DBRS Morningstar Confirms Royal Bank of Canada at AA (high) With a Stable Trend

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

KEY RATING CONSIDERATIONS
The ratings confirmations and Stable trends recognize the Bank’s large and highly diversified franchise in Canada, combined with a fast growing U.S. banking and wealth management business. In addition, RBC has global capabilities and reach through a number of other businesses, including capital markets and wealth. RBC has exhibited better-than-peer, through the cycle financial performance and has historically exhibited strong risk management and credit fundamentals. Additionally, the Bank earns a significant percentage of revenue outside of Canada, contributing to RBC’s overall geographic diversity.

The ratings also reflect the economic disruption caused by the Coronavirus Disease (COVID-19) pandemic. RBC entered this downturn with a strong balance sheet and the impact on the Bank's revenue, earnings, and asset quality has been fairly muted as the unprecedented support measures put in place by governments and regulators around the globe mitigated much of the negative effects of this crisis. Moreover, the ratings also consider RBC’s business mix, which includes a large capital markets business that, through the pandemic, has been performed well but may add potential earnings volatility.

RATING DRIVERS
Given RBC’s high rating level, an upgrade of the ratings is unlikely. Ratings would be downgraded if there were a sustained deterioration in asset quality, especially if it were related to deficiencies in risk management. Additionally, a sustained weakening of profitability metrics would also result in a downgrade of ratings.

RATING RATIONALE
RBC operates a significant North American franchise, including a leading Canadian banking franchise that maintains top market shares across a number of products. In addition, City National Bank, which the Bank acquired five years ago, has been a steady platform for strong growth in the United States, particularly in private and commercial banking as well as wealth management. A number of RBC’s business lines also have a global reach, especially capital markets and wealth management. RBC’s very strong franchise has historically contributed to consistently robust profitability garnered through its highly diversified revenue streams.

While earnings were pressured in F2020, volume growth and a strong performance in capital markets helped to offset the pressure of an elevated provision for credit losses and low interest rates. In Q1 2021, RBC reported earnings of $3.8 billion, representing a strong growth of 19% compared with the linked quarter, largely because of a sharply lower provision for credit losses and strong volume driven revenue growth that offset ongoing net interest margin pressure. In addition, the Bank's adjusted efficiency ratio improved to 51.9% in this quarter compared with 53.5% last quarter, driven by positive operating leverage.

As of January 31, 2021, the loan balances remaining under deferrals were very low at about 0.25% of gross loans and acceptances, with the Bank experiencing a high rate of payment resumption on loans that have exited the deferral period. With an improving economic outlook and strong credit performance, RBC recorded a recovery of provision for credit losses (PCL) on performing loans of $97 million during the quarter, with PCL on impaired loans also declining quarter over quarter. As a result, PCL on impaired loans ratio and total PCL ratio improved sequentially to 13 basis points (bps) and 7 bps, respectively, representing the lowest levels since Q1 2005. The gross impaired loans ratio in Q1 2021 declined 6 bps sequentially to 0.41% as new formations remained low.

DBRS Morningstar views RBC as having strong levels of on balance sheet liquidity and a very strong deposit franchise in Canada. Augmenting its substantial deposit funding, RBC enjoys ready access to diversified wholesale funding sources. For Q1 2021, the liquidity coverage ratio of 141% was well above the regulatory minimum of 100% and remains somewhat elevated from typical levels, given the large amounts of liquidity in the system. The Canadian domestic systemically important banks (D-SIBs) began disclosing their net stable funding ratio (NSFR), which looks at funding resilience over the medium to longer term. RBC's NSFR was 118% as at January 31, 2021, exceeding the regulatory minimum of 100%.

As at January 31, 2021, the Bank's CET1 ratio was solid at 12.5% as internal capital generation largely offset growth in risk-weighted assets (RWA). At this level, RBC's capital cushion was a sizeable $19BN surplus over a 9% CET1 ratio. DBRS Morningstar expects capital levels to remain elevated until the Office of the Superintendent of Financial Institutions (OSFI) relaxes its stance on common share buybacks and dividend increases, which were curtailed in March 2020. Furthermore, the Bank's total loss-absorbing capacity as a percentage of RWA increased 60 bps to 22.5%, which meets the current minimum of 22.5% (21.5% plus 1.0% Domestic Stability Buffer) set by OSFI, with compliance required by November 1, 2021.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Royal Bank of Canada are as follows: Franchise Strength – Very Strong; Earnings Power – Very Strong/Strong; Risk Profile –Strong; Funding & Liquidity – Strong; Capitalisation – Very Strong/Strong.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020; https://www.dbrsmorningstar.com/research/362170). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings: Each of the principal methodologies/principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020) was used to evaluate the Issuer, while the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021) was used to assess ESG factors.

The last rating action on this Issuer took place on July 27, 2020, when DBRS Morningstar assigned a final rating to NVCC Additional Tier 1 (AT1) Limited Recourse Capital Notes.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: John Mackerey, Senior Vice President
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG
Initial Rating Date: December 19, 2005

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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