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Rating Action:

Moody's assigns Baa3 (hyb) to Royal Bank of Canada's non-viability contingent capital (NVCC) non-cumulative first preferred shares series AZ

Global Credit Research - 21 Jan 2014

NOTE: On June 01, 2014, the press release was revised as follows: In the Regulatory Disclosures section, added the Canada Ancillary Disclosure as the fourth paragraph. Revised release follows.

Toronto, January 21, 2014 -- On 21 January, 2014, Moody's assigned a rating of Baa3 (hyb) to Royal Bank of Canada's (RBC, Aa3 Stable, C+/a2 stable) 4% CAD$500 million Basel III compliant NVCC rate reset preferred shares series AZ. Proceeds from the issuance will be used to refinance outstanding preferred shares with pending rate resets. The NVCC preferred shares provide loss absorption as they are subject to automatic conversion into common shares, based on a predetermined conversion formula, at the point of non-viability, as defined by the Office of the Superintendent of Financial Institutions Canada (OSFI), subject to regulatory discretion. This incremental loss absorption feature is credit positive for holders of senior securities of RBC, as a layer of loss absorbing securities will reduce the risk of losses incurred higher in the capital hierarchy if the bank gets into financial distress.

RATINGS RATIONALE

This marks the first issuance in Canada of contractual non-viability preferred securities. The rating is positioned 4 notches below the a2 adjusted baseline credit assessment (adjusted BCA) of RBC, in line with Moody's standard notching guidance for contractual non-viability preferred securities. An additional notch is added relative to the notching for legacy Canadian non-cumulative preferred shares (currently 3 notches below adjusted BCA) to capture the potential uncertainty related to the timing of loss absorption.

Given that only securities compliant with OSFI's Capital Adequacy Requirements will be included for regulatory capital purposes going forward, we expect this issuance could establish a precedent for future NVCC preferred shares in the Canadian market -- similar to what occurred with the structure The Toronto-Dominion Bank (TD, Aa1 Stable, B/aa3 stable) established in 2000 for Innovative Tier I Capital that held constant for several years. The contractual terms of the NVCC preferred shares incorporate a provision whereby the issuer can amend the terms of the security, subject in some cases to regulatory approval and in all cases to preferred shareholder approval. We view this investor protection as a credit positive because it ensures that any future amendments to the terms will not be made to the detriment of the security holders.

We expect the market for Canadian Basel III-compliant Additional Tier 1 (AT1) preferred shares to eventually reach in excess of CAD20 billion, based upon 1.5% of the largest Canadian banks' risk weighted assets (RWA). OSFI guidelines will require all domestic systemically important banks (D-SIBs) to maintain minimum Common Equity Tier 1 (CET1,excluding AT1) of 8% and total Tier I Capital (CET1 plus AT1) of 9.5% (in each case of RWAs) when fully phased-in. Moody's expects that not all of the incremental Tier I requirement above 8% will be held as contractual non-viability preferred shares, as banks will likely hold a "buffer" of CET1 which will count towards the total 9.5% requirement. However, to the extent that NVCC preferred shares can be issued more cheaply than common stock, we expect that banks will likely optimize the most cost-effective Tier I securities they can while maintaining prudent common equity levels. This supports our expectations for a pickup in Canadian AT1 issuance in the coming year as the banks seek to refinance upcoming preferred share redemptions.

The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Moody’s has not provided advisory services but may have provided Ancillary or Other Permissible Service(s) to the rated entity, its related third parties and/or the party that requested the rating within the past two years (including during the most recently ended fiscal year). Please see the special report “Ancillary or other permissible services provided to entities rated by MIS’s credit rating agency in Canada” on the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

David Beattie
VP - Senior Credit Officer
Financial Institutions Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Robert Franklyn Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody's assigns Baa3 (hyb) to Royal Bank of Canada's non-viability contingent capital (NVCC) non-cumulative first preferred shares series AZ
No Related Data.
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