(The following statement was released by the rating agency) Fitch Ratings-Toronto-January 17: Fitch Ratings has affirmed Royal Bank of Canada's (RBC) Long-Term and Short-Term Issuer Default Ratings (IDRs) at 'AA' and 'F1+', respectively. The Rating Outlook is Stable. This rating action follows Fitch's periodic review of the Canadian Banks Peer Group, which includes Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CIBC), Desjardins Group (DESJ), National Bank of Canada (NBC), RBC and Toronto-Dominion Bank (TD). Company-specific rating rationales for the other banks will be published separately. For further information about the Canadian banking sector, please refer to the special reports titled "Fitch Ratings 2020 Outlook: Canadian Banks" (Nov. 19, 2019) and "Canadian Banks Fiscal 2019 Results" (Dec. 18, 2019). City National Bank; Long Term Issuer Default Rating; Affirmed; AA-; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F1+ ; Support Rating; Affirmed; 1 ----subordinated; Long Term Rating; Affirmed; A+ ----long-term deposits; Long Term Rating; Affirmed; AA ----short-term deposits; Short Term Rating; Affirmed; F1+ Royal Bank of Canada; Long Term Issuer Default Rating; Affirmed; AA; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F1+ ; Viability Rating; Affirmed; aa ; Support Rating; Affirmed; 5 ; Support Rating Floor; Affirmed; NF ; Derivative Counterparty Rating; Affirmed; AA(dcr) ----senior unsecured; Long Term Rating; Affirmed; AA ----subordinated; Long Term Rating; Affirmed; AA- ----long-term deposits; Long Term Rating; Affirmed; AA ----Senior preferred; Long Term Rating; Affirmed; AA ----short-term deposits; Short Term Rating; Affirmed; F1+ ----Senior preferred; Short Term Rating; Affirmed; F1+ Royal Bank of Canada (Sydney Branch) ----senior unsecured; Long Term Rating; Affirmed; AA Key Rating Drivers IDRS, VRS AND SENIOR DEBT The Stable Outlook incorporates Fitch's recognition of persistent tail risks to the Canadian banking system. These include elevated levels of household and corporate indebtedness, vulnerability to global trade tensions and structural weaknesses in the Canadian oil sector. However, Fitch notes that risks stemming from the housing market have eased in light of successful macro-prudential measures. Moreover, trade tensions have materially moderated since the lifting of U.S. imposed aluminum and steel tariffs and progress in ratification of the Canada-United States-Mexico-Agreement. Downside risks in the operating environment are also mitigated by Canada's strong, proactive banking regulation.
RBC's ratings are highly influenced by the company's very strong domestic franchise and business position. RBC's company profile and ratings benefit from Canada's concentrated banking sector and high barriers to entry, diverse product business mix, solid asset quality, consistently good operating performance, sound funding and liquidity position, and good capital ratios. RBC's ratings also reflect its sizeable capital markets business that has generally remained below 25% of total revenues and not translated to into increased revenue and earnings volatility. RBC's ratings are supported by its strong franchise/brand and market share positioning in Canada across various product segments. The bank's retail operations has leading loans and deposit market share throughout Canada with approximately 18% in both categories, as well as maintaining #1 or #2 rankings in other key retail and business product segments. This is helped by its significant distribution network that is made up of the largest branch and ATM network in Canada. In addition, RBC has strong franchises in Wealth Management in both Canada and the U.S., including leading market shares in high net worth and retail funds in Canada. Furthermore its capital markets business is strong in Canada and the U.S., ranking high on league tables, including in corporate and investment banking and equity and debt originations. The company continues to make solid investments in technology in all its businesses not only for gain efficiencies, but to also gain market share and position itself for changing customer behaviour. RBC's asset quality is strong and reflects the strong operating environments in Canada and the U.S. and the company's good underwriting. In Canada, approximately 50% of the company's uninsured mortgage exposure is to Ontario, with 20% to British Columbia and Territories, which exposes RBC to the large run ups in home prices in both provinces (specifically the GTA and GVA). However, loan-to-value ratios for both regions remain conservative (Ontario - 70%; British Columbia - 68%) and allows for some cushion should home prices experience negative shocks in the near future. As of 2019, the company had gross impaired loans ratio of 0.46%, which was below the peer average by 10bps. Wholesale impairments made up most of the company's impairments at 63%, with the remainder coming from retail. Most of the wholesale impairments were derived from the oil gas sector (27% of wholesale impairments), which is an industry that is still experiencing some challenges. Over the near-to-medium term, Fitch anticipates credit quality to normalize from current benign levels to a range more in line with historical averages. In Fitch's base case, this normalization would remain consistent with current rating levels. Approximately 40% of RBC's revenues are from outside of Canada, giving the company good geographic diversification of earnings. This has been helped by its acquisition of City National Bank (CNB) in 2015, which has performed well. With CNB, RBC gained a stronger presence in the U.S. market in both wealth management and in commercial lending, which has also provided the company with growth opportunities as some of its Canadian business begin to slow. The incremental revenues from CNB to RBC's total revenue base have also helped to keep capital markets revenues below management's 25% threshold, which accounted for approximately 18% of total revenue for fiscal 2019. RBC's earnings performance continues to remain strong. Over the last 20 quarters, RBC's operating performance as measured by operating income-to-risk weighted assets averaged approximately 3.1%, the second highest of the peer group but with the lowest standard deviation of roughly 0.2% over that time period. Fitch attributes RBC's strong performance track record to its solid market positions, good distribution network and diversified operations, especially in Canada. Also helping has been its solid underwriting and risk management practices as well as its growing capital markets presence in the U.S. where it is now among the top 10 lists for advising on MA deals. Fitch also considers RBC's funding and liquidity profile to be appropriate in the context of the overall rating. RBC's Fitch adjusted loan-to-deposit ratio of 92% (2019) is the second lowest amongst its peer group and also compares favorably to peers and to similarly rated entities. The company's Liquidity Coverage Ratio (LCR) of 127% (2019) is slightly below the peer average but still considered strong. RBC also has a sizable and diverse wholesale funding mix that is diversified by instrument, geography, currency, structure and maturity. Similarly, RBC's capital ratios are also commensurate with its rating. As of 2019, it had a CET1 ratio of 12.1%, which was higher than its banking peers (excluding Desjardins group) by 40bps. In Fitch's opinion, RBC continues to exhibit superior internal capital generation abilities via retained earnings. SUPPORT RATING AND SUPPORT RATING FLOOR The bank's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF' (No Floor) reflect the implementation of bail-in rules for domestic systemically important banks (D-SIBs) in 2018. Bail-in rules empower relevant authorities to impose losses on creditors in the event of a D-SIB failure. The Canadian bail-in regime adheres to the Financial Stability Board's principles. However, it differs from other resolution regimes in that Canadian authorities retain significant flexibility to resolve an insolvent financial institution. Conversion of bail-inable senior debt to common equity is not triggered automatically in Canada but is retained at the discretion of the relevant authorities, which have wide latitude, including re-capitalizing an institution, creating a bridge bank or imposing losses on creditors. Notwithstanding this flexibility, in Fitch's view, the government's propensity to support these institutions has diminished such that it can no longer be relied upon. INSTITUTIONAL SUPPORT The ratings of City National are linked to that of their parent, RBC. As such, these subsidiaries have a Support Rating of '1', indicating that there is a high likelihood of institutional support from RBC, if required. Since the Support Rating is based on institutional rather than sovereign support, there is no Support Floor Rating assigned. SENIOR PREFERRED DEBT RBC Bank's legacy senior debt and short-term (less than 400 days) senior obligations are equalized with the Bank's Long-Term IDR and senior unsecured debt. Over time, however, Fitch will likely provide a one-notch rating uplift to these "senior preferred" obligations as these instruments are legally exempted from bail-in conversion under the Canadian bail-in regime and are increasingly supported by qualifying junior debt buffers, including TLAC which is required to reach 23.75% of risk-weighted assets by November 2021. DERIVATIVE COUNTERPARTY RATING, LONG- AND SHORT-TERM DEPOSIT RATINGS RBC Bank's Derivative Counterparty Rating (DCR) and long-term deposit ratings are at the same level as the bank's Long-Term IDR and senior unsecured debt. Short-term deposit ratings are similarly equalized with the bank's Short-Term IDR. Fitch will likely provide a one-notch rating uplift to these obligations as these instruments are legally exempted from bail-in conversion under the Canadian bail-in regime and are increasingly supported by qualifying junior debt buffers. City National Bank's uninsured long-term deposit ratings are rated one notch higher than the bank level IDR because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by RBC are notched down from its Viability Rating (VR) in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles. RBC's subordinated debt is notched one level below its VR for loss severity in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles. RBC's preferred shares are rated five notches below the VR, made up of two notches down for non-performance and three notches down for loss severity. SUBSIDIARY AND AFFILIATED COMPANY All of the subsidiaries and affiliated companies reviewed as part of the Canadian bank peer review factor in a high probability of support from parent institutions to the subsidiaries. This reflects that performing parent banks have very rarely allowed subsidiaries to default. It also considers the high level of integration, brand, management, financial and reputational incentives to avoid subsidiary defaults. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT RBC's ratings are solidly situated at their current level, which is at the top of Fitch's global bank universe of ratings, therefore an upgrade is unlikely. Similar to peers, RBC's ratings are sensitive to any significant downturns to the Canadian housing market and general economy. Although not expected to rise significantly in the short-term, this could be caused by higher levels of unemployment and/or interest rates that may impact asset quality, especially considering the high levels of consumer debt in Canada. The ratings are also exposed to general economic conditions in the U.S., especially in the western and eastern coastal regions it operates in. To date, consumer assets, particularly mortgages, continue to perform well for all the Canadian banks and RBC. In Fitch's opinion, any medium term stresses are mitigated by structural features in the Canadian mortgage market, relatively low loan-to-value ratios, appropriate macro-prudential measures, and sound loss-absorbing capacity of the banks. Given Toronto and Vancouver represent RBC's two largest mortgage markets, its ratings would be sensitive to any regional housing shocks to those regions. A housing downturn would also affect the broader economy through the link between housing wealth and consumer consumption, and the real estate sector, which are important drivers of GDP growth. This would likely impact earnings not only for RBC, but for all the Canadian banks. RBC's ratings, similar to peers, would also be sensitive to any regulatory roll-back of mortgage underwriting guidelines that re-ignite any home price appreciation and increases in consumer debt from already high levels. While overall impaired loan ratios for RBC remain at cyclical lows, Fitch believes impaired loan ratios will likely increase over time. Modest rating pressure could emerge should RBC's credit performance deteriorate as evidenced by a significant rise in impaired loans and loan losses. RBC's ratings are also sensitive to potential earnings volatility as measured by the volatility of operating income/RWA relative to domestic and highly rated international peers. Specifically, negative rating pressure could eventuate should capital markets revenue as a percentage of total revenue consistently exceed management's threshold of 25%. RBC's ratings are also sensitive to any larger acquisitions (especially in the U.S.) that might impact capital ratios, especially outside its existing footprint and/or lines of businesses. In addition, given the Financial Action Task Force's identified weaknesses in Canada's anti-money laundering / anti-terrorism financing (AML/ATF) regime, noting that it lacks disclosure requirements critical to ensuring financial institutions' timely and accurate access to customer information, ratings would be sensitive to material and systemic conduct risk findings, particularly as they relate to AML/ATF or sanctions compliance. While this is not currently expected, material findings that suggest broad-based weaknesses or failings in the risk management infrastructure could pressure RBC's ratings. SUPPORT RATING AND SUPPORT RATING FLOOR RBC's SR and SRF are sensitive to any change in assumptions around the propensity of Canadian authorities to provide timely support, if necessary. This may arise in the event of a change in bank resolution legislation or the issuance of government commitments to provide support, although Fitch does not view this as likely over the rating horizon. SENIOR PREFERRED DEBT, DERIVATIVE COUNTERPARTY RATINGS, LONG- AND SHORT-TERM DEPOSIT RATINGS RBC's senior preferred debt, Derivative Counterparty Rating (DCR) and long-term deposit ratings are primarily sensitive to changes in the bank's Long-Term IDR. RBC's short-term deposit ratings are sensitive to changes in the bank's Short-Term IDR, as well as to a deterioration in the bank's funding and liquidity metrics. A one notch uplift to these bail-in exempt obligations is likely when the bank builds up sufficient Qualifying Junior Debt buffers to a level which Fitch views as sufficient to recapitalize the bank. Rating uplift of these instruments could potentially be accelerated under proposals included in Fitch's published Exposure Draft: Bank Rating Criteria (Nov. 15, 2019). City National Bank's uninsured long-term deposit ratings are sensitive to any change in its IDR. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES RBC's subordinated debt and preferred stock ratings are primarily sensitive to a changes to its VR. In addition, ratings would also be sensitive to Fitch's recently published Exposure Draft: Bank Rating Criteria (Nov. 15, 2019), which contemplates potential changes to the notching of hybrid issuances. SUBSIDIARY AND AFFILIATED COMPANIES The ratings of City National Bank and Royal Bank of Canada, Sydney branch are primarily sensitive to any change in the VR of RBC. City National Bank's ratings would also be sensitive to Fitch's view of its strategic importance to RBC. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg. Contacts: Primary Rating Analyst Foster Cheng, Director +1 416 644 1572 Fitch Ratings, Inc. , Canada Branch 120 Adelaide Street West Suite 2500 Toronto Secondary Rating Analyst Mark Narron, Director +1 212 612 7898 Committee Chairperson Alan Adkins, Managing Director +44 20 3530 1702
Media Relations: Hannah James, New York, Tel: +1 646 582 4947, Email: hannah.james@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Bank Rating Criteria (pub. 12 Oct 2018) https://www.fitchratings.com/site/re/10044408 Exposure Draft: Bank Rating Criteria (pub. 15 Nov 2019) https://www.fitchratings.com/site/re/10101980 Short-Term Ratings Criteria (pub. 02 May 2019) https://www.fitchratings.com/site/re/10073011 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10108176 Solicitation Status https://www.fitchratings.com/site/pr/10108176#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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