DBRS Confirms Royal Bank of Canada at AA and R-1 (high), Stable Trend

DBRS has today confirmed the ratings of Royal Bank of Canada (RBC or the Bank) and its related entities, including RBC’s Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high). All trends are Stable.

The debt ratings of RBC are underpinned by its superior domestic franchise, which provides the Bank with stable earnings and credit and financial risk profiles. RBC has leading or near-leading market shares in retail banking, wealth management and capital markets products in Canada. Theses segments are diversified geographically and by business line. RBC continues to invest to defend and strengthen its Canadian franchise value.

DBRS believes it is this strong domestic franchise that supports the Bank’s international growth initiatives. Investments in the United States, most notably RBC Bancorporation USA, have yet to generate profit levels that are close to the Bank’s domestic franchise. Relative to the entire Bank, RBC Bank (USA) contribution remains modest. Longer term, RBC’s ability to successfully build competitive U.S. businesses will be a contributing factor to improving profitability. Not deterred by the RBC Bank (USA) performance, RBC continued with its strategy of expanded its footprint outside of Canada with the purchase of RBTT Financial Group (RBTT) in the Caribbean, which closed in June 2008. Currently, the Bank is generating approximately two-thirds of its earnings in Canada and one-third internationally. So far, the level of profitability from the U.S. and international operations has been very low.

In RBC’s Q2 2009 results, the Bank recognized a $1 billion goodwill impairment charge (pre- and post-tax) as a result of weak U.S. economic conditions, deterioration in the U.S. housing market and lower U.S. bank valuations. The goodwill impairment was not unexpected given the ongoing weakness in the United States over the last two years. The charge did not have a material impact on the overall credit profile of the Bank given the strength of its earnings profile. So far, the magnitude of market environment-related losses has also been more than adequately covered by earnings from ongoing operations. Excluding the goodwill charge, RBC earned $2 billion in the first half of 2009. Capital ratios remain reasonable and provide a further cushion should additional impairments and losses occur.

RBC’s long-term Deposits & Senior Debt rating, at AA, is composed of its intrinsic assessment at AA (low) and its support assessment at SA2 (reflecting the expectation of systemic and timely external support by the government of Canada). The SA2 results in a one-notch benefit to the senior debt and deposits and subordinated debt ratings, which benefit from this implied support.

On April 20, 2009, DBRS announced a change to its banking methodology, specifically related to bank preferred shares and Tier 1 innovative instruments. Following a review, the change resulted in a downgrade of these instruments by one notch on June 29, 2009. Please see the related DBRS press releases for further details.

RBC’s Canadian businesses, based in Toronto, include full-service domestic banking, a full-service brokerage and bank-owned mutual fund firms. The Bank’s global businesses include retail banking, insurance, international wealth management, global capital markets and 50% ownership of RBC Dexia Investor Services (RBC Dexia IS).

The Bank’s operations are divided into six segments: Canadian Banking, Wealth Management, Insurance, International Banking, Capital Markets and Corporate Support, which represented 62%, 15%, 6%, -4%, 25% and -4% of adjusted pre-tax earnings (net revenue – expenses – loan loss provisions) in fiscal 2008, respectively:
– Canadian Banking includes domestic personal and business banking operations and certain retail investment businesses. This segment operates one of the largest personal and business banks in Canada. It services more than ten million individual and business clients through an extensive network that includes 1,187 branches. In every Canadian business it participates in, Royal currently holds first- or second-ranking positions, with ambitions to become number one in every business.
– Wealth Management comprises businesses that directly serve the growing wealth management needs of affluent and high-net-worth clients globally and provides asset management services and estate and trust products through RBC and external partners.
– Insurance is a global business that provides a wide range of creditor, life, health, travel, home and auto insurance products and services to individual and business clients in Canada and the United States, as well as reinsurance.
– International Banking comprises banking businesses outside Canada, including banking operations in the United States and the Caribbean and the 50%-owned RBC Dexia IS.
– Capital Markets comprises the Bank’s global wholesale banking business, sales and trading, research and related products and services to corporations and public-sector and institutional clients in North America and specialized products and services in select global markets.

Royal Bank of Canada is Canada’s largest Schedule I bank as measured by assets ($680 billion) at the end of Q2 2009.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The ratings for the Deposits & Senior Debt and Short-Term Instruments apply to Royal Bank Mortgage Corporation, Royal Trust Corporation of Canada (no guarantee) and Royal Trust Company (no guarantee).

The applicable methodologies are Rating Banks in Canada, Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessment and Rating Preferred Shares and Equivalent Hybrids, which can be found on the DBRS website under Methodologies.

This is a Corporate (Financial Institutions) rating.