The Royal Bank of Canada gets high marks from Standard & Poor’s for its history of stability and profitability, but it comes with a caution that domestic competition remains intense and its U.S. strategy has yet to be proven.

S&P says in a report that RBC’s “significant and very stable domestic retail franchise and consistent earnings support the steady performance trend and stable outlook … The ratings on Royal Bank of Canada reflect the bank’s competitive advantage in Canada because of its very strong domestic market position in a full range of banking businesses.”

The rating agency says that the bank commands a 22% share of the banking business in Canada and is the largest Canadian bank when measured by assets ($441 billion), with dominant retail and wholesale operations and important wealth management and insurance platforms. “These strengths have translated into a consistent earnings growth trend. Profits trends have exhibited low volatility because credit metrics remained relatively stable through the last cycle supported by strong risk management capabilities and lower exposure to problematic industries. Offsetting this is the investment in an unproven U.S. strategy, which has encountered some difficulties,” it says.

S&P also says that domestic competition in retail banking products remains intense and continues to put pressure on the margin and the need to defend the franchise. “Royal Bank has been pricing more aggressively to regain market share in the past year at the expense of giving up margin,” it says. “Royal Bank’s (and peers’) revenue growth in personal and commercial banking continues to be constrained by the mature and competitive domestic banking landscape. Also, loan demand in the commercial segment remains soft and the unprecedented level of mortgage originations in 2003 is beginning to slow.”

“The major Canadian banks’ significantly diminished appetite for wholesale lending outside Canada is leading to heightened competition domestically. A pickup in investment banking volumes would benefit both Royal Bank’s equity and capital market related businesses at least in the near term.,” it says.

Finally, the rating agency notes that, “Royal Bank’s U.S. strategy is challenging to implement, requiring the melding of companies with different product capabilities into a cohesive whole. Thus far, the strategy is proving to be very costly and certain operational issues have arisen in the mortgage operations. Various initiatives, however, are being implemented to deal with them. Standard & Poor’s Ratings Services would like to see further progress in the set out objectives as the success of the U.S. strategy is still unknown.”