The big goodwill impairment charge announced by Royal Bank of Canada won’t affect its ratings or outlook, Moody’s Investors Service said Friday.

The bank announced Friday that it would take a US$850 million goodwill impairment charge related to its international banking unit. In Moody’s view, the bank’s U.S. retail banking operation was the primary source of the impairment.

Moody’s senior vice president and lead analyst for RBC, Peter Routledge, explained that Moody’s ratings and outlook remain unchanged because the weaknesses highlighted by the sizable goodwill impairment charge have a limited impact on the institution’s overall credit profile given the small size of the U.S. retail banking business relative to RBC’s Canadian franchise. Moreover, Moody’s has long identified the underlying weakness in RBC’s U.S. retail banking franchise and incorporated this into RBC’s ratings.

“In Moody’s view, loan losses in its U.S. subsidiary’s residential housing construction portfolio, which are well in excess of historic norms, and persistently weak risk-adjusted profitability are the primary causes of the writedown,” it says.

Moody’s also notes that this writedown will not have an impact on RBC’s performance on key capital ratios, particularly its Tier 1 ratio and the ratio of RBC’s tangible common equity to risk-weighted assets, which are very high at 10.6% and 7.7%, respectively. This occurs because goodwill is already subtracted from the numerators of both of these ratios.

Moody’s also points out that the charge must be placed within the broader context of RBC’s recent Tier 1 capital raises which have totaled approximately $4.2 billion since November 2008, its high capital ratios, and the consistency in its risk-adjusted profitability throughout this period of financial market volatility.

The rating agency has a negative outlook on RBC, reflecting the potential for future costs associated with its structured credit activities as well as the prospects of a weakening Canadian economy that will likely produce elevated loan losses in 2009 and 2010.

IE