DBRS Comments on RBC Q3 2011 Results

DBRS has reviewed the third-quarter results announced by Royal Bank of Canada (RBC or the Bank). There was a reported loss of $92 million in Q3 2011, but excluding a previously announced loss of $1.573 billion on the sale of the U.S. regional retail banking operations (as well as $85 million in losses from discontinued operations), earnings from continuing operations were $1.566 billion. There are no rating implications.

The sale of the U.S. regional retail banking operations, which consisted of RBC Bank (USA) and related credit card assets, to PNC Financial Services Group, Inc. (PNC) and related losses were disclosed in June 2011. Please see the DBRS press release dated June 21, 2011. Of the $1.573 billion in losses on the sale, $1.3 billion was related to write-offs of goodwill and intangibles. Improving profitability at RBC Bank (USA) had been a significant challenge for the Bank. On its own, DBRS believed RBC Bank (USA) did not have the economies of scale in products and services to compete in the longer term.

Q3 2011 earnings from continuing operations were consistent with Q2 2011, with a return on equity (ROE) of 16.7% versus 17.6% in Q2 2011. The performance of the Canadian Banking segment was steady, with loan growth partially offset by higher costs and net interest margin compression. The Capital Markets segment had a substantial decrease in net income, driven by lower trading revenue in a difficult fixed income trading market environment. Regulatory capital levels remain strong, with the Tier 1 capital ratio at 13.2% at the end of Q3 2011.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (January 14, 2010), Rating Bank Preferred Shares and Equivalent Hybrids (June 29, 2009), and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments (February 11, 2009), which can be found on our website, www.dbrs.com, under Methodologies.