Standard & Poor’s Ratings Services affirmed its ratings on Royal Bank of Canada, but revised the outlook to stable from positive based on markedly diminished prospects for its retail banking operations in the United States.

The rating agency said that the outlook revision “reflects the significant pressure on earnings and reduced near-to-medium-term growth prospects for Royal Bank’s retail banking operations in the U.S. due to the downturn in the U.S. real estate markets, which is hurting the U.S. residential builder finance business, translating into rapidly increasing nonperforming loans.”

“Its earnings remain at risk from further deterioration in the material exposure to U.S. homebuilders and the potential for significantly higher provisions than in previous quarters,” S&P said. Nevertheless, it added that , “Royal Bank’s strongly embedded risk culture and robust balance sheet solidly position it to weather continuing credit challenges.”

“Despite the challenges in the U.S., we believe that Royal Bank remains strongly committed to its retail banking franchise and strategy in the U.S. southeast,” said Standard & Poor’s credit analyst Lidia Parfeniuk.

The ratings on RBC also reflect the bank’s very strong domestic market position in a full range of banking businesses, S&P said. “This strength has translated into a consistent earnings trend from its leading domestic operations, providing an underpinning of substantial stability. Also helping Royal Bank stay ahead of most of its peers are the breadth and product capability it commands. The ratings also reflect growing contributions from global operations but modest to date returns on the substantial investments in retail banking in the U.S.,” it added.

“Much of the impact from negative valuation adjustments related to Royal Bank’s moderate exposure (relative to size and capital position) to structured investments in U.S. subprime has been manageable to date and absorbed through the solid results from the bank’s diversified businesses. However, we expect additional writedowns on investments affected by U.S. subprime issues and certain fixed income businesses from wider concerns and liquidity issues in the fixed income markets,” S&P said.