Royal Bank of Canada

1. Royal Bank of Canada BUS 419 – Advanced Derivatives Securities Heng I (Miki) PunJeff ChanMacau ChanNathan Yau

2. Agenda • Industry Overview • Regulations • Overview of RBC • Financial Statement Analysis • Risk Management Structure • Major Risks of RBC • Risk Management Strategies

3. Industry Overview

4. Number of Banks Operating in Canada • 29 domestic banks • 24 foreign bank subsidiaries • 27 full-service foreign bank branches • 3 foreign bank lending branches 

5. Major Players • Toronto-Dominion (TD) Bank – 21.9% • Royal Bank of Canada – 20.6% • Canadian Imperial Bank of Commerce (CIBC) – 16.4% • Scotiabank – 14.1% • Bank of Montreal – 13.4%

6. Products and Services Segmentation

7. Major Market Segmentation

8. Key External Drivers • Consumer Confidence Index - measures consumer optimism about the current macroeconomic environment and is strongly correlated with aggregate household debt levels. • Overnight Rate - the interest rate at which major financial institutions can borrow and lend short-term funds to each other. It is strongly correlated with interest rates charged by industry operators on lending products. • Corporate profit - Corporate clients are anticipated to account for 20.2% of total industry revenue in 2015. Changes in corporate profit tend to dictate demand for credit from this market segment. • Regulations - improve the reputations of Canadian banks on a global scale, yet temper lending and increase compliance costs, to the detriment of industry profit.

9. Regulations

10. Bank Act • Schedule I Banks are domestic banks and are allowed to accept deposits, which makes them eligible to receive, hold and enforce a special security interest • Schedule II banks are also allowed to accept deposits and are subsidiaries of foreign banks, but they are excluded from the Back Act security • Schedule III banks are permitted to operate in Canada, but are not incorporated under the Bank Act, which limits their range of banking activities

11. The Basel Committee • Established in 1930 in Basel, Switzerland • Created by the central bank Governors of the Group Ten nations in 1974 and meets four times a year at the Bank for International Settlements (BIS) in Basel Switzerland • A forum to promote discussion and policy analysis among central banks and within the international financial community • Objective: To enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide

12. Basel I – The Basic Capital Accord • Published in 1988 • Established a set of minimum capital requirements for banks with the goal of minimizing credit risk • Banks that operate internationally were required to maintain a minimum capital ratio of capital to risk-weighted assets of 8% to be implemented by the end of 1992

13. Basel II - The New Capital Framework • Initially published in 2004 – built on the work of Basel I, especially in the areas of risk and capital • Designed to improve the way regulatory capital requirements reflect underlying risks and to better address the financial innovation that had occurred in recent years • Aimed at rewarding and encouraging continued improvements in risk measurement and control • Comprised three pillars: • Minimum capital requirements, which sought to develop and expand the standardised rules set out in Basel I; • Supervisory review of an institution's capital adequacy and internal assessment process; and • Effective use of disclosure as a lever to strengthen market discipline and encourage sound banking practices • Provided 3 tiers of capital

14. Basel III • Originally published in December 2010 in response to the global financial crisis and is expected to be phased in between 2013 and 2019 • To strengthen the regulation, supervision and risk management of the banking sector • Raises both the quality and quantity of required regulatory capital bases • Improve the banking sector's ability to absorb shocks arising from financial and economic stress • Enhances the risk coverage of the Basel II capital framework to capture on- and off-balance sheet risks • Also strengthens the consistency and transparency of the capital base for commercial banks by defining and limiting the types of capital instruments they use

17. Tier 1 Capital • Under Basel III, need to be subordinated to depositors and general creditors, have fully discretionary non-cumulative dividends or coupons and have neither a maturity date nor an incentive to redeem • Common shares and non-cumulative, perpetual preferred shares would be compliant with the new rules • The “innovative instruments” issued by the Canadian banks which currently qualify as Tier 1 capital would not be compliant with Basel III

18. Tier 2 & Tier 3 Capital • Will be simplified – there will be only one set of Tier 2 capital (rather than Tier 2A and Tier 2B under the current rules) • Will need to meet the minimum standard of being subordinated to depositors and general creditors and have an original maturity of at least five years • Subordinated debt issuances will not be compliant where they contain a step-up feature, other incentives to redeem, or provide for redemption in the first five years • Tier 3 capital will be eliminated

19. Basel Ratios of RBC

20. Overview of RBC

21. Company Background • Banking Industry contributes $51 billion for Canada (3.1% of the GDP) • The second largest bank in Canada • Currently based in Toronto and was founded in Halifax in 1864 • Operates in Canada, the US, and other 44 countries • 1,372 bank branches and 4,973 ATMs • Has over 78,000 employees serving over 16 million clients • Bank of the Year for Canada in 2014

22. Industry Leader • Royal bank is leading the industry in terms of total assets, only ranking after TD bank.

23. Market share

24. Management Team Dave Mckay- CEO and President • Joined RBC in 1988 Education: • Bachelor of Mathematics from the University of Waterloo • MBA from the Richard Ivey School of Business at University of Western Ontario Doug McGregor - Chairman and CEO of RBC Capital Market • Joined Marcil Trust in 1983, which was later acquired by RBC Capital Markets in 1990. Education: • Honours BA (Business) from the University of Western Ontario • MBA from the University of Western Ontario

25. Management Team Janice Fukakusa- Chief Financial Officer • Joined RBC in 1985 Education: • Bachelor of Arts from University of Toronto • Master of Business Administration from Schulich School of Business. Mark Hughes - Chief Risk Officer • Joined RBC in 1981 Education: • MBA (Finance) from Manchester Business School • LL.B from Leeds University in England

26. Corporate Governance Structure • Risk Committee’s Responsibilities • Oversee risk management • Balance risk and rewards • Make recommendation to the board

27. SWOT Analysis

28. Vision and Goals • Vision – Always earning the right to be our clients’ first choice. • Three Strategic Goals: • In Canada, to be the undisputed leader in financial services; • Globally, to be a leading provider of capital markets, investor and wealth management solutions; and • In targeted markets, to be a leading provider of select financial services complementary to our core strengths.

29. Major Products and Services • There are 5 profit segment: • Personal $ Commercial Banking • Wealth Management • Insurance • Investors and treasury services • Capital markets

30. Major Products and Services

32. Lucrative!!! 11 % increase

33. Stock Trend • TD - $52.20 • BMO - $73.60 • Scotia Bank – 63.62

34. Financial Analysis

35. Balance Sheet 9.3% of Total Asset

36. Balance Sheet Cont. 10 % of Liabilities 94 % is Liabilities

37. Income Statement Hedging Purpose

38. Income Statement Cont.

39. Comprehensive Income

40. Cash Flows

41. Cash Flows Cont. $1,673 Net Cash Flow

42. Summary of Derivative Income

43. Fair Value of Derivative Instrument

44. Growth and Strength of the Last Three Years

45. Comparison of ROE of RBC & Global Peer Second highest among Global Peer Group.

46. Risk Management Structure

47. Risk Philosophy • Seeking to ensure that business activities and transactions provide an appropriate balance of return for the risks assumed and remain within our Risk Appetite through adherence to our Enterprise Risk Appetite Framework.

48. Enterprise Risk Management Framework • Provides an overview of our enterprise-wide programs for identifying, assessing, measuring, controlling, monitoring and reporting on the significant risks that face the organization.

49. Risk Conduct • A shared set of behavioral norms that sustain the core values, protect their clients, safeguard the shareholders’ value, and support market integrity and stability from undue risk. • Four key components: • Tone at the top and middle management • Accountability, which is shared across all businesses and employees • Incentives • Effective challenge

50. Risk Appetite The Enterprise Risk Appetite Framework • The amount and type of risk they are able and willing in the pursuit of our business objective.