# EDGAR Filing Document

**Accession Number:** 0001000275
**File Stem:** 0001193125-23-058337
**Filing Date:** 2023-3
**Character Count:** 423242
**Document Hash:** 1d4060dee0d76aa4d02a130e466f1333
**Contains OCR:** False
**Source Format:** 

## Filing Content

## Filing Summary
**0001193125-23-058337.hdr.sgml**: 20230302

**ACCESSION NUMBER**: 0001193125-23-058337

**CONFORMED SUBMISSION TYPE**: 6-K

**PUBLIC DOCUMENT COUNT**: 2

**CONFORMED PERIOD OF REPORT**: 20230302

**FILED AS OF DATE**: 20230302

**DATE AS OF CHANGE**: 20230302

**FILER**: 

**COMPANY DATA:**
- **COMPANY CONFORMED NAME:** ROYAL BANK OF CANADA
- **CENTRAL INDEX KEY:** 0001000275
- **STANDARD INDUSTRIAL CLASSIFICATION:** COMMERCIAL BANKS, NEC [6029]
- **IRS NUMBER:** 135357855
- **STATE OF INCORPORATION:** A6
- **FISCAL YEAR END:** 1031

**FILING VALUES:**
- **FORM TYPE:** 6-K
- **SEC ACT:** 1934 Act
- **SEC FILE NUMBER:** 001-13928
- **FILM NUMBER:** 23700306

**BUSINESS ADDRESS:**
- **STREET 1:** ROYAL BANK PLAZA
- **STREET 2:** 200 BAY STREET
- **CITY:** TORONTO
- **STATE:** A6
- **ZIP:** M5J2J5
- **BUSINESS PHONE:** 212-437-9267

**MAIL ADDRESS:**
- **STREET 1:** ROYAL BANK PLAZA
- **STREET 2:** 200 BAY STREET
- **CITY:** TORONTO
- **STATE:** A6
- **ZIP:** M5J2J5

**FORMER COMPANY:**
- **FORMER CONFORMED NAME:** ROYAL BANK OF CANADA \
- **DATE OF NAME CHANGE:** 19950908

**UNITED STATES** 

**SECURITIES AND EXCHANGE COMMISSION** 

**Washington, D.C. 20549** 

**FORM 6-K** 

**Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 under the** 

**Securities Exchange Act of 1934** 

For the month of March 2023

Commission File Number: 001-13928

**Royal Bank of Canada** 

(Translation of registrant's name into English)

---

| | |
|:---|:---|
| 200 Bay Street |  |
| Royal Bank Plaza | 1 Place Ville Marie |
| Toronto, Ontario | Montreal, Quebec |
| Canada M5J 2J5 | Canada H3B 3A9 |
| Attention: Senior Vice-President, | Attention: Senior Vice-President, |
| Associate General Counsel | Associate General Counsel |
| & Secretary | & Secretary |

---

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F ☐ Form 40-F ☒

------

**Signatures** 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

---

| | | |
|:---|:---|:---|
|  | ROYAL BANK OF CANADA | ROYAL BANK OF CANADA |
| Date: March 2, 2023 | By: | /s/ Karen McCarthy |
|  | Name: | Karen McCarthy |
|  | Title: | Senior Vice-President, Associate General Counsel & Secretary |

---

------

**EXHIBIT INDEX** 

---

| | |
|:---|:---|
| **Exhibit** | **Description of Exhibit** |
| 99.1 | 2022 Annual Report |

---

### Attached PDF Documents

**Attachment 1:** `d326681dex991.pdf`

# Royal Bank of Canada  
Annual Report 2022

![img-0.jpeg](img-0.jpeg)

![img-1.jpeg](img-1.jpeg)

## Table of contents

| CEO Letter | 4 |
| --- | --- |
| Chair Letter | 8 |
| 2022 Highlights | 10 |
| Management's Discussion and Analysis | 20 |
| Enhanced Disclosure Task Force Recommendations Index | 128 |
| Reports and Consolidated Financial Statements | 129 |
| Ten-Year Statistical Review | 230 |
| Shareholder Information | 232 |

## About the cover

Participants at the starting gate of the Kids' Mile as part of the RBC Race for the Kids event held in Hyde Park, Chicago, U.S. on October 16, 2022. The event raised close to US$300,000 to support pediatric research at the University of Chicago Medicine Comer Children's Hospital. To learn more about how we are helping communities prosper across the regions where we live and work, please refer to pages 14 and 15 of this report. (Photo/Jason Smith)

## Connect with us

facebook.com/rbc

instagram.com/rbc

twitter.com/@rbc

youtube.com/user/RBC

linkedin.com/company/rbc

tiktok.com/@rbc

For more information on how we are leading with Purpose in creating differentiated value for our clients, communities, employees and shareholders, please visit RBC Stories.

Our Purpose

# Helping clients thrive and communities prosper

Guided by our Vision to be among the world's most trusted and successful financial institutions, and driven by our Purpose, we aim to be:

In Canada: the undisputed leader in financial services

In the United States: the preferred partner to corporate, institutional and high net worth clients and their businesses

In select global financial centres: a leading financial services partner valued for our expertise

We are guided by our Values:

- Client First
- Collaboration
- Accountability
- Diversity & Inclusion
- Integrity

![img-2.jpeg](img-2.jpeg)

Royal Bank of Canada Annual Report 2022 | 1

## Who we are

Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading performance. Our success comes from the 95,000+ employees who leverage their imaginations and insights to bring our vision, values and strategy to life so we can help our clients thrive and communities prosper. As Canada's biggest bank and one of the largest in the world, based on market capitalization, we have a diversified business model with a focus on innovation and providing exceptional experiences to our 17 million clients in Canada, the U.S. and 27 other countries.

This report showcases our 2022 results and the many stories that defined our year, including how we're performing against our balanced scorecard and the strong industry and client recognition awarded to our products, services, brand and people.

**By the numbers**

**17 million**
clients

**95,000+**
employees

**29**
countries

2 | Royal Bank of Canada Annual Report 2022

## Why invest?

- Diversified business model with scale and market-leading franchises that provide a full suite of products, advice and services for clients
- Market-leading presence in Canada and an established multi-platform U.S. strategy with a long runway for premium growth
- Differentiated technology and innovation investments that go beyond banking
- Premium ROE and disciplined expense management
- Strong balance sheet and prudent risk management
- Leading Canadian core deposit franchise that serves as a stable source of funding
- Well-positioned to benefit from evolving macro environment
- Strong performance in ESG rankings and ratings(1)

![img-3.jpeg](img-3.jpeg)

(1) Based on our 80 25 average percentile ranking compiled from our four top-tier ESG rankings and ratings; refer to page 19 of the 2022 Annual Report for additional information

Royal Bank of Canada Annual Report 2022 | 3

![img-4.jpeg](img-4.jpeg)

A message from **Dave McKay** President and CEO

### **Fellow shareholders,**

I'm writing this letter as we all continue to live through a period of historic economic and societal change.

Many of our clients and communities are anxious about the future, including the effects of rising inflation, higher interest rates and volatile markets. The onset of a tragic and senseless war in Ukraine has intensified post-pandemic economic challenges while also contributing to supply chain disruptions and global energy market turmoil. Against this backdrop, our communities continue to grapple with combating climate change - arguably the most complex challenge of all - and shifting toward a more inclusive and sustainable net-zero future.

In these uncertain times, one thing is clear to me: the leadership, stability and guidance that RBC can bring to our clients and communities is more important than ever.

The future is bright for RBC. Much of my optimism comes from working alongside tens of thousands of passionate, imaginative and inspirational RBC colleagues who bring support and new ideas to our stakeholders every single day. These ideas are more than advice and can come in many shapes and sizes - from big ideas that can change whole industries to in-the-moment ideas that make things easier for a young person starting their career or a growing family.

**As I've expressed in the past, our bank's prosperity rests on the strength and stability of our 17 million clients and the communities where they raise families, build businesses and live their lives.**

In these challenging times, our colleagues take seriously the responsibility of helping clients navigate risks and opportunities to make the best decisions possible for them. They bring that same dedication to helping build and grow sustainable, vibrant and inclusive communities.

It is a true privilege to work alongside my colleagues, and this report shares many examples of how Team RBC is helping make progress possible for people, places and projects that matter to our collective future.

### **An all-weather bank with our sights set on growth**

We aspire to be one of the most highly valued and most respected financial institutions in the world.

On that journey, I'm pleased to share that we ended the fiscal year as a top-10 global bank by market capitalization and the highest valued bank on a Price-to-Book Ratio among global banks$^{(1)}$. We've also been recognized yet again as the most valuable brand in Canada and second among all global banks.

In 2022, we generated earnings of $15.8 billion and an ROE of 16.4 per cent, and we delivered $6.9 billion in dividends to our common shareholders while buying back $5.4 billion in common shares.

(1) Banks with over $850 billion in loans

4 | Royal Bank of Canada Annual Report 2022

Our financial performance demonstrates how we continue to build long-term client franchises and deliver a premium return on equity, even as we transform RBC for the future and pursue targeted growth strategies in Canada, the U.S., the U.K. and Europe. This has been one of the most challenging operating environments in decades, but our size, scale, strong and prudent risk and capital management, and diversified business mix put us in a position of strategic and financial strength.

**In short, we're an all-weather bank that's not only built to perform through the economic cycle, but also pursue big opportunities to grow where others simply can't.**

In Canada, we are the leading bank with deep and trusted client relationships across our franchises. We have #1 or #2 in market share in all key product categories, supported by the largest retail network in the country. This year, we partnered with ICICI Bank Canada to create a seamless banking experience for newcomers. We also prioritized building more engaging digital experiences that clients truly value. We've received industry recognition numerous times this year, including ranking highest in mobile banking client satisfaction by J.D. Power.

![img-5.jpeg](img-5.jpeg)

100 Bishopsgate - RBC's London, U.K. headquarters

![img-6.jpeg](img-6.jpeg)

In the U.S., our second home market, we're continuing to win and have a long runway for premium growth through our differentiated strategy to serve corporate, institutional and high-net-worth clients and their businesses. As a top-10 capital markets business in the U.S., we continue to deliver notable wins in corporate and investment banking and global markets. At City National, we kept our focus on organically growing the core banking business and enhancing our risk resilience. As the 6th largest wealth manager in the country$^{(2)}$, our U.S. Wealth Management business continues to add more products and talent to support our growing client base.

In the U.K. and Europe, steady and consistent growth has led us to build a trusted and competitive franchise that's just getting started. With the acquisition of Brewin Dolphin, we're now one of the largest wealth managers in the U.K., Ireland and Channel Islands, and are able to leverage our global capabilities for clients. We have big ambitions for targeted growth in these regions, with plans to continue leading with advice and recruiting top talent.

**Across all these key regions, we've spent years building our core deposit franchises - both on the consumer side and the business side.**

Deposits are the long-term lifeblood of any bank, giving it the ability to fund loans and growth. Our focus and scale in this area has given us a significant advantage against our peers, which we'll continue to prioritize in the years ahead.

This report showcases our 2022 results and the many stories that defined our year, including how we're performing against our balanced scorecard and the strong industry and client recognition awarded to our products, services, brand and people. I'm proud of these highlights and encourage you to read them for a deeper understanding of what we accomplished this year.

Despite our recent success, we are not content to coast on our brand and size. We're striving to be even better. Here are just a few things I'm most excited about heading into 2023:

(2) U.S. wealth advisory firms quarterly earnings releases (10-Q)

Royal Bank of Canada Annual Report 2022 | 5

![img-7.jpeg](img-7.jpeg)

Dave McKay addresses an all-employee town hall, October 18, 2022

### More digitally-backed, client-centric experiences in banking - and beyond

We have a bold ambition to grow our market-leading franchises, add clients and serve them more deeply. To do that, we're investing in building the best and most personalized client experiences possible.

We will continue to challenge the status quo and rethink the experiences we deliver to engage with our clients in newer, smarter and simpler ways. We're always on the lookout for the next great idea. That means more innovative products, insightful advice backed by the power of data and the creativity of our people, and leading partnerships that add more value.

This is especially critical amidst the generational changes in the way people live and work, including what they expect from a bank.

Our RBCxTM division shows how we're doing things differently. This team is supporting 4,000+ tech and innovation clients of all sizes and also redefining what a bank can do through in-house ventures like Ownr®, Mydoh® and Dr. Bill® - services that collectively reach hundreds of thousands of people who are looking to pursue big ambitions or just make life a little easier.

We're innovating across all our businesses, including in Capital Markets with our AI-based Aiden® trading platform; P&CB with our Vantage banking experience and the continued build out of our healthcare strategy with the recent acquisition of cloud-based MDBilling.ca; and other examples across our Wealth Management, Investor & Treasury Services and Insurance teams.

**I truly believe there's no other large bank in the world that delivers the differentiated client experience we do at scale.**

Of course, none of this is possible without investing in our collaborative and client-focused people. Every day, our employees are turning ambitious and bold ideas into

game-changing reality - in areas from cyber security to AI and machine learning, digital to software development, architecture to data science. We're building the bank of the future, and right now we're tracking ahead of the game.

If it doesn't exist, we're probably working on it.

### Climate and inclusion plans that can make progress possible

In a complex environment, our clients and communities look to us to make sense of the world around them, share our views, speak up and lean in on issues that demand action.

In fact, this is a business imperative for RBC, and what we're doing fills me with optimism about the inclusive, sustainable and prosperous communities we're helping to build.

**Climate change is one of the world's most pressing issues - one that can impact where we live, our food supply and the world around us. The actions we take in the coming years will have a lasting effect for generations to come.**

The best way RBC can help is by partnering with our clients to reduce their emissions. We committed to providing $500 billion in sustainable financing by 2025 - which means financing activities that take into account environmental, social and governance factors - and are on our way to reaching that goal. This supports everything from the development and deployment of clean energy technologies to new opportunities in carbon capture use and storage, low-carbon fuels, grid innovations and electric vehicles, just to name a few examples.

We recently released our initial interim emissions reduction targets across three key sectors - oil & gas, power generation and automotive - to help us track and measure how we're doing in working with our clients to reduce their emissions and keep us accountable along the way.

6 | Royal Bank of Canada Annual Report 2022

It's critical that businesses, governments and individuals work together to reshape our economies and societies if we are to be successful. We cannot act independently and expect to make progress. RBC is committed to helping play a coordinating role in this effort to build a cleaner future and bring green solutions to market. This also includes helping to promote climate literacy and offering ideas and research that inform and inspire a successful transition.

Taking collective action on the net-zero transition requires more than financial capital. We must also unlock the incredible potential of people, particularly talent from historically underrepresented groups(3) and young people.

Our society cannot move forward to address the big economic and societal issues if people and communities are at risk of falling behind or being left out completely.

To address the climate challenge and other skills challenges across our changing economy, societies need to transform the way we train and reskill people and build more inclusive workforces. To help, we created RBC Future Launch® - a 10-year, $500 million commitment to prepare youth for the jobs of tomorrow - and we've reached more than five million young Canadians through tools, scholarships and partnerships since 2017.

Alongside new entrepreneur loan programs and scholarship assistance, I'm particularly proud of the impact RBC Future Launch® continues to have in helping empower Black and Indigenous leaders of tomorrow to reach their potential.

People and culture that will define our future

As a relationship-driven bank, our culture and people are a major factor in determining what we strive to achieve and how we perform against those aspirations. Many of RBC's best moments happen when our people are together - problem solving with our clients, being active in our communities and collaborating alongside each other.

Over the past few months, we've been finding the right balance as we continue to build our flexible and hybrid working model for the future - a model that will strengthen our creative, collaborative, inclusive and always-learning culture.

It hasn't been easy to get to where we are today, but I'm proud of the way our teams led through tremendous disruption and uncertainty, and responded to the needs of our clients and communities throughout the pandemic with resilience and determination.

Looking ahead, we aim to continue to be an organization that leads the way on skills and career development, equity and inclusion and the new world of work. This year, we were recognized as one of Canada's top employers for diversity, young people and professional development(4). We were also named one of the best workplaces in Canada for hybrid working(5).

![img-8.jpeg](img-8.jpeg)

RBC employees - WaterPark Place, Toronto, Canada

Lastly, what our people across the globe do in our communities is what will continue to drive our culture. We bring our resources, talents and connections together to make positive change - from empowering ascending artists who are the heart of our vibrant and inclusive cities and towns, to supporting relief and recovery efforts when a natural disaster strikes one of our communities.

This year, through our first-ever global Employee Giving Campaign, our people rallied to support communities at a time of great need, collectively contributing nearly $22 million to over 9,500 charities in more than two dozen countries around the world.

Alongside this program, our global RBC Race for the Kids event series has brought together communities in support of critical youth mental health and wellness causes for over a decade. To date, we've raised more than $83 million for youth-focused charities around the world.

These are just two examples of the impact RBC colleagues can achieve when working together to help solve important societal or community challenges.

Looking ahead

While it might be hard to imagine in an increasingly disruptive and complex world, I have a great deal of optimism and hope for the year ahead.

Part of the strength of RBC is our ability to adapt to the many needs of our clients and communities. Right now, RBC needs to be both a beacon and an anchor to those we proudly serve. We've embraced this role throughout the pandemic, and I'm confident we'll continue doing so.

This is just one of the reasons why we say ideas happen here.

I want to thank you for your trust and belief in Team RBC and what we'll do to thrive and prosper together in the years ahead.

As we enter 2023, I have more conviction than ever in where our great organization is going and how we'll get there together. We have an ambitious plan to build even more amazing digital experiences for our clients and help play an important role to solve some of society's biggest challenges.

I look forward to sharing our progress in the year ahead.

Dave McKay
President and CEO

(3) A group that is historically underrepresented may include those who self-identify as women, Black, Indigenous, and People of Colour (BIPOC), LGBTQ+ and/or persons with disabilities

(4) MediaCorp Canada Inc.

(5) Great Place to Work Institute

Royal Bank of Canada Annual Report 2022 | 7

![img-9.jpeg](img-9.jpeg)

# A message from **Katie**  
**Taylor**  
Chair of the Board

RBC believes leadership centres on serving others.

Helping clients make smart decisions today and remain confident in their financial future is at the heart of everything we do.

Providing our colleagues with greater flexibility and personalized work experiences, while remaining engaged and inspired to make meaningful contributions to our success is a central focus of RBC’s employee experience.

Addressing economic and social ills exposed by the pandemic and placing the planet on a more sustainable path is not only essential to the success of the communities where we serve, but also our own.

RBC continued to align its Purpose with performance to drive premium growth and, in turn, create value for all its stakeholders, including shareholders. The Board’s ongoing confidence in RBC is underpinned by its leadership team, financial strength and scale, growth strategy, diverse business mix, powerful brand and engaged and motivated workforce.

**Directors serve as stewards of the bank, exercising independent judgement in overseeing management and safeguarding the interests of its shareholders. We also recognize the bank is not a passive participant in society. It must - and does - take responsibility for its commitments and actions.**

Governance is key in all of this. The Board not only helps set a strategic direction for the bank, but also oversees the policies and practices that monitor, measure and report on its performance in a timely and transparent manner. Promoting a strong risk-aware culture and conduct-related practices throughout RBC are also priorities for the Board.

Climate continues to be a key area of focus for the Board. Directors oversee the bank’s climate strategy, the RBC Climate Blueprint, and how environmental and social risks are managed. They assess and evaluate progress against the bank’s goals, commitments, plans, targets and metrics to determine their effectiveness and impact.

An important milestone was reached this year with the release of RBC’s 2030 initial interim emissions reduction targets for certain high-emitting sectors: oil & gas, power generation and automotive. In addition, a Sustainable Finance Framework was published which outlines the bank’s approach and methodology for classifying, tracking and disclosing its progress towards the commitment to provide $500 billion in sustainable financing by 2025. Sustainable finance solutions provide clients with products and services that contribute to key environmental, social and governance (ESG) objectives.

More broadly, we believe the bank’s approach to ESG has and will continue to have a significant impact on RBC’s success and those we serve. For instance, oversight of RBC’s diversity and inclusion (D&I) practices, policies and initiatives are carried out at the Board.

8 | Royal Bank of Canada Annual Report 2022

In 2022, the Board reviewed a refreshed D&I strategy that serves both colleagues and communities with, for instance, a focus on improving representation in leadership at all levels and influencing equitable access to financial products and services. Additionally, 31 per cent of new executive appointments were Black, Indigenous or people of colour, surpassing our goal for 2022. We nonetheless still need to do more to further increase women representation at the executive level, as women made up 43 per cent of new executive appointments, below our 50 per cent target$^{(1)}$.

Similarly, good governance is a never-ending journey. A large, vibrant enterprise like RBC will regularly come across new themes or issues that require the Board's engagement. That's why the Board's areas of focus are continuously assessed to align with regulatory requirements, stakeholders' expectations, evolving best practices as well as changes in the industry and economy. Committee work and priorities may adapt as a result. Directors look for ways to continuously improve their understanding in areas of importance, engage with external advisors and participate in education sessions to remain abreast of evolving risks and opportunities.

In 2022, we added to the Board's strength with the appointment of Mirko Bibic, President and Chief Executive Officer of BCE Inc. and Bell Canada. His deep strategic, operational, governance and risk experience across a wide range of commercial and consumer portfolios in the communications sector will strengthen the capabilities and broaden the perspectives of the Board.

Eight years ago, when I wrote my first shareholder letter as RBC Chair, I spoke about the inextricable link between our stakeholders' success and the bank's. As the largest Canadian financial institution by market capitalization and

indeed, one of the largest in the world by the same measure, I underscored the high standard RBC must set as a leading corporate citizen.

When leadership centres on serving others, great things happen. During my time as Chair, RBC's client base has grown by approximately one million and the total value of deposits has almost doubled$^{(2)}$, a testament to the bank's client-first focus. Benefits have expanded and evolved to keep pace with changing employee needs and expectations. The bank embarked upon a 10-year, $500 million commitment to set youth up for success through RBC Future Launch$^{(3)}$. This initiative has provided $331+ million since 2017, reaching over five million Canadian youth$^{(4)}$. Net income has increased at a compound annual growth rate (CAGR) of 7 per cent. Additionally, share price and dividends have grown at a CAGR of 6 per cent and 7 per cent respectively$^{(5)}$.

Serving as RBC Chair has been both an honour and great privilege for me. I am grateful for the Directors past and present who have led us to this exciting point in the bank's journey. I am equally grateful to each and every RBCer who has and continues to build this extraordinary global franchise with passion and purpose. Going forward, as a proud RBC shareholder, I will watch with keen interest in how Dave, his leadership team and our incredible colleagues find even more new ways to create value and make an impact. We will all be better for it.

Chair of the Board

![img-0.jpeg](img-0.jpeg)

Royal Bank Plaza - South Tower, Toronto, Canada

(1) Refer to page 13 of the 2022 Annual Report for additional information

(2) Between October 31, 2014 and October 31, 2022, client base has increased from 16 million to 17 million and deposits from $614.1 billion to $1,208.8 billion

(3) Refer to page 15 of the 2022 Annual Report for additional information

(4) Between October 31, 2014 and October 31, 2022, net income increased from $9.0 billion to $15.8 billion, share price increased from $80.01 to $126.05, and dividends declared per common share increased from $2.84 to $4.96

Royal Bank of Canada Annual Report 2022 | 9

# 2022 highlights across our balanced scorecard

# Clients

At RBC, our clients are at the centre of everything we do. Enabled by our investments in technology and talent, we believe our differentiated advice, products and services deliver long-term value and create exceptional client experiences.

![img-1.jpeg](img-1.jpeg)

**Customer Service Award Winner** among the big 5 retail banks - Recognized in all 11 categories of the 2022 Ipsos Financial Service Excellence Awards, for the 2nd consecutive year

**Best in Customer Satisfaction** among Canada's big 5 retail banks by J.D. Power, 6 out of the last 7 years, and, in 2022, ranked highest in Customer Satisfaction with Mobile Banking Apps

# Market-leading client franchises

- #1 or #2 market share in all key product categories across Canadian Banking
- 9th largest global investment bank(1), #1 in Canada and #1 Canadian investment bank in the U.S.(2)
- #1 in market share for High Net Worth/Ultra High Net Worth in Canada
- Largest retail mutual fund company in Canada based on assets under management (AUM)(3)
- Largest Canadian bank-owned insurance organization(4)
- 6th largest full-service wealth advisory firm in the U.S. as measured by assets under administration (AUA)(3)

(1) Based on global investment banking fees (fiscal 2022), Dealogic
(2) Based on market share (fiscal 2022), Dealogic

(3) Refer to the Glossary for definition on page 126
(4) On a total revenue basis

10 | Royal Bank of Canada Annual Report 2022

![img-2.jpeg](img-2.jpeg)

RBC Global Asset Management® named TopGun Investment Team of the Year(5)

One of the top 3 Greenwich Quality Leaders in Canadian Institutional Investment Management Service for the 8th consecutive year(6)

Recognized as the most valuable Canadian brand and 2nd among the Top 10 Global Banks(7)

Outstanding Global Private Bank in North America for the 7th consecutive year(8)

RBC Dominion Securities ranked highest among Canadian bank-owned investment brokerage firms for the 16th consecutive year(9)

Leveraged our industry-leading Canadian mobile app to deliver value-added client insights. 3.3 million clients have activated personalized plans through MyAdvisor®

Partnered with ICICI Bank Canada to create a seamless banking experience for newcomers to Canada

RBCxTM supports 4,000 tech and innovation clients and in-house ventures like Mydoh® (used by 100,000+ Canadians), Ownr® (trusted by 85,000+ Canadian businesses) and Dr. Bill® (serving 8,000 physicians)

Best Global Retail Bank and Best Bank for small and medium-sized enterprises(10)

Expanded the Avion RewardsTM loyalty program with METRO Inc., Lowe's‡, RONA‡ and Réno-Dépôt‡ joining our retail partnerships with Petro-Canada‡(11), WestJet‡, Rexall‡, DoorDash‡ and more

![img-3.jpeg](img-3.jpeg)

(5) Brendan Wood International

(6) Coalition Greenwich

(7) Kantor BrandZ Most Valuable Global Brands

(8) Private Banker International Global Wealth Awards

![img-4.jpeg](img-4.jpeg)

(9) Investment Executive Brokerage Report Card

(10) RBI Global retail banking awards

(11) Petro-Canada is a Suncor business

Royal Bank of Canada Annual Report 2022 | 11

## 2022 highlights across our balanced scorecard

### Employees

Our collective success depends on attracting, retaining and developing the right talent to deliver on our strategy. From wellness and flexibility, to skill building and leadership development, we are committed to supporting, enabling and empowering our employees as they help our clients thrive and communities prosper.

![img-5.jpeg](img-5.jpeg)

Among Canada's Top 100 Employers, Canada's Best Diversity Employers and Best Workplaces in 2022(1)(2)

Recognized as one of the Best Workplaces for Professional Development for our experiential learning, coaching, mentorship and formal training(2)

Named one of the Best Workplaces for Hybrid Work for flexibility and resources available to support the new world of work(2)

Announced a $200 million investment in our employees, including a mid-year 3% salary increase, enhanced defined pension contributions and family benefits in Canada, and more support for career development

Enhanced our critical tech talent strategy with a new Tech Career Journey and storytelling initiatives to strengthen our reputation as a top employer, welcoming 2,300 experienced technologists, 39% of whom were women

$16.5 billion in competitive compensation and benefits

Recognized as one of Canada's Top Employers for Young People(1)

(1) MediaCorp Canada Inc.

(2) Great Place to Work Institute

12 | Royal Bank of Canada Annual Report 2022

![img-6.jpeg](img-6.jpeg)

Accelerating our progress in Diversity & Inclusion:

**Black, Indigenous and People of Colour (BIPOC) represented:**

- 43% of hires(3)
- 43% of promotions(4)
- 31% of new executive appointments, surpassing our goal of 30% for the year(5)

**Women represented:**

- 51% of hires(3)
- 53% of promotions(4)
- 43% of new executive appointments(5)

Global employee base comprised of **20% young people**(6)

**Welcomed 1,500+ summer students across the globe, 52% were BIPOC**(7)

**2022 Employee Engagement Survey** found employees are highly engaged and feel proud to be part of RBC(8):

- 93% feel they contribute to RBC's success
- 89% are proud to be part of RBC
- 88% are willing to go above and beyond

Introduced a **new HR management system** with self-serve processes and AI-enabled learning and job recommendations to support career growth and enhance our employees' digital experience

(3) Hires includes new external hires and rehires excluding City National Bank, BlueBay Asset Management and Brewin Dolphin; based on self-identification; excludes summer interns, students and co-ops. BIPOC hires includes Canada and U.S. only. Women hires is global

(4) Promotions are defined as an upward change in position level, HR Class or Global Grade. Excludes summer interns, students, co-ops, City National Bank, Blue Bay Asset Management and Brewin Dolphin. Values for women represent data from our global operations. Values for BIPOC represent data from our businesses in Canada and the U.S., based on self-identification

(5) Represents data for our businesses in Canada governed by the Employment Equity Act. A new executive appointment is the appointment of an internal employee or external hire as a first-time Vice President, Senior Vice President or Executive Vice President

(6) Headcount under 30 globally, excluding City National, BlueBay Asset Management and Brewin Dolphin employees

(7) Based on self-identification

(8) Employee Engagement Survey conducted between April 27-May 11, 2022; participation rate was 73%

Royal Bank of Canada Annual Report 2022 | 13

## 2022 highlights across our balanced scorecard

## Communities

Supporting the communities where we live and work is central to our Purpose. Through our global partnerships, donations and employee initiatives, RBC is committed to building vibrant, socially inclusive and sustainable communities.

With our key programs - RBC Future Launch®, Tech for NatureTM and Emerging Artists - our approach is aligned to our priority ESG pillars including youth, climate, diversity & inclusion and financial wellness.

$154+ million given globally through donations and community investments, including nearly $1.9 million to support humanitarian relief efforts in Ukraine, Pakistan, natural disaster response efforts in Canada and the U.S., and in response to local tragedies$^{(1)}$

Employees stepped up to participate in the **second RBC Global Earth Day Challenge**, completing 51,000+ earth-friendly activities. RBC provided rewards for completing each activity, leading to $760,000+ in support of local charities

**Celebrated the return of live events** with marquee enterprise sponsorships, including the RBC Canadian Open, RBC Heritage, RBCxMusic® Concert Series and the Toronto International Film Festival

![img-7.jpeg](img-7.jpeg)

![img-8.jpeg](img-8.jpeg)

(1) Includes employee volunteer grants and gifts in kind, as well as contributions to non-profits and non-registered charities. Figure includes sponsorships

14 | Royal Bank of Canada Annual Report 2022

![img-9.jpeg](img-9.jpeg)

![img-10.jpeg](img-10.jpeg)

Since its start in 2009, the **RBC Race for the Kids** has raised $83+ million for youth-focused charities around the world. In 2022, 37,000+ participants raised $9+ million for 22 charities across 10 countries

## RBC Future Launch

$331+ million provided through **RBC Future Launch®**, reaching 5.3 million Canadian youth through 840+ partner programs since 2017. Through our $1.6 million investment in RBC Future Launch® scholarships this year, 500+ young Canadians will have the opportunity to pursue their business and academic passions

![img-11.jpeg](img-11.jpeg)

Through the **RBC Emerging Artists** program, our investments in arts organizations have exceeded $119 million, supporting 35,000+ artists since 2007

Launched the **RBC Black Entrepreneur Business Loan**, supporting Black entrepreneurs in Canada as they start, manage and grow their business with loans of up to $250,000

![img-12.jpeg](img-12.jpeg)

**RBC Charity Day for the Kids** donated US$5 million to 55+ youth-focused charities around the globe. Since launching in 2015, this initiative has raised US$25.2 million for 100+ organizations

![img-13.jpeg](img-13.jpeg)

Expanded our **Employee Giving Campaign** globally, with 81% of RBC employees supporting 9,500+ charities across 28 countries. Together with retirees, RBC raised $21.8 million

$6 billion in support of our communities as one of the largest taxpayers in Canada, and as a taxpayer in other countries where we operate$^{(2)}$

(2) Refer to page 101 of the 2022 Annual Report for additional information

Royal Bank of Canada Annual Report 2022 | 15

2022 highlights across our balanced scorecard

## Sustainability

Climate change presents a significant challenge that is impacting communities globally. Achieving net-zero greenhouse gas (GHG) emissions by 2050 requires one of the largest economic transformations in generations. RBC is committed to working alongside governments, businesses and individuals to facilitate meaningful progress towards net-zero.

![img-14.jpeg](img-14.jpeg)

16 | Royal Bank of Canada Annual Report 2022

![img-15.jpeg](img-15.jpeg)

- Signed our second long-term renewable energy **Power Purchase Agreement**, advancing our goals to reduce emissions from our global operations by 70% and to source 100% of our electricity from renewable and non-emitting sources, both by 2025
- **Acted as a financial advisor to 23 Indigenous communities** buying an ownership stake in 7 Enbridge pipelines in Northern Alberta - the largest Indigenous energy partnership transaction in North America, to-date(1)
- RBC GAM is a founding signatory to the **Canadian Investor Statement on Climate Change**, which demonstrates the collective ambition and action of Canadian investors in recognizing the need to accelerate the transition towards a net-zero economy
- Supported the development and deployment of **cutting-edge clean energy technologies** through our investment in funds like EVOK, focusing on opportunities in carbon capture use & storage (CCUS), low-carbon fuels, clean energy, grid innovations and mobility(2)

RBC released its **Sustainable Finance Framework**, which outlines the approach the bank takes to measure progress against its commitment to provide $500 billion in sustainable financing by 2025

RBC delivered a key milestone in its commitment to achieving net-zero in its lending portfolio by 2050 with the release of its initial set of 2030 interim emissions reduction targets for key sectors: oil & gas, power generation and automotive

RBC intends to help finance the transition to net-zero, strengthen a diverse and inclusive culture, and build stronger communities and enable economic inclusion

Honoured as **ESG Manager of the year** through the 2022 UK Pensions Awards

**Ranked #4 globally** in Institutional Investor's ESG Research Team category

**Tech for Nature**

**RBC Tech for NatureTM**, a global initiative to support new ideas, technologies, and partnerships that address complex environmental challenges. Since 2019, 550+ organizations have benefitted from $39+ million in community investments towards a $100 million commitment by 2025

(1) Indigenous Communities and Enbridge Announce Landmark Equity Partnership
(2) Evok Innovations Announces First Close of $300 Million USD Cleantech Fund

Royal Bank of Canada Annual Report 2022 | 17

## 2022 highlights across our balanced scorecard

## Shareholders

RBC is driven by its vision, values and commitment to delivering long-term results.

### Financial performance metrics

| Medium-Term Objectives (1) | 3-Year | 5-Year |
| --- | --- | --- |
| Diluted EPS growth of 7%+ | 8% | 8% |
| ROE of 16%+ | 16.4% | 16.7% |
| Strong capital ratio (CET1) | 12.9% | 12.5% |
| Dividend payout ratio of 40%-50% | 46% | 46% |

### Total shareholder return$^{(2)}$

|  | 3-Year | 5-Year |
| --- | --- | --- |
| RBC | 10% | 9% |
| Global peer average | 6% | 5% |

### Earnings

net income (C$ billion)

![img-16.jpeg](img-16.jpeg)

### Revenue by segment$^{(3)}$

(C$ billion)

![img-17.jpeg](img-17.jpeg)

(1) A medium-term (3-5 year) objective is considered to be achieved when the performance goal is met in either a 3- or 5-year period. These objectives assume a normal business environment and our ability to achieve them in a period may be adversely affected by the macroeconomic backdrop.

(2) Annualized TSR is calculated based on the TSX common share price appreciation plus reinvested dividend income. Source: Bloomberg, as at October 31, 2022. Please refer to page 24.

(3) Excludes Corporate Support.

(4) Compound Annual Growth Rate.

18 | Royal Bank of Canada Annual Report 2022

**16.4% return on common equity$^{(5)}$,**
down from 18.6% in 2021

**12.6% robust common equity**
tier 1 (CET1) ratio

**Prudent risk management** with 10 basis points of provision for credit losses (PCL) on impaired loans

**$4.96 dividends**
declared per share, up 15% from 2021; dividend payout ratio of 45%

**$12.4 billion** of profits returned to our shareholders through dividends and share repurchases; total payout ratio of 80%$^{(6)}$

**80.25$^{(7)}$**
average percentile ranking and rating on our priority ESG indices

**Strong funding profile**
Long-term credit rating upgraded to **Aa1** by Moody's$^{(8)}$

**Approximately 400,000 net new clients** added in 2022

**Leading 103% ratio of loans to deposits** in Canadian Banking

**$11.06**
diluted earnings per share (EPS), flat from 2021

(5) Refer to the Glossary for definition on page 127

(6) Total payout ratio is calculated as total common shareholder distributions (common dividends of $6.9 billion + common share repurchases of $5.4 billion) as a percentage of net income available to common shareholders ($15.5 billion)

(7) Average percentile ranking and rating compiled from our priority ESG rating agencies and indices: Sustainalytics, MSCI ESG Rating, FTSE4Good and S&P Global's Corporate Sustainability Assessment (informing the DJSI) - FTSE4Good and MSCI ratings reflect 2021 scores. The ESG rankings and ratings market is evolving and is not currently regulated in Canada or the U.S. ESG rating agencies and indices may use different data, metrics, models and/or methodologies. ESG ranking and ratings are not necessarily comparable, and those given to RBC are for information only. Investors and other stakeholders should carefully consider the foregoing factors and other uncertainties when reviewing these rankings and ratings

(8) On January 27, 2022, Moody's upgraded our long-term debt ratings and assessments, as well as affirmed our short-term debt ratings. Includes senior long-term debt issued prior to September 23, 2018 and senior long-term debt issued on or after September 23, 2018 which is excluded from the Bail-in regime

Royal Bank of Canada Annual Report 2022 | 19

# Management's Discussion and Analysis

Management's Discussion and Analysis (MD&A) is provided to enable a reader to assess our results of operations and financial condition for the fiscal year ended October 31, 2022, compared to the preceding fiscal year. This MD&A should be read in conjunction with our 2022 Annual Consolidated Financial Statements and related notes and is dated November 29, 2022. All amounts are in Canadian dollars, unless otherwise specified, and are based on financial statements presented in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), unless otherwise noted.

Additional information about us, including our 2022 Annual Information Form, is available free of charge on our website at rbc.com/investorrelations, on the Canadian Securities Administrators' website at sedar.com and on the EDGAR section of the United States (U.S.) Securities and Exchange Commission's (SEC) website at sec.gov.

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

## Table of contents

| Caution regarding forward-looking statements | 20 | Key performance and non-GAAP measures | 30 | Operational/regulatory compliance risk drivers | 94 |
| --- | --- | --- | --- | --- | --- |
| Overview and outlook | 21 | Personal & Commercial Banking | 32 | Operational risk | 94 |
| Selected financial and other highlights | 21 | Wealth Management | 37 | Regulatory compliance risk | 96 |
| About Royal Bank of Canada | 22 | Insurance | 43 | Strategic risk drivers | 97 |
| Vision and strategic goals | 22 | Investor & Treasury Services | 47 | Strategic risk | 97 |
| Economic, market and regulatory review and outlook | 22 | Capital Markets | 49 | Reputation risk | 97 |
| Key corporate events of 2022 | 23 | Corporate Support | 53 | Legal and regulatory environment risk | 98 |
| Defining and measuring success through total shareholder returns | 24 | Quarterly financial information | 53 | Competitive risk | 99 |
| Financial performance | 24 | Fourth quarter performance | 53 | Macroeconomic risk drivers | 99 |
| Overview | 24 | Quarterly results and trend analysis | 54 | Systemic risk | 99 |
| Impact of foreign currency translation | 25 | Financial condition | 55 | Overview of other risks | 100 |
| Total revenue | 25 | Condensed balance sheets | 55 | Capital management | 105 |
| Provision for credit losses | 26 | Off-balance sheet arrangements | 56 | Accounting and control matters | 114 |
| Insurance policyholder benefits, claims and acquisition expense | 27 | Risk management | 58 | Critical accounting policies and estimates | 114 |
| Non-interest expense | 27 | Top and emerging risks | 58 | Controls and procedures | 117 |
| Income and other taxes | 27 | Overview | 60 | Related party transactions | 117 |
| Client assets | 28 | Enterprise risk management | 61 | Supplementary information | 118 |
| Business segment results | 29 | Transactional/positional risk drivers | 66 | Glossary | 126 |
| Results by business segment | 29 | Credit risk | 66 | Enhanced Disclosure Task Force recommendations index | 128 |
| How we measure and report our business segments | 29 | Market risk | 76 |  |  |
|  |  | Liquidity and funding risk | 81 |  |  |
|  |  | Insurance risk | 94 |  |  |

## Caution regarding forward-looking statements

From time to time, we make written or oral forward-looking statements within the meaning of certain securities laws, including the 'safe harbour' provisions of the *United States Private Securities Litigation Reform Act of 1995* and any applicable Canadian securities legislation. We may make forward-looking statements in this 2022 Annual Report, in other filings with Canadian regulators or the SEC, in other reports to shareholders, and in other communications. Forward-looking statements in this document include, but are not limited to, statements relating to our financial performance objectives, vision and strategic goals, the economic, market, and regulatory review and outlook for Canadian, U.S., U.K., European and global economies, the regulatory environment in which we operate, the impact from rising interest rates, the expected closing of the transaction involving HSBC Bank Canada, the Strategic priorities and Outlook sections for each of our business segments, the risk environment including our credit risk, market risk, liquidity and funding risk, the direction of the coronavirus (COVID-19) pandemic and its potential impact on our business operations, financial results, condition and objectives and on the global economy and financial market conditions, our climate- and sustainability-related beliefs, targets and goals (including our net-zero and sustainable finance commitments), and includes our President and Chief Executive Officer's statements. The forward-looking information contained in this document is presented for the purpose of assisting the holders of our securities and financial analysts in understanding our financial position and results of operations as at and for the periods ended on the dates presented, as well as our financial performance objectives, vision and strategic goals, and may not be appropriate for other purposes. Forward-looking statements are typically identified by words such as 'believe', 'expect', 'foresee', 'forecast', 'anticipate', 'intend', 'estimate', 'goal', 'commit', 'target', 'objective', 'plan' and 'project' and similar expressions of future or conditional verbs such as 'will', 'may', 'might', 'should', 'could' or 'would'.

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

We caution readers not to place undue reliance on these statements as a number of risk factors could cause our actual results to differ materially from the expectations expressed in such forward-looking statements. These factors - many of which are beyond our control and the effects of which can be difficult to predict - include: credit, market, liquidity and funding, insurance, operational, regulatory compliance (which could lead to us being subject to various legal and regulatory proceedings, the potential outcome of which could include regulatory restrictions, penalties and fines), strategic, reputation, competitive, model, legal and regulatory environment, systemic risks and other risks discussed in the risk sections of our 2022 Annual Report including business and economic conditions in the geographic regions in which we operate, Canadian housing and household indebtedness, information technology and cyber risks, geopolitical uncertainty, environmental and social risk (including climate change), digital disruption and innovation, privacy, data and third-party related risks, regulatory changes, culture and conduct risks, the effects of changes in government fiscal, monetary and other policies, tax risk and transparency, and the emergence of widespread health emergencies or public health crises such as pandemics and epidemics, including the COVID-19 pandemic and its impact on the global economy, financial market conditions and our business operations, and financial results, condition and objectives. Additional factors that could cause actual results to differ materially from the expectations in such forward-looking statements can be found in the risk section of our 2022 Annual Report.

We caution that the foregoing list of risk factors is not exhaustive and other factors could also adversely affect our results. When relying on our forward-looking statements to make decisions with respect to us, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Material economic assumptions underlying the forward-looking statements contained in this 2022 Annual Report are set out in the Economic, market and regulatory review and outlook section and for each business segment under the Strategic priorities and Outlook headings. Except as required by law, we do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by us or on our behalf.

Additional information about these and other factors can be found in the risk sections of this 2022 Annual Report.

20 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

Overview and outlook

# Selected financial and other highlights

Table 1

| (Millions of Canadian dollars, except per share, number of and percentage amounts) | 2022 | 2021 | 2022 vs. 2021 Increase (decrease) |
| --- | --- | --- | --- |
| Total revenue | $48,985 | $49,693 | $(708) (1.4)% |
| Provision for credit losses (PCL) | 484 | (753) | 1,237 (164.3)% |
| Insurance policyholder benefits, claims and acquisition expense (PBCAE) | 1,783 | 3,891 | (2,108) (54.2)% |
| Non-interest expense | 26,609 | 25,924 | 685 2.6% |
| Income before income taxes | 20,109 | 20,631 | (522) (2.5)% |
| Net income | $15,807 | $16,050 | $(243) (1.5)% |
| Segments - net income |  |  |  |
| Personal & Commercial Banking | $8,370 | $7,847 | $523 6.7% |
| Wealth Management | 3,144 | 2,626 | 518 19.7% |
| Insurance | 857 | 889 | (32) (3.6)% |
| Investor & Treasury Services | 513 | 440 | 73 16.6% |
| Capital Markets | 2,921 | 4,187 | (1,266) (30.2)% |
| Corporate Support | 2 | 61 | (59) n.m. |
| Net income | $15,807 | $16,050 | $(243) (1.5)% |
| Selected information |  |  |  |
| Earnings per share (EPS) - basic | $11.08 | $11.08 | $0.00 0.0% |
| - diluted | 11.06 | 11.06 | 0.00 0.0% |
| Return on common equity (ROE) (1) | 16.4% | 18.6% | n.m. (220) bps |
| Average common equity (1) | $94,700 | $84,850 | $9,850 11.6% |
| Net interest margin (NIM) - on average earning assets, net (2) | 1.48% | 1.48% | n.m. - bps |
| PCL on loans as a % of average net loans and acceptances | 0.06% | (0.10)% | n.m. 16 bps |
| PCL on performing loans as a % of average net loans and acceptances | (0.04)% | (0.20)% | n.m. 16 bps |
| PCL on impaired loans as a % of average net loans and acceptances | 0.10% | 0.10% | n.m. - bps |
| Gross impaired loans (GIL) as a % of loans and acceptances | 0.26% | 0.31% | n.m. (5) bps |
| Liquidity coverage ratio (LCR) (3) | 125% | 123% | n.m. 200 bps |
| Net stable funding ratio (NSFR) (3) | 112% | 116% | n.m. (400) bps |
| Capital, Leverage and Total loss absorbing capacity (TLAC) ratios (4) |  |  |  |
| Common Equity Tier 1 (CET1) ratio | 12.6% | 13.7% | n.m. (110) bps |
| Tier 1 capital ratio | 13.8% | 14.9% | n.m. (110) bps |
| Total capital ratio | 15.4% | 16.7% | n.m. (130) bps |
| Leverage ratio | 4.4% | 4.9% | n.m. (50) bps |
| TLAC ratio (5) | 26.4% | n.a. | n.a. n.a. |
| TLAC leverage ratio (5) | 8.5% | n.a. | n.a. n.a. |
| Selected balance sheet and other information (6) |  |  |  |
| Total assets | $1,917,219 | $1,706,323 | $210,896 12.4% |
| Securities, net of applicable allowance | 318,223 | 284,724 | 33,499 11.8% |
| Loans, net of allowance for loan losses | 819,965 | 717,575 | 102,390 14.3% |
| Derivative related assets | 154,439 | 95,541 | 58,898 61.6% |
| Deposits | 1,208,814 | 1,100,831 | 107,983 9.8% |
| Common equity | 100,746 | 91,983 | 8,763 9.5% |
| Total risk-weighted assets | 609,879 | 552,541 | 57,338 10.4% |
| Assets under management (AUM) (2) | 999,700 | 1,008,700 | (9,000) (0.9)% |
| Assets under administration (AUA) (2), (7) | 5,649,700 | 6,347,300 | (697,600) (11.0)% |
| Common share information |  |  |  |
| Shares outstanding (000s) - average basic | 1,403,654 | 1,424,343 | (20,689) (1.5)% |
| - average diluted | 1,406,034 | 1,426,735 | (20,701) (1.5)% |
| - end of period | 1,382,911 | 1,424,525 | (41,614) (2.9)% |
| Dividends declared per common share | $4.96 | $4.32 | $0.64 14.8% |
| Dividend yield (2) | 3.7% | 3.8% | n.m. (10) bps |
| Dividend payout ratio (2) | 45% | 39% | n.m. 600 bps |
| Common share price (RY on TSX) (8) | $126.05 | $128.82 | $(2.77) (2.2)% |
| Market capitalization (TSX) (8) | 174,316 | 183,507 | (9,191) (5.0)% |
| Business information (number of) |  |  |  |
| Employees (full-time equivalent) (FTE) | 91,427 | 85,301 | 6,126 7.2% |
| Bank branches | 1,271 | 1,295 | (24) (1.9)% |
| Automated teller machines (ATMs) | 4,368 | 4,378 | (10) (0.2)% |
| Period average US$ equivalent of C$1.00 (9) | $0.774 | $0.796 | $(0.022) (2.8)% |
| Period-end US$ equivalent of C$1.00 | $0.734 | $0.808 | $(0.074) (9.1)% |

(1) Average amounts are calculated using methods intended to approximate the average of the daily balances for the period. This includes average common equity used in the calculation of ROE. For further details, refer to the Key performance and non-GAAP measures section.
(2) See Glossary for composition of this measure.
(3) The LCR and NSFR are calculated in accordance with the Office of the Superintendent of Financial Institutions' (OSFI) Liquidity Adequacy Requirements (LAR) guideline. LCR is the average for the three months ended for each respective period. For further details, refer to the Liquidity and funding risk section.
(4) Capital ratios are calculated using OSFI's Capital Adequacy Requirements (CAR) guideline and the Leverage ratio is calculated using OSFI's Leverage Requirements (LR) guideline.
(5) Effective Q1 2022, OSFI requires Canadian Domestic Systemically Important Banks (D-SIBs) to meet minimum risk-based TLAC ratio and TLAC leverage ratio requirements which are calculated using OSFI's TLAC guideline. For further details, refer to the Capital management section.
(6) Represents year-end spot balances.
(7) AUA includes $15 billion and $6 billion (2021 - $15 billion and $3 billion) of securitized residential mortgages and credit card loans, respectively.
(8) Based on TSX closing market price at period-end.
(9) Average amounts are calculated using month-end spot rates for the period.
n.a. not applicable
n.m. not meaningful

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

21

## About Royal Bank of Canada

Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading performance. Our success comes from the 95,000+ employees who leverage their imaginations and insights to bring our vision, values and strategy to life so we can help our clients thrive and communities prosper. As Canada's biggest bank and one of the largest in the world, based on market capitalization, we have a diversified business model with a focus on innovation and providing exceptional experiences to our 17 million clients in Canada, the U.S. and 27 other countries. Learn more at rbc.com.

Our business segments are described below.

| Personal & Commercial Banking | Provides a broad suite of financial products and services in Canada, the Caribbean and the U.S. Our commitment to building and maintaining deep and meaningful relationships with our clients is underscored by the breadth of our product suite, our depth of expertise, and the features of our digital solutions. |
| --- | --- |
| Wealth Management | Serves affluent, high net worth (HNW) and ultra-high net worth (UHNW) clients from our offices in key financial centres mainly in Canada, the U.S., the United Kingdom (U.K.), Europe, and Asia. We offer a comprehensive suite of investment, trust, banking, credit and other advice-based solutions. We also provide asset management products to institutional and individual clients through our distribution channels and third-party distributors. |
| Insurance | Offers a wide range of advice and solutions for individual and business clients including life, health, wealth, home, auto, travel, annuities and reinsurance. |
| Investor & Treasury Services | Provides asset, payment and treasury services to financial institutions and asset owners worldwide. We are a leader in Canadian cash management and transaction banking services. Trusted with nearly 4 trillion in AUA, our focus is on safeguarding client assets and supporting our clients' growth. |
| Capital Markets | Provides expertise in advisory & origination, sales & trading, and lending & financing to corporations, institutional clients, asset managers, private equity firms and governments globally. We serve clients from 63 offices in 18 countries across North America, the U.K. & Europe, and Australia, Asia & other regions. |
| Corporate Support | Corporate Support consists of Technology & Operations, which provides the technological and operational foundation required to effectively deliver products and services to our clients. Functions, which includes our finance, human resources, risk management, internal audit and other functional groups, as well as our Corporate Treasury function. |

## Vision and strategic goals

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

- In Canada, to be the undisputed leader in financial services;
- In the U.S., to be the preferred partner to corporate, institutional and HNW clients and their businesses; and
- In select global financial centres, to be a leading financial services partner valued for our expertise.

For our progress in 2022 against our business strategies and strategic goals, refer to the Business segment results section.

## Economic, market and regulatory review and outlook - data as at November 29, 2022

The predictions and forecasts in this section are based on information and assumptions from sources we consider reliable. If this information or these assumptions are not accurate, actual economic outcomes may differ materially from the outlook presented in this section.

### Economic and market review and outlook

Unemployment remains very low across many advanced economies, with labour shortages limiting further increases in production. However, we expect unemployment rates will rise as central banks continue to raise interest rates to contain high inflation, adding to growth headwinds. The U.S. and Canadian economies are expected to undergo moderate recessions in calendar 2023. Recessions in the Euro Area and the United Kingdom (U.K.) have likely already started with higher interest rates adding to surging inflation and disruptions from the war in Ukraine. While global inflation pressures have eased with the price of key commodities and shipping costs declining from peak levels earlier in calendar 2022, inflation pressures have also broadened across a wide array of goods and services. Consumer demand has continued to outpace available supply, and labour shortages have driven wages higher, adding to potentially longer-lasting price pressures. Central banks are responding by increasing interest rates more quickly than previously expected. Higher interest rates, elevated inflation and a decline in the value of equities are reducing household confidence and purchasing power.

22 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

## Canada

Canadian GDP is expected to increase 3.2% in calendar 2022 following a 4.5% increase in calendar 2021. Output growth in this calendar year has been supported by recovery from the COVID-19 pandemic in the travel and hospitality sectors and increased activity in the oil and gas and mining sectors reflecting higher global commodity prices. Labour market conditions remain tight with elevated job openings and unemployment rates at multi-decade lows. Growth is expected to continue to moderate in the final calendar quarter of 2022 with a moderate recession expected in the first half of calendar 2023. While the unemployment rate is low at 5.2% as of October 2022, it has increased from 4.9% in June and July of 2022. While inflation growth rates have begun to moderate as global supply chain disruptions have eased, and house prices are declining in response to Bank of Canada (BoC) interest rate increases, the inflation rate in October was still high and pressures remain broad-based. The BoC has already increased the overnight rate by 350 basis points since March 2022 and we expect that rate to rise to 4.0% before the end of the calendar year. Rising household debt servicing costs, high consumer price growth, and declining house prices are expected to weaken household confidence and purchasing power over the next calendar year.

## U.S.

U.S. GDP is expected to increase 1.8% in calendar 2022 following a 5.9% increase in calendar 2021. Labour markets have remained very strong. However the unemployment rate has begun to increase from lows over the summer and the number of job openings is decreasing. We expect further increases in the unemployment rate over the remainder of calendar 2022 and in calendar 2023. While inflation rates have begun to decrease as global supply chain disruptions ease, and the price of gasoline has declined from higher levels in the spring, price growth remains very high and broad-based. The Federal Reserve (Fed) is responding with continued interest rate hikes. The Fed has already increased the federal funds rate target by 375 basis points since March 2022 and we expect that target range will rise to 4.75% to 5.0% by the end of the first calendar quarter of 2023. Higher interest rates and inflation are reducing household purchasing power, and we expect consumer spending growth to slow with a moderate recession expected in the first half of calendar 2023.

## Europe

Euro area GDP is expected to rise by 3.0% in calendar 2022 following a 5.3% increase in calendar 2021. The Euro area economy is expected to have entered a moderate recession in the second half of calendar 2022. The war in Ukraine is having a more direct impact on economies in the Euro area relative to other regions due to stronger direct trade linkages. In addition, inflation in the region is expected to continue to surge higher driven by increased energy costs. Despite a slowing growth outlook, surging inflation is pushing the European Central Bank (ECB) to raise interest rates from exceptionally low negative rates at the beginning of this calendar year. The ECB increased interest rates by 50 bps in July 2022 and another 75 bps in each of September and October 2022. We expect further increases to push the deposit rate to 2.5% by the end of the first calendar quarter of 2023. U.K. GDP is projected to rise by 4.2% in calendar 2022 after a 7.5% increase in calendar 2021. The U.K. is also expected to have entered a recession in the second half of calendar 2022. As inflation in the U.K. has continued to surge, we expect the Bank of England (BoE) to raise interest rates more quickly than previously anticipated to 3.75% by early calendar 2023.

## Financial markets

Bond yields have increased substantially from the second calendar quarter of 2022 as central banks respond to high inflation. The spread between longer and shorter duration bond yields, which is a commonly used recession indicator, has narrowed sharply with the spread between 10-year and 2-year yields inverting to negative values in the U.S. and Canada. Equity markets have declined from the beginning of calendar 2022 on a worsening global growth outlook. Global inflation pressures have shown signs of easing and inflation rates may have peaked in some regions such as the U.S. and Canada. However, underlying inflation pressures are not expected to ease to central bank target rates until the economy weakens substantially.

## Regulatory environment

We continue to monitor and prepare for regulatory developments and changes in a manner that seeks to ensure compliance with new requirements, while mitigating adverse business or financial impacts. Such impacts could result from new or amended laws or regulations and the expectations of those who enforce them. A high level summary of the key regulatory changes that have the potential to increase or decrease our costs and the complexity of our operations is included in the Legal and regulatory environment risk section of this 2022 Annual Report.

For a discussion on risk factors resulting from these and other developments which may affect our business and financial results, refer to the risk sections of this 2022 Annual Report. For further details on our framework and activities to manage risks, refer to the risk and Capital management sections of this 2022 Annual Report.

## Key corporate events of 2022

### HSBC Bank Canada

On November 29, 2022, we entered into an agreement to acquire 100% of the common shares of HSBC Bank Canada (HSBC Canada) for an all-cash purchase price of $13.5 billion. In addition, we will purchase all of the existing preferred shares and subordinated debt of HSBC Canada held directly or indirectly by HSBC Holdings plc at par value. HSBC Canada is a premier Canadian personal and commercial bank focused on globally connected clients.

The transaction is expected to close by late 2023 and is subject to the satisfaction of customary closing conditions, including regulatory approvals. For further details, refer to Note 33 of our Consolidated Financial Statements.

### Brewin Dolphin Holdings PLC

On September 27, 2022, we completed the acquisition of Brewin Dolphin Holdings PLC (Brewin Dolphin) for total consideration of £1,591 million ($2,341 million) as of the date of close. The results of the acquired business have been consolidated from the closing date and are included in International Wealth Management within our Wealth Management segment. For further details, refer to Note 6 of our Consolidated Financial Statements.

### RBC Investor Services

On October 17, 2022, we announced the signing of a Memorandum of Understanding with CACEIS (the asset servicing banking group of Crédit Agricole S.A. and Banco Santander, S.A.) with a view for CACEIS to acquire the European asset servicing activities of RBC Investor Services and its associated Malaysian centre of excellence. The execution of the final agreements between CACEIS and RBC requires prior consultation with the relevant works councils of CACEIS. The completion of the contemplated transaction will be subject to customary closing conditions, including regulatory and antitrust approvals, and is expected to take place by the end of the third calendar quarter of 2023. This transaction will have a de minimus impact on RBC's CET1 ratio and EPS.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

23

## Defining and measuring success through total shareholder returns

Our focus is to maximize total shareholder returns (TSR) through the achievement of top half performance compared to our global peer group over the medium-term (3-5 years), which we believe reflects a longer-term view of strong and consistent financial performance.

Maximizing TSR is aligned with our three strategic goals discussed earlier and we believe represents the most appropriate measure of shareholder value creation. TSR is a concept used to compare the performance of our common shares over a period of time, reflecting share price appreciation and dividends paid to common shareholders. The absolute size of TSR will vary depending on market conditions, and the bank's position reflects the market's perception of our overall performance relative to our peers over a period of time.

Financial performance objectives are used to measure our performance against our medium-term TSR objectives and are used as goals as we execute against our strategic priorities. We review and revise these financial performance objectives as economic, market and regulatory environments change.

The following table provides a summary of our 3-year and 5-year performance against our medium-term financial performance objectives:

| Financial performance compared to our medium-term objectives |  |  | Table 2 |
| --- | --- | --- | --- |
| Medium-term objectives (1) | 3-year (2) | 5-year (2) |  |
| Diluted EPS growth of 7% + | 8% | 8% |  |
| ROE of 16% + | 16.4% | 16.7% |  |
| Strong capital ratio (CET1) (3) | 12.9% | 12.5% |  |
| Dividend payout ratio 40% - 50% | 46% | 46% |  |

(1) A medium-term (3-5 year) objective is considered to be achieved when the performance goal is met in either a 3- or 5-year period. These objectives assume a normal business environment and our ability to achieve them in a period may be adversely affected by the macroeconomic backdrop.

(2) Diluted EPS growth is calculated using a Compound Annual Growth Rate (CAGR). ROE, CET1 and dividend payout ratio are calculated using an average.

(3) For further details on the CET1 ratio, refer to the Capital management section.

Our 3-year and 5-year medium-term financial performance objectives will remain unchanged in fiscal 2023.

We compare our TSR to that of a global peer group approved by our Board of Directors (the Board). The global peer group consists of the following 9 financial institutions:

- Canadian financial institutions: Bank of Montreal, Canadian Imperial Bank of Commerce, Manulife Financial Corporation, National Bank of Canada, The Bank of Nova Scotia, and Toronto-Dominion Bank.
- U.S. banks: JPMorgan Chase & Co. and Wells Fargo & Company.
- International banks: Westpac Banking Corporation.

| Medium-term objectives - 3- and 5-year TSR vs. peer group average |  |  | Table 3 |
| --- | --- | --- | --- |
|  | 3-year TSR (1) | 5-year TSR (1) |  |
| Royal Bank of Canada | 10% | 9% |  |
|  | Top half | Top half |  |
| Peer group average (excluding RBC) | 6% | 5% |  |

(1) The 3- and 5-year annualized TSR are calculated based on our common share price appreciation as per the TSX closing market price plus reinvested dividends for the period October 31, 2019 to October 31, 2022 and October 31, 2017 to October 31, 2022.

| Common share and dividend information |  |  |  |  |  | Table 4 |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
| For the year ended October 31 | 2022 | 2021 | 2020 | 2019 | 2018 |  |  |
| Common share price (RY on TSX) - close, end of period | $126.05 | $128.82 | $93.16 | $106.24 | $95.92 |  |  |
| Dividends paid per share | 4.96 | 4.32 | 4.26 | 4.00 | 3.70 |  |  |
| Increase (decrease) in share price | (2.2)% | 38.3% | (12.3)% | 10.8% | (4.9)% |  |  |
| Total shareholder return | 1.6% | 43.8% | (8.4)% | 15.2% | (1.0)% |  |  |

## Financial performance

### Overview

#### 2022 vs. 2021

Net income of $15,807 million was down $243 million or 2% from last year. Diluted EPS of $11.06 was flat and ROE of 16.4% was down 220 bps. Our CET1 ratio was 12.6%, down 110 bps from last year.

Our earnings reflect lower results in Capital Markets and Insurance, partially offset by higher earnings in Personal & Commercial Banking, Wealth Management, and Investor & Treasury Services. The current year also reflects lower releases of provisions on performing loans.

For further details on our business segment results and CET1 ratio, refer to the Business segment results and Capital management sections, respectively.

24 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

## Impact of foreign currency translation

The following table reflects the estimated impact of foreign currency translation on key income statement items:

|  | Table 5 |
| --- | --- |
| (Millions of Canadian dollars, except per share amounts) | 2022 vs. 2021 |
| Increase (decrease): |  |
| Total revenue | $165 |
| PCL | 3 |
| Non-interest expense | 72 |
| Income taxes | 8 |
| Net income | 82 |
| Impact on EPS |  |
| Basic | $0.06 |
| Diluted | 0.06 |

The relevant average exchange rates that impact our business are shown in the following table:

|  | Table 6 |
| --- | --- |
| (Average foreign currency equivalent of C$1.00) (1) | 2022 |
|  | 2021 |
| U.S. dollar | 0.774 |
| British pound | 0.618 |
| Euro | 0.727 |
|  | 0.768 |
|  | 0.768 |
|  | (1) Average amounts are calculated using month-end spot rates for the period. |

(1) Average amounts are calculated using month-end spot rates for the period.

## Total revenue

|  | Table 7 |
| --- | --- |
| (Millions of Canadian dollars, except percentage amounts) | 2022 |
|  | 2021 |
| Interest and dividend income | $40,771 |
| Interest expense | 18,054 |
|  | 8,143 |
| Net interest income | $22,717 |
| NIM | 1.48% |
| Insurance premiums, investment and fee income | $3,510 |
| Trading revenue | 926 |
| Investment management and custodial fees | 7,610 |
| Mutual fund revenue | 4,289 |
| Securities brokerage commissions | 1,481 |
| Service charges | 1,976 |
| Underwriting and other advisory fees | 2,058 |
| Foreign exchange revenue, other than trading | 1,038 |
| Card service revenue | 1,203 |
| Credit fees | 1,512 |
| Net gains on investment securities | 43 |
| Share of profit in joint ventures and associates | 110 |
| Other | 512 |
|  | 1,488 |
| Non-interest income | $26,268 |
| Total revenue | $48,985 |
|  | $49,693 |

### 2022 vs. 2021

Total revenue decreased $708 million or 1% from last year, largely due to lower insurance premiums, investment and fee income (Insurance revenue) and other revenue. Lower underwriting and other advisory fees and trading revenue also contributed to the decrease. These factors were partially offset by higher net interest income and investment management and custodial fees.

Net interest income increased $2,715 million or 14%, primarily due to average volume growth and higher spreads in Canadian Banking and Wealth Management.

NIM remained flat, as the benefit to our Canadian Banking and Wealth Management segments from rising interest rates was offset by spread compression in repo products.

Insurance revenue decreased $2,090 million or 37%, mainly due to the change in fair value of investments backing policyholder liabilities and lower group annuity sales, both of which are largely offset in PBCAE. These factors were partially offset by business growth in Canadian Insurance across the majority of our products.

Investment management and custodial fees increased $478 million or 7%, primarily driven by higher average fee-based client assets reflecting net sales.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

25

Trading revenue decreased $257 million or 22%, mainly due to the impact from loan underwriting markdowns, primarily in the U.S., largely driven by challenging market conditions.

Underwriting and other advisory fees decreased $634 million or 24%, mainly attributable to lower debt and equity origination across most regions.

Other revenue decreased $976 million or 66%, primarily attributable to changes in the fair value of the hedges related to our U.S. share-based compensation plans, which was largely offset in Non-interest expense.

## Additional trading information

|  | Table 8 |  |
| --- | --- | --- |
| (Millions of Canadian dollars) | 2022 | 2021 (2) |
| Net interest income (1) | $2,024 | $2,230 |
| Non-interest income | 926 | 1,183 |
| Total trading revenue | $2,950 | $3,413 |
| Total trading revenue by product |  |  |
| Interest rate and credit | $1,147 | $1,904 |
| Equities | 951 | 935 |
| Foreign exchange and commodities | 852 | 574 |
| Total trading revenue | $2,950 | $3,413 |

(1) Reflects net interest income arising from trading-related positions, including assets and liabilities that are classified or designated at fair value through profit or loss (FVTPL).

(2) Amounts have been revised from those previously presented.

## 2022 vs. 2021

Total trading revenue of $2,950 million, which is comprised of trading-related revenue recorded in Net interest income and Non-interest income, decreased $463 million or 14% from last year, mainly due to the impact from loan underwriting markdowns, primarily in the U.S., largely driven by challenging market conditions.

## Provision for credit losses (1)

|  | Table 9 |  |
| --- | --- | --- |
|  | For the year ended |  |
| (Millions of Canadian dollars, except percentage amounts) | October 31 2022 | October 31 2021 |
| Personal & Commercial Banking | $(281) | $(899) |
| Wealth Management | 21 | (32) |
| Capital Markets | (22) | (414) |
| Corporate Support and other (2) | 1 | (5) |
| PCL on performing loans | (281) | (1,350) |
| Personal & Commercial Banking | $755 | $731 |
| Wealth Management | 13 | (14) |
| Capital Markets | 13 | (39) |
| Corporate Support and other (2) | (3) | - |
| PCL on impaired loans | 778 | 678 |
| PCL - Loans | 497 | (672) |
| PCL - Other financial assets (3) | (13) | (81) |
| Total PCL | $484 | $(753) |
| PCL on loans is comprised of: |  |  |
| Retail | $(31) | $(684) |
| Wholesale | (250) | (666) |
| PCL on performing loans | (281) | (1,350) |
| Retail | 648 | 604 |
| Wholesale | 130 | 74 |
| PCL on impaired loans | 778 | 678 |
| PCL - Loans | $497 | $(672) |
| PCL on loans as a % of average net loans and acceptances | 0.06% | (0.10)% |
| PCL on impaired loans as a % of average net loans and acceptances | 0.10% | 0.10% |

(1) Information on loans represents loans, acceptance and commitments.

(2) Includes PCL recorded in Corporate Support, Insurance and Investor & Treasury Services.

(3) PCL on other financial assets mainly represents provisions on debt securities measured at FVOCI and amortized cost, accounts receivable and financial guarantees.

26

Royal Bank of Canada: Annual Report 2022

Management's Discussion and Analysis

## 2022 vs. 2021

Total PCL was $484 million compared to $(753) million last year, primarily reflecting lower releases of provisions on performing loans in Personal & Commercial Banking and Capital Markets. The PCL on loans ratio increased 16 bps.

PCL on performing loans was $(281) million, compared to $(1,350) million last year, primarily in Personal & Commercial Banking and Capital Markets, reflecting the recovery from the COVID-19 pandemic in both 2022 and 2021. The releases in the current year were partially offset by unfavourable changes in our macroeconomic outlook.

PCL on impaired loans increased $100 million or 15%, mainly reflecting recoveries last year as compared to provisions taken in the current year in Capital Markets and Wealth Management, as well as higher provisions in Personal & Commercial Banking.

### Insurance policyholder benefits, claims and acquisition expense (PBCAE)

## 2022 vs. 2021

PBCAE of $1,783 million decreased $2,108 million or 54% from last year, mainly reflecting the change in fair value of investments backing policyholder liabilities and lower group annuity sales, both of which are largely offset in revenue. Higher favourable investment-related experience and favourable annual actuarial assumption updates in the current year largely related to economic assumptions also contributed to the decrease. These factors were partially offset by the impact of lower new longevity reinsurance contracts, as well as business growth in Canadian Insurance.

### Non-interest expense

|  | Table 10 |  |
| --- | --- | --- |
| (Millions of Canadian dollars, except percentage amounts) | 2022 | 2021 |
| Salaries | $7,251 | $6,724 |
| Variable compensation | 7,127 | 7,145 |
| Benefits and retention compensation | 2,015 | 2,053 |
| Share-based compensation | 135 | 617 |
| Human resources | 16,528 | 16,539 |
| Equipment | 2,099 | 1,986 |
| Occupancy | 1,554 | 1,584 |
| Communications | 1,082 | 931 |
| Professional fees | 1,511 | 1,351 |
| Amortization of other intangibles | 1,369 | 1,287 |
| Other | 2,466 | 2,246 |
| Non-interest expense | $26,609 | $25,924 |
| Efficiency ratio (1) | 54.3% | 52.2% |
| Efficiency ratio adjusted (2) | 52.3% | 52.2% |

(1) Efficiency ratio is calculated as Non-interest expense divided by Total revenue.

(2) This is a non-GAAP ratio. This measure has been adjusted by excluding the change in fair value of investments backing policyholder liabilities from total revenue. For further details, refer to the Key performance and non-GAAP measures section.

## 2022 vs. 2021

Non-interest expense increased $685 million or 3% from last year, mainly due to higher staff and technology related costs as well as increased marketing costs and other discretionary spend. These factors were partially offset by the change in the fair value of our U.S share-based compensation plans, which was largely offset in Other revenue.

Our efficiency ratio of 54.3% increased 210 bps from last year. Excluding the change in fair value of investments backing policyholder liabilities, our efficiency ratio of 52.3% increased 10 bps from last year.

Efficiency ratio excluding the change in fair value of investments backing policyholder liabilities is a non-GAAP ratio. For further details, including a reconciliation, refer to the Key performance and non-GAAP measures section.

### Income and other taxes

|  | Table 11 |  |
| --- | --- | --- |
| (Millions of Canadian dollars, except percentage amounts) | 2022 | 2021 |
| Income taxes | $4,302 | $4,581 |
| Other taxes |  |  |
| Value added and sales taxes | 508 | 443 |
| Payroll taxes | 871 | 810 |
| Capital taxes | 90 | 73 |
| Property taxes | 129 | 140 |
| Insurance premium taxes | 31 | 31 |
| Business taxes | 72 | 39 |
|  | 1,701 | 1,536 |
| Total income and other taxes | $6,003 | $6,117 |
| Income before income taxes | $20,109 | $20,631 |
| Effective income tax rate | 21.4% | 22.2% |
| Effective total tax rate (1) | 27.5% | 27.6% |

(1) Total income and other taxes as a percentage of income before income taxes and other taxes.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

27

## 2022 vs. 2021

Income tax expense decreased $279 million or 6% from last year, primarily due to lower income before income taxes, an increase in income from lower tax rate jurisdictions and higher tax-exempt income in the current year.

The effective income tax rate of 21.4% decreased 80 bps, primarily due to higher tax-exempt income and an increase in income from lower tax rate jurisdictions in the current year.

Other taxes increased $165 million or 11% from last year, mainly due to higher value added and sales taxes commensurate with increased purchase activity, higher payroll taxes driven by higher staff-related costs, as well as an increase in business taxes.

## Client assets

### Assets under administration

AUA are assets administered by us which are beneficially owned by our clients. We provide services that are administrative in nature, including safekeeping, collecting investment income, settling purchase and sale transactions, and record keeping. Underlying investment strategies within AUA are determined by our clients and generally do not impact the administrative fees that we receive. Administrative fees can be impacted by factors such as asset valuation level changes from market movements, types of services administered, transaction volumes, geography and client relationship pricing based on volumes or multiple services.

Our Investor & Treasury Services business is the primary business segment that has AUA with approximately 69% of total AUA, as at October 31, 2022, followed by our Wealth Management and Personal & Commercial Banking businesses with approximately 25% and 6% of total AUA, respectively.

## 2022 vs. 2021

AUA decreased $698 billion or 11% from last year, primarily due to unfavourable market conditions, partially offset by increased client activity in Investor & Treasury Services, the impact of foreign exchange translation and the inclusion of our acquisition of Brewin Dolphin in Wealth Management.

The following table summarizes AUA by geography and asset class:

| AUA by geographic mix and asset class |  | Table 12 |
| --- | --- | --- |
| (Millions of Canadian dollars) | 2022 | 2021 |
| Canada (1) |  |  |
| Money market | $43,200 | $42,700 |
| Fixed income | 735,800 | 772,400 |
| Equity | 734,000 | 781,400 |
| Multi-asset and other | 1,006,300 | 1,150,400 |
| Total Canada | 2,519,300 | 2,746,900 |
| U.S. (1) |  |  |
| Money market | 40,700 | 49,800 |
| Fixed income | 116,000 | 90,400 |
| Equity | 246,300 | 256,000 |
| Multi-asset and other | 304,300 | 324,600 |
| Total U.S. | 707,300 | 720,800 |
| Other International (1) |  |  |
| Money market | 38,200 | 32,800 |
| Fixed income | 252,700 | 308,200 |
| Equity | 636,600 | 865,000 |
| Multi-asset and other | 1,495,600 | 1,673,600 |
| Total International | 2,423,100 | 2,879,600 |
| Total AUA | $5,649,700 | $6,347,300 |

(1) Geographic information is based on the location from where our clients are serviced.

### Assets under management

AUM are assets managed by us which are beneficially owned by our clients. Management fees are paid by the investment funds and other clients for the investment capabilities of an investment manager and can also cover administrative services. Management fees may be calculated daily, monthly or quarterly as a percentage of the AUM, depending on the distribution channel, product and investment strategies. In general, equity strategies carry a higher fee rate than fixed income or money market strategies. Fees are also impacted by asset mix and relationship pricing for clients using multiple services. Higher risk assets generally produce higher fees, while clients using multiple services can take advantage of synergies which reduce the fees they are charged. Certain funds may have performance fee arrangements where fees are recorded when certain benchmarks or performance targets are achieved. These factors could lead to differences in fees earned by product and therefore net return by asset class may vary despite similar average AUM. Our Wealth Management segment is the primary business segment that has AUM with approximately 99% of total AUM as at October 31, 2022.

## 2022 vs. 2021

AUM decreased $9 billion or 1% from last year, primarily due to unfavourable market conditions, partially offset by the inclusion of our acquisition of Brewin Dolphin, the impact of foreign exchange translation and net sales.

28 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

The following table presents the change in AUM for the year ended October 31, 2022:

| Client assets - AUM |  |  |  |  |  |  | Table 13 |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  | 2022 |  |  |  |  |  | 2021 |
| (Millions of Canadian dollars) | Money market | Fixed income | Equity | Multi-asset and other | Total | Total | Total |
| AUM, beginning balance | $43,500 | $235,400 | $137,600 | $592,200 | $1,008,700 | $843,600 |  |
| Institutional inflows | 100,000 | 42,900 | 16,100 | 16,600 | 175,600 | 98,000 |  |
| Institutional outflows | (107,300) | (48,900) | (10,600) | (13,200) | (180,000) | (73,700) |  |
| Personal flows, net | (700) | (2,900) | 2,000 | 23,000 | 21,400 | 51,500 |  |
| Total net flows | (8,000) | (8,900) | 7,500 | 26,400 | 17,000 | 75,800 |  |
| Market impact | 200 | (27,400) | (18,100) | (72,100) | (117,400) | 123,800 |  |
| Acquisition/dispositions | - | - | - | 58,500 | 58,500 | (4,500) |  |
| Foreign exchange | 2,100 | (1,300) | 2,900 | 29,200 | 32,900 | (30,000) |  |
| Total market, acquisition/dispositions and foreign exchange impact | 2,300 | (28,700) | (15,200) | 15,600 | (26,000) | 89,300 |  |
| AUM, balance at end of year | $37,800 | $197,800 | $129,900 | $634,200 | $999,700 | $1,008,700 |  |

## Business segment results

### Results by business segments

|  | 2022 |  |  |  |  |  |  | 2021 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| (Millions of Canadian dollars, except percentage amounts) | Personal & Commercial Banking | Wealth Management | Insurance | Investor & Treasury Services | Capital Markets (1) | Corporate Support (1) | Total | Total |
| Net interest income | $14,019 | $3,634 | - | $498 | $4,698 | $(132) | $22,717 | $20,002 |
| Non-interest income | 6,124 | 11,215 | 3,510 | 1,725 | 4,422 | (728) | 26,268 | 29,691 |
| Total revenue | 20,143 | 14,849 | 3,510 | 2,223 | 9,120 | (860) | 48,985 | 49,693 |
| PCL | 463 | 34 | - | (3) | (11) | 1 | 484 | (753) |
| PBCAE | - | - | 1,783 | - | - | - | 1,783 | 3,891 |
| Non-interest expense | 8,437 | 10,701 | 588 | 1,569 | 5,561 | (247) | 26,609 | 25,924 |
| Income before income taxes | 11,243 | 4,114 | 1,139 | 657 | 3,570 | (614) | 20,109 | 20,631 |
| Income taxes | 2,873 | 970 | 282 | 144 | 649 | (616) | 4,302 | 4,581 |
| Net income | $8,370 | $3,144 | $857 | $513 | $2,921 | $2 | $15,807 | $16,050 |
| ROE (2) | 30.9% | 16.5% | 36.4% | 16.4% | 11.3% | n.m. | 16.4% | 18.6% |
| Average assets | $575,900 | $158,100 | $22,500 | $250,600 | $824,800 | $55,000 | $1,886,900 | $1,678,200 |

(1) Net interest income, Non-interest income, Total revenue, Income before income taxes, and Income taxes are presented in Capital Markets on a taxable equivalent basis (teb). The teb adjustment is eliminated in the Corporate Support segment. For a further discussion, refer to the How we measure and report our business segments section.

(2) For further details, refer to the Key performance and non-GAAP measures section.

### How we measure and report our business segments

Our management reporting framework is intended to measure the performance of each business segment as if it were a stand-alone business and reflects the way that the business segment is managed. This approach is intended to ensure that our business segments' results include all applicable revenue and expenses associated with the conduct of their business and depicts how management views those results.

#### Key methodologies

The following outlines the key methodologies and assumptions used in our management reporting framework. These are periodically reviewed by management to ensure they remain valid.

#### Expense and tax allocation

To ensure that our business segments' results include expenses associated with the conduct of their business, we allocate costs incurred or services provided by Technology & Operations and Functions, which are directly undertaken or provided on the business segments' behalf. For other costs not directly attributable to our business segments, including overhead costs and other indirect expenses, we use our management reporting framework for allocating these costs to each business segment in a manner that is intended to reflect the underlying benefits.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

29

### **Capital attribution**

Our management reporting framework also determines the attribution of capital to our business segments in a manner that is intended to consistently measure and align economic costs with the underlying benefits and risks associated with the activities of each business segment. The amount of capital assigned to each business segment is referred to as attributed capital. Unattributed capital and associated amounts are reported in Corporate Support. For further information, refer to the Capital management section.

### **Funds transfer pricing**

Funds transfer pricing refers to the pricing of intra-company borrowing or lending for management reporting purposes. We employ a funds transfer pricing process to enable risk-adjusted management reporting of segment results. This process determines the costs and revenue for intra-company borrowing and lending of funds after taking into consideration our interest rate risk and liquidity risk management objectives, as well as applicable regulatory requirements.

### **Provisions for credit losses**

PCL is recorded to recognize expected credit losses on all financial assets, except for financial assets classified or designated as FVTPL and equity securities designated as FVOCI, which are not subject to impairment assessment. For details on our accounting policy on Allowance for credit losses (ACL), refer to Note 2 of our 2022 Annual Consolidated Financial Statements.

PCL is included in the results of each business segment to fully reflect the appropriate expenses related to the conduct of each business segment.

In addition to the key methodologies described above, the following components of our management reporting framework also impact how our business segments are managed and reported:

- • Wealth Management results include disclosure in U.S. dollars, primarily for U.S. Wealth Management (including City National) as we review and manage the results of this business largely in this currency.
- • Capital Markets results are reported on a teb basis, which grosses up total revenue from certain tax-advantaged sources (Canadian taxable corporate dividends and the U.S. tax credit investment business) to their effective taxable equivalent value with a corresponding offset recorded in the provision for income taxes. We record the elimination of the teb adjustments in Corporate Support. We believe these adjustments are useful and reflect how Capital Markets manages its business, since it enhances the comparability of revenue and related ratios across taxable revenue and our principal tax-advantaged sources of revenue. The use of teb adjustments and measures may not be comparable to similar GAAP measures or similarly adjusted amounts disclosed by other financial institutions.
- • Corporate Support results include all enterprise level activities that are undertaken for the benefit of the organization that are not allocated to our five business segments, such as certain treasury and liquidity management activities, including amounts associated with unattributed capital, and consolidation adjustments, including the elimination of the teb gross-up amounts. In addition, we record gains (losses) on economic hedges of our U.S. Wealth Management (including City National) share-based compensation plans, which are reflected in revenue, and related variability in share-based compensation expense driven by changes in the fair value of liabilities relating to these plans in Corporate Support as we believe this presentation more closely aligns with how we view business performance and manage the underlying risks.

### **Key performance and non-GAAP measures**

#### **Performance measures**

We measure and evaluate the performance of our consolidated operations and each business segment using a number of financial metrics, such as net income and ROE. Certain financial metrics, including ROE, do not have a standardized meaning under generally accepted accounting principles (GAAP) and may not be comparable to similar measures disclosed by other financial institutions.

#### **Return on common equity**

We use ROE, at both the consolidated and business segment levels, as a measure of return on total capital invested in our business. Management views the business segment ROE measure as a useful measure for supporting investment and resource allocation decisions because it adjusts for certain items that may affect comparability between business segments and certain competitors.

Our consolidated ROE calculation is based on net income available to common shareholders divided by total average common equity for the period. Business segment ROE calculations are based on net income available to common shareholders divided by average attributed capital for the period. For each segment, average attributed capital includes the capital required to underpin various risks as described in the Capital management section and amounts invested in goodwill and intangibles.

The attribution of capital involves the use of assumptions, judgments and methodologies that are regularly reviewed and revised by management as deemed necessary. Changes to such assumptions, judgments and methodologies can have a material effect on the business segment ROE information that we report. Other companies that disclose information on similar attributions and related return measures may use different assumptions, judgments and methodologies.

30 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

# Calculation of ROE

Table 15

| (Millions of Canadian dollars, except percentage amounts) | 2022 |  |  |  |  |  |  | 2021 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Personal & Commercial Banking | Wealth Management | Insurance | Investor & Treasury Services | Capital Markets | Corporate Support | Total | Total |
| Net income available to common shareholders | $8,287 | $3,096 | $851 | $505 | $2,855 | $(47) | $15,547 | $15,781 |
| Total average common equity (1), (2) | 26,800 | 18,800 | 2,350 | 3,100 | 25,350 | 18,300 | 94,700 | 84,850 |
| ROE (3) | 30.9% | 16.5% | 36.4% | 16.4% | 11.3% | n.m. | 16.4% | 18.6% |

(1) Total average common equity represents rounded figures.

(2) The amounts for the segments are referred to as attributed capital.

(3) ROE is based on actual balances of average common equity before rounding.

n.m. not meaningful

# Non-GAAP measures

We believe that certain non-GAAP measures described below are more reflective of our ongoing operating results and provide readers with a better understanding of management's perspective on our performance. These measures also enhance the comparability of our financial performance for the year ended October 31, 2022 with the results from last year. Non-GAAP measures (including non-GAAP ratios) do not have a standardized meaning under GAAP and may not be comparable to similar measures disclosed by other financial institutions.

The following discussion describes the non-GAAP measures we use in evaluating our operating results.

# Adjusted efficiency ratio

Our efficiency ratio is impacted by the change in fair value of investments backing policyholder liabilities, which is reported in revenue and largely offset in PBCAE. The adjusted efficiency ratio is a non-GAAP ratio and is calculated using adjusted total revenue, which is a non-GAAP measure as it excludes the impact from the change in fair value of investments backing policyholder liabilities. We believe the adjusted efficiency ratio is a useful measure as changes in the fair value of investments backing policyholder liabilities can lead to volatility in total revenue that could obscure trends in underlying business performance and reduce comparability with prior periods.

# Consolidated non-GAAP efficiency ratio

Table 16

| (Millions of Canadian dollars, except percentage amounts) | 2022 |  |  | 2021 |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | Item excluded |  |  | Item excluded |  |  |
|  | As reported | Change in fair value of investments backing policyholder liabilities | Adjusted | As reported | Change in fair value of investments backing policyholder liabilities | Adjusted |
| Total revenue | $48,985 | $1,888 | $50,873 | $49,693 | $13 | $49,706 |
| Non-interest expense | 26,609 | - | 26,609 | 25,924 | - | 25,924 |
| Efficiency ratio | 54.3% |  | 52.3% | 52.2% |  | 52.2% |

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

31

Personal & Commercial Banking

Personal & Commercial Banking provides a broad suite of financial products and services to individuals and businesses for their day-to-day banking, investing and financing needs. We are focused on building deep and meaningful relationships with our clients, underscored by the delivery of exceptional client experiences, the breadth of our product suite, our depth of expertise, and the features of our digital solutions.

> 14 million

Number of Canadian Banking clients

#1 or #2

Ranking in market share for all key retail and business products

38,450

Employees

Revenue by business lines

![img-0.jpeg](img-0.jpeg)

We operate through two businesses - Canadian Banking and Caribbean & U.S. Banking. Canadian Banking serves our home market in Canada. We have the largest branch network, the most ATMs, one of the largest mobile sales forces across Canada along with market-leading digital capabilities. In Caribbean & U.S. Banking, we offer a broad range of financial products and services in targeted markets.

In Canada, we compete with other Schedule 1 banks, independent trust companies, foreign banks, credit unions, caisses populaires, auto financing companies, as well as emerging entrants to the financial services industry.

In the Caribbean, our competition includes banks, trust companies and investment management companies serving retail and corporate clients, as well as public institutions. In the U.S., we compete primarily with other Canadian banking institutions that have U.S. operations.

2022 Operating environment

- In the early part of the fiscal year, the operating environment continued to be impacted by COVID-19 related restrictions; however, it was buffered in part by low unemployment levels, sustained GDP growth and government support. As restrictions eased during the year, client activity improved, driving solid revenue growth in fiscal 2022.
- In response to rising inflation, the BoC raised the benchmark interest rate by 350 basis points from March 2022 to October 2022. As a result of the rising interest rate environment, we saw NIM expansion in fiscal 2022, reversing the decline in the prior year. The combination of strong volumes and higher NIM translated to significant growth in net interest income.
- While the credit environment in fiscal 2022 reflected a recovery from the COVID-19 pandemic, it also reflected unfavourable changes in our economic outlook towards the latter half of the year, including the impact of slowing economic growth as well as rising inflation and interest rates. PCL on impaired loans remained well below pre-pandemic levels.
- As a result of the rising rate environment, housing activity has slowed and household debt servicing costs increased. In the latter half of the year, we saw mortgage originations below prior year levels.
- Personal and business deposits continued to see significant growth in the first half of the year as COVID-19 related disruptions persisted; however, as a result of the economy re-opening and robust client activity, as well as the impact from Bank of Canada's monetary policy, deposit growth decelerated in the latter half of the fiscal year but remained well above pre-pandemic levels.
- In fiscal 2022, we saw unfavourable market conditions driving mutual fund balances lower from both market depreciation and net redemptions. We also saw a decline in client activity in our Direct Investing business from elevated levels in the previous year.
- Client preferences for digital offerings are evolving and we continue to invest in digital solutions to improve the client experience and deliver personalized advice.
- Our Caribbean Banking business was favourably impacted by the recovery from the COVID-19 pandemic, reflecting higher client activity. We also saw releases of provisions on performing and impaired loans.
- In the U.S., earnings were favourably impacted by the rising interest rate environment and the increase in cross-border travel, as most restrictions related to COVID-19 were lifted.

32 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

## Strategic priorities

| OUR STRATEGY | PROGRESS IN 2022 | PRIORITIES IN 2021 |
| --- | --- | --- |
| Transform sales, advice and services | Evolved our branch network by opening new format branches and investing in upgrading existing locations with the objective of enhancing the client experience, allowing clients to engage in deeper conversations with our advisors and enabling them to complete more transactions digitally Continued to create capacity and capability to focus on advice, complex servicing and sales, all underpinned by innovation across our distribution network Leveraged our industry-leading Canadian mobile app to revolutionize the mobile client experience through personalization and value-added client insights Continued to tailor advice and insights to the individual to help clients manage their finances through the NOMI suite of capabilities, including NOMI Insights®, NOMI Find & Save® that uses predictive technology to help clients save, and NOMI® Forecast that provides a seven-day forecast of clients' future cash flow In May 2022, Retail Banker International awarded RBC with the Best Global Retail Bank and Best Bank for Small & Medium-Sized enterprises (SMEs) awards, recognizing the Bank's success in respect of its retail banking profits, world-class cost-income ratio, continued market share gains and exceptional client base In October 2022, J.D. Power Canada ranked RBC the highest in Customer Satisfaction among Big 5 Banks for the third consecutive year from the J.D. Power 2022 Canada Retail Banking Satisfaction Study In November 2021, RBC was awarded the Best Payments Innovation Award from The Digital Banker as part of the Global Retail Banking Innovation Awards 2021 Leveraged our existing product portfolio to support our clients' transition to net zero, including lending such as electric and hybrid vehicles and energy retrofit loans, and ESG investment products including market-linked ESG GIC, InvestEase® responsible investing portfolio and RBC Vision funds Continued to grow our national cleantech practice through RBCs and worked with a number of cleantech ecosystem partners to identify and overcome the hurdles to commercialization of cleantech solutions | Provide flexibility by continuing to deliver anytime, anywhere solutions to our clients across all channels, seamlessly integrating mobile and digital services into our clients' lives Continue to reimagine our branch network to meet the evolving needs of our clients Expand our expert advisor network to support clients with complex advice needs Continue to focus on opportunities to support businesses and retail clients in their transition to net zero, including building upon our existing portfolio of products, services and advice Continue to utilize and transform our joint venture Moneris to deliver a leading merchant platform |
| Accelerate our growth | Own® has launched more than 32,800 new Canadian businesses, driving close to 21,600 small business RBC bank accounts this year Since the launch of the full product offering in August 2021, Mydoh has reached 100,000 Canadian parents and children and is experiencing very high engagement Continued to provide superior working capital solutions to our business clients through RBC PayEdgeTM platform Lead with RBC VantageTM, a program that allows clients to unlock rewards, savings, insights and more with any eligible bank account. Approximately 2 million clients signed up for RBC Vantage since launch and we've delivered millions in fee rebates and over 1 billion RBC Avion® points Launched Vantage SnapshotTM that provides clients with a personalized picture of the cumulative savings and benefits they've received with their RBC bank accounts and highlights opportunities for clients to earn and save more - all in one spot Launched our next-generation loyalty program, Avion RewardsTM, that provides Canadians with more ways to shop, earn, save and redeem with innovative shopping features, best-in-class cash back deals and offers, and more ways to pay with points Maintained our focus on key high-growth and high-value segments such as retirees, youth, newcomers, business owners, high net worth clients, and healthcare professionals Entered into a collaboration agreement with ICICI Bank Canada to focus on building banking solutions that simplify the financial transition for newcomers from the time they choose Canada to their arrival and beyond | Continue to build a suite of best-in-class value propositions, digital experiences and Beyond Banking ventures to accelerate client acquisition Engage Canadians earlier, more often and in more compelling ways Focus on engaging key high-growth client segments and enabling our advisors to build new and deeper relationships with the objective of achieving industry-leading volume growth Establish additional key partnerships to continue to add value for our clients Enable unparalleled value for both consumers and merchants through best-in-class loyalty program Focus on increasing employee engagement and continue to build a future-ready workforce |

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

33

| OUR STRATEGY | PROGRESS IN 2022 | PRIORITIES IN 2023 |
| --- | --- | --- |
| Digitize to unlock productivity | Achieved 11% year over year growth in number of mobile users Recognized with the J.D. Power Canada award for 'Best in Customer Satisfaction' for our mobile banking app. The recognition comes from the J.D. Power 2022 Canadian Banking Mobile App Satisfaction Study Continued to invest in solutions that simplify, digitize and automate experiences for clients and employees, and enable employees to deliver relevant and expert advice, such as our market-leading MyAdvisor® personalized planning capability Enhanced digital experience for our small business and commercial clients and made it easier for them to transact with us Entered into agreements with Plaid and Envestnet \| Yodlee that allow RBC clients to better manage their finances and build wealth by securely connecting to and sharing their RBC financial information with thousands of third-party applications | Deliver more personalized insights to improve the client experience while continuing to simplify and digitize everyday banking Lead in mobile capabilities and enable fulfillment of servicing through digital channels with access to advisors to help clients on their chosen path Invest in new tools and capabilities and proactively seek ways to streamline internal processes and the client experience Accelerate adoption of business agility and deliver faster, smarter and higher quality products and solutions |
| In the Caribbean | Accelerated actions focused on enhancing the client experience underpinned by programs across growth and transformation priorities, including product development and digitization | Continue focus on modernizing data and technology; enhancing the client experience by digitizing and simplifying day to day banking; and developing and accelerating key programs to enable employees for success and accelerate growth |
| In the U.S. | Despite lingering impacts of the COVID-19 pandemic, continued to drive accelerated client and real estate financing growth leveraging a competitively differentiated value proposition and home-buying solution Made focused investments to digitize client and internal processes within real estate financing, improving process robustness and control automation, and expanding targeted discounts and offers of value to the cross-border lifestyle | Continue driving accelerated growth momentum through deeper integration to increase market share of Canadian purchasers of U.S. real estate and new-to-RBC relationship acquisition Expand digitally enabled client experiences to extend competitive differentiation and drive industry leading client satisfaction, while accelerating automation of operational processes and controls to enhance scalability |

## Outlook

Interest rate hikes by central banks to contain surging inflation are adding to global growth risk in the year ahead. Housing markets in Canada have already pulled back significantly since spring in response to increases in interest rates. Labour market conditions are extremely tight with demand for workers well outpacing available supply, leading to shortages across regions and sectors. However, as the economic backdrop deteriorates we expect job openings will fall and unemployment rates will rise. We expect moderate recessions in the U.S. and Canada in the first half of calendar 2023 with consumer spending contracting as higher borrowing costs and prices reduce household purchasing power. We expect the economy will begin to grow again in the second half of calendar 2023 with slowing inflation allowing central banks to pause interest rate hikes in the coming months. We will continue to pursue industry-leading outcomes and operational efficiency initiatives during uncertain times, and channel transformation to achieve our vision of being a digitally-enabled relationship bank.

The Caribbean's economic recovery has continued to strengthen in calendar 2022, supported by strong tourism-related travel. However, a slowing of the growth momentum is expected in 2023 as major source markets (U.S., U.K., Canada, Europe) are projected to fall into recessions. We will continue to focus on growth strategies in our target markets, improving operational efficiency, and adding value for our clients.

For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.

34 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

# **Personal & Commercial Banking**

**Table 17**

| (Millions of Canadian dollars, except percentage amounts and as otherwise noted) |  |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| Net interest income | $14,019 | $12,621 |
| Non-interest income | 6,124 | 5,725 |
| Total revenue | 20,143 | 18,346 |
| PCL on performing assets | (283) | (909) |
| PCL on impaired assets | 746 | 722 |
| PCL | 463 | (187) |
| Non-interest expense | 8,437 | 7,978 |
| Income before income taxes | 11,243 | 10,555 |
| Net income | $8,370 | $7,847 |
| Revenue by business |  |  |
| Canadian Banking | $19,282 | $17,570 |
| Personal Banking | 13,957 | 13,337 |
| Business Banking | 5,325 | 4,233 |
| Caribbean & U.S. Banking | 861 | 776 |
| Key ratios |  |  |
| ROE | 30.9% | 32.0% |
| NIM | 2.55% | 2.51% |
| Efficiency ratio | 41.9% | 43.5% |
| Operating leverage (1) | 4.0% | 3.1% |
| Selected balance sheet information |  |  |
| Average total assets | $575,900 | $527,100 |
| Average total earning assets, net | 548,900 | 502,000 |
| Average loans and acceptances, net | 553,300 | 505,600 |
| Average deposits | 552,100 | 504,300 |
| Other information |  |  |
| AUA (2) , (3) | $336,400 | $367,700 |
| Average AUA | 355,600 | 340,800 |
| AUM (3) | 5,600 | 5,400 |
| Number of employees (FTE) | 38,450 | 36,675 |
| Credit information |  |  |
| PCL on impaired loans as a % of average net loans and acceptances | 0.14% | 0.14% |
| Other selected information - Canadian Banking |  |  |
| Net income | $8,024 | $7,620 |
| NIM | 2.54% | 2.50% |
| Efficiency ratio | 40.5% | 42.0% |
| Operating leverage | 3.8% | 2.9% |

(1) See Glossary for composition of this measure.

(2) AUA includes securitized residential mortgages and credit card loans as at October 31, 2022 of $15 billion and $6 billion, respectively (October 31, 2021 - $15 billion and $3 billion).

(3) Represents year-end spot balances.

# **Financial performance**

# **2022 vs. 2021**

Net income increased $523 million or 7% from last year, primarily attributable to higher net interest income, driven by average volume growth of 9% in Canadian Banking and higher spreads. Higher non-interest income also contributed to the increase. These factors were partially offset by higher PCL, higher staff and technology related costs, including digital initiatives.

Total revenue increased $1,797 million or 10%, primarily due to higher net interest income reflecting average volume growth in Canadian Banking of 9% in loans and 9% in deposits. Increased client activity contributed to higher foreign exchange revenue, card service revenue and service charges.

NIM increased 4 bps, primarily due to the impact of the rising interest rate environment, partially offset by changes in product mix and lower prepayment revenue in our mortgage portfolios.

PCL was $463 million compared to $(187) million last year. The increase in PCL was primarily attributable to lower releases of provisions on performing loans due to unfavourable changes in our macroeconomic outlook in the current year.

Non-interest expense increased $459 million or 6%, mainly attributable to higher staff and technology related costs, including digital initiatives, as well as higher marketing costs.

Average loans and acceptances increased $48 billion or 9%, mainly driven by growth in residential mortgages and business loans.

Average deposits increased $48 billion or 9%, reflecting growth in business deposits and personal deposits including Guaranteed Investment Certificates (GICs).

# **Business line review**

In Canada, we operate through two business lines: Personal Banking and Business Banking.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

35

## Personal Banking

Personal Banking offers a full range of products focused on meeting the needs of our individual Canadian clients at every stage of their lives through a wide range of financing and investment products and services. This includes home equity financing, personal lending, chequing and savings accounts, private banking, indirect lending (including auto financing), mutual funds and self-directed brokerage accounts, GICs, credit cards, and payment products and solutions.

We rank #1 or #2 in market share for all key Personal Banking products in Canada supported by the largest retail banking network in Canada, with 1,162 branches and 4,028 ATMs.

### Financial performance

Total revenue increased $620 million or 5% compared to last year, primarily due to higher net interest income reflecting average volume growth of 9% and higher interest rates, partially offset by the impact of competitive pricing in our mortgage portfolios. Increased client activity also contributed to higher card service revenue, foreign exchange revenue and service charges. These factors were partially offset by lower securities brokerage commissions.

Average residential mortgages increased 11% compared to last year, mainly due to solid, but moderating, housing activity and mortgage originations.

Average deposits increased 9% from last year, largely reflecting acquisition of new clients and an increase in activity from existing clients.

| Selected highlights | Table 18 |  |
| --- | --- | --- |
| (Millions of Canadian dollars, except number of) | 2022 | 2021 |
| Total revenue | $13,957 | $13,337 |
| Other information |  |  |
| Average residential mortgages | 338,400 | 305,400 |
| Average other loans and acceptances, net | 75,700 | 74,800 |
| Average deposits | 293,500 | 270,500 |
| Average credit card balances | 18,200 | 16,600 |
| Credit card purchase volumes | 162,200 | 132,400 |
| Branch mutual fund balances (1) | 178,600 | 205,500 |
| Average branch mutual fund balances | 194,400 | 191,300 |
| AUA - Self-directed brokerage (1) | 127,600 | 135,900 |
| Number as at October 31: |  |  |
| Branches | 1,162 | 1,182 |
| ATMs | 4,028 | 4,032 |

(1) Represents year-end spot balances.

Average residential mortgages, loans and deposits
(Millions of Canadian dollars)

![img-1.jpeg](img-1.jpeg)

## Business Banking

Business Banking offers a wide range of lending, leasing, deposit, investment, foreign exchange, cash management, auto dealer financing, trade products, and services to small and medium-sized commercial businesses across Canada. With one of the largest teams of relationship managers and specialists in the industry, our commitment to client experience and trusted advice has earned us leading market share in business lending and deposits.

### Financial performance

Total revenue increased $1,092 million or 26% compared to last year, primarily due to higher net interest income reflecting higher interest rates and average volume growth of 11%. Higher credit fees, service charges and foreign exchange revenue reflecting increased client activity also contributed to the increase.

Average loans and acceptances increased 11% and average deposits increased 11%, mainly due to new account acquisitions as well as deepening of our existing client relationships.

| Selected highlights | Table 19 |  |
| --- | --- | --- |
| (Millions of Canadian dollars) | 2022 | 2021 |
| Total revenue | $5,325 | $4,233 |
| Other information (average) |  |  |
| Loans and acceptances, net | 110,800 | 99,800 |
| Deposits | 237,900 | 215,200 |

Average loans and acceptances and deposits
(Millions of Canadian dollars)

![img-2.jpeg](img-2.jpeg)

## Caribbean & U.S. Banking

Our Caribbean Banking business offers a comprehensive suite of banking products and services, as well as international financing and trade promotion services through extensive branch, ATM, online, and mobile banking networks.

Our U.S. Banking business serves the needs of Canadian retail and small business clients providing personalized, digitally-enabled cross-border banking solutions enabling a cross-border lifestyle in all 50 states across the U.S.

36 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

## Financial performance

Total revenue increased $85 million or 11% from last year, primarily due to higher net interest income reflecting average volume growth of 12% and higher spreads. Higher card service revenue reflecting increased client activity also contributed to the increase.

Average loans and acceptances increased 12% and average deposits increased 11% primarily due to increased client activity and the impact of foreign exchange translation.

| Selected highlights | Table 20 |  |
| --- | --- | --- |
| (Millions of Canadian dollars, except number of and percentage amounts) | 2022 | 2021 |
| Total revenue | $861 | $776 |
| Other information |  |  |
| NIM | 2.90% | 2.85% |
| Average loans and acceptances, net | 10,200 | 9,100 |
| Average deposits | 20,800 | 18,700 |
| AUA (1) | 6,500 | 5,700 |
| Average AUA | 6,300 | 5,700 |
| AUM (1) | 5,300 | 5,100 |
| Number as at October 31: |  |  |
| Branches | 38 | 38 |
| ATMs | 269 | 271 |

(1) Represents year-end spot balances.

## Average loans and deposits (Millions of Canadian dollars)

![img-3.jpeg](img-3.jpeg)

## Wealth Management

Wealth Management is a global business serving clients in key financial centres. We serve HNW and UHNW individual and institutional clients with a comprehensive suite of advice-based solutions and strategies to help them achieve their financial goals.

**$14.8 billion**

Total revenue

**> 6,100**

Client-facing advisors

**> $55 billion**

AUA net flows

### Asset under Administration (AUA)

![img-4.jpeg](img-4.jpeg)

### Assets under Management (AUM)

![img-5.jpeg](img-5.jpeg)

Our lines of business include Canadian Wealth Management, U.S. Wealth Management (including City National), Global Asset Management (GAM), and International Wealth Management.

- Canadian Wealth Management is the largest full-service wealth advisory business in Canada, as measured by AUA, serving HNW and UHNW clients
- U.S. Wealth Management (including City National) also encompasses our private client group (PCG) and clearing and custody (C&C) businesses. PCG is the 6th largest full-service wealth advisory firm in the U.S., as measured by AUA, and City National is a premier U.S. private and commercial bank serving HNW, UHNW and commercial clients
- GAM is the largest retail mutual fund company in Canada as measured by AUM, as well as a leading institutional asset manager
- International Wealth Management serves HNW and UHNW clients, primarily through key financial centres in the U.K., Ireland, the Channel Islands and Asia

## 2022 Operating environment

- Earnings in the current fiscal year were favourably impacted by the rising interest rate environment reflecting rate hikes by the Fed, BoC and other central banks, while challenging market conditions unfavourably impacted our fee-based client assets.
- Our core businesses performed well with continued volume growth in City National and net positive flows of fee-based client assets in our wealth advisory businesses reflecting the strength of our business driven by the quality of our advice, the breadth of our investment and holistic wealth planning solutions and clients' trust in our brand. The mutual fund sector has seen a slowdown in sales due to the rising interest rate environment and market volatility.
- We continued to invest in our people and technology to maintain our competitive advantage and increase efficiencies in an environment characterized by market volatility, rapidly changing client preferences and increasing regulatory requirements.
- While the credit environment in fiscal 2022 reflected a recovery from the COVID-19 pandemic, it also reflected unfavourable changes in our economic outlook towards the latter half of the year, including the impact of slowing economic growth as well as rising inflation and interest rates.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

37

## Strategic priorities

| OUR STRATEGY | PROGRESS IN 2022 | PRIORITIES IN 2023 |
| --- | --- | --- |
| In Canada, be the premier service provider for HNW and UHNW clients | Further extended our position as industry leader in our full-service private wealth business Continued to focus on holistic wealth planning, including advisor training on intergenerational and business wealth transfer Continued to expand RBC® Premier Banking to deepen banking relationships with Wealth Management clients Continued to enhance our digital and data capabilities to drive increased client satisfaction and advisor productivity Implemented unique capabilities that are becoming increasingly important to our client base such as private alternative investment products | Continue to retain and attract top-performing advisors to strengthen our talent advantage Deliver a differentiated client experience through enriched advisor-client interactions and seamless digital experiences Deepen client relationships by leveraging the combined strengths across other business segments with a focus on the business owner client segment Continue to invest in digital solutions to streamline and simplify the business and improve efficiency and advisor productivity Renew legacy infrastructure to ensure ongoing resiliency in our technology platforms |
| In the U.S., become the leading private and commercial bank and wealth manager in our key markets | Continued to invest in key areas needed to grow our U.S. Wealth Management business, including substantial financial advisor recruitment, solid execution on our technology transformation and provided proactive liquidity to our clients via a revamped securities-based lending platform In City National, we continued to focus on organically growing our core-banking business and enhancing our risk management and controls foundation As part of the Preferred Banking mortgage-led strategy, City National launched a pilot mortgage pod program designed to attract new clients with a mortgage-led strategy The National Corporate Banking division, which was launched in 2021 to pursue the mid-Corp segment (companies with annual revenue from $500 million to $2 billion), gained market share in 2022 | Continue to deliver an exceptional client experience for targeted HNW, UHNW, middle market, and business banking segments Leverage the combined strengths within U.S. Wealth Management (including City National) and Capital Markets to deepen client relationships In City National, we will continue to focus on enhancing our risk management and compliance capabilities across the three lines of defense Serve our clients more effectively through a technology-driven platform, for example, transforming our end-to-end commercial credit journey leveraging a new commercial lending platform, strengthening the mortgage platform by modernizing technology and enhancing our client-facing digital capabilities Drive programs to enhance profitability and scalability across the organization |
| In select global financial centres, become the most trusted regional private bank | Continued to deliver on successful growth initiatives, bringing the full strength and breadth of RBC to our clients Focused on delivering a differentiated client experience by leveraging our global capabilities Completed acquisition of Brewin Dolphin, increasing our distribution, AUM and client base to position ourselves as the third largest wealth manager in the U.K. In Asia, continued growth momentum achieved through the addition of experienced client-facing advisors and net new assets | Focus on growing market share in target markets Continue to leverage our global strengths to better serve clients Continue to deliver an exceptional client experience and increase business effectiveness and talent capabilities Successful integration of RBC Brewin Dolphin to enhance client value proposition and consolidate position in the U.K. local market Focus on growing the business in Asia by attracting experienced advisors; enhancing digital and product capabilities; and deepening cross-business, global collaboration |
| In asset management, be a leading, diversified asset manager focused on global institutional and North American retail clients | Maintained #1 market share in Canadian mutual fund AUM RBC® iShares strategic alliance maintained #1 market share in Canadian ETFs RBC GAM investment teams continued to integrate material ESG factors into their investment processes for applicable investment strategies | Continue to expand our investment capabilities to meet evolving client needs in our target distribution regions Continue shift to a more unified asset management operating model to take better advantage of enterprise and GAM global scale, resources and infrastructure |

## Outlook

The ongoing uncertainty in the macroeconomic environment, including the expectation of further interest rate increases and a slowdown in economic growth, will continue to impact markets.

Despite this uncertainty, we believe our diversified businesses remain well-positioned to continue growing our leading position in Canada and increasing our market share in the HNW and UHNW client segments globally, leveraging the strength of our brand, reputation and solid financial position. Our strategy remains unchanged as we continue to focus on delivering an unmatched client experience through holistic goals-based advice, attracting and retaining top-performing advisors, and collaborating across the enterprise to bring the full breadth of our capabilities to our clients. We will continue to invest in our people and technology to improve client and advisor experiences, drive operational efficiencies, and further strengthen our risk, compliance and controls infrastructure to meet heightened regulatory requirements.

For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.

38 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

| Wealth Management |  | Table 21 |  |
| --- | --- | --- | --- |
| (Millions of Canadian dollars, except number of, percentage amounts and as otherwise noted) |  |  |  |
|  | 2022 |  | 2021 |
| Net interest income | $3,634 | $ | 2,689 |
| Non-interest income | 11,215 |  | 10,607 |
| Total revenue | 14,849 |  | 13,296 |
| PCL on performing assets | 21 |  | (33) |
| PCL on impaired assets | 13 |  | (14) |
| PCL | 34 |  | (47) |
| Non-interest expense | 10,701 |  | 9,929 |
| Income before income taxes | 4,114 |  | 3,414 |
| Net income | $3,144 | $ | 2,626 |
| Revenue by business |  |  |  |
| Canadian Wealth Management | $4,308 | $ | 3,908 |
| U.S. Wealth Management (including City National) | 7,448 |  | 6,320 |
| U.S. Wealth Management (including City National) (US$ millions) | 5,757 |  | 5,035 |
| Global Asset Management | 2,667 |  | 2,726 |
| International Wealth Management | 426 |  | 342 |
| Key ratios |  |  |  |
| ROE | 16.5% |  | 15.9% |
| NIM | 2.57% |  | 2.25% |
| Pre-tax margin (1) | 27.7% |  | 25.7% |
| Selected balance sheet information |  |  |  |
| Average total assets | $158,100 | $ | 136,000 |
| Average total earning assets, net | 141,200 |  | 119,500 |
| Average loans and acceptances, net | 99,800 |  | 84,000 |
| Average deposits | 158,800 |  | 143,000 |
| Other information |  |  |  |
| AUA (2), (3) | $1,387,900 | $ | 1,322,300 |
| AUM (2) | 991,500 |  | 1,000,600 |
| Average AUA | 1,318,100 |  | 1,242,400 |
| Average AUM | 966,300 |  | 937,200 |
| PCL on impaired loans as a % of average net loans and acceptances | 0.01% |  | (0.02)% |
| Number of employees (FTE) | 22,782 |  | 19,486 |
| Number of advisors (4) | 6,158 |  | 5,548 |

#### Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items

| (Millions of Canadian dollars, except percentage amounts) |  | 2022 vs. 2021 |
| --- | --- | --- |
| Increase (decrease): |  |  |
| Total revenue | $158 |  |
| PCL | 5 |  |
| Non-interest expense | 129 |  |
| Net income | 17 |  |
| Percentage change in average U.S. dollar equivalent of C$1.00 | (3)% |  |
| Percentage change in average British pound equivalent of C$1.00 | 7% |  |
| Percentage change in average Euro equivalent of C$1.00 | 9% |  |

(1) Pre-tax margin is defined as Income before income taxes divided by Total revenue.

(2) Represents year-end spot balances.

(3) In addition to Canadian Wealth Management, U.S. Wealth Management (including City National), and International Wealth Management, AUA includes $6,400 million (2021 - $7,100 million) related to GAM.

(4) Represents client-facing advisors across all our Wealth Management businesses.

| Client assets - AUA |  | Table 22 |  |
| --- | --- | --- | --- |
| (Millions of Canadian dollars) |  |  |  |
|  | 2022 |  | 2021 |
| AUA, beginning balance | $1,322,300 | $ | 1,100,000 |
| Asset inflows | 380,600 |  | 352,800 |
| Asset outflows | (325,100) |  | (299,200) |
| Total net flows | 55,500 |  | 53,600 |
| Market impact | (153,000) |  | 235,900 |
| Acquisitions/dispositions | 79,800 |  | (12,100) |
| Foreign exchange | 83,300 |  | (55,100) |
| Total market, acquisition/dispositions and foreign exchange impact | 10,100 |  | 168,700 |
| AUA, balance at end of year | $1,387,900 | $ | 1,322,300 |

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

39

# Client assets - AUM

Table 23

|  | 2022 |  |  |  |  | 2021 |
| --- | --- | --- | --- | --- | --- | --- |
|  | Money market | Fixed income | Equity | Multi-asset and other | Total | Total |
| (Millions of Canadian dollars) |  |  |  |  |  |  |
| AUM, beginning balance | $43,400 | $233,300 | $137,200 | $586,700 | $1,000,600 | $836,400 |
| Institutional inflows | 100,000 | 42,900 | 16,100 | 16,600 | 175,600 | 97,900 |
| Institutional outflows | (107,300) | (48,900) | (10,600) | (13,200) | (180,000) | (73,600) |
| Personal flows, net | (700) | (2,900) | 1,900 | 22,700 | 21,000 | 51,000 |
| Total net flows | (8,000) | (8,900) | 7,400 | 26,100 | 16,600 | 75,300 |
| Market impact | 200 | (27,200) | (18,100) | (71,600) | (116,700) | 123,200 |
| Acquisition/dispositions | - | - | - | 58,500 | 58,500 | (4,500) |
| Foreign exchange | 2,200 | (1,600) | 2,900 | 29,000 | 32,500 | (29,800) |
| Total market, acquisition/dispositions and foreign exchange impact | 2,400 | (28,800) | (15,200) | 15,900 | (25,700) | 88,900 |
| AUM, balance at end of year | $37,800 | $195,600 | $129,400 | $628,700 | $991,500 | $1,000,600 |

# AUA by geographic mix and asset class

Table 24

| (Millions of Canadian dollars) | 2022 | 2021 |
| --- | --- | --- |
| Canada (1) |  |  |
| Money market | $26,200 | $24,700 |
| Fixed income | 30,500 | 29,200 |
| Equity | 81,800 | 91,300 |
| Multi-asset and other | 369,500 | 377,400 |
| Total Canada | 508,000 | 522,600 |
| U.S. (1) |  |  |
| Money market | 40,700 | 49,500 |
| Fixed income | 116,000 | 90,300 |
| Equity | 246,300 | 256,000 |
| Multi-asset and other | 297,100 | 308,400 |
| Total U.S. | 700,100 | 704,200 |
| Other International (1) |  |  |
| Money market | 16,600 | 15,300 |
| Fixed income | 8,900 | 8,100 |
| Equity | 47,000 | 37,700 |
| Multi-asset and other | 107,300 | 34,400 |
| Total International | 179,800 | 95,500 |
| Total AUA | $1,387,900 | $1,322,300 |

(1) Geographic information is based on the location from where our clients are served.

# Financial performance

# 2022 vs. 2021

Net income increased $518 million or 20% from last year, mainly due to higher net interest income reflecting higher average volume growth and interest rates as well as higher average fee-based client assets. The impact of a legal provision taken in U.S. Wealth Management (including City National) in the prior year that was partially released in the first quarter of 2022 also contributed to the increase. These factors were partially offset by higher staff-related costs and variable compensation.

Total revenue increased $1,553 million or 12%, largely due to higher net interest income driven by average volume growth of 19% in loans and 11% in deposits and higher interest rates. Higher average fee-based client assets, primarily reflecting net sales, and the impact of foreign exchange translation also contributed to the increase.

PCL was $34 million compared to $(47) million last year, primarily in U.S. Wealth Management (including City National), mainly attributable to releases of provisions on performing loans in the prior year reflecting the recovery from the COVID-19 pandemic, as compared to provisions taken in the current year, largely driven by unfavourable changes in our macroeconomic outlook. Provisions taken on impaired loans in the current year, as compared to recoveries in the prior year, also contributed to the increase, resulting in a 3 bps increase in the PCL on impaired loans ratio.

Non-interest expense increased $772 million or 8%, mainly due to higher staff and technology related costs. Higher variable compensation commensurate with increased results, the impact of foreign exchange translation as well as the Brewin Dolphin acquisition and related costs also contributed to the increase. Partly offsetting these factors was the impact of a legal provision taken in U.S. Wealth Management (including City National) in the prior year that was partially released in the first quarter of 2022.

AUA increased $66 billion or 5%, mainly due to the impact of foreign exchange translation, the inclusion of our acquisition of Brewin Dolphin, and net sales. These factors were partially offset by unfavourable market conditions.

AUM decreased $9 billion or 1%, primarily due to unfavourable market conditions, partially offset by the inclusion of our acquisition of Brewin Dolphin, the impact of foreign exchange translation and net sales.

40 Royal Bank of Canada: Annual Report 2022

Management's Discussion and Analysis

## Business line review

### Canadian Wealth Management

Canadian Wealth Management includes our full-service Canadian wealth advisory business, which is the largest in Canada as measured by AUA, with over 1,950 investment advisors providing comprehensive financial solutions with a focus on HNW and UHNW clients. Additionally, we provide discretionary investment management and estate and trust services to our clients through over 100 investment counsellors and over 100 trust professionals across Canada.

We compete with domestic banks and trust companies, investment counselling firms, bank-owned full-service brokerages and boutique brokerages, mutual fund companies, and global private banks. In Canada, bank-owned wealth managers continue to be the major players.

#### Financial performance

Revenue increased $400 million or 10% from last year, primarily due to higher average fee-based client assets, largely driven by net sales, as well as higher net interest income from higher interest rates.

| Selected highlights | Table 25 |  |
| --- | --- | --- |
| (Millions of Canadian dollars) | 2022 | 2021 |
| Total revenue | $4,308 | $3,908 |
| Other information |  |  |
| Average loans and acceptances, net | 5,600 | 4,600 |
| Average deposits | 28,600 | 26,200 |
| AUA (1) | 511,300 | 524,200 |
| AUM (1) | 171,700 | 168,900 |
| Average AUA | 519,600 | 486,100 |
| Average AUM | 171,800 | 151,900 |

(1) Represents year-end spot balances.

#### Average AUA and AUM (Millions of Canadian dollars)

![img-0.jpeg](img-0.jpeg)

### U.S. Wealth Management (including City National)

U.S. Wealth Management (including City National) also encompasses PCG and our C&C businesses. PCG is the 7th largest full-service wealth advisory firm in the U.S., as measured by number of advisors, with over 2,100 financial advisors. Our C&C business delivers clearing and execution services for small to mid-sized independent broker-dealers and registered investment advisor firms. City National provides comprehensive financial solutions to affluent individuals, entrepreneurs, professionals, their businesses, and their families, and provides a premier banking and financial experience through a high-touch service model, proactive advice and financial solutions. City National offers a broad range of lending, deposit, cash management, equipment financing, wealth management, and other products and services. In the U.S., we operate in a fragmented and highly competitive industry. Our competitors include other broker-dealers, commercial banks and other financial institutions that service HNW and UHNW individuals, entrepreneurs and their businesses.

#### Financial performance

Revenue increased $1,128 million or 18% from last year. In U.S. dollars, revenue increased $722 million or 14%, primarily due to higher net interest income driven by average volume growth of 14% in loans and 9% in deposits as well as higher interest rates, which also drove higher revenue from sweep deposits. Higher average fee-based client assets, largely driven by net sales, also contributed to the increase.

NIM was up 21 bps, reflecting the impact of the rising interest rate environment as well as changes in average earning assets mix.

| Selected highlights | Table 26 |  |
| --- | --- | --- |
| (Millions of Canadian dollars, except as otherwise noted) | 2022 | 2021 |
| Total revenue | $7,448 | $6,320 |
| Other information |  |  |
| (Millions of U.S. dollars) |  |  |
| Total revenue | 5,757 | 5,035 |
| NIM | 2.38% | 2.17% |
| Average earning assets, net | 98,100 | 86,300 |
| Average loans, guarantees and letters of credit, net | 68,800 | 60,200 |
| Average deposits | 90,600 | 83,000 |
| AUA (1) | 513,700 | 568,800 |
| AUM (1) | 159,200 | 182,100 |
| Average AUA | 538,100 | 525,300 |
| Average AUM | 168,100 | 165,600 |

(1) Represents year-end spot balances.

#### Average AUA and AUM (Millions of U.S. dollars)

![img-1.jpeg](img-1.jpeg)

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

41

## Global Asset Management

GAM provides global investment management services and solutions for individual and institutional investors in Canada, the U.K., the U.S., Europe, and Asia. We provide a broad range of investment management services through mutual, pooled and private funds, fee-based accounts, and separately managed portfolios. We distribute our investment solutions through a broad network of bank branches, our self-directed and full-service wealth advisory businesses, independent third-party advisors and private banks, and directly to individual clients. We also provide investment solutions directly to institutional clients, including pension plans, insurance companies, corporations, and endowments and foundations.

We are the largest retail fund company in Canada measured by AUM, as well as a leading institutional asset manager. We face competition in Canada from banks, insurance companies and asset management organizations. The Canadian fund management industry is large and mature, but remains a relatively fragmented industry.

In the U.S., our asset management business offers investment management solutions and services, primarily to institutional investors, and competes with independent asset management firms, as well as those that are part of national and international banks and insurance companies.

Internationally, through our global capabilities distributed under the brand RBC BlueBay Asset Management, we offer investment management solutions for institutions and, through private banks including RBC Wealth Management®, to HNW and UHNW investors. We face competition from asset managers that are owned by international banks, as well as national and regional asset managers in the geographies where we serve clients.

### Financial performance

Revenue decreased $59 million or 2% from last year, largely due to changes in the fair value of seed capital investments, the impact of foreign exchange translation as well as lower performance fees. These factors were partially offset by higher fee-based revenue driven by the impact of net sales.

| Selected highlights | Table 27 |  |
| --- | --- | --- |
| (Millions of Canadian dollars) | 2022 | 2021 |
| Total revenue | $2,667 | $2,726 |
| Other information |  |  |
| Canadian net long-term mutual fund sales (redemptions) (1) | (5,246) | 21,830 |
| Canadian net money market mutual fund sales (redemptions) (1) | (127) | (2,757) |
| AUM (2) | 522,700 | 597,300 |
| Average AUM | 562,200 | 568,200 |

(1) As reported to the Investment Funds Institute of Canada. Includes all prospectus-based mutual funds across our Canadian GAM businesses.

(2) Represents year-end spot balances.

![img-2.jpeg](img-2.jpeg)

## International Wealth Management

International Wealth Management includes operations in the U.K., Ireland, the Channel Islands and Asia. We provide customized and integrated wealth management solutions to HNW, UHNW and corporate clients in key financial centres. Competitors to our International Wealth Management business include global wealth managers, traditional private banks and domestic wealth managers.

### Financial performance

Revenue increased $84 million or 25% from last year, primarily due to higher net interest income reflecting higher interest rates.

| Selected highlights | Table 28 |  |
| --- | --- | --- |
| (Millions of Canadian dollars) | 2022 | 2021 |
| Total revenue | $426 | $342 |
| Other information |  |  |
| Average loans, guarantees and letters of credit, net | 5,000 | 4,600 |
| Average deposits | 12,300 | 12,500 |
| AUA (1), (2) | 170,100 | 86,800 |
| AUM (1), (2) | 80,100 | 8,900 |
| Average AUA | 97,200 | 90,500 |
| Average AUM | 15,400 | 9,300 |

(1) Represents year-end spot balances.

(2) AUA and AUM reflect the inclusion of $79,800 million and $72,400 million, respectively, related to our acquisition of Brewin Dolphin, which closed on September 27, 2022.

![img-3.jpeg](img-3.jpeg)

42 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

# Insurance

RBC Insurance® offers a wide range of advice and solutions for individual and business clients, including life, health, wealth, home, auto, travel, annuities, and reinsurance.

$3.5 billion

Total revenue

> 4.9 million

Number of clients

2,731

Employees

# Premiums and Deposits

![img-4.jpeg](img-4.jpeg)

RBC Insurance® is the largest Canadian bank-owned insurance organization on a total revenue basis and operates under two business lines: Canadian Insurance and International Insurance.

In Canada, we offer life, health, travel, wealth accumulation solutions, and annuities to individuals and businesses. We also offer home and auto insurance for individuals through a distribution agreement with Aviva Canada. Our products and services are distributed through a wide variety of channels, including advice centres, RBC Insurance® stores, mobile advisors, digital platforms, independent brokers and partners.

Outside Canada, we operate globally in the reinsurance and retrocession markets offering life, disability and longevity reinsurance.

# 2022 Operating environment

- In Canada, the COVID-19 pandemic continued to stimulate an increased interest in protection, positioning us well to deliver our market-leading products through our best-in-class network of advisors and partners. The industry continued to face a number of challenges and opportunities, including a rising interest rate environment, evolving regulatory requirements, a competitive landscape underscored by consolidation, continued digital disruption and changing client expectations. As a result, we evolved our robust risk frameworks, controls and risk culture to protect clients and meet the expectations of both federal and provincial regulators. We also accelerated investment in product innovation, digitization, and data to better meet client protection needs, enhance access and convenience, and deliver improved experiences. We prioritized investment in our people, positioning ourselves as an employer of choice.
- In the U.K., there was a sustained appetite for longevity risk transfer as companies continued to actively manage longevity risk. As a result, the longevity reinsurance market remained competitive in fiscal 2022.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

43

## Strategic priorities

| OUR STRATEGY | PROGRESS IN 2022 | PRIORITIES IN 2023 |
| --- | --- | --- |
| Grow our Insurance business in Canada, and internationally | Launched RBC Growth Insurance PlusTM product for affluent Canadians looking to supplement life insurance needs, or for corporations, to help meet their corporate life insurance needs Introduced a new critical illness insurance product as an option for Group Benefits Solutions clients, strengthening our offering in the marketplace Launched a Workplace Wellness Toolkit designed to support businesses in assessing the wellbeing needs of their employees and creating wellness strategies tailored to the unique goals of their organization Continued to grow our longevity reinsurance and group annuity businesses, driven by our relationships within the U.K. and Canadian markets, and our strong underwriting expertise | Be an innovative, client-focused provider of a full suite of insurance solutions |
| Develop and sustain excellence in distribution | Launched RBC Insurance® Sales Technology Support Centre (STSC) to support advisors and their clients, resulting in faster and more efficient support for key tools and technologies Launched Aviva Underwriting Chat, giving our home and auto advisors the ability to chat directly with Aviva's Underwriters, improving the client experience by bringing efficiency, and reducing the time spent on hold while applications are considered Built the first interface between RBC Insurance® and our external distribution partners, allowing for more efficient new distribution channels and partnerships for term life products | Sustain distribution excellence through channel growth and by supporting our agents and partners with best-in-class tools, and unique value propositions |
| Accelerate investments in product innovation, digitization, and data | Launched electronic delivery of select life and health contracts, improving cycle times, and increasing contract delivery for clients Introduced a new disability electronic application enabling online submissions of certain disability products, simplifying the process, facilitating quicker decisions on applications, and reducing time to purchase Added digital signature capabilities to electronic applications for our simplified term life insurance product, improving the advisor and client experience | Invest in product innovation, risk selection, underwriting, digital capabilities and other solutions which streamline our processes in order to attract and retain clients |
| Evolve our risk culture | Added two socially responsible investing options to our segregated fund offerings. The fund investments exclude companies whose primary business is alcohol, tobacco products, firearms, cannabis, adult entertainment or gambling As part of our continuous commitment to diversity & inclusion, we enhanced the language of our Group Life and Health booklets and contracts, recognizing all gender identities | Evolve our robust risk frameworks, controls and risk culture to protect clients and meet the expectations of both federal and provincial regulators |
| Attract and retain top talent | Remained an employer of choice enabling us to attract, retain and engage employees to serve our clients and deliver value to our shareholders | Foster diversity, equity and inclusion, and focus on inspiring future readiness to attract, retain and engage top talent |

## Outlook

The insurance industry is expected to continue experiencing change in fiscal 2023 driven by evolving client expectations, accelerated digital disruption, and distribution innovation. Government and regulatory pressures are expected to continue into the coming fiscal year. As consumers focus more attention on overall protection, we will continue to provide advice and education, deliver our products and services, and create industry partnerships to assist our clients. We will maintain our strength by investing in technology, product and service innovation, efficient distribution channels, and a strong risk culture. This will enable our goal of being an innovative, client-focused provider of a full suite of insurance solutions, and will allow us to thrive in a rapidly changing environment.

For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.

44 Royal Bank of Canada: Annual Report 2022

Management's Discussion and Analysis

| Insurance | Table 29 |  |
| --- | --- | --- |
| (Millions of Canadian dollars, except percentage amounts and as otherwise noted) | 2022 | 2021 |
| Non-interest income |  |  |
| Net earned premiums | $4,653 | $4,840 |
| Investment income, gains/(losses) on assets supporting insurance policyholder liabilities (1) | (1,363) | 577 |
| Fee income | 220 | 183 |
| Total revenue | 3,510 | 5,600 |
| PCL | - | (1) |
| Insurance policyholder benefits and claims (1) | 1,468 | 3,547 |
| Insurance policyholder acquisition expense | 315 | 344 |
| Non-interest expense | 588 | 596 |
| Income before income taxes | 1,139 | 1,114 |
| Net income | $857 | $889 |
| Revenue by business |  |  |
| Canadian Insurance | $653 | $2,917 |
| International Insurance | 2,857 | 2,683 |
| Key ratios |  |  |
| ROE | 36.4% | 37.4% |
| Selected balance sheet information |  |  |
| Average total assets | $22,500 | $21,600 |
| Other information |  |  |
| Premiums and deposits (2) | $5,498 | $5,721 |
| Canadian Insurance | 2,999 | 3,162 |
| International Insurance | 2,499 | 2,559 |
| Insurance claims and policy benefit liabilities | 11,511 | 12,816 |
| Fair value changes on investments backing policyholder liabilities (1) | (1,888) | (13) |
| Number of employees (FTE) | 2,731 | 2,573 |

(1) Includes unrealized gains and losses on investments backing policyholder liabilities attributable to fluctuation of assets designated as FVTPL. The investments which support actuarial liabilities are predominantly fixed income assets designated as FVTPL. Consequently, changes in the fair values of these assets are recorded in Insurance premiums, investment and fee income in the Consolidated Statements of Income and are largely offset by changes in the fair value of the actuarial liabilities, the impact of which is reflected in PBCAE.

(2) Premiums and deposits include premiums on risk-based individual and group insurance and annuity products as well as segregated fund deposits, consistent with insurance industry practices.

## Financial performance

### 2022 vs. 2021

Net income decreased $32 million or 4% from last year, largely due to the impact of lower new longevity reinsurance contracts, partially offset by higher favourable investment-related experience.

Total revenue decreased $2,090 million or 37%, mainly due to the change in fair value of investments backing policyholder liabilities and lower group annuity sales, both of which are largely offset in PBCAE as indicated below. These factors were partially offset by business growth in Canadian Insurance across the majority of our products.

PBCAE decreased $2,108 million or 54%, mainly reflecting the change in fair value of investments backing policyholder liabilities and lower group annuity sales, both of which are largely offset in revenue. Higher favourable investment-related experience and favourable annual actuarial assumption updates in the current year largely related to economic assumptions also contributed to the decrease. These factors were partially offset by the impact of lower new longevity reinsurance contracts, as well as business growth in Canadian Insurance.

Non-interest expense decreased $8 million or 1% mainly due to lower costs associated with ongoing efficiency initiatives and lower legal costs. These factors were partially offset by increased costs in support of sales and client service activities.

## Business line review

### Canadian Insurance

We offer life, health, travel, wealth accumulation solutions, and annuities to individuals and businesses across Canada. We also offer home and auto insurance for individuals, through a distribution agreement with Aviva Canada. Our life and health portfolio includes participating whole life, universal life, term life, critical illness, disability, and group benefits, including long-term disability, and health and dental insurance. Wealth solutions include a family of segregated funds as well as individual annuities. Our travel products include out-of-province/country medical coverage, and trip cancellation and interruption insurance.

Our group annuities business helps defined benefit pension plan sponsors better manage and control risk. RBC Insurance® has a set of strategies and initiatives aimed at building our momentum and positioning us for growth in this product line, where companies are increasingly looking to transfer the risks associated with their pension obligations to insurance companies - either through group annuity contracts or longevity swap products.

In Canada, many of our competitors specialize in either life or health or in property and casualty products. As a multi-line carrier, we offer a broad suite of solutions, increasing convenience for our clients. Many of our solutions hold market leadership positions, including our disability insurance and wealth products.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

45

### Financial performance

Total revenue decreased $2,264 million or 78% from last year, primarily due to the change in fair value of investments backing policyholder liabilities and lower group annuity sales. These factors were partially offset by business growth across the majority of our products.

Premiums and deposits decreased $163 million or 5%, mainly due to group annuity and individual life products.

| Selected highlights | Table 30 |  |
| --- | --- | --- |
| (Millions of Canadian dollars) | 2022 | 2021 |
| Total revenue | $653 | $2,917 |
| Other information |  |  |
| Premiums and deposits |  |  |
| Life and health | 1,416 | 1,434 |
| Property and casualty | 81 | 77 |
| Annuity | 834 | 989 |
| Segregated fund deposits | 668 | 662 |
| Fair value changes on investments backing policyholder liabilities | (2,259) | (119) |

### Premiums and deposits (Millions of Canadian dollars)

![img-5.jpeg](img-5.jpeg)

### International Insurance

International Insurance is primarily comprised of our reinsurance businesses which insure risks of other insurance and reinsurance companies. We offer life, disability and longevity reinsurance solutions.

The global reinsurance market is competitive with significant market opportunities in the U.S., U.K. and Europe. Market share is largely held by a small number of reinsurers, with RBC Insurance® continuing to have steady growth.

### Financial performance

Total revenue increased $174 million or 6% from last year, mainly due to the change in fair value of investments backing policyholder liabilities.

Premiums and deposits decreased $60 million or 2%.

| Selected highlights | Table 31 |  |
| --- | --- | --- |
| (Millions of Canadian dollars) | 2022 | 2021 |
| Total revenue | $2,857 | $2,683 |
| Other information |  |  |
| Premiums and deposits |  |  |
| Life and health | 1,044 | 1,050 |
| Annuity | 1,455 | 1,509 |
| Fair value changes on investments backing policyholder liabilities | 371 | 106 |

### Premiums and deposits (Millions of Canadian dollars)

![img-6.jpeg](img-6.jpeg)

46

Royal Bank of Canada: Annual Report 2022

Management's Discussion and Analysis

# Investor & Treasury Services

Investor & Treasury Services provides asset, payment and treasury services to financial institutions and asset owners worldwide. We are a leader in Canadian cash management and transaction banking services. Trusted with nearly 4 trillion in AUA, our focus is on safeguarding client assets and supporting our clients' growth.

$3.9 trillion

AUA

16.4%

Return on equity

$61.8 billion

Average client deposits

# Revenue by Geography

![img-7.jpeg](img-7.jpeg)

- 39% North America
- 33% Europe (Ex. U.K.)
- 17% U.K.
- 11% Asia-Pacific

Our product and service offering includes custody, fund administration, shareholder services, private capital services, middle office, transaction banking (including trade finance, insourced solutions and services to broker dealers), and treasury and market services (including cash/liquidity management, foreign exchange and securities finance).

Our asset services business competes against the world's largest custodians in selected countries in North America, Europe, and the U.K.

Our transaction banking business competes against the largest banks in Canada.

# 2022 Operating environment

- Results for our asset services business were impacted by industry headwinds such as continued pricing pressure, partially offset by rising interest rates.
- Our funding and liquidity business managed through a rising rate environment and results were driven by increased market opportunities.
- We continued to execute on initiatives to improve our cost structure, focus on markets and segments where we have competitive advantages and upgrade our technology capabilities.

# Strategic priorities

| OUR STRATEGY | PROGRESS IN 2022 | PRIORITIES IN 2023 |
| --- | --- | --- |
| Grow the Canadian franchise | Delivered significant revenue growth in our transaction banking business through acquisition of new clients, expansion of existing relationships, and delivery of new product offerings | Grow relationships with Canadian asset managers, investment counsellors, pension funds, insurance companies, and transaction banking clients Deliver new products to meet growing client demand and enhance our core capabilities in Canada to improve the client experience |
| Compete in select asset servicing segments and markets | Signed a Memorandum of Understanding to divest our European asset servicing activities and associated Malaysian centre of excellence Continued cross-segment collaboration to grow fund finance sales | Complete the intended divestiture (subject to customary closing conditions, including regulatory and antitrust approvals) |
| Deliver seamless client experiences and employ technology to enable our clients' success | Continued to evolve our digital offering, improve interactive applications to increase clients' digital self-service capacity and reduce operational risk | Continue to invest to seamlessly onboard, integrate and support our clients through digital channels |

# Outlook

In fiscal 2023, we expect the global asset services industry will remain challenging. While we expect some benefit from rising interest rates in fiscal 2023, ongoing fee reductions, competition from global custody providers in key markets and the impact of reduced client activity as a result of lower asset values and net client movements, are expected to constrain revenue growth. Ongoing inflationary pressures coupled with recession concerns also have the potential to impact our results in fiscal 2023. Completing the divestiture of our European asset servicing activities and associated Malaysian centre of excellence will be a priority. We will focus on growing in markets and segments where we have competitive advantages, improving operational efficiency and leveraging our investment in technology to enable our clients' success.

We will continue to prioritize prudent risk and funding management amidst an evolving liquidity environment and uncertain market backdrop.

For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

47

# **Investor & Treasury Services**

**Table 32**

| (Millions of Canadian dollars, except percentage amounts and as otherwise noted) | 2022 | 2021 |
| --- | --- | --- |
| Net interest income | $498 | $460 |
| Non-interest income | 1,725 | 1,704 |
| Total revenue | 2,223 | 2,164 |
| PCL on performing assets | 1 | (8) |
| PCL on impaired assets | (4) | - |
| PCL | (3) | (8) |
| Non-interest expense | 1,569 | 1,589 |
| Income before income taxes | 657 | 583 |
| Net income | $513 | $440 |
| Key ratios |  |  |
| ROE | 16.4% | 14.0% |
| Selected balance sheet information |  |  |
| Average total assets | $250,600 | $235,400 |
| Average deposits | 245,000 | 219,800 |
| Average client deposits | 61,800 | 64,400 |
| Average wholesale funding deposits | 183,200 | 155,400 |
| Other information |  |  |
| AUA (1) | $3,906,900 | $4,640,900 |
| Average AUA | 4,392,600 | 4,634,900 |
| Number of employees (FTE) | 3,497 | 3,718 |

# **Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items**

| (Millions of Canadian dollars, except percentage amounts) | 2022 vs. 2021 |
| --- | --- |
| Increase (decrease): |  |
| Total revenue | $(70) |
| PCL | - |
| Non-interest expense | (68) |
| Net income | (3) |
| Percentage change in average U.S. dollar equivalent of C$1.00 | (3)% |
| Percentage change in average British pound equivalent of C$1.00 | 7% |
| Percentage change in average Euro equivalent of C$1.00 | 9% |

(1) Represents year-end spot balances.

# **Financial performance**

# **2022 vs. 2021**

Net income increased $73 million or 17% from last year, mainly driven by higher revenue from client deposits, partially offset by higher technology-related costs.

Total revenue increased $59 million or 3%, mainly due to higher revenue from client deposits reflecting improved margins, partially offset by the impact of foreign exchange translation.

Non-interest expense decreased $20 million or 1%, mainly due to the impact of foreign exchange translation and lower staff-related costs. These factors were partially offset by higher technology-related costs, a favourable sales tax adjustment in the prior year and higher legal costs.

48 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

# Capital Markets

RBC Capital Markets® is a premier global investment bank providing expertise in advisory & origination, sales & trading, and lending & financing to corporations, institutional clients, asset managers, private equity firms and governments globally. Our professionals ensure that clients receive the advice, products, and services their businesses need from 63 offices in 18 countries. Our presence extends across North America, the U.K. & Europe, and Australia, Asia & other regions.

>19,500

Number of clients

#9

Global league table rankings1

6,887

Employees

Revenue by Geography

![img-0.jpeg](img-0.jpeg)

We operate two main business lines, Corporate & Investment Banking and Global Markets.

In North America, we offer a full suite of products and services which include equity and debt origination and distribution, advisory services, and sales & trading. In Canada, we are a market leader with a strategic presence in all lines of capital markets businesses. In the U.S., where our competitors include large global investment banks, we have a full industry sector coverage and investment banking product range, as well as capabilities in credit, secured lending, municipal finance, fixed income, currencies & commodities, and equities.

Outside North America, we have a targeted strategic presence in the U.K. & Europe, Australia, Asia & other markets aligned to our global expertise. In the U.K. & Europe, we offer a diversified set of capabilities in key industry sectors of focus. In Australia and Asia, we compete with global and regional investment banks in targeted areas aligned to our global expertise, including fixed income distribution and currencies trading, secured financing, as well as corporate and investment banking.

# 2022 Operating environment

- The fiscal 2022 operating environment was characterized by significant geopolitical and economic uncertainty alongside elevated inflation and rising interest rates, resulting in increased financial market volatility and asset revaluation. This created a challenging operating environment that led to a decline in activity across some of our global capital markets businesses, particularly in the second half of the fiscal year. Global investment banking fee pools were impacted by weakness in credit and equity markets beginning in the second fiscal quarter of 2022, resulting in an approximately 30% decline in global investment banking fee pools1 this fiscal year compared to record levels in fiscal 2021.
- Trading activity remained elevated in some businesses, particularly in macro-focused businesses such as rates and foreign exchange. However, this was offset by a more challenging environment for credit trading as a result of widening spreads and slower new issuance activities. Despite the market disruption, our balance sheet strength enabled us to continue supporting our clients during the 2022 fiscal year.
- While the credit environment in fiscal 2022 reflected the recovery from the COVID-19 pandemic, it also reflected unfavourable changes in our economic outlook towards the latter half of the year, including the impact of slowing economic growth as well as rising inflation and interest rates. PCL on impaired loans remained below pre-pandemic levels.

1 Source: Dealogic, based on global investment bank fees, Fiscal 2022

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

49

## Strategic priorities

| OUR STRATEGY | PROGRESS IN 2022 | PRIORITIES IN 2023 |
| --- | --- | --- |
| Grow and deepen client relationships | Strengthened relationships with key clients, resulting in high quality mandates and notable wins in Corporate & Investment Banking and Global Markets, for example: Financial Advisor to DigitalBridge and IFM Investors on US$11 billion landmark communications infrastructure take-private transaction Financial Advisor and Lead Arranger to The Vertex Company and American Industrial Partners on its merger with Vectrus, creating a US$2.1 billion entity | Deliver holistic coverage to clients and drive multi-product client relationships to gain market share Expand client coverage in underpenetrated sectors and products |
| Lead with advice and extend capabilities | Expanded advisory and thought leadership capabilities inclusive of Sustainable Finance 1 and Private Capital Refreshed our Global Markets strategy to deliver holistic client service providing trusted solutions and execution, leveraging origination and financing, enabled by digital offerings Examples include: Joint Bookrunner and Global Coordinator on Definity Financial's Initial Public Offering (IPO) and Private Placement Agent on its Cornerstone Private Placement raising proceeds of C$2.1 billion, making it the largest IPO in Canadian financial services since 1999 Advised SS&C Technologies on the £1.2 billion acquisition of BluePrism, demonstrating our strength in delivering support in complex cross-border, sector and product transactions involving publicly traded targets | Grow all areas of origination, inclusive of structured solutions, through partnership across Corporate & Investment Banking and Global Markets Continue to drive cross-platform and geographic collaboration across businesses and asset classes Lead on Sustainable Finance 1 , Energy Transition, and Private Capital solutions |
| Leverage digital and data to deliver innovative solutions | Launched Aiden ® Arrival, the second algorithm on the AI-based electronic trading platform, aimed at enhancing flexibility and control over trade execution Scaled our digital research platform, Elements, into next generation applications utilizing alternative data | Scale digital capabilities including electronic execution, analytics and platform capabilities across Capital Markets Generate differentiated insights and thought leadership leveraging data and analytics |
| Prioritize and align for impact | Embedded productivity and efficiency measures within the businesses, and formalized a benefits tracking process Enhanced collaboration with Treasury & Market Services to increase funding capacity | Strategically deploy talent, technology and financial resources to areas of greatest opportunity Align business and functional strategies to build scale and maximize impact |
| Drive agility and ease of doing business | Leveraged the newly created cross-business and functional Investment Review Board to address the technology capital allocation process | Improve processes, leveraging an end-to-end approach to enhance client outcomes Accelerate execution and simplify procedures to improve employee experience |
| Engage, enable and empower our talent | Invested in senior talent through external hiring and promotions and repositioned our talent strategy to be better aligned with business outcomes Advanced our Diversity & Inclusion (D&I) strategy and improved representation of diverse talent | Invest in talent through scaled development programs, increased mobility, senior hiring and promotions Deliver on D&I strategy and build on our inclusive culture |

## Outlook

In fiscal 2023, the outlook remains uncertain and financial market volatility is expected to persist. Despite these market dynamics, a modest recovery of capital markets industry revenues is expected. We will continue to pursue market share growth in both our Corporate & Investment Banking and Global Markets businesses. In Investment Banking, we continue to focus on targeted sectors and investment in talent, with an emphasis on advisory products. In Global Markets, our focus remains on delivering robust results through continued resource optimization, acceleration of cross-selling activities, further deployment of electronic and digital capabilities, and building on our strong risk management practices. In Corporate Banking, following higher levels of balance sheet deployment in support of increased client financing demands in fiscal 2022, we will continue to pursue a moderate growth approach consistent with our focus on our balance sheet-enabled strategy to deepen relationships with lending clients in order to drive growth in our non-lending businesses. This strategy will continue to be underpinned by strong credit risk management practices, optimization of our financial resources and supporting our clients in the execution of their strategies.

For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.

$^{1}$ Sustainable finance refers to financial activities that take into account environmental, social and governance factors

50 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

# **Capital Markets**

**Table 33**

| (Millions of Canadian dollars, except percentage amounts and as otherwise noted) |  |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| Net interest income (1) | $4,698 | $4,553 |
| Non-interest income (1) | 4,422 | 5,634 |
| Total revenue (1) | 9,120 | 10,187 |
| PCL on performing assets | (34) | (476) |
| PCL on impaired assets | 23 | (33) |
| PCL | (11) | (509) |
| Non-interest expense | 5,561 | 5,427 |
| Income before income taxes | 3,570 | 5,269 |
| Net income | $2,921 | $4,187 |
| Revenue by business |  |  |
| Corporate & Investment Banking | $4,309 | $4,823 |
| Global Markets | 5,245 | 5,542 |
| Other | (434) | (178) |
| Key ratios |  |  |
| ROE | 11.3% | 18.3% |
| Selected balance sheet information |  |  |
| Average total assets | $824,800 | $710,200 |
| Average trading securities | 133,000 | 122,900 |
| Average loans and acceptances, net | 121,700 | 100,000 |
| Average deposits | 79,000 | 73,500 |
| Other information |  |  |
| Number of employees (FTE) | 6,887 | 6,414 |
| Credit information |  |  |
| PCL on impaired loans as a % of average net loans and acceptances | 0.01% | (0.04)% |

# **Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items**

| (Millions of Canadian dollars, except percentage amounts) |  | 2022 vs. 2021 |
| --- | --- | --- |
| Increase (decrease): |  |  |
| Total revenue | $42 |  |
| PCL | - |  |
| Non-interest expense | 8 |  |
| Net income | 34 |  |
| Percentage change in average U.S. dollar equivalent of C$1.00 | (3)% |  |
| Percentage change in average British pound equivalent of C$1.00 | 7% |  |
| Percentage change in average Euro equivalent of C$1.00 | 9% |  |

(1) The teb adjustment for 2022 was $572 million (2021 - $518 million). For further discussion, refer to the How we measure and report our business segments section.

# **Revenue by region (Millions of Canadian dollars)**

![img-1.jpeg](img-1.jpeg)

# **Financial performance**

# **2022 vs. 2021**

Net income decreased $1,266 million or 30% from last year, primarily driven by lower revenue in Corporate & Investment Banking, larger releases of provisions on performing assets in the prior year, and lower revenue in Global Markets.

Total revenue decreased $1,067 million or 10%, mainly due to the impact from loan underwriting markdowns, primarily in the U.S., largely driven by challenging market conditions. Lower debt and equity origination across most regions also contributed to the decrease. This was partially offset by higher lending revenue across most regions.

PCL was $(11) million compared to $(509) million last year, primarily attributable to releases of provisions on performing assets reflecting the recovery from the COVID-19 pandemic in both 2022 and 2021. The releases in the current year were partially offset by unfavourable changes in our macroeconomic outlook. Provisions taken on impaired loans in the current year as compared to recoveries in the prior year also contributed to the increase, resulting in an increase of 5 bps in the PCL on impaired loans ratio.

Non-interest expense increased $134 million or 2%, mainly due to higher technology-related costs, higher marketing and business development costs, and higher trade execution costs. These factors were partially offset by changes in the fair value of our share-based compensation plans, which was largely offset in other revenue.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

51

## Business line review

### Corporate & Investment Banking

Corporate & Investment Banking comprises our corporate lending, municipal finance, loan syndication, debt and equity origination, and M&A advisory services. For debt and equity origination, revenue is allocated between Corporate & Investment Banking and Global Markets based on the contribution of each group in accordance with an established agreement.

#### Financial performance

Corporate & Investment Banking revenue of $4,309 million decreased $514 million or 11% from last year.

Investment Banking revenue decreased $773 million or 30%, mainly due to the impact from loan underwriting markdowns, primarily in the U.S., largely driven by challenging market conditions. Lower debt origination primarily in the U.S. also contributed to the decrease.

Lending and other revenue increased $259 million or 11%, primarily due to average volume growth in the U.S. and Europe.

| Selected highlights | Table 34 |  |
| --- | --- | --- |
| (Millions of Canadian dollars) | 2022 | 2021 |
| Total revenue (1) | $4,309 | $4,823 |
| Breakdown of revenue (1) |  |  |
| Investment banking | 1,786 | 2,559 |
| Lending and other (2) | 2,523 | 2,264 |
| Other information |  |  |
| Average assets | 100,100 | 81,400 |
| Average loans and acceptances, net | 92,400 | 73,300 |

(1) The tab adjustment for the year ended October 31, 2022 was $39 million (October 31, 2021 - $37 million). For further discussion, refer to the How we measure and report our business segments section.
(2) Comprises our corporate lending, client securitization, and global credit businesses.

Breakdown of total revenue (Millions of Canadian dollars)

![img-2.jpeg](img-2.jpeg)

### Global Markets

Global Markets comprises our sales and trading businesses including fixed income, foreign exchange, commodities, and equities, as well as our repo and secured financing products.

#### Financial performance

Global Markets revenue of $5,245 million decreased $297 million or 5% from last year.

Revenue in our Fixed income, currencies and commodities business decreased $308 million or 11%, largely driven by lower fixed income trading revenue and lower debt origination both primarily in the U.S. These factors were partially offset by higher foreign exchange trading revenue across all regions.

Revenue in our Equities business decreased $73 million or 5%, primarily due to lower equity origination across most regions.

Revenue in our Repo and secured financing business increased $84 million or 7%, mainly due to increased client activity.

| Selected highlights | Table 35 |  |
| --- | --- | --- |
| (Millions of Canadian dollars) | 2022 | 2021 |
| Total revenue (1) | $5,245 | $5,542 |
| Breakdown of revenue (1) |  |  |
| Fixed income, currencies and commodities | 2,570 | 2,878 |
| Equities | 1,458 | 1,531 |
| Repo and secured financing (2) | 1,217 | 1,133 |
| Other information |  |  |
| Average assets | 707,500 | 626,500 |

(1) The tab adjustment for the year ended October 31, 2022 was $533 million (October 31, 2021 - $481 million). For further discussion, refer to the How we measure and report our business segments section.
(2) Comprises our secured funding businesses for internal businesses and external clients.

Breakdown of total revenue (Millions of Canadian dollars)

![img-3.jpeg](img-3.jpeg)

### Other

Other includes our legacy portfolio, which mainly consists of our U.S. commercial mortgage-backed securities (MBS), bank-owned life insurance (BOLI) derivative contracts and structured rates in Asia.

#### Financial performance

Revenue decreased $256 million from last year, reflecting higher residual funding costs and changes in the fair value of hedges related to our share-based compensation plans, which was largely offset in non-interest expense.

52 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

## Corporate Support

Corporate Support consists of Technology & Operations, which provides the technological and operational foundation required to effectively deliver products and services to our clients. Functions, which includes our finance, human resources, risk management, internal audit and other functional groups, as well as our Corporate Treasury function. Reported results for Corporate Support mainly reflect certain activities related to monitoring and oversight of enterprise activities which are not allocated to business segments. For further details, refer to the How we measure and report our business segments section.

| Corporate Support | Table 36 |  |
| --- | --- | --- |
| (Millions of Canadian dollars) | 2022 | 2021 |
| Net interest income (loss) (1) | $(132) | $(321) |
| Non-interest income (loss) (1), (2) | (728) | 421 |
| Total revenue (1), (2) | (860) | 100 |
| PCL | 1 | (1) |
| Non-interest expense (2) | (247) | 405 |
| Income (loss) before income taxes (1) | (614) | (304) |
| Income taxes (recoveries) (1) | (616) | (365) |
| Net income (loss) | $2 | $61 |

(1) Teb adjusted.

(2) Revenue for the year ended October 31, 2022, included losses of $363 million (October 31, 2021 - gains of $394 million) on economic hedges of our U.S. Wealth Management (including City National) share-based compensation plans, and non-interest expense included $(289) million (October 31, 2021 - $382 million) of share-based compensation expense driven by changes in the fair value of liabilities relating to our U.S. Wealth Management (including City National) share-based compensation plans.

Due to the nature of activities and consolidation adjustments reported in this segment, we believe that a comparative period analysis is not relevant.

Total revenue and Income taxes (recoveries) in each period in Corporate Support include the deduction of the teb adjustments related to the gross-up of income from Canadian taxable corporate dividends and the U.S. tax credit investment business recorded in Capital Markets. The amount deducted from revenue was offset by an equivalent increase in Income taxes (recoveries).

The teb amount for the year ended October 31, 2022 was $572 million and was $518 million last year.

The following identifies the material items, other than the teb impacts noted previously, affecting the reported results in each year.

### 2022

Net income was $2 million. Net favourable tax adjustments and asset/liability management activities were offset by residual unallocated items.

### 2021

Net income was $61 million, primarily due to asset/liability management activities and residual unallocated items, partially offset by net unfavourable tax adjustments.

## Quarterly financial information

### Fourth quarter performance

#### Q4 2022 vs. Q4 2021

Fourth quarter net income of $3,882 million was down $10 million. Diluted EPS of $2.74 was up $0.06 and ROE of 15.6% was down 130 bps. Our CET1 ratio of 12.6% was down 110 bps from a year ago. Lower results in Capital Markets and Corporate Support were partially offset by strong earnings in Wealth Management and Personal & Commercial Banking.

Total revenue increased $191 million or 2%, largely due to higher net interest income and trading revenue. These factors were partially offset by lower insurance revenue, other revenue, underwriting and other advisory fees and mutual fund revenue.

Net interest income increased $1,221 million or 24%, mainly due to higher spreads and average volume growth in loans and deposits in Canadian Banking and Wealth Management. These factors were partially offset by lower net interest income in Investor & Treasury Services reflecting higher funding costs that were offset by related gains on non-trading derivatives in Other revenue.

Insurance revenue decreased $857 million or 57%, primarily due to lower group annuity sales and the change in fair value of investments backing policyholder liabilities, both of which are largely offset in PBCAE.

Trading revenue increased $348 million, largely due to higher fixed income trading revenue across most regions.

Mutual fund revenue decreased $132 million or 12%, largely due to lower average mutual fund balances in Wealth Management and Canadian Banking.

Underwriting and other advisory fees decreased $174 million or 27%, mainly due to lower debt origination across all regions.

Other revenue decreased $219 million or 90%, largely due to the impact of economic hedges, including changes in the fair value of hedges related to our U.S. share-based compensation plans that were largely offset in Non-interest expense. These factors were partially offset by net gains on non-trading derivatives, which were offset within net interest income.

Total PCL was $381 million compared to $(227) million last year, reflecting provisions taken on performing loans and higher provisions on impaired loans in the current quarter as compared to releases of provisions on performing loans in the prior year, primarily in Personal & Commercial Banking. The PCL on loans ratio of 18 bps compared to (12) bps last year increased 30 bps.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

53

PBCAE decreased $916 million, primarily due to lower group annuity sales and the change in fair value of investments backing policyholder liabilities, both of which are largely offset in revenue. Higher favourable annual actuarial assumption updates largely related to economic assumption updates in the current year also contributed to the decrease.

Non-interest expense increased $626 million or 10%, mainly attributable to higher variable compensation, primarily due to the timing of true-ups related to our variable compensation plans in Capital Markets and higher staff-related costs. The impact of foreign exchange translation as well as the Brewin Dolphin acquisition and related costs also contributed to the increase. These factors were partially offset by the change in the fair value of our U.S. share-based compensation plans as well as the impact of a legal provision taken in U.S. Wealth Management (including City National) in the prior year that was partially released in the first quarter of 2022.

Income tax expense decreased $117 million or 11%, primarily due to an increase in income from lower tax rate jurisdictions in the current year and lower income before income taxes. The effective income tax rate of 20.1% decreased 190 bps from last year, mainly due to an increase in income from lower tax rate jurisdictions in the current year.

#### Q4 2022 vs. Q3 2022

Net income of $3,882 million was up $305 million or 9% compared to last quarter, primarily due to higher fixed income trading revenue in Capital Markets as the prior quarter included the impact from loan underwriting markdowns, primarily in the U.S. and higher spreads in Canadian Banking and Wealth Management. These factors were partially offset by higher compensation, primarily due to the timing of true-ups related to our variable compensation plans.

### Quarterly results and trend analysis

Our quarterly results are impacted by a number of trends and recurring factors, which include seasonality of certain businesses, general economic and market conditions, and fluctuations in the Canadian dollar relative to other currencies. The following table summarizes our results for the last eight quarters (the period):

| Quarterly results (1) | Table 37 |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | 2022 |  |  |  | 2021 |  |  |  |
| (Millions of Canadian dollars, except per share and percentage amounts) | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 |
| Personal & Commercial Banking | $5,419 | $5,182 | $4,739 | $4,803 | $4,605 | $4,651 | $4,527 | $4,563 |
| Wealth Management | 3,976 | 3,655 | 3,605 | 3,613 | 3,444 | 3,373 | 3,260 | 3,219 |
| Insurance | 644 | 1,233 | 234 | 1,399 | 1,501 | 1,754 | 536 | 1,809 |
| Investor & Treasury Services | 503 | 582 | 551 | 587 | 548 | 517 | 534 | 565 |
| Capital Markets (2) | 2,313 | 1,649 | 2,348 | 2,810 | 2,298 | 2,463 | 2,718 | 2,708 |
| Corporate Support (2) | (288) | (169) | (257) | (146) | (20) | (2) | 43 | 79 |
| Total revenue | 12,567 | 12,132 | 11,220 | 13,066 | 12,376 | 12,756 | 11,618 | 12,943 |
| PCL | 381 | 340 | (342) | 105 | (227) | (540) | (96) | 110 |
| PBCAE | 116 | 850 | (180) | 997 | 1,032 | 1,304 | 149 | 1,406 |
| Non-interest expense | 7,209 | 6,386 | 6,434 | 6,580 | 6,583 | 6,420 | 6,379 | 6,542 |
| Income before income taxes | 4,861 | 4,556 | 5,308 | 5,384 | 4,988 | 5,572 | 5,186 | 4,885 |
| Income taxes | 979 | 979 | 1,055 | 1,289 | 1,096 | 1,276 | 1,171 | 1,038 |
| Net income | $3,882 | $3,577 | $4,253 | $4,095 | $3,892 | $4,296 | $4,015 | $3,847 |
| EPS - basic | $2.75 | $2.52 | $2.97 | $2.84 | $2.68 | $2.97 | $2.76 | $2.66 |
| - diluted | 2.74 | 2.51 | 2.96 | 2.84 | 2.68 | 2.97 | 2.76 | 2.66 |
| Effective income tax rate | 20.1% | 21.5% | 19.9% | 23.9% | 22.0% | 22.9% | 22.6% | 21.2% |
| Period average US$ equivalent of C$1.00 | $0.739 | $0.783 | $0.789 | $0.787 | $0.796 | $0.812 | $0.798 | $0.779 |

(1) Fluctuations in the Canadian dollar relative to other foreign currencies have affected our consolidated results over the period.

(2) Teb adjusted. For further discussion, refer to the How we measure and report our business segments section of this 2022 Annual Report.

#### Seasonality

Seasonal factors may impact our results in certain quarters. The first quarter has historically been stronger for our Capital Markets businesses. The second quarter has fewer days than the other quarters, which generally results in a decrease in net interest income and certain expense items. The third and fourth quarters include the summer months which generally results in lower client activity and may negatively impact the results of our Capital Markets trading business.

#### Trend analysis

Earnings over the period have been impacted by the factors noted below.

Personal & Commercial Banking revenue has benefitted from solid volume growth in loans and deposits over the period. NIM has been favourably impacted by the rising interest rate environment over the last three quarters, whereas a low interest rate environment persisted in the earlier part of the period.

Wealth Management revenue has benefitted from growth in average fee-based client assets, which is impacted by market conditions, and volume growth in loans and deposits over the period. The rising interest rate environment also favourably impacted revenue over the last three quarters, whereas a low interest rate environment persisted in the earlier part of the period.

Insurance revenue has fluctuated over the period, primarily due to the impact of changes in the fair value of investments backing policyholder liabilities as well as the timing of group annuity sales, both of which are largely offset in PBCAE. Group annuity sales are generally higher in the first half of the fiscal year.

Investor & Treasury Services revenue has been impacted by interest rate movements, market volatility and client activity over the period.

54 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

Capital Markets revenue is influenced, to a large extent, by market conditions that impact client activity. Trading revenue across the first half of the period benefitted from increased client activity. Beginning in the second quarter of 2022, there was a decline in global fee pools. Trading results were further impacted notably in the third quarter of 2022 amidst challenging market conditions, driving lower fixed income trading revenue, including the impact from loan underwriting markdowns.

PCL is comprised of provisions taken on performing assets and provisions taken on impaired assets. PCL on performing assets has fluctuated over the period as it is impacted by changes in macroeconomic conditions, exposures and credit quality. Throughout 2021 and the first half of 2022, we saw improvements in our macroeconomic and credit quality outlook, as the economic impact from the COVID-19 pandemic eased in most regions, resulting in releases of provisions on performing assets. In the last half of 2022, unfavourable changes in our macroeconomic outlook resulted in an increase in provisions. PCL on impaired assets remained lower than pre-pandemic levels over the period.

PBCAE has fluctuated over the period reflecting changes in the fair value of investments backing policyholder liabilities, which is impacted by changes in market conditions, as well as group annuity sales, both of which are largely offset in revenue. PBCAE has also fluctuated due to the impact of investment-related experience and claims costs over the period. Actuarial adjustments, which generally occur in the fourth quarter of each year, also impact PBCAE.

Non-interest expense has been impacted by fluctuations in variable compensation over the period, commensurate with fluctuations in revenue and earnings. Changes in the fair value of our U.S. share-based compensation plans, which are largely offset in revenue, have also contributed to fluctuations over the period and are impacted by market conditions. While we continue to focus on efficiency management activities, expenses over the period also reflect investments in staff and technology and increases in discretionary spend, including marketing. The fourth quarter of 2021 included a legal provision in U.S. Wealth Management (including City National) that was partially released in the first quarter of 2022.

Our effective income tax rate has fluctuated over the period, mostly due to varying levels of tax adjustments and changes in earnings mix. The second and fourth quarters of 2022 reflected the impact of net favourable tax adjustments and an increase in income from lower tax rate jurisdictions, respectively.

## Financial condition

### Condensed balance sheets

|  | Table 38 |  |
| --- | --- | --- |
| As at October 31 (Millions of Canadian dollars) | 2022 | 2021 |
| Assets |  |  |
| Cash and due from banks | $72,397 | $113,846 |
| Interest-bearing deposits with banks | 108,011 | 79,638 |
| Securities, net of applicable allowance (1) | 318,223 | 284,724 |
| Assets purchased under reverse repurchase agreements and securities borrowed | 317,845 | 307,903 |
| Loans |  |  |
| Retail | 549,751 | 503,598 |
| Wholesale | 273,967 | 218,066 |
| Allowance for loan losses | (3,753) | (4,089) |
| Other - Derivatives | 154,439 | 95,541 |
| - Other (2) | 126,339 | 107,096 |
| Total assets | $1,917,219 | $1,706,323 |
| Liabilities |  |  |
| Deposits | $1,208,814 | $1,100,831 |
| Other - Derivatives | 153,491 | 91,439 |
| - Other (2) | 436,714 | 405,698 |
| Subordinated debentures | 10,025 | 9,593 |
| Total liabilities | 1,809,044 | 1,607,561 |
| Equity attributable to shareholders | 108,064 | 98,667 |
| Non-controlling interests | 111 | 95 |
| Total equity | 108,175 | 98,762 |
| Total liabilities and equity | $1,917,219 | $1,706,323 |

(1) Securities are comprised of trading and investment securities.

(2) Other - Other assets and liabilities include Segregated fund net assets and liabilities, respectively.

### 2022 vs. 2021

Total assets increased $211 billion or 12% from last year. Foreign exchange translation increased total assets by $114 billion.

Cash and due from banks was down $41 billion or 36%, primarily due to lower deposits with central banks, reflecting our liquidity and short-term cash management activities.

Interest-bearing deposits with banks increased $28 billion or 36%, mainly due to higher deposits with central banks, reflecting our short-term cash and liquidity management activities.

Securities, net of applicable allowance, were up $33 billion or 12%, mainly due to higher government securities, reflecting short-term market opportunities and liquidity management activities, and the impact of foreign exchange translation. These factors were partially offset by lower equity trading securities.

Assets purchased under reverse repurchase agreements (reverse repos) and securities borrowed increased $10 billion or 3%, primarily due to the impact of foreign exchange translation and liquidity management activities, partially offset by decreased client demand.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

55

Loans (net of Allowance for loan losses) were up $102 billion or 14%, primarily due to volume growth in wholesale loans and residential mortgages. The impact of foreign exchange translation also contributed to the increase.

Derivative assets were up $59 billion or 62%, primarily attributable to the impact of foreign exchange translation.

Other assets were up $19 billion or 18%, primarily reflecting higher cash collateral and margin deposits. The impact of foreign exchange translation also contributed to the increase.

Total liabilities increased $201 billion or 13% from last year. Foreign exchange translation increased total liabilities by $114 billion.

Deposits increased $108 billion or 10%, mainly due to issuances of long-term and short-term notes due to funding requirements and the impact of foreign exchange translation. Higher retail deposits also contributed to the increase.

Derivative liabilities were up $62 billion or 68%, primarily attributable to the impact of foreign exchange translation and higher fair values on interest rate contracts, partially offset by lower fair values on foreign exchange contracts.

Other liabilities increased $31 billion or 8%, primarily due to higher short-term borrowings of subsidiaries due to funding requirements, higher cash collateral and the impact of foreign exchange translation.

Total equity increased $9 billion or 10%, mainly reflecting earnings, net of dividends, and other comprehensive income (OCI). These factors were partially offset by share repurchases.

## Off-balance sheet arrangements

In the normal course of business, we engage in a variety of financial transactions that, for accounting purposes, are not recorded on our Consolidated Balance Sheets. Off-balance sheet transactions are generally undertaken for risk, capital and funding management purposes which benefit us and our clients. These include transactions with structured entities and may also include the issuance of guarantees. These transactions give rise to, among other risks, varying degrees of market, credit, liquidity and funding risk, which are discussed in the Risk management section.

We use structured entities to securitize our financial assets as well as assist our clients in securitizing their financial assets. These entities are not operating entities, typically have no employees, and may or may not be recorded on our Consolidated Balance Sheets.

In the normal course of business, we engage in a variety of financial transactions that may qualify for derecognition. We apply the derecognition rules to determine whether we have transferred substantially all the risks and rewards or control associated with the financial assets to a third party. If the transaction meets specific criteria, it may qualify for full or partial derecognition from our Consolidated Balance Sheets.

### Securitizations of our financial assets

We periodically securitize our credit card receivables and residential and commercial mortgage loans primarily to diversify our funding sources, enhance our liquidity position and for capital purposes. We also securitize residential and commercial mortgage loans as part of our sales and trading activities.

We securitize our credit card receivables, on a revolving basis, through a consolidated structured entity. We securitize single and multiple-family residential mortgages through the National Housing Act Mortgage-Backed Securities (NHA MBS) program. The majority of our securitization activities are recorded on our Consolidated Balance Sheets as we do not meet the derecognition criteria. During 2022 and 2021, we did not derecognize any mortgages securitized through the NHA MBS program. For further details, refer to Note 7 and Note 8 of our 2022 Annual Consolidated Financial Statements.

We also periodically securitize commercial mortgage loans by selling them in collateral pools, which meet certain diversification, leverage and debt coverage criteria, to structured entities, one of which is sponsored by us. Securitized commercial mortgage loans are derecognized from our Consolidated Balance Sheets as we have transferred substantially all of the risks and rewards of ownership of the securitized assets. During the year ended October 31, 2022, we securitized $450 million of commercial mortgages (October 31, 2021 - $nil). Our continuing involvement with the transferred assets is limited to servicing certain of the underlying commercial mortgages sold. As at October 31, 2022, there was $2 billion of commercial mortgages outstanding that we continue to service related to these securitization activities (October 31, 2021 - $2 billion).

### Involvement with unconsolidated structured entities

In the normal course of business, we engage in a variety of financial transactions with structured entities to support our customers' financing and investing needs, including securitization of our clients' financial assets, creation of investment products, and other types of structured financing.

We have the ability to use credit mitigation tools such as third-party guarantees, credit default swaps, and collateral to mitigate risks assumed through securitization and re-securitization exposures. The process in place to monitor the credit quality of our securitization and re-securitization exposures involves, among other things, reviewing the performance data of the underlying assets. We affirm our ratings each quarter and formally confirm or assign a new rating at least annually. For further details on our activities to manage risks, refer to the Risk management section.

Below is a description of our activities with respect to certain significant unconsolidated structured entities. For a complete discussion of our interests in consolidated and unconsolidated structured entities, refer to Note 8 of our 2022 Annual Consolidated Financial Statements.

### RBC-administered multi-seller conduits

We administer multi-seller conduits which are used primarily for the securitization of our clients' financial assets. Our clients primarily use our multi-seller conduits to diversify their financing sources and to reduce funding costs by leveraging the value of high-quality collateral. The conduits offer us a favourable revenue stream and risk-adjusted return.

We provide services such as transaction structuring, administration, backstop liquidity facilities and partial credit enhancements to the multi-seller conduits. Revenue for all such services amounted to $296 million during the year (October 31, 2021 - $304 million).

Our total commitment to the conduits in the form of backstop liquidity and credit enhancement facilities is shown below. The total committed amount of these facilities exceeds the total amount of the maximum assets that may have to be purchased by the conduits under the purchase agreements. As a result, the maximum exposure to loss attributable to our backstop liquidity and credit enhancement facilities is less than the total committed amounts of these facilities.

56 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

# Liquidity and credit enhancement facilities

Table 39

| As at October 31 (Millions of Canadian dollars) | 2022 |  |  | 2021 |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | Notional of committed amounts (1) | Allocable notional amounts | Maximum exposure to loss (2) | Notional of committed amounts (1) | Allocable notional amounts | Maximum exposure to loss (2) |
| Backstop liquidity facilities | $48,235 | $45,261 | $45,261 | $40,876 | $38,330 | $38,330 |
| Credit enhancement facilities (3) | 2,974 | 2,974 | 2,974 | 2,546 | 2,546 | 2,546 |
| Total | $51,209 | $48,235 | $48,235 | $43,422 | $40,876 | $40,876 |

(1) Based on total committed financing limit.

(2) Not presented in the table above are derivative assets with a fair value of $25 million (October 31, 2021 - $17 million) which are a component of our total maximum exposure to loss from our interests in the multi-seller conduits. Refer to Note 8 of our 2022 Annual Consolidated Financial Statements for more details.

(3) Includes $14 million (October 31, 2021 - $9 million) of Financial standby letters of credit.

As at October 31, 2022, the notional amount of backstop liquidity facilities we provide increased $7 billion or 18% from last year, primarily due to an increase in outstanding securitized assets of the multi-seller conduits as well as the impact of foreign exchange translation. The notional amount of partial credit enhancement facilities we provide increased $428 million or 17% from last year, primarily due to an increase in outstanding securitized assets of the multi-seller conduits.

# Maximum exposure to loss by client type

Table 40

| As at October 31 (Millions of dollars) | 2022 |  |  | 2021 |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | US$ | C$ | Total C$ | US$ | C$ | Total C$ |
| Outstanding securitized assets |  |  |  |  |  |  |
| Auto and truck loans and leases | $10,553 | $3,967 | $18,351 | $11,546 | $3,752 | $18,048 |
| Consumer loans | 3,198 | - | 4,359 | 2,466 | - | 3,054 |
| Credit cards | 4,932 | 719 | 7,441 | 3,876 | 510 | 5,309 |
| Dealer floor plan receivables | 1,012 | 580 | 1,960 | 906 | 770 | 1,892 |
| Equipment receivables | 2,291 | 243 | 3,365 | 2,227 | - | 2,757 |
| Fleet finance receivables | 785 | 213 | 1,283 | 366 | 213 | 667 |
| Insurance premiums | 143 | 428 | 624 | 170 | 428 | 638 |
| Residential mortgages | - | 1,785 | 1,785 | - | 873 | 873 |
| Student loans | 2,013 | 139 | 2,882 | 1,587 | - | 1,965 |
| Trade receivables | 2,306 | - | 3,144 | 2,337 | - | 2,893 |
| Transportation finance | 2,119 | 153 | 3,041 | 2,163 | 102 | 2,780 |
| Total | $29,352 | $8,227 | $48,235 | $27,644 | $6,648 | $40,876 |
| Canadian equivalent | $40,007 | $8,227 | $48,235 | $34,228 | $6,648 | $40,876 |

Our overall exposure increased 18% compared to last year, primarily due to an increase in the outstanding securitized assets of the multi-seller conduits as well as the impact of foreign exchange translation. Correspondingly, total assets of the multi-seller conduits increased $7 billion or 18% from last year, also primarily due to an increase in outstanding securitized assets in the multi-seller conduits as well as the impact of foreign exchange. All of the multi-seller conduits transactions were internally rated A or above. All transactions funded by the unconsolidated multi-seller conduits are internally rated using a rating system as outlined in the internal ratings map in the credit risk section.

Multiple independent debt rating agencies review all of the transactions in the multi-seller conduits. Transactions financed in the U.S. multi-seller conduits are reviewed by Moody's Investors Service (Moody's), Standard & Poor's (S&P) and Fitch Ratings (Fitch). Transactions in two of the Canadian multi-seller conduits are reviewed by DBRS Morningstar (DBRS) and Moody's while one of the Canadian multi-seller conduits is also reviewed by S&P. Each applicable rating agency also reviews ongoing transaction performance on a monthly basis and may publish reports detailing portfolio and program information related to the conduits.

As at October 31, 2022, the total asset-backed commercial paper (ABCP) issued by the conduits amounted to $33 billion, an increase of $8 billion or 32% from last year, primarily due to higher client usage. The rating agencies that rate the ABCP rated 100% (October 31, 2021 - 100%) of the total amount issued within the top ratings category.

# **Structured finance**

We provide liquidity facilities to certain municipal bond tender option bond trusts in which we have an interest but do not consolidate because the residual certificates issued by the tender option bond trusts are held by third parties. As at October 31, 2022, our maximum exposure to loss from these unconsolidated municipal bond tender option bond trusts was $3 billion (October 31, 2021 - $3 billion).

We provide senior warehouse financing to unaffiliated structured entities that are established by third parties to acquire loans and issue term collateralized loan obligations (CLO). Subordinated financing is provided during the warehouse phase by either the collateral manager or third-party investors. Subordinated financing serves as the first loss tranche which absorbs losses prior to ourselves as the senior lender. A portion of the proceeds from the sale of the term CLO is used to fully repay the senior warehouse financing that we provide. As at October 31, 2022, our maximum exposure to loss associated with the outstanding senior warehouse financing facilities was $640 million (October 31, 2021 - $951 million). The decrease in our maximum exposure to loss from last year was driven by repayments of existing financing facilities partially offset by the impact of foreign exchange translation.

We provide senior financing to unaffiliated structured entities that are established by third parties to acquire loans. Subordinated financing is provided by either the collateral manager or third-party investors. Subordinated financing serves as the first loss tranche which absorb losses prior to ourselves as the senior lender. These facilities tend to be longer in term than the CLO warehouse facilities and benefit from credit enhancement designed to cover a multiple of historical losses. As at October 31, 2022, our maximum exposure to loss associated with the outstanding senior financing facilities was $5 billion (October 31, 2021 - $4 billion). The increase in our maximum exposure to loss from last year was driven by the addition of new financing facilities as well as the impact of foreign exchange translation.

Management's Discussion and Analysis

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57

### Investment funds

We invest in hedge funds primarily to provide clients with desired exposures to reference funds. As we make investments in the reference funds, exposures to the funds are simultaneously transferred to clients through derivative transactions. Our maximum exposure to loss in the reference funds is limited to our investments in the funds. As at October 31, 2022, our maximum exposure to loss was $3 billion (October 31, 2021 - $3 billion).

We also provide liquidity facilities to certain third-party investment funds. The funds issue unsecured variable-rate preferred shares and invest in portfolios of tax exempt bonds. As at October 31, 2022, our maximum exposure to loss on these funds was $667 million (October 31, 2021 - $606 million). The increase in our maximum exposure to loss from last year was driven by the addition of new financing facilities as well as the impact of foreign exchange translation.

### Third-party securitization vehicles

We hold interests in certain unconsolidated third-party securitization vehicles, which are structured entities. We, as well as other financial institutions, are obligated to provide funding to these entities up to our maximum commitment level and are exposed to credit losses on the underlying assets after various credit enhancements. As at October 31, 2022, our maximum exposure to loss in these entities was $14 billion (October 31, 2021 - $12 billion). The increase in our maximum exposure to loss compared to last year reflects an increase in client activity with third-party securitization vehicles. Interest and non-interest income earned in respect of these investments was $186 million (October 31, 2021 - $89 million).

### Guarantees, retail and commercial commitments

We provide our clients with guarantees and commitments that expose us to liquidity and funding risks. Our maximum potential amount of future payments in relation to our commitments and guarantee products as at October 31, 2022 amounted to $453 billion compared to $414 billion last year, primarily driven by the impact of foreign exchange translation and volume growth in other commitments to extend credit. Refer to Liquidity and funding risk and Note 24 of our 2022 Annual Consolidated Financial Statements for details regarding our guarantees and commitments.

### Risk management

We are in the business of managing the risks inherent to the financial services industry as we aim to create maximum value for our shareholders, clients, employees and communities. The ability to manage risk is a core competency of the bank, and is supported by our risk-aware culture and risk management approach. Our view of risks is dynamic, and reflects the pace of change in the financial services industry.

### Top and emerging risks

An important component of our risk management approach is to ensure that top and emerging risks, as they evolve, are identified, managed, and incorporated into our existing risk management assessment, measurement, monitoring and escalation processes and addressed in our risk frameworks and policies. These practices are intended to ensure a forward-looking risk assessment is maintained by management in the course of business development and as part of the execution of ongoing risk oversight responsibilities. Top and emerging risks are discussed by senior management and the Board on a regular basis.

We have developed supplementary internal guidance to support enterprise-wide identification and assessment of all material risks, including those that are not readily apparent. Top and emerging risks encompass those that could materially impact our financial results, financial and operational resilience, reputation, business model, or strategy, as well as those that may materially impact us as the risks evolve. The following represents our top and emerging risks:

| Top & emerging risks | Description |
| --- | --- |
| Business and economic conditions | Our financial results are affected to varying degrees by the general business and economic conditions in the geographic regions in which we operate. These conditions may include factors such as: consumer saving and spending habits; consumer borrowing and repayment patterns; unemployment rates; the differing economic trajectories among nations across the globe, global tensions and geopolitical uncertainty; the level of business investment and overall business sentiment; trade; the direction of the COVID-19 pandemic and the emergence of new pathogens; the level of government spending as well as fiscal and monetary policy; the level of activity and volatility of the financial markets; disruptions to energy and other commodity markets; competitiveness; supply chain challenges and labour shortages affecting certain sectors; the evolution of elevated inflationary pressures; and possible stagflation or deflation. Moreover, interest rate changes and actions taken by central banks to manage inflation or the broader economy have implications for us. Our financial results are sensitive to changes in interest rates, as described in the Systemic risk section. For example, a slowdown in economic growth or an economic downturn could adversely impact employment rates and household incomes, consumer spending, housing prices, corporate earnings and business investment and could adversely affect our business, including but not limited to the demand for our loan and other products, and result in lower earnings, including higher credit losses. In addition to risks arising from monetary policy tightening, risks are also emerging around how governments will seek to recoup pandemic-related support, or any new support provided to deal with emerging economic challenges. This may include, for example, changes to tax policy to address fiscal capacity concerns and to balance budgets in the future. There are also emerging risks related to wealth and income inequality, as well as changing demographics and immigration, which could impact the labour market, inflation, demand and consumer trends, and potentially have broader societal and government policy implications. |

58 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

| Top & emerging risks | Description |
| --- | --- |
| Canadian housing and household indebtedness | Notwithstanding currently low unemployment rates, Canadian housing and household indebtedness risks remain heightened in the current rising interest rate environment. Concerns related to elevated levels of mortgage-related Canadian household debt, which accelerated during the COVID-19 pandemic, could escalate if the BoC continues to increase interest rates, if the current period of elevated inflation is prolonged or if unemployment increases, potentially resulting in, among other things, higher credit losses. Moreover, continued interest rate increases or slowing economic growth could adversely impact housing market activity and housing prices, which could push loan-to-value (LTV) ratios higher and further increase credit losses. While real estate rental activity has rebounded in certain markets, changing consumer preferences and work arrangements, and the impact from elevated borrowing costs, may continue to have an adverse impact on future real estate investment and demand. |
| Information technology and cyber risks | Information technology (IT) and cyber risks remain top risks, not only for the financial services sector, but for other industries worldwide. Geopolitical tensions have increased the risk of nation state actors attacking critical infrastructure, including banks and critical third-party suppliers (e.g., utilities, telecom providers, etc.). We continue to be subject to the heightened inherent risk of cyber-attacks, data breaches, cyber extortion and similar compromises, due to: (i) the size, scale, and global nature of our operations; (ii) our heavy reliance on the internet to conduct day-to-day business activities; (iii) our intricate technological infrastructure; and (iv) our reliance on third-party service providers. Ransomware threats are growing in sophistication and being used to launch major supply chain attacks. Additionally, clients' use of personal devices can create further avenues for potential cyber-related incidents, as the bank has little or no control over the safety of these devices. Resulting implications could include business interruptions, client service disruptions, financial loss, theft of intellectual property and confidential information, litigation, enhanced regulatory attention and penalties, as well as reputational damage. Furthermore, the adoption of emerging technologies, such as cloud computing, Artificial Intelligence (AI) and robotics, call for continued focus and investment to manage risks effectively. For more details on how we are managing these risks, refer to the Operational risk section. |
| Geopolitical uncertainty | In 2022, the Russia-Ukraine conflict upended the geopolitical landscape, with wide-ranging impacts to the global economy and markets. The duration and path of the conflict remains uncertain, and could continue to fuel, or exacerbate global tensions, energy and other commodity shortages, supply chain disruptions, inflationary pressures, weakening sentiment and growth prospects, market volatility, cyberattacks, and the proliferation of sanctions and trade measures. Europe, in particular, faces significant uncertainty given its dependence on Russia for energy imports and its weakening economic prospects. Furthermore, the Canadian economy is vulnerable to continued trade tensions given the country's trading relationships with the U.S. and China. Tensions remain elevated between China and the U.S. and its allies over a number of issues, including trade, technology, human rights, Taiwan, Hong Kong, and Macau. Tensions between China and its neighbours over territorial claims, and the prospect of even closer relations between China and Russia, add further global and economic uncertainty. Other geopolitical tensions could also add to economic and market uncertainties. In addition, an uncertain geopolitical or economic environment could lead to increases in polarization, social unrest, or terrorism, each of which could have direct or indirect impacts to the bank. More broadly, the future of global trade remains uncertain, as countries look to decrease reliance on the global supply chain and nations with differing values. Increased protectionism and economic nationalism could reshape global alliances as the supply of critical goods of economic and national importance (e.g., energy, semiconductors) remains one of the top priorities of governments. We will continue to monitor these developments and others, and will assess the implications they have on us. |
| Environmental and social risk (including climate change) | We, like other organizations, are increasingly under scrutiny to address social and racial inequality and other human rights issues, and failure to do so may result in strategic, regulatory and reputation risks. Risks associated with climate change are evolving as it relates to the global transition to a net-zero economy and physical climate risks (e.g., extreme weather events). Environmental and social risks, including climate change, are each unique and transverse risks impacting our principal risk types in different ways and to varying degrees. While E&S risk manifests itself through credit, reputation, and regulatory compliance risks, the impact of E&S risk also extends to our other principal risks, including systemic, competitive, strategic, legal and regulatory environment, operational, market, liquidity and insurance risks. For details on these risks and how we are managing these risks, refer to the Overview of other risks section. |
| Digital disruption and innovation | The COVID-19 pandemic changed the way consumers interact with financial services providers, including increasing demand for digital banking services. While this represents an opportunity for us to leverage our use of technology, the need to meet the rapidly evolving needs of clients and compete with non-traditional competitors has increased our strategic and reputation risks. Additional risks continue to emerge, as demographic trends, evolving client expectations, the increased power to analyze data and the emergence of disruptors are creating competitive pressures across a number of sectors. Moreover, established technology companies, newer competitors, and regulatory changes continue to foster new business models that are challenging or could challenge traditional banks and financial products. Finally, while the adoption of new technologies, such as AI and machine learning, presents opportunities for us, it is resulting or could result in new and complex strategic, operational, regulatory, compliance and reputation risks that would need to be managed effectively. |

Management's Discussion and Analysis

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| Top & emerging risks | Description |
| --- | --- |
| Privacy, data and third-party related risks | The protection and responsible use of personal information are critical to maintaining our clients' trust. In addition, the management and governance of our data also remains a top risk given the high value attributed to our data for the insights it can generate for clients and communities. Resulting implications from failing to manage data and privacy risks could include financial loss, theft of intellectual property and/or confidential information, litigation, enhanced regulatory attention and penalties, as well as reputational damage. Effective privacy and information management practices continue to grow in importance, as demonstrated by the continued development of complex regulations in the jurisdictions in which we operate. Our potential exposure to these risks increases as we continue to partner with third-party service providers and adopt new business models and technologies (e.g., cloud computing, AI and machine learning). Threat actors gravitate towards vulnerabilities in an ecosystem, and the weakest link in the supply chain can be a supplier or third-party service provider that may not have sufficiently robust controls. Privacy, data and third-party related risks have been heightened as the use of work from home arrangements remains common practice. Third-party providers critical to our operations are monitored for any impact on their ability to deliver services, including vendors of our third-party providers. For details on how we are managing these risks, refer to the Operational risk section. |
| Regulatory changes | The ongoing introduction of new or revised regulations requires enhanced focus across the organization on meeting additional regulatory requirements across the multiple jurisdictions in which we operate. Financial and other reforms that have been implemented or are being implemented, across multiple jurisdictions, such as digital, data and technology reforms, cyber security and anti-money laundering regulations, interest rate benchmark reform, as well as privacy, climate and consumer protection, continue to impact our operations and strategies. For more details, refer to the Legal and regulatory environment risk section. |
| Culture and conduct risks | Our Purpose, values and risk principles are key dimensions of our culture. We demonstrate our culture through our conduct - the behaviours, decisions, and actions of the organization and our employees. Culture and conduct risks are considered top risks for the financial services industry due to the impact that our choices, behaviours, and overall risk governance can have on outcomes for our stakeholders. We embed client considerations into our decision-making processes and aim to focus on the fair treatment of clients, and continue to implement regulatory changes that align with this objective. We are responsive to evolving employee needs while expecting employees to always act with integrity. Regulators continue to focus on conduct matters and risks, and heightened expectations generally from regulators could lead to investigations, remediation requirements, higher compliance costs and enforcement actions and fines, and potential criminal prosecutions or imposition of sanctions, including restrictions on our activities. While we take steps to continue to strengthen our conduct practices, and prevent and detect outcomes which could potentially harm clients, employees or the integrity of the markets, such outcomes may not always be prevented or detected. For more details, refer to the Culture and conduct risks section. |

## Overview

As a global financial institution with a diversified business model, we actively manage a variety of risks to help protect and enable our businesses by following these risk management principles:

### Risk management principles

- Effectively balance risk and reward to enable sustainable growth.
- Collectively share the responsibility for risk management.
- Undertake only risks we understand and make thoughtful and future-focused risk decisions.
- Always uphold our Purpose and vision, and consistently abide by our values and Code of Conduct to maintain our reputation and the trust of our clients, colleagues and communities.
- Maintain a healthy and robust control environment to protect our stakeholders.
- Use judgment and common sense.
- Always be operationally prepared and financially resilient for a potential crisis.

The dynamic nature of the financial services industry, and technological innovation, necessitate that our processes, tools and practices are continuously improving and responding to the changing landscape and emerging risks. We seek to accomplish this through an effective and evolving risk management approach. All risk-taking activities and exposures are within the Board-approved risk appetite, and corresponding capital and liquidity requirements. We seek to ensure that our business activities and transactions provide an appropriate balance of return for the risks assumed and the costs incurred. Our organizational design and governance processes are intended to ensure that our Group Risk Management (GRM) function is independent from the businesses it supports.

### Risk drivers

We define risk as the potential vulnerabilities in the short-, medium- or long-term that may impact our financial results, financial and operational resilience, reputation, business model, or strategy. Risk can be realized through losses, or an undesirable outcome with respect to volatility of earnings in relation to expected earnings, capital adequacy, or liquidity. Our principal risks include credit, market, liquidity, insurance, operational, regulatory compliance, strategic, reputation, legal and regulatory environment, competitive, and systemic risks, that have been classified into four categories based on the level of control and

60 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

influence that we can exert against these risks. These categories are maintained by GRM and reviewed regularly to ensure all principal risks are reflected. This classification methodology provides a common language and discipline for the identification and assessment of risk in existing businesses, new businesses, products or initiatives, as well as acquisitions and alliances.

| Less | Macroeconomic | Adverse changes in the macroeconomic environment can lead to a material impact on the real economy or the financial system in any of the regions in which we operate. Examples include rising inflationary pressures and interest rates, economic slowdowns or recessions, deterioration in the Canadian housing market, abrupt changes in the geopolitical environment, unfavourable global trade agreements, political uncertainties, or the outbreak of a pandemic or other health crises. Resultant impacts can materialize as loss of revenue, as well as the realization of credit, market or operational risk losses. Macroeconomic risk is the least controllable type of risk arising from the business environment in which we operate. However, we have in place a number of controls to mitigate the impacts of systemic risk, including our diversified business model and funding sources, financial crisis management strategies and protocols, stress testing programs, and product and geographic diversification. |  |
| --- | --- | --- | --- |
|  | Strategic | Business strategy is a major driver of our risk appetite, including acquisitions and dispositions, responses to threats posed by non-traditional competitors and responses to proposed changes in the regulatory environment. Choosing the wrong strategy, or poorly executing on the correct strategy, could result in reputational risk consequences, impact our revenue mix, and/or affect our exposure to earnings volatility and loss absorption capacity. There is a fair degree of control and influence that we can exert in managing strategic and reputation risk. While the legal and regulatory environment and competitive risks are less controllable, we seek to influence them through our role as a corporate entity and as an active participant in the Canadian and global financial services industry. |  |
|  | Operational / Regulatory Compliance | The complexity and scope of our operations across the globe exposes us to operational and regulatory compliance risks. We have a certain level of control over these risks through the effective management of operational risk and regulatory compliance risk, including how we manage our dependence on people, systems, and processes, as well as how we respond to external events. |  |
|  | Transactional / Positional | A more traditional risk perspective involves credit, market, liquidity and insurance risks arising from, among other things, lending transactions and balance sheet positions. These risks are an integral part of our day-to-day business activities. We understand these risks well and have the greatest level of control and influence over them. We earn revenue by taking these transactional / positional risks. |  |
| More |  |  |  |

## Enterprise risk management

Under the oversight of the Board and senior management, the Enterprise Risk Management Framework (ERMF) provides an overview of our enterprise-wide programs for managing risk, including identifying, assessing, measuring, controlling, monitoring and reporting on the significant risks that face the organization.

### Risk governance

We have an effective and well-established governance framework in place so that risks impacting our businesses are identified, appropriately categorized, assessed, managed and communicated to the Board in a timely manner. The risk governance framework has been established, and is maintained in alignment with, the expectations of OSFI, the Basel Committee on Banking Supervision's (BCBS) corporate governance principles, and the requirements and expectations of other regulators in the jurisdictions in which we conduct business, and in accordance with industry best practices. The Board oversees the implementation of our risk management framework, while employees at all levels of the organization are responsible for managing the day-to-day risks that arise in the context of their mandates. As illustrated below, we use the three lines of defence governance model so that risks are appropriately and adequately managed throughout the enterprise to achieve our strategic objectives.

Management's Discussion and Analysis

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## BOARD OF DIRECTORS

RISK COMMITTEE

AUDIT COMMITTEE

GOVERNANCE COMMITTEE

HUMAN RESOURCES COMMITTEE

- The **Board** annually approves our Code of Conduct and closely collaborates with management to set the tone from above and promotes a strong governance culture that influences RBC at every level and across all global businesses. The Board also approves our risk appetite, provides oversight and carries out its risk management mandate primarily through its committees.
- The **Risk Committee** assists the Board in overseeing our risk management program ensuring that management has policies, processes and procedures to manage our significant risks and monitor our risk posture and risk profile. The Risk Committee oversees the risk management function, having regard to its independence from the businesses whose activities it reviews. Its oversight activities include the review of the GRM function which evaluates GRM's success against its key priorities, the mandate of the Chief Risk Officer (CRO), and GRM's organizational structure, budget and resources.
- The **Audit Committee** assists the Board in its oversight of (i) the integrity of our financial statements; (ii) the qualifications, performance and independence of our external auditors; (iii) the performance of our internal audit function; (iv) internal controls; and (v) compliance with legal and regulatory requirements.
- The **Governance Committee** recommends individuals for Board member election or re-election, oversees the process for evaluating Board Committee and director effectiveness, and oversees management of conduct and culture, including breaches of our Code of Conduct. Additional responsibilities include (i) developing and recommending governance frameworks, principles and policies to the Board; (ii) overseeing and coordinating ESG matters at the Board and its committees; (iii) monitoring developments in corporate governance and adapting best practices; and (iv) reviewing shareholder proposals and recommending responses to the Board.
- The **Human Resources Committee** assists the Board in its oversight of compensation policies and programs, compensation risk management and the compensation for the CEO and Group Executives (GE). It also oversees our pension plans, key talent management and human resources strategies and practices, including employee engagement, diversity & inclusion and health & wellness, as well as succession plans for key senior leadership roles.

## THE GROUP EXECUTIVE AND GROUP RISK COMMITTEE

- Actively shapes enterprise risk appetite and recommends it for Board approval.
- Visibly supports and communicates enterprise risk appetite, seeking to ensure that sufficient resources and expertise are in place to help provide effective oversight of adherence to the enterprise risk appetite.
- Seeks to ensure principles, policies, authorities, resources, responsibilities and reporting are in place to support the control infrastructure necessary for an effective enterprise-wide risk management program.
- Oversees culture and conduct program and key activities.
- Provides appropriate and timely information to the Board or its Committees with regard to the identification, measurement, and management of the significant risks to which we are exposed across all of our legal entities, businesses and operations globally.
- The Compensation Risk Management Oversight Committee (CRMOC) oversees the design of major compensation programs in an effort to ensure alignment with sound risk management principles, and that risks that may not be fully captured in our current financial performance are appropriately considered in variable compensation payouts, including our enterprise risk profile relative to risk appetite. The CRMOC has responsibility for ensuring our compensation programs align with the Financial Stability Board (FSB) Principles for Sound Compensation Practices and Implementation Standards and other applicable guidance and best practices.

FIRST LINE OF DEFENCE

RISK OWNERS

- All employees across our businesses and functional areas
- Accountable for:
  - Identification;
  - Assessment;
  - Measurement;
  - Mitigation;
  - Monitoring; and
  - Reporting of risk against approved policies and appetite

SECOND LINE OF DEFENCE

RISK OVERSIGHT

RISK MANAGEMENT

GLOBAL COMPLIANCE AND ANTI-MONEY LAUNDERING

- The CRO has direct access to the Risk Committee
- The Chief Compliance Officer (CCO) and the Chief Anti-Money Laundering Officer (CAMLO) have direct access to the Audit Committee
- Establishes risk management practices and provides risk guidance
- Provides oversight of the effectiveness of First Line risk management practices
- Monitors and independently reports on the level of risk against established risk appetite

THIRD LINE OF DEFENCE

INDEPENDENT ASSURANCE

- Internal Audit
- Independent assurance to management and the Board on the effectiveness of risk management practices

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Management's Discussion and Analysis

## Risk appetite

Effective risk management protects us from unacceptable losses or undesirable outcomes with respect to earnings volatility, capital adequacy or liquidity, reputation risk or other risks while supporting and enabling our overall business strategy. It requires the clear articulation of our risk appetite, which is the amount and type of risk that we are able and willing to accept in the pursuit of our business objectives. It reflects our self-imposed upper bound to risk-taking, set at levels inside of regulatory limits and constraints, and influences our risk management philosophy, Code of Conduct, business practices and resource allocation. It provides clear boundaries and sets an overall tone for balancing risk-reward trade-offs to ensure the long-term viability of the organization.

Our risk appetite is integrated into our strategic, financial, and capital planning processes, as well as ongoing business decision-making processes and is reviewed and approved annually by the Board.

Our Enterprise Risk Appetite Framework (ERAF) outlines the foundational aspects of our approach to risk appetite, articulates our quantitative and qualitative risk appetite statements and their supporting measures and associated constraints, which can be applied at the enterprise, business segment, business unit and legal entity level, and describes our requirements and expectations to embed effective risk appetite practices throughout the organization.

![img-0.jpeg](img-0.jpeg)

### Risk appetite statements

#### Quantitative statements

- Manage earnings volatility and exposure to future losses under normal and stressed conditions.
- Avoid excessive concentrations of risk.
- Ensure capital adequacy and sound management of liquidity and funding risk.
- Ensure sound management of operational and regulatory compliance risk.
- Maintain strong credit ratings and a risk profile in the top half of our peer group.

#### Qualitative statements

- Always uphold our Purpose and vision and consistently abide by our values and Code of Conduct to maintain our reputation and the trust of our clients, colleagues, and communities.
- Undertake only risk we understand. Make thoughtful and future-focused risk decisions, taking environmental and social considerations into account.
- Effectively balance risk and reward to enable sustainable growth.
- Maintain a healthy and robust control environment to protect our stakeholders.
- Always be operationally prepared and financially resilient for a potential crisis.

The allocation of our risk appetite across the bank is supported by the establishment of delegated authorities or risk limits. These delegated authorities or risk limits represent the maximum level of risk permitted for a line of business, portfolio, individual or group and are used to govern ongoing operations. Risk posture, the anticipated shift in risk profile as a result of changes in objectives, strategies, and external factors, is used to provide insights on key areas that may require management attention to ensure strategies are able to be executed successfully within our risk appetite.

## Risk measurement

Quantifying risk is a key component of our enterprise-wide risk and capital management processes. Risk measurement and planning processes are integrated across the enterprise, especially in regards to forward-looking projections and analyses, including but not limited to, stress testing, recovery and resolution planning, and credit provisioning. The degree of integration across our Finance and Risk functions continues to increase in measuring both financial and risk performance.

Certain risks, such as credit, market, liquidity and insurance risks, can be more easily quantified than others, such as operational, reputation, strategic, legal, and regulatory compliance risks. For the risks that are more difficult to quantify, greater emphasis is placed on qualitative risk factors and assessment of activities to gauge the overall level of risk. In addition, judgmental risk measures and techniques such as stress testing, and scenario and sensitivity analyses can be used to assess and measure risks, and we are continuously evolving our risk measures and techniques to manage our risks. Our primary methods for measuring risk include:

- Quantifying expected loss: losses that are statistically expected to occur as a result of conducting business in a given time period;
- Quantifying unexpected loss: an estimate of the deviation of actual earnings from expected earnings, over a specified time horizon;
- Stress testing: evaluates, from a forward looking perspective, the potential effects of a set of specified changes in risk factors, corresponding to exceptional but plausible adverse economic and financial market events; and
- Back-testing: the realized values are compared to the parameter estimates that are currently used in an effort to ensure the parameters remain appropriate for regulatory and economic capital calculations.

Management's Discussion and Analysis

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63

### **Stress testing**

Stress testing is an important component of our risk management framework. Stress testing results are used for:

- Assessing the viability of long-term business plans and strategies;
- Monitoring our risk profile relative to our risk appetite in terms of earnings and capital at risk;
- Setting limits;
- Identifying key risks to, and potential shifts in, our capital and liquidity levels, as well as our financial position;
- Enhancing our understanding of available mitigating actions in response to potential adverse events; and
- Assessing the adequacy of our capital and liquidity levels.

Our enterprise-wide stress tests evaluate key balance sheet, income statement, leverage, capital, and liquidity impacts arising from risk exposures and changes in earnings. The results are used by the Board, Group Risk Committee (GRC) and senior management risk committees to understand our performance drivers under stress, and review stressed capital, leverage, and liquidity ratios against regulatory thresholds and internal limits. The results are also incorporated into our Internal Capital Adequacy Assessment Process (ICAAP) and capital plan analyses.

We evaluate a number of enterprise-wide stress scenarios over a multi-year horizon, featuring a range of severities. Our Board reviews the recommended scenarios, and GRM leads the scenario assessment process. Results from across the organization are integrated to develop an enterprise-wide view of the impacts, with input from subject matter experts in GRM, Corporate Treasury, Finance, and Economics. Generally, our stress testing scenarios evaluate global recessions, equity market corrections, elevated debt levels, trade policies, changes in interest rates, real estate price corrections, and shocks to credit spreads and commodity markets, among other factors. During our fiscal 2022 stress testing exercises, we addressed several emerging risks inclusive of inflation risk, supply chain pressures as well as physical and transitional climate risk, with a focus on the impacts of these risks on revenue, net income and capital projections.

Ongoing stress testing and scenario analyses within specific risk types, such as market risk (including Interest Rate Risk in the Banking Book (IRRBB)), liquidity risk, retail and wholesale credit risk, operational risk, and insurance risk, supplement and support our enterprise-wide analyses. Results from these risk-specific programs are used in a variety of decision-making processes including risk limit setting, portfolio composition evaluation, risk appetite articulation and business strategy implementation.

In addition to ongoing enterprise-wide and risk-specific stress testing programs, we use ad hoc and reverse stress testing to deepen our knowledge of the risks we face. Ad hoc stress tests are one-off analyses used to investigate developing conditions or to stress a particular portfolio in more depth. Reverse stress tests, starting with a severe outcome and aiming to reverse-engineer scenarios that might lead to it, are used in risk identification and understanding of risk/return boundaries.

In addition to internal stress tests, we participate in a number of regulator-required stress test exercises, on a periodic basis, across several jurisdictions.

### **Model governance and validation**

Quantitative models are used for many purposes including, but not limited to, the valuation of financial products, the identification, measurement and management of different types of risk, stress testing, assessing capital adequacy, informing business and risk decisions, measuring compliance with internal limits, meeting financial reporting and regulatory requirements, and issuing public disclosures.

Model risk is the risk of adverse financial and/or reputational consequences to the enterprise arising from the use or misuse of a model at any stage throughout its life cycle and is managed through our model risk governance and oversight structure. The governance and oversight structure, which is implemented through our three lines of defence governance model, is founded on the basis that model risk management is a shared responsibility across the three lines spanning all stages of the model's life cycle. We continue to evolve our governance model to seek to take into account any new risk considerations that may emerge from the growing use of AI methods and applications in our models across our organization.

Prior to being used, models are subject to independent validation and approval by our enterprise model risk management function, a team of modelling professionals with reporting lines independent of those of the model owners, developers and users. The validation seeks to ensure that models are sound and capable of fulfilling their intended use. In addition to independently validating models prior to use, our enterprise model risk management function provides controls that span the life-cycle of a model, including model change management procedures, requirements for ongoing monitoring, and annual assessments to ensure each model continues to serve its intended purpose.

### **Risk control**

Our enterprise-wide risk management approach is supported by a comprehensive set of risk controls that are defined in our ERMF. The ERMF serves as the foundation for our approach to risk management and sets the expectations for the development and communication of policies, the establishment of formal independent risk review and approval processes, and the establishment of delegated risk approval authorities and risk limits. The ERMF is further reinforced and supported by a number of additional Board-approved risk frameworks, various policies thereunder and a comprehensive set of risk controls. Together, our risk frameworks and supporting policies provide direction and insight on how respective risks are identified, assessed, measured, managed, mitigated, monitored and reported. The enterprise-wide policies are considered our minimum requirements, articulating the parameters within which business groups and employees must operate.

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Royal Bank of Canada: Annual Report 2022

Management's Discussion and Analysis

## Enterprise Risk Policy Architecture

![img-1.jpeg](img-1.jpeg)

The approval hierarchy for risk frameworks and policy documents:

- Board of Directors or Board Committees
- Senior Management Committees (e.g. Policy Review Committee, Operational Risk Committee, Asset Liability Committee) for most policies. Board or Board Committee approval is required in some instances (e.g. RBC Code of Conduct, Dividend Policy)
- Generally by business or Functional Unit management/committees. Group Risk Management approval is required if there are significant risk implications

### Delegated risk approval authorities and risk limits

Risk Appetite is designed to account for strategic and forward-looking considerations whereas delegated authorities and risk limits are used to govern and monitor our day-to-day business activities. Risk Appetite is supported by Risk Approval Authorities delegated by the Board to senior management which provide thresholds for escalation of exposures and transactions to the Risk Committee of the Board for review and approval. The allocation of Risk Appetite and Board Delegated Authorities may be supported by the establishment of management delegated authorities and/or risk limits. These authorities and limits are used to implement risk management strategies to diversify risks, reduce unexpected losses and/or promote stability of earnings, govern on-going operations and monitor utilization of risk limits. Excesses to Management Delegated Authorities and risk limits can act as early warning indicators for Risk Appetite constraints and Board Delegated Authorities thus allowing for timely management attention. Senior management can delegate some or all of their authorities onwards to others in the organization. The delegated authorities enable the approval of single name, geographic and industry sectors, and product and portfolio exposures within defined parameters and limits. They are also used to manage concentration risk, establish underwriting and inventory limits for trading and investment banking activities and set market risk tolerances.

### Risk review and approval processes

Risk review and approval processes provide an important control mechanism and are established by GRM based on the nature, size and complexity of the risk involved. In general, the risk review and approval process involves a formal review and approval by an individual, group or committee that is independent from the originator. The approval responsibilities are governed by the Enterprise Risk Appetite Framework and delegated authorities and risk limits are based on the following categories: transactions, projects and initiatives, and new products and services.

### Risk monitoring and reporting

Enterprise and business segment level risk monitoring and internal reporting are critical components of our enterprise risk management program and support the ability of senior management and the Board to effectively perform their risk management and oversight responsibilities. In addition, we publish a number of external reports on risk matters to comply with regulatory requirements. The Risk Committee of the Board receives a CRO report at each meeting that has been reviewed by senior management, and which includes, among others, top and emerging risks, industry trends or other notable items. On a quarterly basis, we provide our Enterprise Risk Report to senior management and the Risk Committee of the Board which includes, among others, top and emerging risks, risk profile relative to our risk appetite, portfolio quality metrics and a range of risks we face along with an analysis of the related issues, key trends and, when required, management actions. On an annual basis, we provide a benchmarking review to the Board which compares our performance to peers across a variety of risk metrics and includes a composite risk scorecard which provides an objective measure of our ranking relative to the peer group. In addition to our regular risk monitoring, other risk-specific presentations are provided to, and discussed with, senior management and the Board on top and emerging risks or changes in our risk profile.

The shaded text along with the tables specifically marked with an asterisk (*) in the following sections of the MD&A represent our disclosures on credit, market and liquidity and funding risks in accordance with IFRS 7, Financial Instruments: Disclosures, and include discussion on how we measure our risks and the objectives, policies and methodologies for managing these risks. Therefore, these shaded text and marked tables represent an integral part of our 2022 Annual Consolidated Financial Statements.

Management's Discussion and Analysis

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65

Transactional/positional risk drivers

# Credit risk

Credit risk is the risk of loss associated with an obligor's potential inability or unwillingness to fulfill its contractual obligations on a timely basis and may arise directly from the risk of default of a primary obligor (e.g., issuer, debtor, counterparty, borrower or policyholder), indirectly from a secondary obligor (e.g., guarantor or reinsurer), through off-balance sheet exposures, contingent credit risk, associated credit risk and/or transactional risk. Credit risk includes counterparty credit risk arising from both trading and non-trading activities.

The responsibility for managing credit risk is shared broadly following the three lines of defence governance model. The allocation of the Board approved credit risk appetite is supported by the establishment of risk approval authorities and risk limits, delegated by the Board to the President & CEO and CRO. Credit transactions in excess of these authorities must be approved by the Risk Committee of the Board. To facilitate day-to-day business activities, the CRO has been empowered to further delegate credit risk approval authorities to individuals within GRM, the business segments, and functional units as necessary.

We balance our risk and return by setting the following objectives for the management of credit risk:

- Ensuring credit quality is not compromised for growth;
- Mitigating credit risk in transactions, relationships and portfolios;
- Avoiding excessive concentrations in correlated credit risks;
- Using our credit risk rating and scoring systems or other approved credit risk assessment or rating methodologies, policies and tools;
- Pricing appropriately for the credit risk taken;
- Detecting and preventing inappropriate credit risk through effective systems and controls;
- Applying consistent credit risk exposure measurements;
- Ongoing credit risk monitoring and administration;
- Transferring credit risk to third parties where appropriate through approved credit risk mitigation techniques (e.g., sale, hedging, insurance, securitization); and
- Avoiding activities that are inconsistent with our values, Code of Conduct or policies.

The Enterprise Credit Risk Management Framework (ECRMF) describes the principles, methodologies, systems, roles and responsibilities, reports and controls that exist for managing credit risk within the enterprise. Additional supporting policies exist that are designed to provide further clarification of roles and responsibilities, acceptable practices, limits and key controls within the enterprise.

# Credit risk measurement

We quantify credit risk at both the individual obligor and portfolio levels to manage expected credit losses and minimize unexpected losses to limit earnings volatility and ensure we are adequately capitalized.

We employ a variety of risk measurement methodologies to measure and quantify credit risk for our wholesale and retail credit portfolios. The wholesale portfolio is comprised of businesses, sovereigns, public sector entities, banks and other financial institutions, as well as certain HNW individuals. The retail portfolio is comprised of residential mortgages, personal loans, credit cards, and small business loans. Our credit risk rating systems are designed to assess and quantify the risk inherent in credit activities in an accurate and consistent manner. The resulting ratings and scores are then used for both client- and transaction-level risk decision-making and as key inputs for our risk measurement and capital calculations.

# Measurement of economic and regulatory capital

Economic capital, which is our internal quantification of risks, is used for limit setting. It is also used for internal capital adequacy and allocation of capital to the Insurance segment. Our methodology for allocating capital to our business segments, other than Insurance, is based on regulatory requirements. For further details, refer to the Capital management section.

In measuring credit risk to determine regulatory capital, two principal approaches are available: Internal Ratings Based (IRB) Approach and Standardized Approach.

The Standardized Approach applies primarily to our Caribbean banking operations and City National and is based on risk weights prescribed by OSFI that are used to calculate RWA for credit risk exposure.

The IRB Approach, which applies to most of our credit risk exposures, utilizes three key parameters which form the basis of our credit risk measures for both regulatory and economic capital.

- Probability of default (PD): An estimated percentage that represents the likelihood of default within a given time period of an obligor for a specific rating grade or for a particular pool of exposure.
- Exposure at default (EAD): An amount expected to be owed by an obligor at the time of default.
- Loss given default (LGD): An estimated percentage of EAD that is not expected to be recovered during the collections and recovery process.

These parameters are determined based primarily on historical experience from internal credit risk rating systems in accordance with supervisory standards.

Each credit facility is assigned an LGD rate that is largely driven by factors that impact the extent of losses anticipated in the event the obligor defaults. These factors mainly include seniority of debt, collateral and the industry sector in which the obligor operates. Estimated LGD rates draw primarily on internal loss experiences. Where we have limited internal loss data, we also refer to appropriate external data to supplement the estimation process. LGD rates are estimated to reflect conditions that might be expected to prevail in a period of an economic downturn, with additional conservatism added to reflect data limitations and statistical uncertainties identified in the estimation process.

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Management's Discussion and Analysis

EAD is estimated based on the current exposure to the obligor and the possible future changes in that exposure driven by factors such as the nature of the credit commitment. As with LGD, rates are estimated to reflect an economic downturn, with added conservatism to reflect data and statistical uncertainties identified in the modelling process.

Estimates of PD, LGD and EAD are reviewed, and then validated and back-tested by an independent validation team within the bank, on an annual basis. In addition, quarterly monitoring and back-testing is performed by the estimation team. These ratings and risk measurements are used to determine our expected losses as well as economic and regulatory capital, setting of risk limits, portfolio management and product pricing.

### Financial and regulatory measurement distinctions

Expected loss models are used for both regulatory capital and accounting purposes. Under both models, expected losses are calculated as the product of PD, LGD and EAD. However, there are certain key differences under current Basel and IFRS reporting frameworks which could lead to significantly different expected loss estimates, including:

- Basel PDs are based on long-run averages over an entire economic cycle. IFRS PDs are based on current conditions, adjusted for estimates of future conditions that will impact PD under probability-weighted macroeconomic scenarios.
- Basel PDs consider the probability of default over the next 12 months. IFRS PDs consider the probability of default over the next 12 months only for instruments in stage 1. Expected credit losses for instruments in stage 2 are calculated using lifetime PDs.
- Basel LGDs are based on severe but plausible downturn economic conditions. IFRS LGDs are based on current conditions, adjusted for estimates of future conditions that will impact LGD under probability-weighted macroeconomic scenarios. For further details, refer to the Critical accounting policies and estimates section.

### Gross credit risk exposure

Gross credit risk is categorized as i) lending-related and other credit risk or ii) trading-related credit risk; and is calculated based on the Basel III framework. Under this method, EAD for all lending-related and other credit transactions and trading-related repo-style transactions is calculated before taking into account any collateral and is inclusive of an estimate of potential future changes to that credit exposure. EAD for derivatives is calculated inclusive of collateral in accordance with regulatory guidelines.

Lending-related and other credit risk includes:

- Loans and acceptances outstanding, undrawn commitments, and other exposures, including contingent liabilities such as letters of credit and guarantees, debt securities carried at FVOCI or amortized cost and deposits with financial institutions. Undrawn commitments represent an estimate of the contractual amount that may be drawn upon at the time of default of an obligor.

Trading-related credit risk includes:

- Repo-style transactions, which include repurchase and reverse repurchase agreements and securities lending and borrowing transactions. For repo-style transactions, gross exposure represents the amount at which securities were initially financed, before taking collateral into account.
- Derivative amounts which represent the credit equivalent amount, as defined by OSFI as the replacement cost plus an add-on amount for potential future credit exposure, scaled by a regulatory factor. For further details on replacement cost and credit equivalent amounts, refer to Note 9 of our 2022 Annual Consolidated Financial Statements.

### Credit risk assessment

#### Wholesale credit risk

The wholesale credit risk rating system is designed to measure the credit risk inherent in our wholesale credit activities.

Each obligor is assigned a borrower risk rating (BRR), reflecting an assessment of the credit quality of the obligor. Each BRR has a PD calibrated against it. The BRR differentiates the riskiness of an obligor and represents our evaluation of the obligor's ability and willingness to meet its contractual obligations on time over a three year time horizon. The assignment of BRRs is based on the evaluation of the obligor's business risk and financial risk through fundamental credit analysis, as well as data-driven modelling. The determination of the PD associated with each BRR relies primarily on internal default history since 2006. PD estimates are designed to be a long-run average of our experience across the economic cycle in accordance with regulatory guidelines.

Our rating system is designed to stratify obligors into 22 grades. The following table aligns the relative rankings of our 22-grade internal risk ratings with the external ratings used by S&P and Moody's.

Management's Discussion and Analysis

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Internal ratings map*

Table 41

| Ratings | PD Bands |  | BRR | S&P | Moody's | Description |
| --- | --- | --- | --- | --- | --- | --- |
|  | Business and Bank | Sovereign |  |  |  |  |
| 1 | 0.0000% - 0.0300% | 0.0000% - 0.0150% | 1+ | AAA | Aaa | Investment Grade |
| 2 | 0.0000% - 0.0300% | 0.0151% - 0.0250% | 1H | AA+ | Aa1 |  |
| 3 | 0.0000% - 0.0350% | 0.0251% - 0.0350% | 1M | AA | Aa2 |  |
| 4 | 0.0351% - 0.0450% |  | 1L | AA- | Aa3 |  |
| 5 | 0.0451% - 0.0550% |  | 2+H | A+ | A1 |  |
| 6 | 0.0551% - 0.0650% |  | 2+M | A | A2 |  |
| 7 | 0.0651% - 0.0750% |  | 2+L | A- | A3 |  |
| 8 | 0.0751% - 0.0850% |  | 2H | BBB+ | Baa1 |  |
| 9 | 0.0851% - 0.1000% |  | 2M | BBB | Baa2 |  |
| 10 | 0.1001% - 0.1770% |  | 2L | BBB- | Baa3 |  |
| 11 | 0.1771% - 0.3705% |  | 2-H | BB+ | Ba1 | Non-investment Grade |
| 12 | 0.3706% - 0.7065% |  | 2-M | BB | Ba2 |  |
| 13 | 0.7066% - 1.1600% |  | 2-L | BB- | Ba3 |  |
| 14 | 1.1601% - 1.6810% |  | 3+H | B+ | B1 |  |
| 15 | 1.6811% - 2.3490% |  | 3+M | B | B2 |  |
| 16 | 2.3491% - 4.4040% |  | 3+L | B- | B3 |  |
| 17 | 4.4041% - 7.0010% |  | 3H | CCC+ | Caa1 |  |
| 18 | 7.0011% - 13.1760% |  | 3M | CCC | Caa2 |  |
| 19 | 13.1761% - 24.9670% |  | 3L | CCC- | Caa3 |  |
| 20 | 24.9671% - 99.9990% |  | 4 | CC | Ca |  |
| 21 | 100% |  | 5 | D | C | Impaired |
| 22 | 100% |  | 6 | D | C |  |

* This table represents an integral part of our 2022 Annual Consolidated Financial Statements.

### Counterparty credit risk

Counterparty credit risk is the risk that a party with whom the bank has entered into a financial or non-financial contract will fail to fulfill its contractual agreement and default on its obligation. It incorporates not only the contract's current value, but also considers how that value can move as market conditions change. Counterparty credit risk usually arises from trading-related derivative and repo-style transactions. Derivative transactions include forwards, futures, swaps and options, and can have underlying references that are either financial (e.g., interest rate, foreign exchange, credit, or equity) or non-financial (e.g., precious metal and commodities). For further details on our derivative instruments and credit risk mitigation, refer to Note 9 of our 2022 Annual Consolidated Financial Statements.

Trading counterparty credit activities are undertaken in a manner consistent with the relevant requirements under the ECRMF and the Enterprise Market Risk Management Framework (EMRMF), in line with our credit risk management policy documents and with approval in accordance with the appropriate delegated authorities.

The primary risk mitigation techniques for trading counterparty credit risk are close-out netting and collateralization. Close-out netting considers the net value of contractual obligations between counterparties in a default situation, thereby reducing overall credit exposure. Collateralization is when a borrower pledges assets as security, which provides recourse to the lender in the event of default. The policies that we maintain in relation to the recognition of risk mitigation from these techniques incorporate such considerations as:

- The use of standardized agreements such as the International Swaps and Derivatives Association Master Agreement and Credit Support Annex;
- Restricting eligible collateral to high quality liquid assets, primarily cash and highly-rated government securities, subject to appropriate haircuts; and
- The use of initial margin and variation margin arrangements in accordance with regulatory requirements and internal risk standards.

Similarly, for securities finance and repurchase trading activity we mitigate counterparty credit risk via the use of standardized securities finance agreements, and by taking collateral generally in the form of eligible liquid securities.

We also mitigate counterparty credit risk through the use of central counterparties (CCPs). These highly-regulated entities intermediate trades between participating bilateral counterparties and mitigate credit risk through the use of initial and variation margin and the ability to net offsetting trades amongst participants. The specific structure and capitalization, including contingent capital arrangements, of individual CCPs are analyzed as part of assigning an internal counterparty credit risk rating and determining appropriate counterparty credit risk limits.

68 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

### Wrong-way risk

Wrong-way risk is the risk that exposure to a counterparty is adversely correlated with the credit quality of that counterparty.

There are two types of wrong-way risk:

- Specific wrong-way risk, which exists when our exposure to a particular counterparty is positively correlated with the PD of the counterparty due to the nature of our transactions with them (e.g., loans collateralized by shares or debt issued by the counterparty or a related party). Specific wrong-way risk over-the-counter (OTC) derivative trades are done on an exception basis only, and are permitted only when explicitly pre-approved by GRM. Factors considered in reviewing such trades include the credit quality of the counterparty, the nature of the asset(s) underlying the derivative and the existence of credit mitigation.
- General wrong-way risk, which exists when there is a positive correlation between the PD of the counterparties and general macroeconomic or market factors. This typically occurs with derivatives (e.g., the size of the exposure increases) or with collateralized transactions (e.g., the value of the collateral declines). We monitor general wrong-way counterparty credit risk using a variety of metrics including stress scenarios, investment strategy concentration, the ability of counterparties to generate cash and liquidity, liquidity of the collateral and terms of financing.

### Retail credit risk

Credit scoring is the primary risk rating system for assessing obligor and transaction risk for retail exposures. Scoring models use internal and external data to assess and score borrowers, predict future performance and manage limits for existing loans and collection activities. Credit scores are one of the factors employed in the acquisition of new clients and management of existing clients. The credit score of the borrower is used to assess the predicted credit risk for each independent acquisition or account management action, leading to an automated decision or guidance for an adjudicator. Credit scoring improves credit decision quality, adjudication timeframes and consistency in the credit decision process and facilitates risk-based pricing. Since the onset of the COVID-19 pandemic, we adapted our retail credit risk methodology by enhancing our product level credit strategies with advanced analytics and portfolio monitoring.

To arrive at a retail risk rating, borrower scores are categorized and associated with PDs for further grouping into risk rating categories. The following table maps PD bands to various summarized risk levels for retail exposures:

| Internal ratings map* |  | Table 42 |
| --- | --- | --- |
| PD bands | Description |  |
| 0.030% - 3.844% | Low risk |  |
| 3.845% - 6.786% | Medium risk |  |
| 6.787% - 99.99% | High risk |  |
| 100% | Impaired/Default |  |

* This table represents an integral part of our 2022 Annual Consolidated Financial Statements.

### Credit risk mitigation

We seek to reduce our exposure to credit risk through a variety of means, including the structuring of transactions and the use of collateral.

#### Structuring of transactions

Specific credit policies and procedures set out the requirements for structuring transactions. Risk mitigants include the use of guarantees, collateral, seniority, LTV requirements and covenants. Product-specific guidelines set out appropriate product structuring as well as client and guarantor criteria.

#### Collateral

When we advance credit, we often require obligors to pledge collateral as security. The extent of risk mitigation provided by collateral depends on the amount, type and quality of the collateral taken. Specific requirements relating to collateral valuation and management are set out in our credit risk management policies.

The types of collateral used to secure credit or trading facilities within the bank are varied. For example, our securities financing and collateralized OTC derivatives activities are primarily secured by cash and highly-rated liquid government and agency securities. Wholesale lending to business clients is often secured by pledges of the assets of the business, such as accounts receivable, inventory, operating assets and commercial real estate. In Canadian Banking and Wealth Management, collateral typically consists of a pledge over a real estate property, or a portfolio of debt securities and equities trading on a recognized exchange.

- We employ a risk-based approach to property valuation. Property valuation methods include automated valuation models (AVM) and appraisals. An AVM is a tool that estimates the value of a property by reference to market data including sales of comparable properties and price trends specific to the Metropolitan Statistical Area in which the property being valued is located. Using a risk-based approach, we also employ appraisals which can include drive-by or full on-site appraisals.
- We continue to actively manage our entire mortgage portfolio and perform stress testing, based on a combination of increasing unemployment, rising interest rates and a downturn in real estate markets.
- We are compliant with regulatory requirements that govern residential mortgage underwriting practices, including LTV parameters and property valuation requirements.

There were no significant changes regarding our risk management policies on collateral or to the quality of the collateral held during the period.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

69

### **Credit risk approval**

The Board, GE, GRC and other senior management committees work together to ensure the ECRMF and supporting policies, processes and procedures exist to manage credit risk and approve related credit risk limits. Reports are provided to the Board, the GRC, and senior executives to keep them informed of our risk profile, including significant credit risk issues, shifts in exposures and trending information, to ensure appropriate and timely actions can be taken where necessary. Our enterprise-wide credit risk policies set out the minimum requirements for the management of credit risk in a variety of borrower, transactional and portfolio management contexts.

### **Transaction approval**

Credit transactions are governed by our RBC Enterprise Policy on Risk Limits and Risk Approval Authorities that captures the limits delegated to management and the credit rules policy, which outlines the minimum standards for managing credit risk at the individual client relationship and/or transaction level. The credit rules policy is further supported by business and/or product-specific policies and guidelines as appropriate. Transaction approvals are subject to delegated risk approval authorities. If a transaction exceeds senior management's authorities, the approval of the Risk Committee of the Board is required.

### **Product approval**

Proposals for credit products and services are comprehensively reviewed and approved under a risk assessment framework and are subject to risk approval authorities which increase as the level of risk increases. New and amended products must be reviewed relative to all risk drivers, including credit risk. All existing products must be reviewed following a risk-based assessment approach on a regular basis.

### **Credit risk limits**

- The allocation of risk appetite and Board delegated authorities are supported by the establishment of risk limits which take into account both regulatory constraints and internal risk management judgment. Risk limits are established at the following levels: single name limits, regional, country and industrial sector limits (notional and economic capital), regulatory large exposure limits, product and portfolio limits, and underwriting and distribution risk limits. These limits apply across all businesses, portfolios, transactions and products.
- We actively manage credit exposures and limits to ensure alignment with our risk appetite, to maintain our target business mix and to ensure that there is no undue concentration risk.
  - Concentration risk is defined as the risk arising from large exposures that are highly correlated such that their ability to meet contractual obligations could be similarly affected by changes in economic, political or other risk drivers.
  - Credit concentration limits are reviewed on a regular basis after taking into account business, economic, financial and regulatory environments.

### **Credit risk administration**

#### **Loan forbearance**

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

70

Royal Bank of Canada: Annual Report 2022

Management's Discussion and Analysis

## Credit risk exposure by portfolio, sector and geography

The following table presents our credit risk exposures under the Basel regulatory defined classes and reflects EAD. The classification of our sectors aligns with our view of credit risk by industry.

### Credit risk exposure by portfolio, sector and geography

Table 43

| (Millions of Canadian dollars) | October 31 2022 |  |  |  |  |  | October 31 2021 |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Credit risk (1), (2) |  |  | Counterparty credit risk (5) |  |  | Credit risk (1), (2) |  |  | Counterparty credit risk (5) |  |  |
|  | On-balance sheet amount | Off-balance sheet amount (3) |  | Repo-style transactions | Derivatives | Total exposure | On-balance sheet amount | Off-balance sheet amount (3) |  | Repo-style transactions | Derivatives | Total exposure |
|  |  | Undrawn | Other (4) |  |  |  |  | Undrawn | Other (4) |  |  |  |
| Retail |  |  |  |  |  |  |  |  |  |  |  |  |
| Residential secured (6) | $393,346 | $107,604 | $ - | $ - | $ - | $500,950 | $362,793 | $96,609 | $ - | $ - | $ - | $459,402 |
| Qualifying revolving (7) | 32,474 | 94,949 | - | - | - | 127,423 | 30,080 | 90,932 | - | - | - | 121,012 |
| Other retail | 98,070 | 19,993 | 136 | - | - | 118,199 | 85,362 | 19,422 | 146 | - | - | 104,930 |
| Total retail | $523,890 | $222,546 | $136 | $ - | $ - | $746,572 | $478,235 | $206,963 | $146 | $ - | $ - | $685,344 |
| Wholesale |  |  |  |  |  |  |  |  |  |  |  |  |
| Agriculture | $10,417 | $2,089 | $36 | $ - | $161 | $12,703 | $9,400 | $1,756 | $30 | $ - | $84 | $11,270 |
| Automotive | 8,919 | 9,184 | 317 | - | 1,606 | 20,026 | 6,288 | 9,184 | 173 | - | 1,124 | 16,769 |
| Banking (8) | 73,335 | 5,487 | 1,036 | 111,559 | 38,830 | 230,247 | 45,906 | 4,545 | 765 | 117,996 | 30,888 | 200,100 |
| Consumer discretionary | 19,666 | 9,297 | 569 | - | 949 | 30,481 | 14,792 | 9,380 | 573 | - | 698 | 25,443 |
| Consumer staples | 7,103 | 6,750 | 346 | - | 1,923 | 16,122 | 6,254 | 6,949 | 180 | - | 1,058 | 14,441 |
| Oil and gas | 6,086 | 11,272 | 1,923 | - | 5,959 | 25,240 | 5,678 | 10,328 | 1,474 | - | 7,493 | 24,973 |
| Financial services | 45,394 | 25,017 | 3,530 | 69,790 | 24,546 | 168,277 | 32,977 | 19,252 | 2,623 | 64,593 | 16,262 | 135,707 |
| Financing products (8) | 5,762 | 2,352 | 163 | 237 | 780 | 9,294 | 7,868 | 2,405 | 485 | 388 | 848 | 11,994 |
| Forest products | 1,143 | 1,033 | 230 | - | 78 | 2,484 | 969 | 991 | 201 | - | 17 | 2,178 |
| Governments (8) | 279,401 | 5,678 | 1,563 | 18,745 | 6,290 | 311,677 | 287,806 | 4,794 | 1,533 | 23,536 | 5,692 | 323,361 |
| Industrial products | 10,755 | 9,319 | 601 | - | 1,216 | 21,891 | 7,308 | 8,933 | 594 | - | 811 | 17,646 |
| Information technology | 5,291 | 7,144 | 298 | 55 | 1,908 | 14,696 | 3,591 | 5,715 | 237 | 49 | 5,447 | 15,039 |
| Investments | 23,764 | 3,946 | 669 | 157 | 458 | 28,994 | 22,238 | 3,201 | 412 | 12 | 174 | 26,037 |
| Mining and metals | 2,377 | 4,259 | 945 | - | 467 | 8,048 | 993 | 3,730 | 952 | - | 237 | 5,912 |
| Public works and infrastructure | 2,614 | 2,417 | 497 | - | 144 | 5,672 | 1,427 | 1,963 | 391 | - | 239 | 4,020 |
| Real estate and related | 89,926 | 18,295 | 1,872 | - | 818 | 110,911 | 76,141 | 14,223 | 1,568 | - | 1,176 | 93,108 |
| Other services | 27,839 | 13,425 | 2,848 | 33 | 852 | 44,997 | 23,872 | 13,362 | 1,860 | 47 | 1,316 | 40,457 |
| Telecommunication and media | 7,301 | 8,298 | 79 | - | 2,751 | 18,429 | 5,294 | 9,748 | 598 | - | 1,976 | 17,616 |
| Transportation | 6,394 | 6,386 | 930 | - | 2,069 | 15,779 | 6,151 | 6,832 | 1,319 | - | 1,426 | 15,728 |
| Utilities | 12,318 | 20,651 | 5,275 | - | 5,081 | 43,325 | 9,059 | 17,152 | 4,131 | - | 4,464 | 34,806 |
| Other sectors | 4,113 | 1,700 | 71 | 73 | 20,126 | 26,083 | 3,084 | 1,139 | 7 | 7 | 6,960 | 11,197 |
| Total wholesale | $649,918 | $173,999 | $23,798 | $200,649 | $117,012 | $1,165,376 | $577,096 | $155,582 | $20,106 | $206,628 | $88,390 | $1,047,802 |
| Total exposure (1) | $1,173,808 | $396,545 | $23,934 | $200,649 | $117,012 | $1,911,948 | $1,055,331 | $362,545 | $20,252 | $206,628 | $88,390 | $1,733,146 |
| By geography (9) |  |  |  |  |  |  |  |  |  |  |  |  |
| Canada | $697,015 | $284,705 | $9,444 | $79,795 | $41,923 | $1,112,882 | $693,700 | $264,708 | $9,141 | $88,523 | $27,978 | $1,084,050 |
| U.S. | 334,821 | 79,829 | 10,145 | 59,866 | 24,161 | 508,822 | 245,929 | 69,295 | 7,866 | 54,617 | 27,270 | 404,977 |
| Europe | 79,343 | 25,485 | 2,603 | 39,244 | 36,107 | 182,782 | 62,509 | 22,667 | 1,991 | 42,483 | 25,757 | 155,407 |
| Other International | 62,629 | 6,526 | 1,742 | 21,744 | 14,821 | 107,462 | 53,193 | 5,875 | 1,254 | 21,005 | 7,385 | 88,712 |
| Total exposure (1) | $1,173,808 | $396,545 | $23,934 | $200,649 | $117,012 | $1,911,948 | $1,055,331 | $362,545 | $20,252 | $206,628 | $88,390 | $1,733,146 |

(1) Excludes securitization, banking book equities and other assets not subject to the standardized or IRB approach as well as exposures acquired through the U.S. government Paycheck Protection Program.

(2) EAD for standardized exposures are reported net of allowance for impaired assets and EAD for IRB exposures are reported gross of all ACL and partial write-offs as per regulatory definitions.

(3) EAD for undrawn credit commitments and other off-balance sheet amounts are reported after the application of credit conversion factors.

(4) Includes other off-balance sheet exposures such as letters of credit and guarantees.

(5) Counterparty credit risk EAD reflects exposure amounts after netting. Collateral is included in EAD for repo-style transactions to the extent allowed by regulatory guidelines. Exchange traded derivatives are included in Other sectors.

(6) Includes residential mortgages and home equity lines of credit.

(7) Includes credit cards, unsecured lines of credit and overdraft protection products.

(8) Comparative amounts have been reclassified from those previously presented.

(9) Geographic profile is based on country of residence of the borrower.

### 2022 vs. 2021

Total credit risk exposure increased $179 billion or 10% from last year, primarily due to the impact of foreign exchange translation, volume growth in loans and undrawn commitments in our retail and wholesale portfolios, higher derivative exposures and an increase in securities.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

71

# Net International exposure by region and client type (1), (2)

# Table 44

| (Millions of Canadian dollars) | As at |  |  |  |  |  |  |  | October 31 2021 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | October 31 2022 |  |  |  |  |  |  | Total |  |
|  | Asset type |  |  |  | Client type |  |  |  |  |
|  | Loans Outstanding | Securities (3) | Repo-style transactions | Derivatives | Financials | Sovereign | Corporate |  |  |
| Europe (excluding U.K.) | $14,832 | $38,187 | $1,408 | $3,326 | $18,746 | $25,896 | $13,111 | $57,753 | $49,893 |
| U.K. | 8,332 | 26,926 | 597 | 4,094 | 17,374 | 14,198 | 8,377 | 39,949 | 34,075 |
| Caribbean (4) | 8,524 | 10,594 | 455 | 115 | 7,605 | 3,913 | 8,170 | 19,688 | 20,945 |
| Asia-Pacific | 6,817 | 26,031 | 941 | 1,549 | 11,017 | 19,392 | 4,929 | 35,338 | 27,871 |
| Other (4), (5) | 596 | 1,990 | 390 | 67 | 574 | 1,833 | 636 | 3,043 | 2,547 |
| Net International exposure (6), (7) | $39,101 | $103,728 | $3,791 | $9,151 | $55,316 | $65,232 | $35,223 | $155,771 | $135,331 |

(1) Geographic profile is based on country of risk, which reflects our assessment of the geographic risk associated with a given exposure. Typically, this is the residence of the borrower.
(2) Exposures are calculated on a fair value basis and net of collateral, which includes $357 billion against repo-style transactions (October 31, 2021 - $349 billion) and $14 billion against derivatives (October 31, 2021 - $11 billion).
(3) Securities include $13 billion of trading securities (October 31, 2021 - $22 billion), $56 billion of deposits (October 31, 2021 - $34 billion), and $35 billion of investment securities (October 31, 2021 - $33 billion).
(4) Exposures to Latin America, previously reported with Caribbean exposures, are now presented in Other. Comparative period amounts have been reclassified to conform to this presentation.
(5) Includes exposures in the Middle East, Africa, and Latin America.
(6) Excludes $5,213 million (October 31, 2021 - $3,076 million) of exposures to supranational agencies.
(7) Reflects $2,233 million of mitigation through credit default swaps, which are largely used to hedge single name exposures and market risk (October 31, 2021 - $1,499 million).

72 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

# **Residential mortgages and home equity lines of credit (insured vs. uninsured) $^{(1)}$**

Residential mortgages and home equity lines of credit are secured by residential properties. The following table presents a breakdown by geographic region.

# **Residential mortgages and home equity lines of credit**

**Table 45**

| (Millions of Canadian dollars, except percentage amounts) | As at October 31, 2022 |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  | Residential mortgages |  |  | Home equity lines of credit (3) |  |
|  | Insured (2) | Uninsured | Total | Total |  |
| Region (4) |  |  |  |  |  |
| Canada |  |  |  |  |  |
| Atlantic provinces | $8,460 46% | $10,052 54% | $18,512 | $1,659 |  |
| Quebec | 12,444 29 | 30,623 71 | 43,067 | 3,300 |  |
| Ontario | 31,409 17 | 156,700 83 | 188,109 | 17,009 |  |
| Alberta | 19,663 47 | 22,154 53 | 41,817 | 4,923 |  |
| Saskatchewan and Manitoba | 8,847 43 | 11,808 57 | 20,655 | 1,940 |  |
| B.C. and territories | 12,290 17 | 59,347 83 | 71,637 | 7,386 |  |
| Total Canada (5) | 93,113 24 | 290,684 76 | 383,797 | 36,217 |  |
| U.S. | - - | 31,956 100 | 31,956 | 1,776 |  |
| Other International | - - | 3,043 100 | 3,043 | 1,621 |  |
| Total International | - - | 34,999 100 | 34,999 | 3,397 |  |
| Total | $93,113 22% | $325,683 78% | $418,796 | $39,614 |  |

| (Millions of Canadian dollars, except percentage amounts) | As at October 31, 2021 |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  | Residential mortgages |  |  | Home equity lines of credit (3) |  |
|  | Insured (2) | Uninsured | Total | Total |  |
| Region (4) |  |  |  |  |  |
| Canada |  |  |  |  |  |
| Atlantic provinces | $8,407 48% | $8,944 52% | $17,351 | $1,602 |  |
| Quebec | 12,742 32 | 27,567 68 | 40,309 | 3,135 |  |
| Ontario | 34,211 20 | 135,767 80 | 169,978 | 15,891 |  |
| Alberta | 20,680 50 | 20,821 50 | 41,501 | 5,343 |  |
| Saskatchewan and Manitoba | 9,179 46 | 10,714 54 | 19,893 | 1,970 |  |
| B.C. and territories | 13,314 20 | 51,823 80 | 65,137 | 7,383 |  |
| Total Canada (5) | 98,533 28 | 255,636 72 | 354,169 | 35,324 |  |
| U.S. | 1 - | 23,422 100 | 23,423 | 1,413 |  |
| Other International | - - | 2,740 100 | 2,740 | 1,518 |  |
| Total International | 1 - | 26,162 100 | 26,163 | 2,931 |  |
| Total | $98,534 26% | $281,798 74% | $380,332 | $38,255 |  |

(1) Disclosure is provided in accordance with the requirements of OSFI's Guideline B-20 (Residential Mortgage Underwriting Practices and Procedures).

(2) Insured residential mortgages are mortgages whereby our exposure to default is mitigated by insurance through the Canadian Mortgage and Housing Corporation or other private mortgage default insurers.

(3) Includes $39,591 million and $23 million of uninsured and insured home equity lines of credit, respectively (October 31, 2021 - $38,228 million and $27 million, respectively), reported within the personal loan category. The amounts in the U.S. and Other International include term loans collateralized by residential mortgages.

(4) Region is based upon the address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick, and B.C. and territories are comprised of British Columbia, Nunavut, Northwest Territories and Yukon.

(5) Total consolidated residential mortgages in Canada of $384 billion (October 31, 2021 - $354 billion) includes $12 billion (October 31, 2021 - $11 billion) of mortgages with commercial clients in Canadian Banking, of which $9 billion (October 31, 2021 - $8 billion) are insured mortgages, and $17 billion (October 31, 2021 - $19 billion) of residential mortgages in Capital Markets, of which $17 billion (October 31, 2021 - $18 billion) are held for securitization purposes. All of the residential mortgages held for securitization purposes are insured (October 31, 2021 - all insured).

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

73

### Residential mortgages portfolio by amortization period (1)

The following table provides a summary of the percentage of residential mortgages that fall within the remaining amortization periods based upon current customer payment amounts, which incorporate payments larger than the minimum contractual amount and/or higher frequency of payments.

#### Residential mortgages portfolio by amortization period

Table 46

|  | As at |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | October 31 2022 |  |  | October 31 2021 |  |  |
|  | Canada | U.S. and other International | Total | Canada | U.S. and other International | Total |
| Amortization period |  |  |  |  |  |  |
| ≤ 25 years | 57% | 25% | 54% | 75% | 27% | 71% |
| > 25 years ≤ 30 years | 16 | 75 | 21 | 25 | 71 | 28 |
| > 30 years ≤ 35 years | 2 | - | 2 | - | 2 | 1 |
| > 35 years | 25 | - | 23 | - | - | - |
| Total | 100% | 100% | 100% | 100% | 100% | 100% |

(1) Disclosure is provided in accordance with the requirements of OSFI's Guideline B-20 (Residential Mortgage Underwriting Practices and Procedures).

### Average LTV ratios (1)

The following table provides a summary of our average LTV ratios for newly originated and acquired uninsured residential mortgages and RBC Homeline Plan® products by geographic region, as well as the respective LTV ratios for our total Canadian Banking residential mortgage portfolio outstanding.

#### Average LTV ratios

Table 47

|  | For the year ended |  |  |  |
| --- | --- | --- | --- | --- |
|  | October 31 2022 |  | October 31 2021 |  |
|  | Uninsured |  | Uninsured |  |
|  | Residential mortgages (2) | RBC Homeline Plan® products (3) | Residential mortgages (2) | RBC Homeline Plan® products (3) |
| Average of newly originated and acquired for the period, by region (4) |  |  |  |  |
| Atlantic provinces | 72% | 73% | 74% | 75% |
| Quebec | 72 | 72 | 72 | 74 |
| Ontario | 70 | 66 | 71 | 68 |
| Alberta | 73 | 73 | 73 | 72 |
| Saskatchewan and Manitoba | 73 | 75 | 74 | 75 |
| B.C. and territories | 68 | 66 | 69 | 67 |
| U.S. | 75 | n.m. | 74 | n.m. |
| Other International | 72 | n.m. | 73 | n.m. |
| Average of newly originated and acquired for the period (5), (6) | 71% | 68% | 72% | 69% |
| Total Canadian Banking residential mortgages portfolio (7) | 52% | 46% | 52% | 46% |

(1) Disclosure is provided in accordance with the requirements of OSFI's Guideline B-20 (Residential Mortgage Underwriting Practices and Procedures).

(2) Residential mortgages exclude residential mortgages within the RBC Homeline Plan® products.

(3) RBC Homeline Plan® products are comprised of both residential mortgages and home equity lines of credit.

(4) Region is based upon address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick, and B.C. and territories are comprised of British Columbia, Nunavut, Northwest Territories and Yukon.

(5) The average LTV ratio for newly originated and acquired uninsured residential mortgages and RBC Homeline Plan® products is calculated on a weighted basis by mortgage amounts at origination.

(6) For newly originated mortgages and RBC Homeline Plan® products, LTV is calculated based on the total facility amount for the residential mortgage and RBC Homeline Plan® product divided by the value of the related residential property.

(7) Weighted by mortgage balances and adjusted for property values based on the Teranet - National Bank National Composite House Price Index.

n.m. not meaningful

74

Royal Bank of Canada: Annual Report 2022

Management's Discussion and Analysis

## Credit quality performance

The following credit quality performance tables and analysis provide information on loans, which represents loans, acceptances and commitments, and other financial assets.

| Gross impaired loans (GIL) |  | Table 48 |
| --- | --- | --- |
|  |  | As at and for the year ended |
|  |  | October 31 2022 |
|  |  | October 31 2021 |
| (Millions of Canadian dollars, except percentage amounts) |  |  |
| Personal & Commercial Banking | $1,362 | $1,590 |
| Wealth Management | 278 | 233 |
| Capital Markets | 559 | 485 |
| Total GIL | $2,199 | $2,308 |
| Impaired loans, beginning balance | $2,308 | $3,195 |
| Classified as impaired during the period (new impaired) (1) | 1,711 | 1,726 |
| Net repayments (1) | (450) | (721) |
| Amounts written off | (1,149) | (1,169) |
| Other (2) | (221) | (723) |
| Impaired loans, balance at end of period | $2,199 | $2,308 |
| GIL as a % of related loans and acceptances |  |  |
| Total GIL as a % of related loans and acceptances | 0.26% | 0.31% |
| Personal & Commercial Banking | 0.23% | 0.30% |
| Canadian Banking | 0.18% | 0.24% |
| Caribbean Banking | 3.93% | 4.65% |
| Wealth Management | 0.25% | 0.26% |
| Capital Markets | 0.42% | 0.45% |

(1) Certain GIL movements for Canadian Banking retail and wholesale portfolios are generally allocated to new impaired, as Net repayments and certain Other movements are not reasonably determinable. Certain GIL movements for Caribbean Banking retail and wholesale portfolios are generally allocated to Net repayments and new impaired, as Net repayments and certain Other movements are not reasonably determinable.
(2) Includes return to performing status during the period, recoveries of loans and advances previously written off, sold, and foreign exchange translation and other movements.

## 2022 vs. 2021

Total GIL of $2,199 million decreased $109 million or 5% from last year and the total GIL ratio of 26 bps decreased 5 bps, due to lower impaired loans in Personal & Commercial Banking, partially offset by higher impaired loans in Capital Markets and Wealth Management.

GIL in Personal & Commercial Banking decreased $228 million or 14%, mainly due to lower impaired loans in our Canadian Banking commercial portfolios, largely in the real estate and related and other services sectors. Lower impaired loans in our Canadian Banking residential mortgages portfolios also contributed to the decrease.

GIL in Wealth Management increased $45 million or 19%, largely due to higher impaired loans in U.S. Wealth Management (including City National), mainly in the consumer discretionary sector, partially offset by repayments in International Wealth Management in the investment sector.

GIL in Capital Markets increased $74 million or 15%, largely due to higher impaired loans in the real estate and related and consumer staples sectors, partially offset by lower impaired loans in a few sectors, including the transportation sector.

| Allowance for credit losses |  | Table 49 |
| --- | --- | --- |
|  |  | As at |
|  |  | October 31 2022 |
|  |  | October 31 2021 |
| (Millions of Canadian dollars) |  |  |
| Personal & Commercial Banking | $3,200 | $3,478 |
| Wealth Management | 382 | 320 |
| Capital Markets | 597 | 620 |
| Corporate Support and other (1) | 2 | 1 |
| ACL on loans | 4,181 | 4,419 |
| ACL on other financial assets (2) | 33 | 52 |
| Total ACL | $4,214 | $4,471 |
| ACL on loans is comprised of: |  |  |
| Retail | $2,285 | $2,287 |
| Wholesale | 1,227 | 1,435 |
| ACL on performing loans | $3,512 | $3,722 |
| ACL on impaired loans | 669 | 697 |

(1) Includes PCL recorded in Corporate Support, Insurance and Investor & Treasury Services.

(2) ACL on other financial assets mainly represents allowances on debt securities measured at FVOCI and amortized cost, accounts receivable and financial guarantees.

## 2022 vs. 2021

Total ACL of $4,214 million decreased $257 million or 6% from last year, primarily reflecting a decrease of $238 million in ACL on loans.

ACL on performing loans of $3,512 million decreased $210 million or 6%, primarily due to lower ACL in Personal & Commercial Banking, reflecting the recovery from the COVID-19 pandemic, partially offset by unfavourable changes in our macroeconomic outlook in the current year.

ACL on impaired loans of $669 million decreased $28 million or 4%, due to lower ACL in Capital Markets and Personal & Commercial Banking, partially offset by higher ACL in Wealth Management.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

75

## Market risk

Market risk is defined to be the impact of market prices upon our financial condition. This includes potential gains or losses due to changes in market determined variables such as interest rates, credit spreads, equity prices, commodity prices, foreign exchange rates and implied volatilities.

The measures of financial condition impacted by market risk are as follows:

1. Positions whose revaluation gains and losses are reported in revenue, which includes:
   a) Changes in the fair value of instruments classified or designated as FVTPL, and
   b) Hedge ineffectiveness.
2. CET1 capital, which includes:
   a) All of the above, plus
   b) Changes in the fair value of FVOCI securities where revaluation gains and losses are reported as OCI,
   c) Changes in the Canadian dollar value of investments in foreign subsidiaries, net of hedges, due to foreign exchange translation, and
   d) Changes in the fair value of employee benefit plan deficits.
3. CET1 ratio, which includes:
   a) All of the above, plus
   b) Changes in RWA resulting from changes in traded market risk factors, and
   c) Changes in the Canadian dollar value of RWA due to foreign exchange translation.
4. The economic value of the Bank, which includes:
   a) Points 1 and 2 above, plus
   b) Changes in the economic value of other non-trading positions, net interest income, and fee based income, as a result of changes in market risk factors.

### Market risk controls - FVTPL positions

As an element of the ERAF, the Board approves our overall market risk constraints. GRM creates and manages the control structure for FVTPL positions which ensures that business is conducted on a basis consistent with Board requirements. The Market and Counterparty Credit Risk function within GRM is responsible for creating and managing the controls and governance procedures that ensure that risk taken is consistent with risk appetite constraints set by the Board. These controls include limits on probabilistic measures of potential loss such as Value-at-Risk, Stressed Value-at-Risk, Incremental Risk Charge and stress tests as defined below:

**Value-at-Risk (VaR)** is a statistical measure of potential loss for a financial portfolio computed at a given level of confidence and over a defined holding period. We measure VaR at the 99th percentile confidence level for price movements over a one-day holding period using historic simulation of the last two years of equally weighted historic market data. These calculations are updated daily with current risk positions, with the exception of certain less material positions that are not actively traded and are updated on at least a monthly basis.

**Stressed Value-at-Risk (SVaR)** is calculated in an identical manner as VaR with the exception that it is computed using a fixed historical one-year period of extreme volatility and its inverse rather than the most recent two-year history. The stress period used is a one-year period covering the market volatility observed during Q2 2020. SVaR is calculated daily for all portfolios, with the exception of certain less material positions that are not actively traded and are updated on at least a monthly basis.

VaR and SVaR are statistical estimates based on historical market data and should be interpreted with knowledge of their limitations, which include the following:

- VaR and SVaR will not be predictive of future losses if the realized market movements differ significantly from the historical periods used to compute them.
- VaR and SVaR project potential losses over a one-day holding period and do not project potential losses for risk positions held over longer time periods.
- VaR and SVaR are measured using positions at close of business and do not include the impact of trading and hedging activity over the course of a day.

We validate our VaR and SVaR measures through a variety of means - including subjecting the models to vetting and validation by a group independent of the model developers and by back-testing the VaR against daily marked-to-market revenue to identify and examine events in which actual outcomes in trading revenue exceed the VaR projections.

**Incremental Risk Charge (IRC)** captures the risk of losses under default or rating changes for issuers of certain traded fixed income instruments. IRC is measured over a one year horizon at a 99.9% confidence level, and captures different liquidity horizons for instruments and concentrations in issuers under a constant level of risk assumption. Changes in measured risk levels are primarily associated with changes in inventory from the applicable fixed income trading portfolios.

**Stress tests** - Our market risk stress testing program is used to identify and control risk due to large changes in market prices and rates. We conduct stress testing daily on positions that are marked-to-market. The stress tests simulate both historical and hypothetical events which are severe and long-term in duration. Historical scenarios are taken from actual market events and range in duration up to 90 days. Examples include the COVID-19 Pandemic of 2020, Global Financial Crisis of 2008 and the Taper Tantrum of 2013. Hypothetical scenarios are designed to be forward-looking at potential future market stresses, and are designed to be severe but plausible. We are constantly evaluating and refining these scenarios as market conditions change. Stress results are calculated assuming an instantaneous revaluation of our positions with no management action.

76 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

These measures are computed on all positions that are FVTPL for financial reporting purposes, with the exception of those in a designated hedging relationship and those in our insurance businesses.

## Market risk measures - FVTPL positions

| Market risk measures* | October 31, 2022 |  |  |  | October 31, 2021 |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | For the year ended |  |  |  | For the year ended |  |  |  |
|  | As at | Average | High | Low | As at | Average | High | Low |
| (Millions of Canadian dollars) |  |  |  |  |  |  |  |  |
| Equity | $45 | $34 | $51 | $21 | $24 | $20 | $38 | $12 |
| Foreign exchange | 3 | 4 | 7 | 1 | 4 | 4 | 6 | 2 |
| Commodities | 6 | 5 | 6 | 3 | 3 | 3 | 4 | 2 |
| Interest rate (1) | 47 | 34 | 62 | 17 | 61 | 44 | 64 | 21 |
| Credit specific (2) | 5 | 7 | 10 | 4 | 9 | 8 | 11 | 6 |
| Diversification (3) | (47) | (31) | n.m. | n.m. | (51) | (35) | n.m. | n.m. |
| Market risk VaR (4) | $59 | $53 | $87 | $34 | $50 | $44 | $72 | $23 |
| Market risk Stressed VaR (4) | $192 | $103 | $226 | $47 | $59 | $53 | $101 | $29 |

\* This table represents an integral part of our 2022 Annual Consolidated Financial Statements.

(1) General credit spread risk and funding spread risk associated with uncollateralized derivatives are included under interest rate VaR.

(2) Credit specific risk captures issuer-specific credit spread volatility.

(3) Market risk VaR is less than the sum of the individual risk factor VaR results due to risk factor diversification.

(4) The average market risk VaR and average SVaR for the year ended October 31, 2022 includes $11 million and $36 million, respectively (October 31, 2021 - $13 million and $15 million), related to loan underwriting commitments.

n.m. not meaningful

### 2022 vs. 2021

Average market risk VaR of $53 million increased $9 million from last year. This was driven by the impact of heightened market volatility this year on our equity derivatives portfolio, partially offset by the impact of the Q2 2020 period of significant market volatility no longer being reflected in our two-year historical VaR period.

Average SVaR of $103 million increased $50 million, largely driven by unfavourable market conditions this year which impacted loan underwriting commitments, and increased exposures in our fixed income portfolios.

The following chart displays a bar graph of our daily trading profit and loss and a line graph of our daily market risk VaR. We incurred 4 days of net trading losses in 2022.

![img-0.jpeg](img-0.jpeg)

(1) Trading revenue (teb) amounts in the chart above have been revised from those previously presented.

(2) Trading revenue (teb) amounts in the chart above exclude the impact of loan underwriting commitments.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

77

The following chart displays the distribution of daily trading profit and loss in 2022 and 2021 with 4 days of net trading losses in 2022 as mentioned above and no net trading losses in 2021. The largest reported profit was $54 million with an average daily profit of $16 million.

#### Trading revenue (teb), (1) (2)

![img-1.jpeg](img-1.jpeg)

(1) Amounts have been revised from those previously presented.

(2) Trading revenue (teb) amounts in the chart above exclude the impact of loan underwriting commitments.

#### Market risk measures for assets and liabilities of RBC Insurance®

We offer a range of insurance products to clients and hold investments to meet the future obligations to policyholders. The investments which support actuarial liabilities are predominantly fixed income assets designated as FVTPL. Consequently, changes in the fair values of these assets are recorded in the Consolidated Statements of Income and are largely offset by changes in the fair value of the actuarial liabilities, the impact of which is reflected in PBCAE. As at October 31, 2022, we held assets in support of approximately $12 billion of liabilities with respect to insurance obligations (October 31, 2021 - $13 billion).

#### Market risk controls - Interest Rate Risk in the Banking Book (IRRBB) positions$^{1}$

IRRBB arises primarily from traditional customer-originated banking products such as deposits and loans, and includes related hedges and interest rate risk from securities held for liquidity management purposes. Factors contributing to IRRBB include mismatches between asset and liability repricing dates, relative changes in asset and liability rates in response to market rate scenarios, and other product features affecting the expected timing of cash flows, such as options to pre-pay loans or redeem term deposits prior to contractual maturity. IRRBB sensitivities are regularly measured and reported, and subject to limits and controls with independent oversight from GRM.

The Board approves the risk appetite for IRRBB, and the Asset-Liability Committee (ALCO) and GRM provide ongoing governance through IRRBB risk policies, limits, operating standards and other controls. IRRBB reports are reviewed regularly by GRM, ALCO, the GRC, the Risk Committee of the Board and the Board.

#### IRRBB measurement

To monitor and control IRRBB, we assess two primary metrics, Net Interest Income (NII) risk and Economic Value of Equity (EVE) risk, under a range of market shocks, scenarios, and time horizons. Market scenarios include currency-specific parallel and non-parallel yield curve changes, interest rate volatility shocks, and interest rate scenarios prescribed by regulators.

In measuring NII risk, detailed banking book balance sheets and income statements are dynamically simulated to estimate the impact of market stress scenarios on projected NII. Assets, liabilities and off-balance sheet positions are simulated over various time horizons. The simulations incorporate maturities, renewals, and new originations along with prepayment and redemption behaviour. Product pricing and volumes are forecasted based on past experience to determine response expectations for a given market shock scenario. EVE risk captures the market value sensitivity to changes in rates. In measuring EVE risk, deterministic (single-scenario) and stochastic (multiple-scenario) valuation techniques are applied to spot position data. NII and EVE risks are measured for a range of market risk stress scenarios which include extreme but plausible changes in market rates and volatilities. IRRBB measures assume continuation of existing hedge strategies.

Management of NII and EVE risk is complementary and supports our efforts to generate a sustainable high-quality NII stream. NII and EVE risks for specific units are measured daily, weekly or monthly depending on materiality, complexity and hedge strategy.

A number of assumptions affecting cash flows, product re-pricing and the administration of rates underlie the models used to measure NII and EVE risk. The key assumptions pertain to the projected funding date of mortgage rate commitments, fixed-rate loan prepayment behaviour, term deposit redemption behaviour, and the term and rate profile of non-maturity deposits. All assumptions are derived empirically based on historical client behaviour and product pricing with consideration of possible forward-looking changes. All models and assumptions used to measure IRRBB are subject to independent oversight by GRM.

#### Market risk measures - IRRBB Sensitivities

The following table shows the potential before-tax impact of an immediate and sustained 100 bps increase or decrease in interest rates on projected 12-month NII and EVE, assuming no subsequent hedging. Rate floors are applied within the declining rate scenarios to prevent EVE valuation and NII simulation market rate levels from falling below a minimum average level of negative 25 bps across major currencies. Interest rate risk measures are based on current on and off-balance sheet positions which can change over time in response to business activity and management actions.

$^{1}$ IRRBB positions include the impact of derivatives in hedge accounting relationships and FVOCI securities used for interest rate risk management.

78 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

Market risk - IRRBB measures\*

Table 51

| (Millions of Canadian dollars) | October 31 2022 |  |  |  |  |  | October 31 2021 |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | EVE risk |  |  | NII risk (1) |  |  | EVE risk | NII risk (1) |
|  | Canadian dollar impact | U.S. dollar impact | Total | Canadian dollar impact | U.S. dollar impact | Total |  |  |
| Before-tax impact of: |  |  |  |  |  |  |  |  |
| 100 bps increase in rates | $(1,332) | $(568) | $(1,900) | $547 | $234 | $781 | $(2,009) | $929 |
| 100 bps decrease in rates | 1,269 | 440 | 1,709 | (598) | (241) | (839) | 1,537 | (921) |

\* This table represents an integral part of our 2022 Annual Consolidated Financial Statements.

(1) Represents the 12-month NII exposure to an instantaneous and sustained shift in interest rates.

As at October 31, 2022, an immediate and sustained -100 bps shock would have had a negative impact to our NII of $839 million, down from $921 million last year, and an immediate and sustained +100 bps shock would have had a negative impact to our EVE of $1,900 million, down from $2,009 million last year. Both the year-over-year change in NII and EVE sensitivity reflect additional hedging activity. The impact of hedging activity on the EVE sensitivity was more than offset by the impact of a higher rate environment. During 2022, NII and EVE risks remained within approved limits.

## Market risk measures for other material non-trading portfolios

### Investment securities carried at FVOCI

We held $93 billion of investment securities carried at FVOCI as at October 31, 2022, compared to $78 billion at the end of the prior year. We hold debt securities carried at FVOCI primarily as investments, as well as to manage liquidity risk and hedge interest rate risk in our non-trading banking balance sheet. As at October 31, 2022, our portfolio of investment securities carried at FVOCI is interest rate sensitive and would impact OCI by a pre-tax change in value of $6 million as measured by the change in the value of the securities for a one basis point parallel increase in yields. The portfolio also exposes us to credit spread risk of a pre-tax change in value of $16 million, as measured by the change in value for a one basis point widening of credit spreads. The value of the investment securities carried at FVOCI included in our IRRBB measures as at October 31, 2022 was $90 billion. Our investment securities carried at FVOCI also include equity exposures of $1 billion as at October 31, 2022, compared to $1 billion at the end of the prior year.

### Non-trading foreign exchange rate risk

Foreign exchange rate risk is the potential adverse impact on earnings and economic value due to changes in foreign currency rates. Our revenue, expenses and income denominated in currencies other than the Canadian dollar are subject to fluctuations as a result of changes in the value of the average Canadian dollar relative to the average value of those currencies. Our most significant exposure is to the U.S. dollar, due to our operations in the U.S. and other activities conducted in U.S. dollars. Other significant exposures are to the British pound and the Euro, due to our activities conducted internationally in these currencies. A strengthening or weakening of the Canadian dollar compared to the U.S. dollar, British pound and the Euro could reduce or increase, as applicable, the translated value of our foreign currency denominated revenue, expenses and earnings and could have a significant effect on the results of our operations. We are also exposed to foreign exchange rate risk arising from our investments in foreign operations. For unhedged equity investments, when the Canadian dollar appreciates against other currencies, the unrealized translation losses on net foreign investments decreases our shareholders' equity through the other components of equity and decreases the translated value of the RWA of the foreign currency-denominated asset. The reverse is true when the Canadian dollar depreciates against other currencies. Consequently, we consider these impacts in selecting an appropriate level of our investments in foreign operations to be hedged.

### Derivatives related to non-trading activity

Derivatives are also used to hedge market risk exposure unrelated to our trading activity. Hedge accounting is elected where applicable. These derivatives are included in our IRRBB measures and other internal non-trading market risk measures. We use interest rate swaps to manage our IRRBB, funding and investment activities. Interest rate swaps are also used to hedge changes in the fair value of certain fixed-rate instruments. We also use foreign exchange derivatives to manage our exposure to equity investments in subsidiaries that are denominated in foreign currencies, particularly the U.S. dollar, British Pound, and Euro.

For further details on the application of hedge accounting and the use of derivatives for hedging activities, refer to Notes 2 and 9 of our 2022 Annual Consolidated Financial Statements.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

79

### Linkage of market risk to selected balance sheet items

The following tables provide the linkages between selected balance sheet items with positions included in our trading market risk and non-trading market risk disclosures, which illustrates how we manage market risk for our assets and liabilities through different risk measures:

| Linkage of market risk to selected balance sheet items |  |  |  | Table 52 |
| --- | --- | --- | --- | --- |
| (Millions of Canadian dollars) | As at October 31, 2022 |  |  |  |
|  | Balance sheet amount | Market risk measure |  | Non-traded risk primary risk sensitivity |
|  |  | Traded risk (1) | Non-traded risk (2) |  |
| Assets subject to market risk |  |  |  |  |
| Cash and due from banks | $72,397 | $ - | $72,397 | Interest rate |
| Interest-bearing deposits with banks | 108,011 | 84,468 | 23,543 | Interest rate |
| Securities |  |  |  |  |
| Trading | 148,205 | 137,293 | 10,912 | Interest rate, credit spread |
| Investment, net of applicable allowance | 170,018 | - | 170,018 | Interest rate, credit spread, equity |
| Assets purchased under reverse repurchase agreements and securities borrowed | 317,845 | 264,665 | 53,180 | Interest rate |
| Loans |  |  |  |  |
| Retail | 549,751 | 6,128 | 543,623 | Interest rate |
| Wholesale | 273,967 | 8,558 | 265,409 | Interest rate |
| Allowance for loan losses | (3,753) | - | (3,753) | Interest rate |
| Segregated fund net assets | 2,638 | - | 2,638 | Interest rate |
| Other |  |  |  |  |
| Derivatives | 154,439 | 151,244 | 3,195 | Interest rate, foreign exchange |
| Other assets | 109,629 | 8,826 | 100,803 | Interest rate |
| Assets not subject to market risk (3) | 14,072 |  |  |  |
| Total assets | $1,917,219 | $661,182 | $1,241,965 |  |
| Liabilities subject to market risk |  |  |  |  |
| Deposits | $1,208,814 | $141,319 | $1,067,495 | Interest rate |
| Segregated fund liabilities | 2,638 | - | 2,638 | Interest rate |
| Other |  |  |  |  |
| Obligations related to securities sold short | 35,511 | 35,511 | - |  |
| Obligations related to assets sold under repurchase agreements and securities loaned | 273,947 | 248,712 | 25,235 | Interest rate |
| Derivatives | 153,491 | 139,406 | 14,085 | Interest rate, foreign exchange |
| Other liabilities | 102,881 | 10,594 | 92,287 | Interest rate |
| Subordinated debentures | 10,025 | - | 10,025 | Interest rate |
| Liabilities not subject to market risk (4) | 21,737 |  |  |  |
| Total liabilities | $1,809,044 | $575,542 | $1,211,765 |  |
| Total equity | 108,175 |  |  |  |
| Total liabilities and equity | $1,917,219 |  |  |  |

(1) Traded risk includes positions that are classified or designated as FVTPL and positions whose revaluation gains and losses are reported in revenue. Market risk measures of VaR, SVaR, IRC and stress tests are used as risk controls for traded risk.

(2) Non-traded risk includes positions used in the management of IRRBB and other non-trading portfolios. Other material non-trading portfolios include positions from RBC Insurance® and investment securities, net of applicable allowance, not included in IRRBB.

(3) Assets not subject to market risk include physical and other assets.

(4) Liabilities not subject to market risk include payroll related and other liabilities.

80

Royal Bank of Canada: Annual Report 2022

Management's Discussion and Analysis

| (Millions of Canadian dollars) | As at October 31, 2021 |  |  |  |
| --- | --- | --- | --- | --- |
|  | Market risk measure |  |  | Non-traded risk primary risk sensitivity |
|  | Balance sheet amount | Traded risk (1) | Non-traded risk (2) |  |
| Assets subject to market risk |  |  |  |  |
| Cash and due from banks | $113,846 | $ - | $113,846 | Interest rate |
| Interest-bearing deposits with banks | 79,638 | 56,896 | 22,742 | Interest rate |
| Securities |  |  |  |  |
| Trading | 139,240 | 127,259 | 11,981 | Interest rate, credit spread |
| Investment, net of applicable allowance | 145,484 | - | 145,484 | Interest rate, credit spread, equity |
| Assets purchased under reverse repurchase agreements and securities borrowed | 307,903 | 265,011 | 42,892 | Interest rate |
| Loans |  |  |  |  |
| Retail | 503,598 | 9,231 | 494,367 | Interest rate |
| Wholesale | 218,066 | 9,685 | 208,381 | Interest rate |
| Allowance for loan losses | (4,089) | - | (4,089) | Interest rate |
| Segregated fund net assets | 2,666 | - | 2,666 | Interest rate |
| Other |  |  |  |  |
| Derivatives | 95,541 | 92,829 | 2,712 | Interest rate, foreign exchange |
| Other assets | 92,157 | 8,615 | 83,542 | Interest rate |
| Assets not subject to market risk (3) | 12,273 |  |  |  |
| Total assets | $1,706,323 | $569,526 | $1,124,524 |  |
| Liabilities subject to market risk |  |  |  |  |
| Deposits | $1,100,831 | $136,927 | $963,904 | Interest rate |
| Segregated fund liabilities | 2,666 | - | 2,666 | Interest rate |
| Other |  |  |  |  |
| Obligations related to securities sold short | 37,841 | 37,841 | - |  |
| Obligations related to assets sold under repurchase agreements and securities loaned | 262,201 | 236,146 | 26,055 | Interest rate |
| Derivatives | 91,439 | 89,290 | 2,149 | Interest rate, foreign exchange |
| Other liabilities | 87,084 | 8,528 | 78,556 | Interest rate |
| Subordinated debentures | 9,593 | - | 9,593 | Interest rate |
| Liabilities not subject to market risk (4) | 15,906 |  |  |  |
| Total liabilities | $1,607,561 | $508,732 | $1,082,923 |  |
| Total equity | 98,762 |  |  |  |
| Total liabilities and equity | $1,706,323 |  |  |  |

(1) Traded risk includes positions that are classified or designated as FVTPL and positions whose revaluation gains and losses are reported in revenue. Market risk measures of VaR, SVaR, IRC and stress tests are used as risk controls for traded risk.

(2) Non-traded risk includes positions used in the management of IRRBB and other non-trading portfolios. Other material non-trading portfolios include positions from RBC Insurance® and investment securities, net of applicable allowance, not included in IRRBB.

(3) Assets not subject to market risk include physical and other assets.

(4) Liabilities not subject to market risk include payroll related and other liabilities.

## Liquidity and funding risk

Liquidity and funding risk (liquidity risk) is the risk that we may be unable to generate sufficient cash or its equivalents in a timely and cost-effective manner to meet our commitments. Liquidity risk arises from mismatches in the timing and value of on-balance sheet and off-balance sheet cash flows.

Our liquidity profile is structured to ensure that we have sufficient liquidity to satisfy current and prospective commitments in both normal and stressed conditions. To achieve this goal, we operate under a comprehensive Liquidity Risk Management Framework (LRMF) and Pledging Policy. We also employ several liquidity risk mitigation strategies that include:

- Achieving an appropriate balance between the level of exposure allowed under our risk appetite and the cost of risk mitigation;
- Maintaining broad funding access, including preserving and promoting a reliable base of core client deposits and ongoing access to diversified wholesale funding sources;
- A comprehensive liquidity stress testing program, contingency, recovery and resolution planning and status monitoring to ensure sufficiency of unencumbered marketable securities and demonstrated capacity to monetize specific asset classes;
- Governance of pledging activity through limits and liquid asset buffers for potential pledging activity;
- Timely and granular risk measurement information;
- Transparent liquidity transfer pricing and cost allocation; and
- Our three lines of defense governance model.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

81

### Risk control

Our liquidity risk objectives, policies, models and methodologies are reviewed regularly, and are updated to reflect changing market conditions and business mix. This includes aligning with local regulatory developments. We continue to maintain liquidity and funding that is appropriate for the execution of our strategy. Liquidity risk remains well within our risk appetite.

The Board annually approves the enterprise liquidity risk appetite recommended by the Risk Committee of the Board. The Risk Committee of the Board reviews and recommends the liquidity risk appetite and approves the LRMF. The Board, the Risk Committee of the Board, the GRC and the ALCO regularly review reporting on our consolidated liquidity position. The GRC, the Policy Review Committee (PRC) and/or the ALCO also review liquidity documents prepared for the Board or its committees.

- The PRC approves the Liquidity Risk Policy, which establishes minimum risk control elements in accordance with the Board-approved risk appetite and the LRMF, and the Pledging Policy, which outlines the requirements and authorities for the management of our pledging activities.
- The ALCO annually approves the Enterprise Liquidity Contingency Plan (ELCP) and provides strategic direction and oversight to Corporate Treasury, other functions, and business segments on the management of liquidity.

These policies are supported by operational, desk and product-level policies that implement risk control elements, such as parameters, methodologies, management limits and authorities that govern the measurement and management of liquidity. Stress testing is also employed to assess the robustness of the control framework and inform liquidity contingency plans.

### Risk measurement

Liquidity risk is measured by applying scenario-specific assumptions against our assets and liabilities and off-balance sheet commitments to derive expected cash flow profiles over varying time horizons. For example, government bonds generally can be quickly and easily converted to cash without significant loss of value regardless of their contractual maturity. Similarly, while relationship-based deposits contractually can be withdrawn immediately, in practice, these balances can be relatively stable sources of funding depending on several factors, such as the nature of the client and their intended use. Risk methodologies and underlying assumptions are periodically reviewed and validated to ensure their alignment with our operating environment, expected economic and market conditions, rating agency preferences, regulatory requirements and generally accepted industry practices.

To manage liquidity risk within our liquidity risk appetite, we set limits on various metrics reflecting a range of time horizons and severity of stress conditions and develop contingency, recovery and resolution plans. Our liquidity risk measurement and control activities are divided into three categories as follows:

#### Structural (longer-term) liquidity risk

To guide our secured and unsecured wholesale term funding activities, we employ both internal and regulatory metrics to manage and control the structural alignment between long-term illiquid assets and longer-term funding sourced from wholesale investors and core relationship deposits.

#### Tactical (shorter-term) liquidity risk

To address potential immediate cash flow risks in times of stress, we use short-term net cash flow limits to control risk of material units, subsidiaries and currencies, and perform stress testing assessments. Net cash flow positions are determined by applying internally-derived risk assumptions and parameters to known and anticipated cash flows for all material unencumbered assets, liabilities and off-balance sheet activities. Encumbered assets are not considered a source of available liquidity. We also control tactical liquidity by adhering to relevant regulatory standards, such as LCR.

#### Contingency liquidity risk

Contingency liquidity risk planning assesses the impact of sudden stress events and our planned responses. Our ELCP, maintained and administered by Corporate Treasury, has been developed to guide our potential responses to liquidity crises. Under leadership of Corporate Treasury, both enterprise and regional Liquidity Crisis Teams (LCT) meet regularly to assess our liquidity status, approve the ELCP, and in times of stress provide valuable linkages to front line and risk functions to support the crisis management process. LCT's include members from key business segments, GRM, Finance, Operations, and Communications with relevant subject matter expertise.

Our stress tests, which include elements of scenario and sensitivity analyses, measure our prospective exposure to systemic and RBC-specific events over a period of several weeks. Different levels of severity are considered for each type of crisis with some scenarios reflecting multiple-downgrades to our credit ratings.

The contingency liquidity risk planning process identifies contingent funding needs (e.g., draws on committed credit and liquidity lines, demands for more collateral and deposit run-off) and sources (e.g., contingent liquid asset sales and incremental wholesale funding capacity) under various stress scenarios, and as a result, informs requirements for our earmarked unencumbered liquid asset portfolios.

Our unencumbered liquid asset portfolios consist of diversified, highly rated and liquid marketable securities, overnight government reverse repos and deposits with central banks. These portfolios are subject to minimum asset quality levels and, as appropriate, other eligibility guidelines (e.g., maturity, diversification and eligibility for central bank advances) to maximize ready access to additional cash should it be required. These securities, when added to other unencumbered liquid assets that we hold as a result of capital markets or other activities, contribute to our liquidity reserve, and are reflected in the asset encumbrance disclosures shown below.

82 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

## Liquidity reserve and asset encumbrance

The following tables provide summaries of our liquidity reserve and asset encumbrance. In both tables, unencumbered assets represent, to varying degrees, a ready source of funding. Unencumbered assets are the difference between total and encumbered assets from both on- and off-balance sheet sources. The encumbered assets include: (i) bank-owned liquid assets that are either pledged as collateral (e.g., repo financing and derivative pledging) or not freely available due to regulatory or internal policy requirements (e.g., earmarked to satisfy mandatory reserve or regional capital adequacy requirements and to maintain continuous access to payment and settlement systems); (ii) securities received as collateral from securities financing and derivative transactions which have either been re-hypothecated where permissible (e.g., to obtain financing through repos or to cover securities sold short) or have no liquidity value since re-hypothecation is prohibited; and (iii) illiquid assets that have been securitized and sold into the market or that have been pledged as collateral in support of structured term funding vehicles. As per our liquidity management framework and practice, encumbered assets are not considered a source of liquidity.

### Liquidity reserve

Our liquidity reserve consists of available unencumbered liquid assets. Although unused wholesale funding capacity, which is regularly assessed, could be another potential source of liquidity to mitigate stressed conditions, it is excluded in the determination of the liquidity reserve. Similarly, uncommitted and undrawn central bank borrowing facilities that could be accessed subject to satisfying certain preconditions as set by various central banks (e.g., BoC, the Fed, Bank of England, and Bank of France), as well as amounts that qualify as eligible collateral at the Federal Reserve Bank of New York (FRBNY) and Federal Home Loan Bank (FHLB) are also excluded from the determination of the liquidity reserve.

| Liquidity reserve |  | Table 53 |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  | As at October 31, 2022 |  |  |  |
|  |  | Bank-owned liquid assets | Securities received as collateral from securities financing and derivative transactions | Total liquid assets | Encumbered liquid assets |
| (Millions of Canadian dollars) |  |  |  |  |  |
| Cash and deposits with banks | $ | 180,408 | $ - | $180,408 | $3,601 |
| Securities issued or guaranteed by sovereigns, central banks or multilateral development banks (1) |  | 246,916 | 326,089 | 573,005 | 373,893 |
| Other securities |  | 110,057 | 119,129 | 229,186 | 135,349 |
| Other liquid assets (2) |  | 42,090 | - | 42,090 | 40,318 |
| Total liquid assets | $ | 579,471 | $445,218 | $1,024,689 | $553,161 |
|  |  | As at October 31, 2021 |  |  |  |
|  |  | Bank-owned liquid assets | Securities received as collateral from securities financing and derivative transactions | Total liquid assets | Encumbered liquid assets |
| (Millions of Canadian dollars) |  |  |  |  |  |
| Cash and deposits with banks | $ | 193,484 | $ - | $193,484 | $3,405 |
| Securities issued or guaranteed by sovereigns, central banks or multilateral development banks (1) |  | 214,326 | 313,732 | 528,058 | 357,927 |
| Other securities |  | 114,692 | 115,396 | 230,088 | 132,360 |
| Other liquid assets (2) |  | 27,600 | - | 27,600 | 25,981 |
| Total liquid assets | $ | 550,102 | $429,128 | $979,230 | $519,673 |
|  |  | As at |  |  |  |
|  |  | October 31 2022 | October 31 2021 |  |  |
| (Millions of Canadian dollars) |  |  |  |  |  |
| Royal Bank of Canada | $ | 186,855 | $233,342 |  |  |
| Foreign branches |  | 90,910 | 68,567 |  |  |
| Subsidiaries |  | 193,763 | 157,648 |  |  |
| Total unencumbered liquid assets | $ | 471,528 | $459,557 |  |  |

(1) Includes liquid securities issued by provincial governments and U.S. government-sponsored entities working under U.S. Federal government's conservatorship (e.g., Federal National Mortgage Association and Federal Home Loan Mortgage Corporation).

(2) Encumbered liquid assets amount represents cash collateral and margin deposit amounts pledged related to OTC and exchange-traded derivative transactions.

The liquidity reserve is typically most affected by routine flows of client banking activity where liquid asset portfolios reflect changes in deposit and loan balances, as well as by activities in Capital Markets and Investor & Treasury Services, where business strategies and client flows may also affect liquidity reserve balances. Corporate Treasury also affects liquidity reserves through the management of funding issuances where reserves absorb timing mismatches between debt issuances and deployment into business activities.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

83

## 2022 vs. 2021

Total unencumbered liquid assets increased $12 billion or 3% from last year, mainly due to an increase in on-balance sheet securities reflecting higher wholesale funding and client deposit levels.

### Asset encumbrance

The table below provides a summary of our on- and off-balance sheet amounts for cash, securities and other assets, distinguishing between those that are encumbered or available for sale or use as collateral in secured funding transactions. Other assets, such as mortgages and credit card receivables, can also be monetized, albeit over longer timeframes than those required for marketable securities. As at October 31, 2022, our unencumbered assets available as collateral comprised 24% of total assets (October 31, 2021 - 26%).

| (Millions of Canadian dollars) | October 31 2022 |  |  |  |  | October 31 2021 |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Encumbered |  | Unencumbered |  | Total | Encumbered |  | Unencumbered |  | Total |
|  | Pledged as collateral | Other (1) | Available as collateral (2) | Other (3) |  | Pledged as collateral | Other (1) | Available as collateral (2) | Other (3) |  |
| Cash and deposits with banks | $ - | $3,601 | $176,807 | $ - | $180,408 | $ - | $3,405 | $190,079 | $ - | $193,484 |
| Securities |  |  |  |  |  |  |  |  |  |  |
| Trading | 62,941 | - | 91,738 | 3,303 | 157,982 | 56,602 | - | 87,311 | 3,633 | 147,546 |
| Investment, net of applicable allowance | 7,996 | - | 162,022 | - | 170,018 | 12,055 | - | 133,429 | - | 145,484 |
| Assets purchased under reverse repurchase agreements and securities borrowed (4) | 456,292 | 21,709 | 9,192 | 3,409 | 490,602 | 437,408 | 18,310 | 17,436 | 5,343 | 478,497 |
| Loans |  |  |  |  |  |  |  |  |  |  |
| Retail |  |  |  |  |  |  |  |  |  |  |
| Mortgage securities | 28,208 | - | 27,263 | - | 55,471 | 29,370 | - | 30,778 | - | 60,148 |
| Mortgage loans | 62,905 | - | 26,696 | 273,724 | 363,325 | 46,699 | - | 29,858 | 243,627 | 320,184 |
| Non-mortgage loans | 6,066 | - | - | 124,889 | 130,955 | 3,213 | - | 8,110 | 111,943 | 123,266 |
| Wholesale | - | - | 9,119 | 264,848 | 273,967 | - | - | - | 218,066 | 218,066 |
| Allowance for loan losses | - | - | - | (3,753) | (3,753) | - | - | - | (4,089) | (4,089) |
| Segregated fund net assets | - | - | - | 2,638 | 2,638 | - | - | - | 2,666 | 2,666 |
| Other |  |  |  |  |  |  |  |  |  |  |
| Derivatives | - | - | - | 154,439 | 154,439 | - | - | - | 95,541 | 95,541 |
| Others (5) | 40,318 | - | 1,772 | 81,611 | 123,701 | 25,981 | - | 1,619 | 76,830 | 104,430 |
| Total assets | $664,726 | $25,310 | $504,609 | $905,108 | $2,099,753 | $611,328 | $21,715 | $498,620 | $753,560 | $1,885,223 |

(1) Includes assets restricted from use to generate secured funding due to legal or other constraints.

(2) Represents assets that are readily available for use as collateral, including NHA MBS, our unencumbered mortgage loans that qualify as eligible collateral at FHLB, as well as loans that qualify as eligible collateral for discount window facility available to us and lodged at the FRBNY.

(3) Other unencumbered assets are not subject to any restrictions on their use to secure funding or as collateral but would not be considered readily available.

(4) Includes bank-owned liquid assets and securities received as collateral from off-balance sheet securities financing, derivative transactions, and margin lending. Includes $22 billion (October 31, 2021 - $18 billion) of collateral received through reverse repurchase transactions that cannot be rehypothecated in its current legal form.

(5) The Pledged as collateral amount represents cash collateral and margin deposit amounts pledged related to OTC and exchange-traded derivative transactions.

## Funding

### Funding strategy

Core funding, comprising capital, longer-term wholesale liabilities and a diversified pool of personal and, to a lesser extent, commercial and institutional deposits, is the foundation of our structural liquidity position.

### Deposit and funding profile

As at October 31, 2022, relationship-based deposits, which are the primary source of funding for retail and commercial lending, were $819 billion or 54% of our total funding (October 31, 2021 - $771 billion or 55%). The remaining portion is comprised of short- and long-term wholesale funding.

Funding for highly liquid assets consists primarily of short-term wholesale funding that reflects the monetization period of those assets. Long-term wholesale funding is used mostly to fund less liquid wholesale assets and to support liquid asset buffers.

Senior long-term debt issued by the bank on or after September 23, 2018, that has an original term greater than 400 days and is marketable, subject to certain exceptions, is subject to the Canadian Bank Recapitalization (Bail-in) regime. Under the Bail-in regime, in circumstances when the Superintendent of Financial Institutions has determined that a bank may no longer be viable, the Governor in Council may, upon a recommendation of the Minister of Finance that he or she is of the opinion that it is in the public interest to do so, grant an order directing the Canada Deposit Insurance Corporation (CDIC) to convert all or a portion of certain shares and liabilities of that bank into common shares. As at October 31, 2022, the notional value of issued and outstanding long-term debt subject to conversion under the Bail-in regime was $85 billion (October 31, 2021 - $53 billion).

For further details on our wholesale funding, refer to the Composition of wholesale funding tables below.

84

Royal Bank of Canada: Annual Report 2022

Management's Discussion and Analysis

### Long-term debt issuance

During 2022, we continued to experience favourable unsecured wholesale funding access and pricing. We issued, either directly or through our subsidiaries, unsecured long-term funding of $43 billion in various currencies and markets.

We primarily use residential mortgage and credit card securitization programs as alternative sources of funding and for liquidity and asset/liability management purposes. Our total secured long-term funding includes outstanding MBS sold, covered bonds that are collateralized with residential mortgages and securities backed by credit card receivables.

Compared to 2021, our outstanding MBS sold decreased $190 million. Our covered bonds and securitized credit card receivables increased $10 billion and $3 billion, respectively.

For further details, refer to the Off-balance sheet arrangements section.

#### Long-term funding sources\*(1)

Table 55

| (Millions of Canadian dollars) | As at |  |
| --- | --- | --- |
|  | October 31 2022 | October 31 2021 |
| Unsecured long-term funding | $119,241 | $89,447 |
| Secured long-term funding | 68,953 | 56,688 |
| Subordinated debentures | 10,639 | 9,620 |
|  | $198,833 | $155,755 |

\* This table represents an integral part of our 2022 Annual Consolidated Financial Statements.

(1) Based on original term to maturity greater than 1 year.

Our wholesale funding activities are well-diversified by geography, investor segment, instrument, currency, structure and maturity. We maintain an ongoing presence in different funding markets which allows us to continuously monitor market developments and trends, identify opportunities and risks, and take appropriate and timely actions. We operate long-term debt issuance registered programs. The following table summarizes these programs with their authorized limits by geography.

#### Programs by geography

Table 56

| Canada | U.S. | Europe/Asia |
| --- | --- | --- |
| • Canadian Shelf Program - $25 billion | • U.S. Shelf Program - US$50 billion | • European Debt Issuance Program - US$40 billion • Global Covered Bond Program - €75 billion • Japanese Issuance Programs - ¥1 trillion |

We also raise long-term funding using Canadian Senior Notes, Canadian National Housing Act MBS, Canada Mortgage Bonds, credit card receivable-backed securities, Kangaroo Bonds (issued in the Australian domestic market by foreign firms) and Yankee Certificates of Deposit (issued in the U.S. domestic market by foreign firms). We continuously evaluate opportunities to expand into new markets and untapped investor segments since diversification expands our wholesale funding flexibility, minimizes funding concentration and dependency, and generally reduces financing costs. As presented in the following charts, our current long-term debt profile is well-diversified by both currency and product. Maintaining competitive credit ratings is also critical to cost-effective funding.

#### Long-term debt (1) - funding mix by currency of issuance

![img-0.jpeg](img-0.jpeg)

(1) Includes unsecured and secured long-term funding and subordinated debentures with an original term to maturity greater than 1 year

#### Long-term debt (1) - funding mix by product

![img-1.jpeg](img-1.jpeg)

(1) Includes unsecured and secured long-term funding and subordinated debentures with an original term to maturity greater than 1 year

(2) Mortgage-backed securities and Canada Mortgage Bonds

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

85

The following table provides our composition of wholesale funding based on remaining term to maturity:

| Composition of wholesale funding (I) |  |  |  |  |  |  |  | Table 57 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| (Millions of Canadian dollars) | As at October 31, 2022 |  |  |  |  |  |  |  |
|  | Less than 1 month | 1 to 3 months | 3 to 6 months | 6 to 12 months | Less than 1 year sub-total | 1 year to 2 years | 2 years and greater | Total |
| Deposits from banks (2) | $5,758 | $34 | $311 | $1,766 | $7,869 | $ - | $ - | $7,869 |
| Certificates of deposit and commercial paper | 9,482 | 16,575 | 23,676 | 39,674 | 89,407 | - | - | 89,407 |
| Asset-backed commercial paper (3) | 3,488 | 2,373 | 6,646 | 722 | 13,229 | - | 323 | 13,552 |
| Senior unsecured medium-term notes (4) | 375 | 5,968 | 2,846 | 13,189 | 22,378 | 19,108 | 48,556 | 90,042 |
| Senior unsecured structured notes (5) | 404 | 721 | 2,136 | 4,091 | 7,352 | 2,363 | 9,898 | 19,613 |
| Mortgage securitization | - | 1,238 | 421 | 2,614 | 4,273 | 2,402 | 9,697 | 16,372 |
| Covered bonds/asset-backed securities (6) | - | 1,016 | 1,960 | 2,838 | 5,814 | 4,575 | 42,194 | 52,583 |
| Subordinated liabilities | 60 | - | - | 110 | 170 | 1,483 | 8,986 | 10,639 |
| Other (7) | 7,241 | 2,934 | 8,673 | 4,387 | 23,235 | 10,219 | 409 | 33,863 |
| Total | $26,808 | $30,859 | $46,669 | $69,391 | $173,727 | $40,150 | $120,063 | $333,940 |
| Of which: |  |  |  |  |  |  |  |  |
| - Secured | $9,030 | $6,641 | $15,367 | $7,536 | $38,574 | $6,977 | $52,605 | $98,156 |
| - Unsecured | 17,778 | 24,218 | 31,302 | 61,855 | 135,153 | 33,173 | 67,458 | 235,784 |

| (Millions of Canadian dollars) | As at October 31, 2021 |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Less than 1 month | 1 to 3 months | 3 to 6 months | 6 to 12 months | Less than 1 year sub-total | 1 year to 2 years | 2 years and greater | Total |
| Deposits from banks (2) | $5,202 | $ - | $ - | $ - | $5,202 | $ - | $ - | $5,202 |
| Certificates of deposit and commercial paper | 7,118 | 17,013 | 19,046 | 27,053 | 70,230 | 918 | - | 71,148 |
| Asset-backed commercial paper (3) | 2,378 | 2,563 | 4,076 | 3,697 | 12,714 | - | - | 12,714 |
| Senior unsecured medium-term notes (4) | 27 | 939 | 8,944 | 2,622 | 12,532 | 16,296 | 37,617 | 66,445 |
| Senior unsecured structured notes (5) | 118 | 825 | 817 | 714 | 2,474 | 2,914 | 5,879 | 11,267 |
| Mortgage securitization | - | 354 | 1,302 | 917 | 2,573 | 4,260 | 9,729 | 16,562 |
| Covered bonds/asset-backed securities (6) | - | 847 | 495 | 5,189 | 6,531 | 6,087 | 27,521 | 40,139 |
| Subordinated liabilities | - | - | - | 188 | 188 | 165 | 9,267 | 9,620 |
| Other (7) | 6,637 | 2,194 | 1,448 | 827 | 11,106 | 7,531 | 466 | 19,103 |
| Total | $21,480 | $24,735 | $36,128 | $41,207 | $123,550 | $38,171 | $90,479 | $252,200 |
| Of which: |  |  |  |  |  |  |  |  |
| - Secured | $8,467 | $4,017 | $6,108 | $9,803 | $28,395 | $10,347 | $37,695 | $76,437 |
| - Unsecured | 13,013 | 20,718 | 30,020 | 31,404 | 95,155 | 27,824 | 52,784 | 175,763 |

(1) Excludes bankers' acceptances and repos.

(2) Excludes deposits associated with services we provide to banks (e.g., custody, cash management).

(3) Only includes consolidated liabilities, including our collateralized commercial paper program.

(4) Includes deposit notes.

(5) Includes notes where the payout is tied to movements in foreign exchange, commodities and equities.

(6) Includes credit card and mortgage loans.

(7) Includes tender option bonds (secured) of $6,038 million (October 31, 2021 - $7,020 million), bearer deposit notes (unsecured) of $5,805 million (October 31, 2021 - $3,798 million), other long-term structured deposits (unsecured) of $12,411 million (October 31, 2021 - $8,285 million), and FHLB advances (secured) of $9,609 million (October 31, 2021 - $nil).

86 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

## Credit ratings

Our ability to access unsecured funding markets and to engage in certain collateralized business activities on a cost-effective basis are primarily dependent upon maintaining competitive credit ratings. Credit ratings and outlooks provided by rating agencies reflect their views and methodologies. Ratings are subject to change, based on a number of factors including, but not limited to, our financial strength, competitive position, liquidity and other factors not completely within our control.

The following table presents our major credit ratings:

Credit ratings (1)

Table 58

|  | As at November 29, 2022 |  |  |  |
| --- | --- | --- | --- | --- |
|  | Short-term debt | Legacy senior long-term debt (2) | Senior long-term debt (3) | Outlook |
| Moody's (4) | P-1 | Aa1 | A1 | stable |
| Standard & Poor's (5) | A-1+ | AA- | A | stable |
| Fitch Ratings (6) | F1+ | AA | AA- | stable |
| DBRS (7) | R-1 (high) | AA (high) | AA | stable |

(1) Credit ratings are not recommendations to purchase, sell or hold a financial obligation inasmuch as they do not comment on market price or suitability for a particular investor. Ratings are determined by the rating agencies based on criteria established from time to time by them, and are subject to revision or withdrawal at any time by the rating organization.
(2) Includes senior long-term debt issued prior to September 23, 2018 and senior long-term debt issued on or after September 23, 2018 which is excluded from the Bail-in regime.
(3) Includes senior long-term debt issued on or after September 23, 2018 which is subject to conversion under the Bail-in regime.
(4) On January 27, 2022, Moody's upgraded our long-term debt ratings and assessments, as well as affirmed our short-term debt ratings. Following this rating action, our outlook is stable. This rating action concludes the review for upgrade initiated by Moody's on October 7, 2021.
(5) On May 13, 2022, Standard & Poor's affirmed our ratings with a stable outlook.
(6) On July 11, 2022, Fitch Ratings affirmed our ratings with a stable outlook.
(7) On May 13, 2022, DBRS affirmed our ratings with a stable outlook.

## Additional contractual obligations for rating downgrades

We are required to deliver collateral to certain counterparties in the event of a downgrade to our current credit rating. The following table provides the additional collateral obligations required at the reporting date in the event of a one-, two- or three-notch downgrade to our credit ratings. These additional collateral obligations are incremental requirements for each successive downgrade and do not represent the cumulative impact of multiple downgrades. The amounts reported change periodically as a result of several factors, including the transfer of trading activity to centrally cleared financial market infrastructures and exchanges, the expiration of transactions with downgrade triggers, the imposition of internal limitations on new agreements to exclude downgrade triggers, as well as normal course mark-to-market. There is no outstanding senior debt issued in the market that contains rating triggers that would lead to early prepayment of principal.

Additional contractual obligations for rating downgrades

Table 59

|  | As at |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | October 31 2022 |  |  | October 31 2021 |  |  |
|  | One-notch downgrade | Two-notch downgrade | Three-notch downgrade | One-notch downgrade | Two-notch downgrade | Three-notch downgrade |
| (Millions of Canadian dollars) |  |  |  |  |  |  |
| Contractual derivatives funding or margin requirements | $236 | $146 | $304 | $312 | $112 | $140 |
| Other contractual funding or margin requirements (1) | 38 | 21 | 25 | 157 | 13 | - |

(1) Includes GICs issued by our municipal markets business out of New York.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

87

## Liquidity Coverage Ratio (LCR)

The LCR is a Basel III metric that measures the sufficiency of high-quality liquid assets (HQLA) available to meet liquidity needs over a 30-day period in an acute stress scenario. The BCBS and OSFI regulatory minimum coverage level for LCR is 100%.

OSFI requires Canadian banks to disclose the LCR using the standard Basel disclosure template and calculated using the average of daily LCR positions during the quarter.

| Liquidity coverage ratio common disclosure template (1) |  | Table 60 |
| --- | --- | --- |
|  |  | For the three months ended |
|  |  | October 31 2022 |
|  |  | Total unweighted value (average) (2) |
|  |  | Total weighted value (average) |
| (Millions of Canadian dollars, except percentage amounts) |  |  |
| High-quality liquid assets |  |  |
| Total high-quality liquid assets (HQLA) |  | $364,478 |
| Cash outflows |  |  |
| Retail deposits and deposits from small business customers, of which: | $375,324 | $34,797 |
| Stable deposits (3) | 127,692 | 3,831 |
| Less stable deposits | 247,632 | 30,966 |
| Unsecured wholesale funding, of which: | 431,484 | 201,688 |
| Operational deposits (all counterparties) and deposits in networks of cooperative banks (4) | 180,787 | 43,066 |
| Non-operational deposits | 220,941 | 128,866 |
| Unsecured debt | 29,756 | 29,756 |
| Secured wholesale funding |  | 31,881 |
| Additional requirements, of which: | 334,060 | 78,395 |
| Outflows related to derivative exposures and other collateral requirements | 75,312 | 21,750 |
| Outflows related to loss of funding on debt products | 10,214 | 10,214 |
| Credit and liquidity facilities | 248,534 | 46,431 |
| Other contractual funding obligations (5) | 22,080 | 22,080 |
| Other contingent funding obligations (6) | 710,472 | 11,498 |
| Total cash outflows |  | $380,339 |
| Cash inflows |  |  |
| Secured lending (e.g., reverse repos) | $286,914 | $50,441 |
| Inflows from fully performing exposures | 15,716 | 9,934 |
| Other cash inflows | 28,346 | 28,346 |
| Total cash inflows |  | $88,721 |
|  |  | Total adjusted value |
| Total HQLA |  | $364,478 |
| Total net cash outflows |  | 291,618 |
| Liquidity coverage ratio |  | 125% |
|  |  | July 31 2022 |
|  |  | Total adjusted value |
| (Millions of Canadian dollars, except percentage amounts) |  |  |
| Total HQLA |  | $353,406 |
| Total net cash outflows |  | 287,871 |
| Liquidity coverage ratio |  | 123% |

(1) The LCR is calculated in accordance with OSFI's LAR guideline, which, in turn, reflects liquidity-related requirements issued by the BCBS. The LCR for the quarter ended October 31, 2022 is calculated as an average of 62 daily positions.
(2) With the exception of other contingent funding obligations, unweighted inflow and outflow amounts are items maturing or callable in 30 days or less. Other contingent funding obligations also include debt securities with remaining maturity greater than 30 days.
(3) As defined by the BCBS, stable deposits from retail and small business customers are deposits that are insured and are either held in transactional accounts or the bank has an established relationship with the client making the withdrawal unlikely.
(4) Operational deposits from customers other than retail and small and medium-sized enterprises, are deposits which clients need to keep with the bank in order to facilitate their access and ability to use payment and settlement systems primarily for clearing, custody and cash management activities.
(5) Other contractual funding obligations primarily include outflows from unsettled securities trades and outflows from obligations related to securities sold short.
(6) Other contingent funding obligations include outflows related to other off-balance sheet facilities that carry low LCR runoff factors (0% - 5%).

88 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

We manage our LCR position within a target range that reflects our liquidity risk tolerance and takes into account business mix, asset composition and funding capabilities. The range is subject to periodic review in light of changes to internal requirements and external developments.

We maintain HQLAs in major currencies with dependable market depth and breadth. Our treasury management practices ensure that the levels of HQLA are actively managed to meet target LCR objectives. Our Level 1 assets, as calculated according to OSFI LAR and the BCBS LCR requirements, represent 89% of total HQLA. These assets consist of cash, placements with central banks and highly rated securities issued or guaranteed by governments, central banks and supranational entities.

LCR captures cash flows from on- and off-balance sheet activities that are either expected or could potentially occur within 30 days in an acute stress scenario. Cash outflows result from the application of withdrawal and non-renewal factors to demand and term deposits, differentiated by client type (wholesale, retail and small- and medium-sized enterprises). Cash outflows also arise from business activities that create contingent funding and collateral requirements, such as repo funding, derivatives, short sales of securities and the extension of credit and liquidity commitments to clients. Cash inflows arise primarily from maturing secured loans, interbank loans and non-HQLA securities.

LCR does not reflect any market funding capacity that we believe would be available in a stress situation. All maturing wholesale debt is assigned 100% outflow in the LCR calculation.

#### **Q4 2022 vs. Q3 2022**

The average LCR for the quarter ended October 31, 2022 was 125%, which translates into a surplus of approximately $73 billion, compared to 123% and a surplus of approximately $66 billion in the prior quarter. LCR has increased compared to last quarter as loan growth was more than offset by an increase in volume and change in mix of client deposits, as well as by issuances of term funding.

#### **Net Stable Funding Ratio (NSFR)**

NSFR is a Basel III metric that measures the sufficiency of available stable funding relative to the amount of required stable funding. The BCBS and OSFI regulatory minimum coverage level for NSFR is 100%.

Available stable funding is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. Required stable funding is a function of the liquidity characteristics and residual maturities of the various assets held by the bank as well as those of its off-balance sheet exposures.

OSFI requires Canadian D-SIBs to disclose the NSFR using the standard Basel disclosure template. Amounts presented in this disclosure template are determined in accordance with the requirements of OSFI's LAR guideline and are not necessarily aligned with the classification requirements prescribed under IFRS.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

89

# Net Stable Funding Ratio common disclosure template (1)

Table 61

|  | As at October 31, 2022 |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | Unweighted value by residual maturity (2) |  |  |  | Weighted value |  |
|  | No maturity | < 6 months | 6 months to < 1 year | ≥ 1 year |  |  |
| (Millions of Canadian dollars, except percentage amounts) |  |  |  |  |  |  |
| Available Stable Funding (ASF) Item |  |  |  |  |  |  |
| Capital: | $108,053 | $ - | $ - | $9,608 | $117,661 |  |
| Regulatory Capital | 108,053 | - | - | 9,608 | 117,661 |  |
| Other Capital Instruments | - | - | - | - | - |  |
| Retail deposits and deposits from small business customers: | 326,492 | 71,417 | 37,631 | 32,190 | 431,963 |  |
| Stable deposits (3) | 106,488 | 32,742 | 20,284 | 14,246 | 165,785 |  |
| Less stable deposits | 220,004 | 38,675 | 17,347 | 17,944 | 266,178 |  |
| Wholesale funding: | 312,346 | 438,928 | 79,690 | 121,004 | 340,812 |  |
| Operational deposits (4) | 186,282 | - | - | - | 93,141 |  |
| Other wholesale funding | 126,064 | 438,928 | 79,690 | 121,004 | 247,671 |  |
| Liabilities with matching interdependent assets (5) | - | 3,298 | 4,950 | 21,456 | - |  |
| Other liabilities: | 41,545 | - | 214,175 | - | 14,020 |  |
| NSFR derivative liabilities | - | - | 34,934 | - | - |  |
| All other liabilities and equity not included in the above categories | 41,545 | 164,329 | 1,785 | 13,127 | 14,020 |  |
| Total ASF |  |  |  |  | $904,456 |  |
| Required Stable Funding (RSF) Item |  |  |  |  |  |  |
| Total NSFR high-quality liquid assets (HQLA) |  |  |  |  | $38,537 |  |
| Deposits held at other financial institutions for operational purposes | - | 1,403 | - | - | 701 |  |
| Performing loans and securities: | 198,407 | 295,131 | 107,266 | 507,939 | 661,461 |  |
| Performing loans to financial institutions secured by Level 1 HQLA | - | 111,525 | 15,189 | 15 | 14,312 |  |
| Performing loans to financial institutions secured by non-Level 1 HQLA and unsecured performing loans to financial institutions | 4,000 | 99,000 | 26,949 | 26,099 | 54,587 |  |
| Performing loans to non-financial corporate clients, loans to retail and small business customers, and loans to sovereigns, central banks and PSEs, of which: | 121,583 | 63,827 | 30,277 | 156,711 | 279,382 |  |
| With a risk weight of less than or equal to 35% under the Basel II standardized approach for credit risk | - | 843 | 691 | 3,181 | 2,834 |  |
| Performing residential mortgages, of which: | 38,539 | 17,969 | 33,986 | 298,856 | 259,881 |  |
| With a risk weight of less than or equal to 35% under the Basel II standardized approach for credit risk | 38,539 | 17,952 | 33,951 | 297,918 | 259,057 |  |
| Securities that are not in default and do not qualify as HQLA, including exchange-traded equities | 34,285 | 2,810 | 865 | 26,258 | 53,299 |  |
| Assets with matching interdependent liabilities (5) | - | 3,298 | 4,950 | 21,456 | - |  |
| Other assets: | 1,772 | - | 300,342 | - | 81,558 |  |
| Physical traded commodities, including gold | 1,772 | - | - | - | 1,506 |  |
| Assets posted as initial margin for derivative contracts and contributions to default funds of CCPs | - | - | 26,604 | - | 22,613 |  |
| NSFR derivative assets | - | - | 26,795 | - | - |  |
| NSFR derivative liabilities before deduction of variation margin posted | - | - | 70,722 | - | 3,536 |  |
| All other assets not included in the above categories | - | 123,852 | 8 | 52,361 | 53,903 |  |
| Off-balance sheet items |  |  | 711,922 |  | 26,997 |  |
| Total RSF |  |  |  |  | $809,254 |  |
| Net Stable Funding Ratio (%) |  |  |  |  | 112% |  |

|  | As at July 31, 2022 | Weighted value |
| --- | --- | --- |
| (Millions of Canadian dollars, except percentage amounts) |  |  |
| Total ASF |  | $884,887 |
| Total RSF |  | 784,537 |
| Net Stable Funding Ratio (%) |  | 113% |

(1) The NSFR is calculated in accordance with OSFI's Liquidity Adequacy Requirements (LAR) guideline, which, in turn, reflects liquidity-related requirements issued by the BCBS.
(2) Totals for the following rows encompass the residual maturity categories of less than 6 months, 6 months to less than 1 year, and greater than or equal to 1 year in accordance with the requirements of the common disclosure template prescribed by OSFI: Other liabilities, NSFR derivative liabilities, Other assets, Assets posted as initial margin for derivative contracts and contributions to default funds of CCPs, NSFR derivative assets, NSFR derivative liabilities before deduction of variation margin posted, and Off-balance sheet items.
(3) As defined by the BCBS, stable deposits from retail and small business customers are deposits that are insured and are either held in transactional accounts or the bank has an established relationship with the client making the withdrawal unlikely.
(4) Operational deposits from customers other than retail and small and medium-sized enterprises, are deposits which clients need to keep with the bank in order to facilitate their access and ability to use payment and settlement systems primarily for clearing, custody and cash management activities.
(5) Interdependent assets and liabilities represent National Housing Act Mortgage-Backed Securities (NHA MBS) liabilities, including liabilities arising from transactions involving the Canada Mortgage Bond program and their corresponding encumbered mortgages.

90 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

Available stable funding is comprised primarily of a diversified pool of personal and commercial deposits, capital, as well as long-term wholesale liabilities. Required stable funding is driven mainly by the bank's mortgage and loan portfolio, secured loans to financial institutions and to a lesser extent by other less liquid assets. NSFR does not reflect any unused market funding capacity that we believe is available to the bank.

Volume and composition of available stable funding is actively managed to optimize our structural funding position and meet NSFR objectives. Our NSFR is managed in accordance with our comprehensive LRMF.

#### Q4 2022 vs. Q3 2022

The NSFR as at October 31, 2022 was 112%, which translates into a surplus of approximately $95 billion, compared to 113% and a surplus of approximately $100 billion in the prior quarter. NSFR remained relatively flat compared to last quarter as growth in loans and securities was offset by issuance of term funding and increases in client deposits.

#### Contractual maturities of financial assets, financial liabilities and off-balance sheet items

The following tables provide remaining contractual maturity profiles of all our assets, liabilities, and off-balance sheet items at their carrying value (e.g., amortized cost or fair value) at the balance sheet date. Off-balance sheet items are allocated based on the expiry date of the contract.

Details of contractual maturities and commitments to extend funds are a source of information for the management of liquidity risk. Among other purposes, these details form a basis for modelling a behavioural balance sheet with effective maturities to calculate liquidity risk measures. For further details, refer to the Risk measurement section.

**Contractual maturities of financial assets, financial liabilities and off-balance sheet items** **Table 62**

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

(1) Trading debt securities classified as FVTPL have been included in the less than 1 month category as there is no expectation to hold these assets to their contractual maturity.

(2) Open reverse repo and repo contracts, which have no set maturity date and are typically short term, have been included in the with no specific maturity category.

(3) A major portion of relationship-based deposits are repayable on demand or at short notice on a contractual basis while, in practice, these customer balances form a core base for our operations and liquidity needs, as explained in the preceding Deposit and funding profile section.

Management's Discussion and Analysis

Royal Bank of Canada: Annual Report 2022

91

| (Millions of Canadian dollars) | As at October 31, 2021 |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Less than 1 month | 1 to 3 months | 3 to 6 months | 6 to 9 months | 9 to 12 months | 1 year to 2 years | 2 years to 5 years | 5 years and greater | With no specific maturity | Total |
| Assets |  |  |  |  |  |  |  |  |  |  |
| Cash and deposits with banks | $190,995 | $2 | $1 | $ - | $ - | $ - | $ - | $ - | $2,486 | $193,484 |
| Securities |  |  |  |  |  |  |  |  |  |  |
| Trading (1) | 67,655 | 46 | 87 | 41 | 6 | 20 | 169 | 9,845 | 61,371 | 139,240 |
| Investment, net of applicable allowance | 7,220 | 4,811 | 5,546 | 5,832 | 5,514 | 22,368 | 31,393 | 62,289 | 511 | 145,484 |
| Assets purchased under reverse repurchase agreements and securities borrowed (2) | 104,301 | 89,612 | 51,664 | 22,982 | 16,987 | 98 | - | - | 22,259 | 307,903 |
| Loans, net of applicable allowance | 28,517 | 21,630 | 26,094 | 31,910 | 26,921 | 139,050 | 298,659 | 62,215 | 82,579 | 717,575 |
| Other |  |  |  |  |  |  |  |  |  |  |
| Customers' liability under acceptances | 12,654 | 7,209 | 5 | - | - | 5 | - | - | (75) | 19,798 |
| Derivatives | 5,325 | 10,788 | 4,318 | 4,334 | 3,005 | 10,139 | 17,890 | 39,733 | 9 | 95,541 |
| Other financial assets | 33,149 | 1,523 | 1,942 | 145 | 135 | 270 | 277 | 2,044 | 3,351 | 42,836 |
| Total financial assets | 449,816 | 135,621 | 89,657 | 65,244 | 52,568 | 171,950 | 348,388 | 176,126 | 172,491 | 1,661,861 |
| Other non-financial assets | 6,079 | 1,681 | 164 | 217 | 185 | 1,957 | 2,377 | 5,898 | 25,904 | 44,462 |
| Total assets | $455,895 | $137,302 | $89,821 | $65,461 | $52,753 | $173,907 | $350,765 | $182,024 | $198,395 | $1,706,323 |
| Liabilities and equity |  |  |  |  |  |  |  |  |  |  |
| Deposits (3) |  |  |  |  |  |  |  |  |  |  |
| Unsecured borrowing | $82,183 | $44,058 | $56,519 | $36,342 | $35,792 | $30,625 | $45,745 | $18,320 | $661,924 | $1,011,508 |
| Secured borrowing | 2,442 | 4,244 | 7,543 | 4,362 | 2,804 | 9,557 | 15,040 | 6,118 | - | 52,110 |
| Covered bonds | 1 | 848 | - | 2,693 | 1,878 | 5,350 | 18,321 | 8,122 | - | 37,213 |
| Other |  |  |  |  |  |  |  |  |  |  |
| Acceptances | 12,653 | 7,207 | 5 | 2 | - | 5 | - | - | 1 | 19,873 |
| Obligations related to securities sold short | 37,841 | - | - | - | - | - | - | - | - | 37,841 |
| Obligations related to assets sold under repurchase agreements and securities loaned (2) | 168,763 | 62,338 | 5,610 | 4,742 | 848 | 668 | - | - | 19,232 | 262,201 |
| Derivatives | 5,456 | 9,903 | 4,938 | 3,747 | 2,723 | 9,211 | 18,727 | 36,733 | 1 | 91,439 |
| Other financial liabilities | 33,489 | 1,299 | 1,048 | 439 | 373 | 1,000 | 2,115 | 10,226 | 795 | 50,784 |
| Subordinated debentures | - | - | - | - | 188 | 110 | 1,912 | 7,383 | - | 9,593 |
| Total financial liabilities | 342,828 | 129,897 | 75,663 | 52,327 | 44,606 | 56,526 | 101,860 | 86,902 | 681,953 | 1,572,562 |
| Other non-financial liabilities | 1,663 | 6,907 | 434 | 290 | 155 | 1,108 | 1,172 | 13,360 | 9,910 | 34,999 |
| Equity | - | - | - | - | - | - | - | - | 98,762 | 98,762 |
| Total liabilities and equity | $344,491 | $136,804 | $76,097 | $52,617 | $44,761 | $57,634 | $103,032 | $100,262 | $790,625 | $1,706,323 |
| Off-balance sheet items |  |  |  |  |  |  |  |  |  |  |
| Financial guarantees | $387 | $1,950 | $2,999 | $2,928 | $2,206 | $1,829 | $3,326 | $1,181 | $61 | $16,867 |
| Commitments to extend credit | 5,964 | 5,538 | 11,400 | 16,231 | 12,024 | 56,688 | 160,789 | 16,733 | 4,544 | 289,911 |
| Other credit-related commitments | 966 | 1,064 | 1,569 | 1,536 | 1,376 | 370 | 726 | 38 | 99,815 | 107,460 |
| Other commitments | 101 | 11 | 20 | 21 | 21 | 64 | 144 | 278 | 618 | 1,278 |
| Total off-balance sheet items | $7,418 | $8,563 | $15,988 | $20,716 | $15,627 | $58,951 | $164,985 | $18,230 | $105,038 | $415,516 |

(1) Trading debt securities classified as FVTPL have been included in the less than 1 month category as there is no expectation to hold these assets to their contractual maturity.

(2) Open reverse repo and repo contracts, which have no set maturity date and are typically short term, have been included in the with no specific maturity category.

(3) A major portion of relationship-based deposits are repayable on demand or at short notice on a contractual basis while, in practice, these customer balances form a core base for our operations and liquidity needs, as explained in the preceding Deposit and funding profile section.

92 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

### Contractual maturities of financial liabilities and off-balance sheet items - undiscounted basis

The following tables provide remaining contractual maturity analysis of our financial liabilities and off-balance sheet items. The amounts disclosed in the following table are the contractual undiscounted cash flows of all financial liabilities (e.g., par value or amount payable upon maturity). The amounts do not reconcile directly with those in our consolidated balance sheets as the table incorporates only cash flows relating to payments on maturity and do not recognize premiums, discounts or mark-to-market adjustments recognized in the instruments' carrying values as at the balance sheet date. Financial liabilities are based upon the earliest period in which they are required to be paid. For off-balance sheet items, the undiscounted cash flows potentially payable under financial guarantees and commitments to extend credit are classified on the basis of the earliest date they can be called.

### Contractual maturities of financial liabilities and off-balance sheet items - undiscounted basis\*

Table 63

| (Millions of Canadian dollars) | As at October 31, 2022 |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | On demand | Within 1 year | 1 year to 2 years | 2 years to 5 years | 5 years and greater | Total |
| Financial liabilities |  |  |  |  |  |  |
| Deposits (1) | $562,288 | $463,711 | $50,169 | $106,568 | $37,260 | $1,219,996 |
| Other |  |  |  |  |  |  |
| Acceptances | - | 17,872 | - | - | - | 17,872 |
| Obligations related to securities sold short | - | 35,395 | - | - | - | 35,395 |
| Obligations related to assets sold under repurchase agreements and securities loaned | 16,367 | 256,756 | 948 | - | - | 274,071 |
| Other liabilities | 508 | 61,420 | 220 | 709 | 9,191 | 72,048 |
| Lease liabilities | - | 654 | 630 | 1,609 | 2,217 | 5,110 |
| Subordinated debentures | - | 110 | - | 1,884 | 8,042 | 10,036 |
|  | 579,163 | 835,918 | 51,967 | 110,770 | 56,710 | 1,634,528 |
| Off-balance sheet items |  |  |  |  |  |  |
| Financial guarantees (2) | $20,289 | $2 | $ - | $ - | $ - | $20,291 |
| Other commitments (3) | - | 73 | 60 | 136 | 187 | 456 |
| Commitments to extend credit (2) | 284,606 | 48,573 | 1 | 36 | - | 333,216 |
|  | 304,895 | 48,648 | 61 | 172 | 187 | 353,963 |
| Total financial liabilities and off-balance sheet items | $884,058 | $884,566 | $52,028 | $110,942 | $56,897 | $1,988,491 |

| (Millions of Canadian dollars) | As at October 31, 2021 |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | On demand | Within 1 year | 1 year to 2 years | 2 years to 5 years | 5 years and greater | Total |
| Financial liabilities |  |  |  |  |  |  |
| Deposits (1) | $576,161 | $367,389 | $44,951 | $78,071 | $33,063 | $1,099,635 |
| Other |  |  |  |  |  |  |
| Acceptances | 1 | 19,867 | 5 | - | - | 19,873 |
| Obligations related to securities sold short | - | 37,462 | - | - | - | 37,462 |
| Obligations related to assets sold under repurchase agreements and securities loaned | 19,234 | 242,314 | 669 | - | - | 262,217 |
| Other liabilities | 620 | 35,984 | 384 | 544 | 7,873 | 45,405 |
| Lease liabilities | - | 631 | 582 | 1,522 | 2,342 | 5,077 |
| Subordinated debentures | - | 188 | 110 | 1,916 | 7,392 | 9,606 |
|  | 596,016 | 703,835 | 46,701 | 82,053 | 50,670 | 1,479,275 |
| Off-balance sheet items |  |  |  |  |  |  |
| Financial guarantees (2) | $16,867 | $ - | $ - | $ - | $ - | $16,867 |
| Other commitments (3) | - | 81 | 82 | 209 | 344 | 716 |
| Commitments to extend credit (2) | 248,594 | 41,238 | 77 | 2 | - | 289,911 |
|  | 265,461 | 41,319 | 159 | 211 | 344 | 307,494 |
| Total financial liabilities and off-balance sheet items | $861,477 | $745,154 | $46,860 | $82,264 | $51,014 | $1,786,769 |

\* This table represents an integral part of our 2022 Annual Consolidated Financial Statements.

(1) A major portion of relationship-based deposits are repayable on demand or at short notice on a contractual basis while, in practice, these customer balances form a core base for our operations and liquidity needs, as explained in the preceding Deposit and funding profile.

(2) We believe that it is highly unlikely that all or substantially all of these guarantees and commitments will be drawn or settled within one year, and contracts may expire without being drawn or settled. The management of the liquidity risk associated with potential extensions of funds is outlined in the preceding Risk measurement section.

(3) Includes commitments related to short-term and low-dollar value leases, leases not yet commenced, and lease payments related to non-recoverable tax.

Management's Discussion and Analysis

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93

# Insurance risk

Insurance risk refers to the potential financial loss that may arise where the amount, timing and/or frequency of benefit and/or premium payments under insurance and reinsurance contracts are different than expected. Insurance risk is distinct from those risks covered by other parts of our risk management framework (e.g., credit, market and operational risk) where those risks are ancillary to, or accompany, the risk transfer. The five insurance sub-risks are: morbidity, mortality, longevity, policyholder behaviour (lapse), and travel risk.

Our Insurance Risk Management Framework provides an overview of our processes and tools for identifying, assessing, managing, mitigating and reporting on the insurance risks that face the organization. These are also supported by our robust three lines of defence governance structure, which is consistent with our Enterprise Risk Management Framework.

# Operational/regulatory compliance risk drivers

# Operational risk

Operational risk is the risk of loss or harm resulting from people, inadequate or failed internal processes, controls and systems or from external events. Operational risk is inherent in all of our activities and third-party activities and failure to manage operational risk can result in direct or indirect financial loss, reputational impact or regulatory scrutiny and proceedings in the various jurisdictions where we operate.

Our management of operational risk follows the three lines of defence governance model, encompassing the organizational roles and responsibilities for a coordinated enterprise-wide approach. For further details, refer to the Risk management - Enterprise risk management section.

# Operational risk framework

We have an Enterprise Operational Risk Framework which sets out the processes to identify, assess, monitor, measure, report and communicate on operational risk. The processes are established through the following:

- Risk identification and assessment tools, including the collection and analysis of risk event data, help risk owners understand and proactively manage operational risk exposures. Risk assessments are intended to ensure alignment between risk exposures and efforts to manage them. Management uses outputs of these tools to make informed risk decisions.
- Risk monitoring tools alert management to changes in the operational risk profile. When paired with escalation and monitoring triggers, risk monitoring tools can identify risk trends, warn management of risk levels that approach or exceed defined limits, as well as prompt actions and mitigation plans to be undertaken.
- Risk capital measurement is designed to provide credible estimation of potential risk exposure, including surfacing risk vulnerabilities, and informs strategic and capital planning decisions, which are ultimately intended to ensure that the bank is sufficiently resilient to withstand operational risk losses both in normal times and under stress situations.
- Risk reporting and communication processes seek to ensure that relevant operational risk information is made available to management in a timely manner to support risk-informed business decisions.

Conclusions from our operational risk programs enable learning based on what has occurred, insights into whether it could happen elsewhere in the organization, and what controls we need to amend or implement. These conclusions support the articulation of our operational risk appetite and are used to inform the overall level of operational risk exposure which thereby defines our operational risk profile. This profile includes significant operational risk exposures, potential new and emerging exposures and trends, and overall conclusions on the control environment and risk outlook.

We consider the potential risks and rewards of our decisions to strike a balance between accepting potential losses versus incurring costs of mitigation, the expression of which is in the form of our operational risk appetite. Our operational risk appetite is established at the Board level and cascaded throughout each of our business segments. We proactively identify and investigate corporate insurance opportunities to mitigate and reduce potential future impacts of operational risk.

Management reports have been implemented at various levels to support proactive management of operational risk and transparency of risk exposures. These reports are provided to senior management on a regular basis and provide detail on the main drivers of the risk status and trend for each of our business segments and the bank overall. In addition, changes to the operational risk profile that are not aligned to our business strategy or operational risk appetite are identified and discussed at GRC and the Risk Committee of the Board.

94

Royal Bank of Canada: Annual Report 2022

Management's Discussion and Analysis

Our operations expose us to many different operational risks, which may adversely affect our businesses and financial results. The following list is not exhaustive, as other factors could also adversely affect our results.

| Operational risk | Management strategy |
| --- | --- |
| Information technology and cybersecurity risk | Information technology risk is the risk associated with the use, ownership, operation, and adoption of information systems that can result in business interruptions, client service disruptions and loss of confidential information causing financial loss, reputational damage and regulatory fines and penalties. We maintain a risk driven program to address the risks following our operational risk framework supported by a global team of technology risk management experts.Cybersecurity risk is the risk to the business associated with cyber-attacks initiated to disrupt or disable our operations or to expose or damage data. We have a dedicated team of technology and cybersecurity professionals that manage a comprehensive program to help protect the organization against breaches and other incidents by ensuring appropriate security and operational controls are in place. We continue to strengthen our cyber-control framework and to improve our resilience and cybersecurity capabilities including 24 hour monitoring, cyber intelligence analysis of internal and external threats and alerting of potentially suspicious security events and incidents. Throughout the year, we continued to invest in our cybersecurity program, and multiple scenarios, assessments and simulations were conducted to test our resiliency strategy. |
| Information management and privacy risk | Information management risk is the risk of failing to manage information appropriately through its lifecycle due to inadequate processes, controls and technology resulting in legal and regulatory consequences, reputational damage and/or financial loss. We have made substantial investments in the Enterprise Chief Data Office (CDO) and functional and regional data management and data governance units to promote awareness of and effectively manage information management risk. Managing information management risk is fundamental to realizing our Data Vision, which is to become a data-driven organization that uses data effectively and efficiently to improve client experience and decision-making. Privacy risk is the risk of improper creation or collection, use, disclosure, retention or destruction of information. The collection, use and sharing of data, as well as the management and governance of data, are increasingly important as we continue to invest in digital solutions and innovation, as well as expanding our business activities. This is also reflected through regulatory developments relating to data privacy. The CDO and the Chief Privacy Office partner with cross-functional teams to develop and implement enterprise-wide standards and practices that describe how data is used, protected, managed and governed. |
| Money laundering and Terrorist financing risk | Money laundering and Terrorist financing risk is the risk that our products and services are used to facilitate the laundering of proceeds of crime or the financing of terrorist activity. We maintain an enterprise-wide program designed to deter, detect and report suspected money laundering and terrorist financing activities across our organization, while seeking to ensure compliance with the laws and regulations of the various jurisdictions in which we operate. Our Enterprise Financial Crimes program is dedicated to the continuous development and maintenance of robust policies, guidelines, training, risk-assessment tools and models to enable our employees to manage evolving money laundering and terrorist financing risks and regulatory expectations. The Enterprise Financial Crimes program is regularly evaluated in an effort to ensure it remains aligned with industry standards, best practices and all applicable laws, regulations and guidance. Risks of non-compliance include enforcement actions, criminal prosecutions and reputational damage. |
| Third-party risk | Third-party risk is the risk of failure to effectively manage third parties which may expose us to service disruptions, regulatory action, financial loss, litigation or reputational damage. We have a risk-based enterprise-wide program designed to provide oversight for third-party relationships that enables us to respond effectively to events that can cause service disruptions, financial loss or various other risks that could impact us. Our approach to third-party risk mitigation is outlined in policies and standards that establish the minimum requirements for identifying and managing risks throughout the engagement with a third-party, while ensuring compliance with global regulatory expectations. We monitor third-party providers that we consider critical to our operations for any impact on their ability to deliver services to us, including vendors of our third-party providers. |
| Business continuity risk | Business continuity risk is the risk of being unable to maintain, continue or restore essential business operations during and/or after an event that prevents us from conducting business in the normal course. Exposure to disruptive operational events interrupts the continuity of our business operations and could negatively impact our financial results, reputation, client outcomes and/or result in harm to our employees. These operational events could result from the impact of severe weather, pandemics, failed processes, technology failures or cyber threats. Our risk-based enterprise-wide business continuity management program considers multiple scenarios to address the consequences of a disruption and its effects on the availability of our people, processes, facilities, technology, and third-party arrangements. Our approach to business continuity management is outlined in policies and standards embedded across the organization and the related risks are regularly measured, monitored, reported and integrated in our operational risk management and control framework. |

Management's Discussion and Analysis

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## Operational risk capital

Requirements for operational risk capital are determined in accordance with OSFI issued guidelines. Currently, our operational risk capital is assessed using the Standardized Approach (TSA) which is a formula-based calculation predicated on gross income. Upon implementation of final Basel III reforms, OSFI will require deposit-taking institutions to adopt a new Standardized Approach (SA) in Q2 2023 for measurement of operational risk capital. The SA methodology is based on the Business Indicator Component (BIC), which is a financial statement-based proxy for operational risk, and the Internal Loss Multiplier, a scaling factor that is based on the historical internal loss average relative to the BIC. Once implemented, SA will replace TSA. For further details on operational risk capital, refer to the Capital management section.

## Operational risk loss events

As at October 31, 2022, our operational risk losses remain within our risk appetite. For further details on our contingencies, including litigation, refer to Notes 24 and 25 of our 2022 Annual Consolidated Financial Statements.

## Culture and conduct risk

Our values set the tone of our organizational culture and translate into desired behaviours as articulated in our Code of Conduct and leadership model. We define conduct as the manifestation of culture through the behaviours, judgment, decisions, and actions of the organization and its employees. Our organizational direction establishes the expectation of good conduct outcomes as the operating norm for the organization, all employees, and third-party service providers operating on our behalf to drive positive outcomes for our clients, employees, stakeholders, financial markets and our reputation. We hold ourselves to the highest standards of conduct to build the trust of our clients, investors, colleagues and community. The desired outcomes from effective culture and conduct practices align with our purpose and values and support our risk appetite statements.

Risk culture is a subset of our overall culture that influences how, individually and collectively, we take and manage risks. Our risk culture helps us identify and understand risks, openly discuss risks, and act on the organization's current and perceived future risks. Our risk culture practices are grounded in our existing risk management and human resource disciplines and protocols. When combined with the elements of effective leadership and values, these practices provide a base from which the resulting risk culture and conduct can be assessed, monitored, sustained and subjected to ongoing enhancement.

Our Board-approved Enterprise Culture and Conduct Risks Framework provides organizational direction and describes our approach to a set of related topics applicable to all risk categories such as fair outcomes for clients and other stakeholders, culture, including accountability and risk culture, conduct risk, sales conduct and client practices, and misconduct.

On a regular basis, management communicates behavioural expectations to our employees with an emphasis on conduct and values. Our leadership model also supports and encourages effective challenge between the businesses and control functions. These behavioural expectations are supported by tools and resources which are designed to help employees live our values, report misconduct and raise concerns, including those that might have ethical implications. We are committed to fostering an environment where employees feel safe to speak up without retaliation. Employees have the ability to report matters through a global anonymous Conduct Hotline. In addition, our Code of Conduct outlines an employee's responsibility to be truthful, respect others, and comply with laws, regulations and our policies. Anyone who breaches or fails to report an actual or possible breach of the Code of Conduct is subject to corrective or disciplinary action. This can range from reprimands and impacts on performance ratings and compensation, to termination of employment relationships with the organization. Internal audits, including behavioural science reviews with recommendations are also conducted to better understand and enhance employee attitudes and behaviours as they relate to risk management.

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## Regulatory compliance risk

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

96 Royal Bank of Canada: Annual Report 2022 Management's Discussion and Analysis

Laws and regulations are in place to protect the financial and other interests of our clients, investors and the public. As a large-scale global financial institution, we are subject to numerous laws and extensive and evolving regulation by governmental agencies, supervisory authorities and self-regulatory organizations in Canada, the U.S., the U.K., Europe and other jurisdictions in which we operate. Such regulation continues to become increasingly extensive and complex. In addition, regulatory scrutiny and expectations in Canada, the U.S., the U.K., Europe and other jurisdictions for large financial institutions with respect to, among other things, governance, risk management practices and controls, and conduct, as well as the enforcement of regulatory compliance matters, has intensified. Failure to comply with these regulatory requirements and expectations or to resolve any identified deficiencies could result in increased regulatory oversight and restrictions. Resolution of such matters can also result in the payment of substantial penalties, agreements with respect to future operation of our business, actions with respect to relevant personnel, admission of wrongdoing, and guilty pleas with respect to criminal charges, which may in turn prohibit us from conducting certain types of business absent regulatory relief.

Operating in this increasingly complex regulatory environment and intense regulatory enforcement environment, we are and have been subject to a variety of legal proceedings, including civil claims and lawsuits, criminal charges, regulatory scrutiny, examinations and proceedings, investigations, audits and requests for information by various governmental regulatory agencies and law enforcement authorities in various jurisdictions, and we anticipate that our ongoing business activities will give rise to such matters in the future. The global scope of our operations also means that a single issue may give rise to overlapping regulatory investigations, regulatory proceedings and or civil litigation claims in different jurisdictions. RBC can be subject to such proceedings due to alleged violations of law or, if determined by regulators, allegedly inadequate policies, procedures, controls or remediation of deficiencies. Changes to laws, including tax laws, regulations or regulatory policies, as well as the changes in how they are interpreted, implemented or enforced, could adversely affect us, for example, by lowering barriers to entry in the businesses in which we operate, increasing our costs of compliance, or limiting our activities and ability to execute our strategic plans. In addition, the severity of the remedies sought in legal and regulatory proceedings to which RBC is subject have increased. Further, there is no assurance that we always will be, or be deemed to be, in compliance with laws, regulations or regulatory policies or expectations. Accordingly, it is possible that we could receive a judicial or regulatory enforcement judgment or decision that results in significant fines, damages, penalties, and other costs or injunctions, criminal convictions, or loss of licenses or registrations that would damage our reputation, and negatively impact our earnings and ability to conduct some of our businesses. We are also subject to litigation arising in the ordinary course of our business and the adverse resolution of any litigation could have a significant adverse effect on our results or could give rise to significant reputational damage, which in turn could impact our future business prospects.

Our Regulatory Compliance Management Framework outlines how we manage and mitigate the regulatory compliance risks associated with failing to comply with, or adapt to, current and changing laws and regulations in the jurisdictions in which we operate.

Regulatory compliance risk includes the regulatory risks associated with financial crimes (which include, but are not limited to, money laundering, bribery, and sanctions), privacy, market conduct, consumer protection, business conduct, as well as prudential and other generally applicable non-financial requirements. Specific compliance policies, procedures and supporting frameworks have been developed to seek to manage regulatory compliance risk.

## Strategic risk drivers

### Strategic risk

Strategic risk is the risk that the enterprise or particular business areas will make inappropriate strategic choices, or will be unable to successfully implement selected strategies or achieve the expected benefits. Business strategy is a major driver of our risk appetite and consequently the strategic choices we make in terms of business mix determine how our risk profile changes.

Responsibility for selecting and successfully implementing business strategies is mandated to the individual heads of each business segment. Oversight of strategic risk is the responsibility of the heads of the business segments and their operating committees, the Enterprise Strategy & Transformation group, the GE, and the Board. The Enterprise Strategy & Transformation group supports the management of strategic risk through the strategic planning process, articulated within our Enterprise Strategic Planning Policy, ensuring alignment across our business, financial, capital and risk planning.

Our annual business portfolio review and project approval request processes help to identify and mitigate strategic risk by seeking to ensure that strategies for new initiatives, lines of business, and the enterprise as a whole align with our risk appetite and risk posture. GRM provides oversight of strategic risk by providing independent reviews of these processes, establishing enterprise risk frameworks, and independently monitoring and reporting on the level of risk established against our risk appetite metrics in accordance with the three lines of defence governance model.

For details on the key strategic priorities for our business segments, refer to the Business segment results section.

### Reputation risk

Reputation risk is the risk of an adverse impact on stakeholders' perception of the bank due to i) the actions or inactions of the bank, its employees, third-party service providers, or clients, ii) the perceived misalignment of these actions or inactions with stakeholder expectations of the bank, or iii) negative public sentiment towards a global or industry issue. Our reputation is rooted in the perception of our stakeholders, and the trust and loyalty they place in us is core to our Purpose of helping clients thrive and communities prosper. A strong and trustworthy reputation will generally strengthen our market position, reduce the cost of capital, increase shareholder value, strengthen our resiliency, and help attract and retain top talent. Conversely, damage to our reputation can result in reduced share price and market capitalization, increased cost of capital, loss of strategic flexibility, inability to enter or expand into markets, loss of client loyalty and business, regulatory fines and penalties, restrictive agreements with regulators or prosecutors, or criminal prosecutions. The sources of reputation risk are widespread. Reputation risk is a transverse risk which can manifest as an outcome of other risk types including but not limited to credit, regulatory, legal, operational, and environmental and social risks. We can also experience reputation risk from a failure to maintain an effective control environment, exhibit good conduct and maintain appropriate culture practices.

Managing our reputation risk is an integral part of our organizational culture and our overall enterprise risk management approach, as well as a priority for employees and our Board. Our Board-approved Reputation Risk Management Framework

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provides an overview of our approach to identify, assess, manage, monitor and report on reputation risk. This framework outlines governance authorities, roles and responsibilities, and controls and mechanisms to manage our reputation risk, including our culture of integrity, compliance with our Code of Conduct and operating within our risk appetite.

Our governance of reputation risk aims to be holistic and provides an integrated view of potential reputation issues across the organization. This governance structure is designed to ensure that ownership and accountability for reputation risk are understood across the enterprise, both proactive and reactive reputation risk decisions are escalated to senior management for review and evaluation, and reporting on reputation risk is comprehensive and integrated.

## Legal and regulatory environment risk

Legal and regulatory environment risk is the risk that new or modified laws and regulations, and the interpretation or application of laws and regulations, will negatively impact the way in which we operate, both in Canada and in the other jurisdictions in which we conduct business. The full impact of some of these changes on our business will not be known until final rules are implemented and market practices have developed in response. We continue to respond to these and other developments and are working to minimize any potential adverse business or economic impact. The following provides a high-level summary of some of the key regulatory changes that have potential to increase or decrease our costs, impact our profitability and increase the complexity of our operations.

### Global uncertainty

Significant uncertainty about inflationary and trade pressures, geopolitical tensions and supply chain disruptions all pose risks to the global economic outlook. In October 2022, the International Monetary Fund (IMF) projected global growth of 3.2% in calendar 2022 which remains unchanged from its July forecast. The October 2022 forecast is down from 4.9% in October 2021 and reflects the ongoing economic effects of inflationary pressures and tightening monetary policy, a worse-than-anticipated slowdown in China resulting from COVID-19 containment measures, and the ongoing conflict between Russia and Ukraine. While the outcome of the conflict between Russia and Ukraine remains uncertain, our exposure to Russia and Ukraine is extremely limited, as we do not have operations in these countries, consistent with our strategy and risk appetite. Our diversified business model, as well as our product and geographic diversification, continue to help mitigate the risks posed by global uncertainty.

### Government of Canada Budget 2022

On April 7, 2022, the Government of Canada presented its 2022 budget, which included measures focused on ensuring banking and life insurers' groups help pay a portion of the costs of the Canadian federal government's COVID-19 pandemic response. On November 22, 2022, Bill C-32, Fall Economic Statement Implementation Act, 2022 (the Bill) received second reading in the House of Commons. The Bill includes a Canada Recovery Dividend (CRD) and a permanent increase in the corporate income tax rate. The CRD is a one-time 15% tax for 2022 determined based on the average taxable income above $1 billion for taxation years 2020 and 2021 and payable in equal installments over five years. The permanent increase in the corporate income tax rate is 1.5% on taxable income above $100 million and would apply to taxation years that end after April 7, 2022.

The Bill is not yet substantively enacted and timing of enactment remains uncertain. Based on the draft legislation, which remains subject to amendments prior to enactment, the CRD is expected to reduce net income by approximately $1 billion and other comprehensive income by approximately $0.1 billion when substantively enacted. The CRD is also expected to reduce our CET1 ratio by approximately 20 bps.

### Climate-related regulatory activity

Climate change regulations, frameworks, and guidance that apply to banks, insurers and asset managers are rapidly evolving. We continue to monitor the development of applicable laws in this area and the evolution of disclosure requirements for public issuers. In Canada this includes OSFI's Draft Guideline B-15 Climate Risk Management, which encompasses both climate risk management guidance and disclosure requirements that, if approved, would apply to RBC for fiscal 2023 at the earliest, and the Canadian Securities Administrators' proposed National Instrument 51-107 on disclosure of climate-related matters which would introduce climate-related disclosure requirements for Canadian reporting issuers. In the U.S., the SEC has proposed rule changes which would require many registrants to include certain climate-related disclosures in their regulatory filings, including the financial statements. Internationally, the European Parliament recently approved the Corporate Sustainability Reporting Directive which will require disclosure under the European Sustainability Reporting Standards, and the International Sustainability Standards Board has also proposed standards for climate-related disclosures and general sustainability related disclosures.

### Canadian Housing Market and Consumer Debt

In June 2022, OSFI released a new Advisory - Clarification on the Treatment of Innovative Real Estate Secured Lending Products under Guideline B-20 (the Advisory). The Advisory complements existing expectations under Guideline B-20 - Residential Mortgage Underwriting Practices and Procedures, which articulates OSFI's expectations regarding underwriting practices and procedures for reverse residential mortgages, residential mortgages with shared equity features and combined loan plans (CLPs). We do not originate reverse residential mortgages or residential mortgages with shared equity features, but we do originate CLPs through our RBC Homeline Plan® products. The Advisory is not expected to have an effect on how most borrowers with CLPs use their products.

The Advisory will come into effect for us on October 31, 2023. New CLPs originated after this date will need to meet the new requirements. CLPs originated before October 31, 2023 are not subject to the new requirements unless certain contractual changes are made that would trigger application of the requirements. We have assessed the requirements and initiated a project to meet the requirements by the effective date.

### Interest rate benchmark reform

On May 16, 2022, Refinitiv Benchmark Services (UK) Limited (RBSL), the administrator of the Canadian Dollar Offered Rate (CDOR), announced that the calculation and publication of all remaining tenors of CDOR will permanently cease after June 28, 2024. Concurrently, OSFI published their expectation that federally regulated financial institutions (FRFIs) transition all new derivatives and securities to an alternative benchmark rate by June 30, 2023, with no new CDOR exposure after that date, with

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