Dominion Bond Rating Service Ltd. has confirmed its ratings on Royal Bank of Canada, following the completion of a review of the firm. However, it says that the firm’s U.S. operation remains a problem area.

DBRS says the confirmation reflects RBC’s diversification, strong domestic franchises, consistently strong credit quality, and its comparatively stable trading revenues. RBC reported record earnings in 2003 on lower loan loss provisions and improved returns from market sensitive business lines, it notes.

“Earnings to date in 2004 reflect ongoing improvements with one significant exception — earnings from the bank’s U.S. banking subsidiary, Centura Bank, which declined significantly in the fourth quarter of 2003 and remained weak in the first quarter 2004,” DBRS says.

“While Centura only accounted for 7% of Royal’s profit in the first half of 2003, the earnings weakness in the segment is important because the U.S. business platform is crucial to Royal’s future growth strategy as a result of the lack of domestic acquisition candidates,” DBRS cautions.

DBRS explains that there are two issues at Centura: earnings from the U.S. mortgage origination business declined late in the year as a result of a collapse in the division’s back office processing system; and, a radical reduction in the risk level of the securities portfolio resulted in dramatically lower returns. “While DBRS expects to see evidence of improvement in both areas as the year progresses, the longer-term challenge for Royal is to turn the U.S. operation into a cohesive operating unit,” it concludes.