Moody’s Investors Service has affirmed the ratings of Royal Bank of Canada (RBC) following its second quarter 2008 earnings announcement in which it reported a $854 million writedown, before taxes and compensation adjustments, on a variety of structured credit activities.

For the quarter, RBC reported net income of $928 million. RBC is rated B+ for bank financial strength and Aaa for long-term deposits. RBC’s rating outlook is stable.

Moody’s vp and senior credit officer, Peter Routledge, stated Friday that “Moody’s based its decision to affirm RBC’s ratings on the fact that these losses, and expected potential future losses, are readily absorbable within the bank’s earnings and capital given its current ratings.”

A particular area of focus for Moody’s is RBC’s exposure to bank-owned life insurance stable value contracts — a new element of risk not previously disclosed. Although unlikely, the bank could be obligated to make up the difference between the notional and fair values of the assets in the policies. The current net exposure is $1.1 billion, against which the bank has taken a $76 million writedown. Incorporated into RBC’s ratings and outlook is Moody’s view that growth in this exposure should remain well within RBC’s capital cushion — i.e., the amount of capital RBC holds in excess of regulatory minimums.

Over the past two quarters, RBC’s structured credit writedowns have totaled $1.3 billion with the primary sources of loss being RBC’s exposure to U.S. subprime mortgage assets (some hedged, some unhedged), U.S. auction rate securities, and U.S. municipal guaranteed investment contracts (GIC).

Routledge noted that “on balance these losses are reflective of fairly granular exposures relative to the bank’s capital resources. Nonetheless, the losses also highlight the disadvantaged position of RBC’s U.S. Capital Markets business.” In contrast to Canadian capital markets, where RBC has a leading position, the bank is a small player in U.S. capital markets, a sector with several large and formidable competitors. Routledge stated that “RBC’s relative competitive weakness in U.S. capital markets tends to lead to more volatility in earnings, as evidenced by its recent losses in structured credit.”

The bank reported total assets of $627 billion as of April 30.