Morningstar DBRS Confirms Royal Bank of Canada's Long-Term Issuer Rating at AA (high); Stable Trend

DBRS Limited (Morningstar DBRS) confirmed the credit ratings on Royal Bank of Canada (RBC or the Bank) and its related entities, including RBC's Long-Term Issuer Rating of AA (high) and Short-Term Issuer Rating of R-1 (high). The trend on all credit ratings is Stable. RBC's Long-Term Issuer Rating is composed of an Intrinsic Assessment (IA) of AA and a Support Assessment of SA2, which reflect the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend). As a result of the SA2 designation, the Bank's Long-Term Issuer Rating benefits from a one-notch uplift to the Bank's IA.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends reflect RBC's leading and highly diversified franchise in Canada, with the acquisition of HSBC Bank Canada (HSBC Canada) positioning the Bank for accelerated growth. Additionally, RBC has a growing U.S. wealth management and banking business which also includes City National Bank (CNB; wholly owned U.S. banking subsidiary), along with global capabilities and reach through a number of other strong businesses, including capital markets and wealth management. RBC is geographically diverse with approximately one-third of its F2024 earnings outside of Canada. Morningstar DBRS notes that, while historically well managed, the Bank's large capital markets business creates the potential for earnings volatility. RBC has historically exhibited strong risk management and credit fundamentals; however, asset quality metrics continued to deteriorate amid a challenging operating environment, and remediation efforts remain ongoing to address CNB's operational risk management and internal controls deficiencies identified by the Office of the Comptroller of the Currency (OCC) in January 2024. RBC continues to have ample liquidity and solid capital levels.

The credit ratings also consider the heightened economic and geopolitical uncertainty, particularly as it relates to U.S. trade policy and tariffs, which has increased the likelihood of a recession in Canada and could exacerbate the negative impact on the Bank's profitability and asset quality.

RBC's Intrinsic Assessment of AA has been assigned at the midpoint of the IA Range, and we view the Bank's credit fundamentals and performance as commensurate with those of similarly rated peers.

CREDIT RATING DRIVERS
Given RBC's high credit rating level and current risk profile, a credit ratings upgrade is unlikely.

A credit ratings downgrade would occur if there were a significant and sustained deterioration in earnings or asset quality. Additionally, broader-based operational risk challenges and systemic deficiencies in internal controls and risk management, beyond those identified at CNB, would also result in a downgrade of the credit ratings.

CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Very Strong
RBC is the largest bank in Canada by both total assets and market capitalization. The Bank operates a significant North American presence, led by its dominant Canadian banking franchise with first or second market positions across its core products. In the U.S., RBC has multiple platforms for growth, and CNB is a critical part of the Bank's U.S. strategy despite currently undergoing measures to improve financial performance and simplify and de-risk CNB. A number of RBC's business lines have global capabilities and reach, especially capital markets and wealth management. The Bank benefits from its broad distribution channels and brand, which continue to provide growth opportunities outside Canada.

Earnings Combined Building Block Assessment: Strong
RBC has a diversified earnings base, driven by Personal Banking (34% of F2024 earnings, excluding the Corporate segment), Commercial Banking (16%), Capital Markets (26%), Wealth Management (20%), and Insurance (4%). RBC consistently produces solid profitability, garnered through its highly diversified revenue streams (F2024: 49% net interest income/51% noninterest income). Despite higher provisions for credit losses (PCL), F2024 earnings of $16.2 billion increased 11% year-over-year, primarily driven by higher results across all business segments, which includes a lower impact in F2024 from tax-related adjustments and higher HSBC Canada transaction and integration costs. Q1 2025 net income increased 21.5% quarter-over-quarter (QOQ) to $5.1 billion, reflecting higher results across all business segments and also including a lower impact from the HSBC Canada transaction and integration costs and the positive impact from foreign exchange translation. CNB has shown improved profitability in F2024 and Q1 2025 following what Morningstar DBRS viewed as an unexpected net loss in F2023, and RBC's turnaround effort to return CNB to normalized profitability remains on track. In F2025, Morningstar DBRS expects the Bank to generate positive operating leverage with modest net interest margin expansion.

Risk Combined Building Block Assessment: Strong
Morningstar DBRS views RBC's risk profile as somewhat elevated relative to its peers because of its relatively large capital markets presence and adjusted leveraged lending exposure (albeit well diversified by industry/sector). These concentrations have historically been well managed. Credit quality deterioration progressed further beyond pre-pandemic levels amid a challenging operating environment with still-elevated interest rates, which resulted in rising consumer delinquencies and lumpy nonretail losses. In Q1 2025, the PCL ratio increased by 7 basis points (bps) QOQ to 42 bps, while the allowance coverage (ACL) of 68 bps was up 4 bps QOQ and remains elevated. Commercial real estate (CRE) represented a manageable 10% of total loans and acceptances (L&A) as at Q1 2025, with the office sector at roughly 1.5% of L&A (as last reported by the Bank, 0.9% for Canada in Q3 2024 and 0.6% for the U.S. in Q1 2024). CRE exposure is well diversified by geography, business, and property type, with CRE impaired PCL trending lower as losses become broader based in the nonretail portfolio. RBC's Canadian real estate secured lending (RESL) portfolio represents roughly half of total L&A, at the higher end of the peer range. The Bank's RESL portfolio is of high quality with an uninsured average bureau score of 822 and an uninsured current loan-to-value ratio of 50%, providing a substantial buffer.

Funding and Liquidity Combined Building Block Assessment: Strong
Morningstar DBRS views RBC as having strong levels of on balance sheet liquidity and a very strong deposit franchise in Canada that is diverse and broad-based (personal deposits represent approximately 37% of total deposits). With interest rates still elevated in 2024, term deposits remained the preference, but more recently, the deposit mix has seen a reversion from term deposits to lower rate demand deposits and mutual funds driven by lower interest rates. Augmenting its substantial deposit funding, RBC enjoys extensive access to wholesale funding sources that are well diversified across a variety of markets, products, currencies, and investor segments. RBC's liquidity profile remains strong as at January 31, 2025, with a liquidity coverage ratio of 128% and a net stable funding ratio of 115%, both comfortably exceeding the regulatory minimum threshold of 100%.

Capitalization Combined Building Block Assessment: Strong
Morningstar DBRS views RBC's capitalization as strong, supported by significant internal capital generation. As at January 31, 2025, RBC's CET1 ratio was flat QOQ at a solid 13.2%, as strong internal capital generation was offset by volume growth, net negative credit migration, and share buybacks of 1.9 million shares. Morningstar DBRS expects the Bank to target a CET1 ratio above 12.5%, reflecting its anticipated share repurchases. As of January 31, 2025, the Bank's total loss-absorbing capacity as a percentage of risk-weighted assets increased 50 bps QOQ to 29.8%, and the leverage ratio was 4.4%, both well above the regulatory minimums and in line with its Canadian bank peers.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/453783.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Governance (G) Factors
The following Governance factors had a relevant effect on the credit analysis: Morningstar DBRS finds the Corporate/Transaction Governance ESG factor is relevant to the credit rating but does not change the assigned credit ratings or trends. On January 31, 2024, the OCC imposed a U.S. $65 million fine against CNB, along with a cease-and-desist order, related to "systemic deficiencies in operational risk management and internal controls." CNB is actively working on corrective actions to improve its strategic plan, operational risk management, compliance risk management, and investment management practices. This was preceded by an administrative fine of $7.475 million on November 3, 2023, from the Financial Transactions and Reports Analysis Centre of Canada related to noncompliance with anti-money laundering and terrorist financing measures following a compliance examination in 2022. As a result, this factor is incorporated into RBC's Risk Profile grid grades.

There were no Environmental or Social factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 4, 2024) https://dbrs.morningstar.com/research/433881. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at
https://dbrs.morningstar.com

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

These are solicited credit ratings.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website https://dbrs.morningstar.com/understanding-ratings

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's trends and credit ratings are monitored.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Carl De Souza, Senior Vice President, Sector Lead, North American Financial Institution Ratings
Rating Committee Chair: Tim O'Brien, CFA, CAIA, Managing Director, North American Financial Institution Ratings
Initial Rating Date: April 1, 1976

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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