Dominion Bond Rating Service has confirmed its ratings and trends on the Royal Bank of Canada.

“Royal’s debt ratings continue to be supported by the bank’s core strengths, which remain unchanged. Royal’s strong, diversified domestic franchises with leading or near-leading market shares in many domestic businesses provide the foundation for a strong financial institution,” the credit rating agency says. “The bank generated record earnings excluding unusual items in 2005 and continues to do well into 2006. Royal remains among the strongest of its peers in terms of consistency of credit quality; current asset quality ratios are at or near all-time bests.”

However, DBRS notes that while Royal’s domestic operations have performed well in recent years, the bank ultimately faces constrained growth potential in its Canadian operations as a result of its size and competitive conditions. Since 2001, it has been expanding into a diverse range of businesses in the U.S. to address this issue.

“Since that time, RBC Centura Bank and the mortgage business experienced difficulties, and in 2005, Royal exited the mortgage origination business,” it says. ‘While two significant operations in the U.S. and International Personal and Business division have generated improved performance, both face longer-term challenges. Broker RBC Dain Rauscher Corp. needs a more visible market presence and possibly to build scale. Centura needs to further improve its level of profitability,” DBRS adds.

“While shorter-term initiatives, including improving the return in Centura’s securities portfolio, increased profitability in 2005, the operation continued to generate a substandard return on equity, largely as a result of a reliance on spread income and a comparatively high level of wholesale funding. In the longer term, scale may be an issue with Centura as well,” DBRS suggests.