Standard & Poor’s Ratings Services yesterday cut its outlook on Royal Bank and all its subsidiaries (except Business Men’s Assurance Co. of America), to negative from stable.

All of the ratings on the bank and its subsidiaries remain unchanged.

“The outlook change reflects Standard & Poor’s concerns over the protracted difficulties that the bank is having with its U.S. operations,” said Standard & Poor’s credit analyst Donald Chu. “The bank has invested US$5.5 billion to build out its U.S. platform over the past four years, which is sizable when compared with the bank’s common equity base of $17.3 billion. Specifically, the bank’s U.S. mortgage operations continue to falter, and performance of Centura Bank remains a disappointment,” added Chu.

Although management has been moving aggressively to correct the situation by appointing a new senior management team and rationalizing its head office, the outcome remains uncertain, S&P says. In addition, a broader restructuring is underway that involves changes to senior management, staff cuts, and process changes that could prove distracting in the next year or so.

Despite its operational challenges, the bank has allowed its regulatory capital position to decline in the past two years, the rating agency notes. Although still strong, it is lower than that of its Canadian peers and provides the bank with less financial flexibility should it be exposed to unexpected financial stress.

“The ratings on Royal Bank, Canada’s largest bank, reflect its very strong domestic market position in a full range of banking businesses including dominant retail and wholesale operations and important wealth management and insurance platforms. These strengths have translated into a consistent earnings trend from its domestic operations, providing an underpinning of substantial stability,” it explains.

However, “The negative outlook reflects Standard & Poor’s reduced level of tolerance should the performance of the bank’s U.S. operations not improve within the next six months, given the amount of financial and management resources that have been invested in these operations over the past four years. If the actions taken by management begin to show strong evidence of a turnaround in the U.S. operations, the outlook could be revised to stable,” it concludes.