercomprehensiveincome,netoftaxes Netunrealizedgains(losses)onavailable-for-salesecurities 39 (25) 14 253 (33) Unrealizedforeigncurrencytranslationgains(losses) 879 – 879 91 (609) Reclassificationof(gains)lossesonforeigncurrencytranslationtoincome (40) 40 – – – Netforeigncurrencytranslationgains(losses)fromhedgingactivities (623) – (623) 17 352 Netgains(losses)onderivativesdesignatedascashflowhedges 17 1 18 (69) 42 Reclassificationtoincomeof(gains)lossesonderivativesdesignatedascashflowhedges 17 – 17 47 41 Additionalpensionobligation – – – 251 –
Totalcomprehensiveincome $ 1,783 $ 14 $ 1,797 $ 1,831 $ 934
Incometaxes(recovery)deductedfromtheaboveitems: Netunrealizedgains(losses)onavailable-for-salesecurities $ 26 $ (19) $ 7 $ 134 $ (18) Netforeigncurrencytranslationgains(losses)fromhedgingactivities (352) – (352) 11 173 Netgains(losses)onderivativesdesignatedascashflowhedges 9 – 9 (35) 23 Reclassificationtoincomeof(gains)lossesonderivativesdesignatedascashflowhedges 8 – 8 24 21 Additionalpensionobligation – – – 134 –
Totalincometaxes(recovery) $ (309) $ (19) $ (328) $ 268 $ 199
(1) AnewConsolidatedStatementofComprehensiveIncomewasintroducedunderCanadianGAAPupontheadoptionofSection1530onNovember1,2006(refertoNote1).Accordingly,thereisnoreconciliationforthepriorperiods.
Assets Cashandduefrombanks $ – – (101) – – – – – – – – – –$ (101)Interest-bearingdepositswithbanks $ (33) – (4,190) – – – – – – – – – –$ (4,223)Securities $ – (342) (288) – 369 (179) – – – 60 – – 1 $ (379)Assetspurchasedunderreverserepurchase agreementsandsecuritiesborrowed $ – – (2,148) – – – – – – – – – –$ (2,148)Loans $ 41 – (1,004) – – – – – – – – 852 –$ (111)Otherassets $ 321 (2) (3,723) 2,890 (128) 164 (22) – (25) 10,401 16,558 – 111 $26,545Liabilities and shareholders’ equity Deposits $ 52 – (9,518) – – – – – – – – – –$ (9,466)Otherliabilities $ (77) (39) (1,907) 2,777 – – (58) (34) 37 10,461 16,558 852 87 $28,657Subordinateddebentures $ 300 – – – – – – – – – – – –$ 300Trustcapitalsecurities $ – – – – – – – (1,383) – – – – –$ (1,383)Preferredshareliabilities $ – – – – – – – (298) – – – – –$ (298)Non-controllinginterestinsubsidiaries $ – (305) (29) – – – – 1,417 – – – – –$ 1,083Shareholders’equity $ 54 – – 113 241 (15) 36 298 (62) – – – 25 $ 690
(1) Reclassificationoffinancialinstrumentsreflectsdifferencesinclassificationarisingfromtheuseofthefairvalueoption.Priortotheadoptionofthenewfinancialinstrumentsaccountingstandards,thiscolumnreflectedthereclassificationofsecuritiesonly.RefertothediscussionunderChangesinsignificantaccountingpoliciesaffectingCanadianandU.S.GAAPdifferences.
AssetsCashandduefrombanks $ – – (152) – – – – – – – – – – $ (152)Interest-bearingdepositswithbanks $ (62) – (4,163) – – – – – – – – – – $ (4,225)Securities $ (1) (328) (382) – (1) (190) – – – (3,157) – – 1 $ (4,058)Assetspurchasedunderreverserepurchase agreementsandsecuritiesborrowed $ – – (2,641) – – – – – – – – – – $ (2,641)Loans $ 35 – (1,707) – (14) – – – – – – 893 52 $ (741)Otherassets $ (214) – (3,624) 2,871 3 175 (24) – (25) 11,777 17,747 – 90 $ 28,776 Liabilities and shareholders’ equity Deposits $ 88 – (10,355) – 39 – – – – – – – (4) $ (10,232)Otherliabilities $ (406) (70) (2,284) 2,529 (15) – (63) (8) 37 8,620 17,747 893 (21) $ 26,959 Subordinateddebentures $ 6 – – – – – – – – – – – – $ 6 Trustcapitalsecurities $ – – – – – – – (1,385) – – – – – $ (1,385)Preferredshareliabilities $ – – – – – – – (299) – – – – – $ (299)Non-controllinginterestinsubsidiaries $ – (258) (30) – – – – 1,393 – – – – – $ 1,105 Shareholders’equity $ 70 – – 342 (36) (15) 39 299 (62) – – – 168 $ 805
Note 15: Reconciliation of Canadian and United States generally accepted accounting principles (continued)
Derivative
instrumentsand
hedgingactivities
Variableinterest
entities
Jointventures
Insurance
accounting
Reclassification
ofsecurities(1)
Limited
partnerships
Stock
appreciation
rights
Liabilities
andequity
Additional
pension
obligation
Tradedate
accounting
Non-cash
collateral
Rightofoffset
Guarantees,loan
commitmentsand
otherminoritems
Total
50RoyalBankofCanadaFirstQuarter2007
Changes in significant accounting policies affecting Canadian and U.S. GAAP differencesCanadian GAAPFinancialinstrumentsWiththeadoptionofHandbookSection1530,Comprehensive income,HandbookSection3855,Financial Instruments – Recognition and Measurement,andHandbookSection3865,Hedges,theaccountingofsecurities,derivativeinstru-ments,hedgingactivitiesandguaranteesaresubstantiallyharmonizedwithU.S.GAAP.ThesignificantdifferencesubsequenttotheadoptionofthesenewCanadianstandardsprimarilyrelatestotheuseofthe“fairvalueoption”.AsdescribedinNote1,Section3855allowsthedesignationofanyfinancialinstru-mentasheld-for-tradingonitsinitialrecognitionoruponadoptionofthenewstandard.ThefairvalueoptionunderCanadianGAAPhasabroaderapplicationasitcanbeelectedforanyfinancialinstrumentascomparedtocurrentU.S.GAAPwhichonlyallowsitforservicingrightsandcertainhybridfinancialinstruments(refertothesectiononU.S.GAAPbelow).TheprincipalcategoriesoffinancialinstrumentswherewehaveappliedthefairvalueoptionunderCanadianGAAParedescribedinNote1andarereflectedintheReclassificationoffinancialinstrumentscolumnintheMaterial balance sheet reconciling itemstableasatJanuary31,2007.
U.S. GAAPAccountingforcertainhybridfinancialinstrumentsOnNovember1,2006,weadoptedtheFinancialAccountingStandardsBoard(FASB)StatementNo.155,Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statement No. 133 and 140(FAS155).FAS155allowsanentitytomeasureanyhybridfinancialinstrumentthatcontainsanembeddedderivativethatrequiresbifurcationatitsfairvalue,withchangesinfairvaluerec-ognizedinearnings.TheadoptionofthisU.S.accountingstandarddidnotmateri-allyimpactourconsolidatedfinancialpositionorresultsofoperations.
AccountingforservicingfinancialassetsOnNovember1,2006,weadoptedFASBStatementNo.156,Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140(FAS156).UnderFAS156,anentityisrequiredtoinitiallymeasureitsservicingrightsatfairvalueandcanelecttosubsequentlyamortizeitsinitialfairvalueoverthetermoftheservicingrights,orremeasurethematfairvaluewithchangesrecognizedinNetincome.TheabilitytoremeasureservicingrightsatfairvaluethroughNetincomeeliminatestheaccountingmismatchbetweentheservicingrightsandtherelatedderivativesthatwouldotherwiseresultintheabsenceofhedgeaccounting.TheadoptionofthisU.S.accountingstandarddidnotmateriallyimpactourconsolidatedfinancialpositionorresultsofoperations.
Future accounting changesGuidance for quantifying financial statement misstatementsOnSeptember13,2006,theSecuritiesandExchangeCommission(SEC)issuedStaffAccountingBulletinNo.108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements(SAB108).Itrequiresthatinquantifyingandanalyzingmisstatements,boththeincomestatementapproachandthebalancesheetapproachshouldbeusedtoevaluatethematerialityoffinancialstatementmisstatements.SAB108willbeeffectiveforourannual2007financialstatements.
Accounting for defined benefit pension and other post-retirement plansOnSeptember29,2006,FASBissuedStatementNo.158,Employers’ Accounting for Defined Benefit Pension and Other Post-retirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)(FAS158).FAS158requiresanentityto(i)recognizethefundedstatusofabenefitplanonthebalancesheet;(ii)recog-nizeinOCItheexistingunrecognizednetgainsandlosses,prior-servicecostsandcredits,andnettransitionassetsorobligations;and(iii)measuredefinedbenefitplanassetsandobligationsasatthefiscalyear-enddate.Thisstatementiseffectiveprospectivelyforusattheendoffiscalyear2007inrespectofrecognitionrequirementsmentionedin(i)and(ii)above,andattheendofthefiscalyear2009inrespectofmeasurementdatechangesmentionedin(iii)above.
Guidance on accounting for income taxesOnJuly13,2006,FASBissuedFASBInterpretationNo.48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109(FIN48),whichprovidesadditionalguidanceonhowtorecognize,measureanddiscloseincometaxbenefits.FIN48willbeeffectiveforusonNovember1,2007.
Accounting for deferred acquisition costs for insurance operationsOnSeptember19,2005,theAccountingStandardsExecutiveCommitteeoftheAmericanInstituteofCertifiedPublicAccountantsissuedStatementofPosition05-1,Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts(SOP05-1).SOP05-1providesguidanceonaccountingfordeferredacquisitioncostsoninternalreplacementsofinsuranceandinvestmentcontractsotherthanthosespecificallydescribedinFASBStatementNo.97,Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.SOP05-1definesaninternalreplacementasamodificationinproductbenefits,features,rights,orcoveragesthatoccursbytheexchangeofacontractforanewcontract,byamendmentorendorsement,ridertoacontract,orbytheelectionofafeatureorcoveragewithinacontract.Areplacementcontractthatissubstantiallychangedfromthereplacedcontractisaccountedforasanextinguishmentofthereplacedcontract,resultinginexpens-ingoftheunamortizeddeferredacquisitioncosts.ThisSOP05-1willbeeffectiveforusonNovember1,2007.
Framework on fair value measurementOnSeptember15,2006,FASBissuedStatementNo.157,Fair Value Measurements(FAS157),whichestablishesaframeworkformeasuringfairvalueinU.S.GAAP,andisapplicabletootheraccountingpronouncementswherefairvalueisconsid-eredtobetherelevantmeasurementattribute.FAS157alsoexpandsdisclosuresaboutfairvaluemeasurementsandwillbeeffectiveforusonNovember1,2008.
Fair value option for financial assets and liabilitiesOnFebruary15,2007,theFASBissuedStatementNo.159,The Fair Value Option for Financial Assets and Liabilities(FAS159).FAS159providesanentitytheoptiontoreportselectedfinancialassetsandliabilitiesatfairvalueandestablishesnewdisclosurerequirementsforassetsandliabilitiestowhichthefairvalueoptionisapplied.FAS159willbeeffectiveforusonNovember1,2008.
Wearecurrentlyassessingtheimpactofadoptingtheabovestandardsonourconsolidatedfinancialpositionandresultsofoperations.
Significant capital transactionOnMarch2,2007,weannouncedourintentiontoredeemallofouroutstanding$500millionsubordinateddebenturesdueJune4,2012,atparvalueplusaccruedinterest.TheredemptionisexpectedtobecompletedonJune4,2007.
Note 16: Subsequent event
Note 15: Reconciliation of Canadian and United States generally accepted accounting principles (continued)
AssetsCashandduefrombanks $ – – (4) – – – – – – – – – –$ (4)Interest-bearingdepositswithbanks $ (35) – (4,599) – – – – – – – – – –$ (4,634)Securities $ – – (274) – 193 (142) – – – (1,692) – – (37) $ (1,952)Assetspurchasedunderreverserepurchase agreementsandsecuritiesborrowed $ – – (926) – – – – – – – – – –$ (926)Loans $ 42 – (1,775) – – – – – – – – 865 –$ (868)Otherassets $ 706 – (3,281) 2,800 (68) 128 (19) – 167 13,378 20,522 – 136 $34,469Liabilities and shareholders’ equity Deposits $ (82) – (9,581) – – – – – – – – – –$ (9,663)Otherliabilities $ 473 – (1,252) 2,710 – – (50) (8) 480 11,686 20,522 865 93 $35,519Subordinateddebentures $ 281 – – – – – – – – – – – –$ 281Trustcapitalsecurities $ – – – – – – – (1,399) – – – – –$ (1,399)Preferredshareliabilities $ – – – – – – – (300) – – – – –$ (300)Non-controllinginterestinsubsidiaries $ – – (26) – – – – 1,407 – – – – – $ 1,381Shareholders’equity $ 41 – – 90 125 (14) 31 300 (313) – – – 6 $ 266
(1) Reclassificationoffinancialinstrumentsreflectsdifferencesinclassificationarisingfromtheuseofthefairvalueoption.Priortotheadoptionofthenewfinancialinstrumentsaccountingstandards,thiscolumnreflectedthereclassificationofsecuritiesonly.RefertothediscussionunderChangesinsignificantaccountingpoliciesaffectingCanadianandU.S.GAAPdifferences.
As at January 31, 2006 Derivative
instrumentsand
hedgingactivities
Variableinterest
entities
Jointventures
Insurance
accounting
Reclassification
ofsecurities(1)
Limited
partnerships
Stock
appreciation
rights
Liabilities
andequity
Additional
pension
obligation
Tradedate
accounting
Non-cash
collateral
Rightofoffset
Guarantees,loan
commitmentsand
otherminoritems
Total
RoyalBankofCanadaFirstQuarter200751
CorporateheadquartersStreetaddress:RoyalBankofCanada200BayStreetToronto,Ontario,CanadaTel:(416)974-5151Fax:(416)955-7800
Mailingaddress:P.O.Box1RoyalBankPlazaToronto,OntarioCanadaM5J2J5
website:rbc.com
TransferAgentandRegistrar
Main AgentComputershareTrustCompanyofCanada
Streetaddress:1500UniversityStreetSuite700Montreal,QuebecCanadaH3A3S8Tel:(514)982-7555,or1-866-586-7635Fax:(514)982-7635
website:computershare.com
Co-Transfer Agent (U.S.)TheBankofNewYork101BarclayStreetNewYork,NewYorkU.S.10286
Co-Transfer Agent (United Kingdom)ComputershareServicesPLCSecuritiesServices–RegistrarsP.O.BoxNo.82,ThePavilions,BridgwaterRoad,BristolBS997NHEngland
Stockexchangelistings(Symbol:RY)
Commonsharesarelistedon:CanadaTorontoStockExchange(TSX)U.S.NewYorkStockExchange(NYSE)SwitzerlandSwissExchange(SWX)
AllpreferredsharesarelistedontheTorontoStockExchange.
ValuationDaypriceForcapitalgainspurposes,theValuationDay(December22,1971)costbaseforourcommonsharesis$7.38pershare.Thisamounthasbeenadjustedtoreflectthetwo-for-onesharesplitofMarch1981andthetwo-for-onesharesplitofFebruary1990.Theone-for-onesharedividendspaidinOctober2000andApril2006didnotaffecttheValuationDayvalueforourcommonshares.
Shareholder contactForinformationaboutstocktransfers,addresschanges,dividends,loststockcertificates,taxforms,estatetransfers,contact:ComputershareTrustCompanyofCanada100UniversityAve.,9thFloorToronto,OntarioM5J2Y1Tel:(514)982-7555or1-866-586-7635
Forothershareholderinquiries,contact:InvestorRelationsRoyalBankofCanada123FrontStreetWest,6thFloorToronto,OntarioCanadaM5J2M2Tel:(416)955-7806orvisitourwebsiteat:rbc.com/investorrelations
DirectdepositserviceShareholdersinCanadaandtheU.S.mayhavetheirdividendsdepositedbyelectronicfundstransfer.Toarrangeforthisservice,pleasecontactComputershareTrustCompanyofCanadaatitsmailingaddress.
DividendReinvestmentPlanOurDividendReinvestmentPlanprovidesourregisteredcommonshareholdersresidinginCanadaandtheUnitedStateswiththemeanstopurchaseadditionalcommonsharesofthebankthroughtheautomaticreinvest-mentoftheircashdividends.
FormoreinformationonparticipationintheDividendReinvestmentPlan,pleasecontactourPlanAgent:
ComputershareTrustCompanyofCanadaAttn:DividendReinvestmentDept.100UniversityAve.,9thFloorToronto,OntarioM5J2Y1Tel:1-866-586-7635(CanadaandU.S.)or(514)982-7555Fax:(416)263-9394or1-888-453-0330e-mail:[email protected]
EligibledividenddesignationForpurposesoftheenhanceddividendtaxcreditrulescon-tainedintheIncome Tax Act (Canada)andanycorrespond-ingprovincialandterritorialtaxlegislation,alldividends(anddeemeddividends)paidbyustoCanadianresidentsonourcommonandpreferredshares
afterDecember31,2005,aredesignatedas“eligibledivi-dends”.Unlessstatedotherwise,alldividends(anddeemeddivi-dends)paidbythebankhere-afteraredesignatedas“eligibledividends”forthepurposesofsuchrules.
Institutionalinvestors,brokersandsecurityanalystsForfinancialinformationinquiries,contact:InvestorRelationsRoyalBankofCanada123FrontStreetWest6thFloorToronto,OntarioCanadaM5J2M2Tel:(416)955-7803Fax:(416)955-7800
CommonsharerepurchasesWeareengagedinanormalcourseissuerbidthroughthefacilitiesoftheTorontoStockExchange.Duringtheone-yearperiodcommencingNovember1,2006,wemayrepurchaseupto40millionsharesintheopenmar-ketatmarketprices.Wedeter-minetheamountandtimingofthepurchases.
AcopyofourNoticeofIntentiontofileanormalcourseissuerbidmaybeobtained,withoutcharge,bycontactingRBC’sSecretaryatourTorontomailingaddress.
2007QuarterlyearningsreleasedatesFirstquarter March2Secondquarter May25Thirdquarter August24Fourthquarter November30
Dividenddatesfor2007SubjecttoapprovalbytheBoardofDirectors
Recorddates Paymentdates
Commonandpreferred Jan.25 Feb.23sharesseriesN,W,AA,ABandAC Apr.25 May24 Jul.26 Aug.24 Oct.25 Nov.23ADandAE Apr.25 May24 Jul.26 Aug.24 Oct.25 Nov.23
InformationcontainedinorotherwiseaccessiblethroughthewebsitesmentionedinthisReporttoShareholdersdoesnotformapartofthisreport.AllreferencesinthisReporttoShareholderstowebsitesareinactivetextualreferencesandareforyourinformationonly.
TrademarksusedinthisreportincludetheLION&GLOBESymbol,ROYALBANKOFCANADA,RBC,RBCCENTURA,RBCDAINRAUSCHER,RBCINSURANCE,RBCMORTGAGE,RBCCAPITALMARKETS,RBCCANADIANPERSONALANDBUSINESS,RBCU.S.ANDINTERNATIONALPERSONALANDBUSINESS,RBCASSETMANAGEMENT,RBCCARLIN,RBCDANIELS,RBCGLOBALPRIVATEBANKING,RBCPREMIERLINEOFCREDIT,RBCSELECTAGGRESSIVEGROWTHFUNDandRBCSUISSEwhicharetrademarksofRoyalBankofCanadausedbyRoyalBankofCanadaand/oritssubsidiariesunderlicense.Allothertrademarksmentionedinthisreport,whicharenotthepropertyofRoyalBankofCanada,areownedbytheirrespectiveholders.RBCDexiaISandaffiliatedRBCDexiacompaniesarelicensedusersoftheRBCtrademark.
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