I NSTITUTIONAL E QUITY R ESEARCH Robert Sedran, CFA Marco Giurleo, CFA Christopher Bailey 1 (416) 594-7874 1 (416) 956-3723 1 (416) 594-7283 [email protected] [email protected] [email protected]

E A R N I N G S U PDATE j Royal of May 24, 2018 Financials Good Quarter Against High Expectations - Stock Rating: N EUTRAL Q2/F18 Earnings Key Ratios and Statistics

Our Conclusion 12-18 mo. Price Target $114.00

RY-TSX (5/24/18) $99.12 When earnings exceed expectations but the stock falls ~2% on reporting day, a little work is required to explain the contradiction. Key Indices: TSXFinSv First off, after normalizing for some of the moves (particularly low 523-5-week-Yr. EPS Range Gr. Rate (E) $90.13-$108.5210.0% provisions for credit losses, though benign credit is certainly a theme Shares Outstanding 1,449.2M at the moment), we are more inclined to view the quarter as Float 1,449.7M Shrs notionally in line with expectations. From there, it is more about Avg. Daily Trading Vol. 2,419,000 always lofty expectations for this bank, in our view, rather than Market Capitalization $136,262.9M some fundamental problem with the results. We think it was a solid Dividend/Div Yield $3.76 / 3.9% quarter, albeit one that saw us leave our F2019 estimates Fiscal Year Ends October unchanged. Book Value $47.97 per Shr 2019 ROE (E) 17.2% The shares trade at 11.0x our F2019 EPS estimate, compared with LT Debt $9,068.0M Net Asset Value the peer average of 10.4x. We rate the shares Neutral with a $114 Common Equity $69,119.0M price target.

Implications EPS 2016 2017 2018 2019 Current $6.80A $7.57A $8.50E $8.99E

With the exception of the Capital Markets segment (earnings flat Prior $8.43E $8.99E Y/Y), which is working in a more difficult operating environment this Estimates (Oct. 31) 2016 2017 2018 2019 year than it had last year, the underlying trends in the key segments BV per Share-Curr $43.29A $46.41A $50.11E $54.90E continued to show well. Canadian Banking put up high-single digit BV per Share-Prior $49.18E $53.98E earnings growth (albeit slower than the others we saw so far this Valuation (Oct. 31) quarter), but with management guiding to improved operating P/E-Curr 14.6X 13.1X 11.7X 11.0X leverage in H2/F18 and good volume performance, ongoing solid P/E-Prior 11.8X 11.0X performance seems likely (and the tone of the conference call P/BVPS-Curr 2.3X 2.1X 2.0X 1.8X certainly suggested that the bank is hungry for market share in P/BVPS-Prior 2.0X 1.8X several product categories). Of note, management suggested that mortgage growth remains on track to hit original guidance, which is further supportive of the near-term outlook.

Wealth Management (which includes City National) was up smartly with both the City National franchise and the traditional wealth business showing well. Investor & Treasury Services continues to put Company Description up solid growth, with earnings rising 10% Y/Y. A good quarter, Royal is Canada's largest financial institution and the eleventh largest in the world by market capitalization. The services 16 regardless of the market's reaction. For F2018E EPS, we are now at million clients in 36 different countries. $8.50 (was $8.43). For F2019E, we are now at $8.99 (unchanged). www.royalbank.com

All figures in Canadian dollars, unless otherwise stated. 18-154039 © 2018 CIBC World Markets Corp., the U.S. -dealer, and CIBC World Markets Inc., the Canadian broker-dealer (collectively, CIBC World Markets Corp./Inc.) do and seek to do business with companies covered in its research reports. As a result, investors should be aware that CIBC World Markets Corp./Inc. may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For required regulatory disclosures please refer to "Important Disclosures" beginning on page 7. Please see "Price Target Calculations" and "Key Risks to Price Target" information on page(s) 4.

Find CIBC research on Bloomberg, , CIBC World Markets Inc., P.O. Box 500, 161 , Brookfield Place, , Canada M5J 2S8 (416) 594-7000 FactSet, Capital IQ and ResearchCentral.cibcwm.com CIBC World Markets Corp., 425 Lexington Avenue, New York, NY 10017 (212)-856-4000

Good Quarter Against High Expectations - Q2/F18 Earnings - May 24, 2018

Royal Bank of Canada Neutral RY — TSX Robert Sedran, CFA (416) 594-7874 [email protected] Price as at May 24, 2018: $99.12 Marco Giurleo, CFA (416) 956-3723 [email protected] 12 — 18 Month Price Target: $114.00 Christopher Bailey (416) 594-7283 [email protected] Banks All figures in Canadian millions, except per share data. P / E R atio F 2016A F 2017A F 2018E F 2019E C o mpany P ro file

RY 14.6x 13.1x 11.7x 11.0x RY is the largest Canadian bank by market capitalization. The bank provides P&C banking, , insurance, corporate and , and transaction processing services around Peer Average 11.0x 10.4x the world. RY's operating segments are: 1) Personal & Commercial Banking, 2) Insurance, 3) Investor & Treasury Services 4) Wealth M anagement, 5) Capital M arkets, and 6) Corporate Support.

P / B V R atio Q2-18 RY 2.1x Peer Average 1.9x

Key Financial M etrics F 2016A F 2017A F 2018E F 2019E Investment Thesis

Adjusted EPS $6.80 $7.57 $8.50 $8.99 Our investment thesis is based, in part, on diversification as weakness in any one segment is often offset by strength elsewhere. Q2/F18 had the bank's larger segments reporting strong growth, most notably in Annual EPS Growth 0.2% 11.4% 12.3% 5.8% Wealth M anagement. A growing U.S. exposure should also be viewed favorably, which the bank gets from Adjusted ROE 16.5% 17.0% 17.9% 17.2% its Capital M arkets and Wealth M anagement (City National) businesses. We assume the capital position remains in surplus and see modest ongoing buybacks in F2018, though the bank is no longer near top of Efficiency Ratio 52.1% 53.0% 52.1% 51.0% the group on CET1 ratio. Valuation has improved in recent months, though not to the extent that it could Operating Leverage (Y/Y) 0.0% (0.7%) 3.2% 1.6% support a more positive view.

(1) Loan Loss Rate 0.30% 0.21% 0.24% 0.26%

Income Statement F 2016A F 2017A F 2018E F 2019E Segmented Earnings Contribution

Core Net Interest Income 14,408 14,992 16,303 17,554 125% Insurance income 4,868 4,566 4,318 4,777 100% Other Income 19,968 21,447 22,320 22,737 21% 22% 23% Gross Revenue 39,244 41,005 42,941 45,069 75% 6% 7% 7% 16% 18% 19% 50% PCL (1,546) (1,150) (1,348) (1,570) 6% 6% 6% Gross Revenue after PCL 37,698 39,855 41,593 43,499 25% 50% 48% 47%

Insurance Expense (3,424) (3,053) (2,915) (3,272) 0% F2016A F2017A Q2-18 Non-Interest Expense (20,435) (21,752) (22,364) (22,971) Personal & Commercial Banking Insurance Wealth Management Net Income before Taxes 13,839 15,050 16,314 17,255 Investor & Treasury Services Capital Markets Corporate Support Forward P/E Relative To Peer Group (Based on Consensus Estimates) 10-year Average Relative P/E: 109% Current Relative P/E: 109% Income Taxes (3,559) (3,766) (3,873) (4,141) 125% Non-Controlling Interest (53) (41) (38) (36)

120% N et Inco me 10,227 11,243 12,403 13,078

Preferred Dividends & Capital Inst. (279) (285) (275) (276) 115%

110% Net Income to Common 9,948 10,958 12,128 12,802

105% After-Tax Intangibles 212 206 219 220

Adjusted Earnings 10,160 11,164 12,347 13,022 100%

May-09 May-10 May-11 May-12 May-13 May-14 May-16 May-08 May-15 May-17 May-18 Capital M easures F 2016A F 2017A F 2018E F 2019E Current Relative P/E 6-Month Moving Average Common Equity Tier 1 Capital Ratio 10.8% 10.9% 11.2% 11.7% 1 Standard Deviation Minus 1 Standard Deviation Common Equity Tier 1 Capital 48,181 51,572 56,323 63,218 Price History and Scenario Analysis Risk Weighted Assets 447,436 474,478 503,470 539,649 130

120 Lo an B o o k F 2016A F 2017A F 2018E F 2019E Upside $117 (+18%) Residential mortgages 254,998 270,348 279,984 293,667 Price Target $114 (+15%) 110 Personal 97,344 96,787 97,593 99,559 Credit cards 17,128 18,035 18,737 19,115 100 Wholesale 154,369 159,606 172,335 185,082

Downside $92 (-7%) 90 Gross Loans 523,839 544,776 568,648 597,422

Acceptances 12,843 16,459 15,968 16,616 80

Total Gross Loans & Acceptances 536,682 561,235 584,616 614,038 70

Jul-18 Jul-17

Apr-17 Oct-17 Apr-18 Oct-18 Apr-19

Jan-17 Jun-17 Jan-18 Jun-18 Jan-19

Mar-17 Mar-18 Mar-19

Feb-17 Feb-18 Feb-19

Dec-17 Nov-16 Dec-16 Aug-17 Sep-17 Nov-17 Aug-18 Sep-18 Nov-18 Dec-18

May-18 May-19 Note: May-17 (1) PCLs as a % of average net loans and acceptances (excl. repos). *For target scenario assumptions, please see Price Target Calculation and Key Risks sections.

2 Good Quarter Against High Expectations - Q2/F18 Earnings - May 24, 2018 Focusing On The Positives

Royal Bank reported adjusted earnings of $2.10 (and $2.06 on a reported basis), ahead of our forecast of $2.03 and consensus of $2.05. Amortization of intangibles and City National integration and transactions costs drove the ~$0.04/share adjustment. The beat was panned as driven by larger contributions from the Corporate segment and lower loan losses, but positive trends underlie the results and outlook ahead, in our view.

Canadian Banking: Expense Growth Overshadows Good Revenue Trends Canadian Banking reported earnings of $1,429 million in Q2/F18, good for 8.4% growth. Top line trends were strong and featured six basis points of margin expansion Q/Q, 13% Y/Y commercial loan growth, 5% Y/Y total personal growth (6% for residential mortgages), and 5% growth in non-interest income. Guidance was also strong, indicating additional margin expansion (2-4 basis points by year- end) and stable volume trends. When asked about mortgage activity, management maintained past guidance on growth for the year, while also indicating that originations had actually increased year-over-year during H1. While originations will slow, the bank remains comfortable with prior guidance.

That said, earnings growth has “underperformed” peers thus far as both expense growth and the loss ratio ticked up. Investments in people and technology led to the higher expense growth and a Stage 1 & 2 build added to the loss ratio.

Operating leverage is scheduled to improve to 2-3% in H2 and the near-term credit outlook remains favorable. We are inclined to look past the Q2 negatives (caution on credit late in the cycle and investment in the business) and expect sustained outperformance on revenue to support better earnings growth ahead.

Wealth Management: City National Provides Considerable Lift City National added US$145 million to segment earnings this quarter, down 3% Q/Q (though up 15% Q/Q on an adjusted basis) and up 69% Y/Y. The bulk of this growth was through net interest income, with both loans (+15% Y/Y) and margin (+18 basis points Q/Q) showing well. Deposit growth remains low and expense growth is high, but this segment has been expanding rapidly and holds significant excess deposits to continue funding the rapid growth.

Going forward, management believes that California, as well as its expansion into New York and Washington, provides ample opportunity to continue growing the loan book. Management attributes the margin performance to higher rates and the excess deposit position, which will support further expansion should rates continue to rise. Taken together, we see this business growing into a more meaningful contributor to consolidated earnings.

Capital: Bottom Of The Heap – An Unfamiliar Position While we are only half way through bank earnings season, Royal Bank is likely to be the low of the group after reporting a 10.9% CET1 ratio this quarter, down from 11.0% in Q1/F18. RWA growth (excluding a retail parameter update) consumed the majority of internal capital generation. RWA growth was in the mid-teens in support of efforts to continue building out the investment bank.

Share repurchases totaled 2.3 million this quarter, bringing the bank to 11.6 million in F2018. The bank maintains that organic growth ranks ahead of share repurchases, so the pace of repurchases could slow should the businesses continue consuming excess capital. The bank has repurchased material amounts of shares in the recent past at 10.9%, and higher ratios elsewhere is more reflective announced (and potential) M&A, and we still see this as an avenue for deployment going forward.

3 Good Quarter Against High Expectations - Q2/F18 Earnings - May 24, 2018

Price Target Calculation We derive our $114 price target by applying a 12.7x P/E multiple to our F2019E EPS of $8.99. Our target P/E multiple represents a 7% premium to the company’s peer group average, which compares to the 10-year historical average premium of 9%. Key Risks to Price Target The aforementioned price target for Royal Bank may not be realized if one or more of the following factors arise: significant further provision increases beyond current expectations, prolonged weakness in the capital markets, rapid and substantial changes in interest rates, key management personnel changes, and significant changes in business strategy by management.

Our upside scenario assumes a healthy acceleration in economic growth in both Canada and the United States, supporting decent employment gains. Under this scenario, the Federal Reserve would continue raising interest rates and the Bank of Canada would become progressively more hawkish leading to additional rate hikes in both 2018 and 2019. These conditions would be supportive of better margin conditions and a mild acceleration in loan growth. Credit conditions would improve (albeit only modestly so given current benign conditions) as would non-interest income growth. Banks would take the opportunity to accelerate business re-investment (no additional improvement in efficiency ratios) and earnings growth would improve mildly into the high single digit range.

Our downside scenario assumes a slowdown in economic growth from current conditions with the unemployment rate biased mildly higher. Under this scenario, the Federal Reserve would see less impetus to raise rates beyond 2017 and the Bank of Canada would be on hold throughout our forecast period. Bank margins would see modest pressure and loan growth would decelerate. Elevated consumer debt levels and slowing housing activity would lead to more conservative provisioning and non-interest income growth would slow modestly. With these conditions, expenses would be in greater focus, leading to better efficiency ratios from our base case assumptions, though earnings growth would slow to low single digits and P/E multiples would be expected to contract.

4 Good Quarter Against High Expectations - Q2/F18 Earnings - May 24, 2018

Exhibit 1. RY - Summary Model

All information below is on an adjusted basis YEAR ENDING QUARTER ENDING QUARTER ENDING Q4-16 Q4-17 Q4-18E Q4-19E Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18E Q4-18E Core Net Interest Income 14,408 14,992 16,303 17,554 3,681 3,578 3,745 3,988 3,916 3,969 4,172 4,246 Insurance premiums, investment & fee income 4,868 4,566 4,318 4,777 497 1,448 1,009 1,612 1,144 806 1,181 1,187 Other Income 19,968 21,447 22,320 22,737 5,375 5,483 5,441 5,148 5,860 5,430 5,498 5,532 Gross Revenue 39,244 41,005 42,941 45,069 9,553 10,509 10,195 10,748 10,920 10,205 10,851 10,965 PCL (1,546) (1,150) (1,348) (1,570) (294) (302) (320) (234) (334) (274) (365) (375) Gross Revenue after PCL 37,698 39,855 41,593 43,499 9,259 10,207 9,875 10,514 10,586 9,931 10,486 10,590 Insurance p/h benefits, claims and acq. exp (3,424) (3,053) (2,915) (3,272) (183) (1,090) (643) (1,137) (836) (421) (827) (831) Non-Interest Expense (20,435) (21,752) (22,364) (22,971) (5,305) (5,322) (5,526) (5,599) (5,600) (5,478) (5,541) (5,745) Net Income before Taxes 13,839 15,050 16,314 17,255 3,771 3,795 3,706 3,778 4,150 4,032 4,118 4,014 Income Taxes (3,559) (3,766) (3,873) (4,141) (950) (981) (903) (932) (952) (969) (988) (963) Non-Controlling Interest (53) (41) (38) (36) (12) (8) (13) (8) (11) (9) (9) (9) Net Income 10,227 11,243 12,403 13,078 2,809 2,806 2,790 2,838 3,187 3,054 3,120 3,042 Preferred Dividends & Capital Instruments (279) (285) (275) (276) (71) (74) (72) (68) (68) (69) (69) (69) Net Income to Common 9,948 10,958 12,128 12,802 2,738 2,732 2,718 2,770 3,119 2,985 3,051 2,973 Adjusted Earnings 10,160 11,164 12,347 13,022 2,794 2,783 2,768 2,819 3,173 3,040 3,106 3,028

Reported GAAP EPS - Fully Diluted $6.66 $7.43 $8.23 $8.84 $1.83 $1.85 $1.86 $1.89 $2.01 $2.06 $2.11 $2.05 % Change (0.7%) 11.6% 10.7% 7.5% 10.7% 1.0% 0.2% 1.9% 6.3% 2.5% 2.3% (2.5%) Adjusted EPS - Fully Diluted $6.80 $7.57 $8.50 $8.99 $1.87 $1.89 $1.89 $1.92 $2.17 $2.10 $2.14 $2.09 % Change 0.2% 11.4% 12.3% 5.8% 10.6% 0.8% 0.2% 1.9% 12.9% (3.5%) 2.2% (2.5%)

Financial & Capital Ratios/Other Adjusted ROE (excl. EO items) 16.5% 17.0% 17.9% 17.2% 17.1% 17.6% 16.7% 17.0% 18.8% 18.5% 17.6% 16.8% Adjusted Return on TCE 21.9% 22.3% 23.0% 21.7% 22.5% 22.9% 21.8% 21.5% 24.6% 23.3% 22.3% 21.2% Return on RWA's (trailing 4-quarter) 2.26% 2.39% 2.50% 2.46% 2.31% 2.35% 2.36% 2.39% 2.45% 2.46% 2.50% 2.50% Efficiency Ratio (excl. EO items) 57.0% 57.3% 55.9% 55.0% 56.6% 56.5% 57.9% 58.3% 55.5% 56.0% 55.3% 56.7% Book Value $43.29 $46.41 $50.11 $54.90 $43.97 $45.20 $44.93 $46.41 $46.01 $47.97 $49.07 $50.11 Adjusted Effective Tax Rate 26% 25% 24% 24% 25% 26% 24% 25% 23% 24% 24% 24% Common Dividends $3.24 $3.48 $3.77 $4.08 $0.83 $0.87 $0.87 $0.91 $0.91 $0.94 $0.94 $0.98 Payout Ratio 47% 46% 44% 45% 44% 46% 46% 47% 42% 45% 44% 47% Common Equity Tier 1 Capital Ratio 10.8% 10.9% 11.2% 11.7% 11.0% 10.6% 10.9% 10.9% 11.0% 10.9% 11.1% 11.2% Average Shares O/S (fully diluted) 1,492 1,465 1,448 1,448 1,493 1,476 1,465 1,465 1,459 1,450 1,449 1,448 Credit Quality Provisions $1,546 $1,150 $1,348 $1,570 $294 $302 $320 $234 $334 $274 $365 $375 % Change 41% (26%) 17% 16% (18%) 3% 6% (27%) 43% (18%) 33% 3% Avg. Net Loans & Acceptances $520,040 $545,107 $567,342 $596,417 $535,208 $541,365 $548,021 $554,178 $556,742 $560,727 $570,709 $578,090 PCL Ratio (% of Loans + Accept.) 0.30% 0.21% 0.24% 0.26% 0.22% 0.23% 0.23% 0.17% 0.24% 0.20% 0.25% 0.26%

Net Capital Markets Related Revenue Total Trading Revenue $3,560 $3,502 $3,478 $3,400 $1,025 $898 $835 $744 $939 $839 $850 $850 % Change 1.2% (1.6%) (0.7%) (2.2%) 31.7% (12.4%) (7.0%) (10.9%) 26.2% (10.6%) 1.3% 0.0% Underwriting & Other Advisory $1,876 $2,093 $2,018 $2,040 $468 $590 $537 $498 $541 $457 $510 $510 % Change (0.5%) 11.6% (3.6%) 1.1% (8.1%) 26.1% (9.0%) (7.3%) 8.6% (15.5%) 11.6% 0.0% Securities Brokerage Commissions $1,429 $1,416 $1,344 $1,430 $399 $360 $330 $327 $355 $334 $330 $325 % Change (0.5%) (0.9%) (5.1%) 6.4% 14.0% (9.8%) (8.3%) (0.9%) 8.6% (5.9%) (1.2%) (1.5%) Total Capital Markets Related Revenue $6,865 $7,011 $6,840 $6,870 $1,892 $1,848 $1,702 $1,569 $1,835 $1,630 $1,690 $1,685 % Change 0.4% 2.1% (2.4%) 0.4% 15.6% (2.3%) (7.9%) (7.8%) 17.0% (11.2%) 3.7% (0.3%) Less: Variable Compensation $4,584 $5,204 $5,321 $5,221 $1,262 $1,277 $1,342 $1,323 $1,384 $1,338 $1,301 $1,297 % Change 1.1% 13.5% 2.2% (1.9%) 4.8% 1.2% 5.1% (1.4%) 4.6% (3.3%) (2.7%) (0.3%) Net Capital Markets Related Revenue $2,281 $1,807 $1,519 $1,649 $630 $571 $360 $246 $451 $292 $389 $388 % Change (1.0%) (20.8%) (15.9%) 8.5% 45.6% (9.4%) (37.0%) (31.7%) 83.3% (35.3%) 33.1% (0.3%) Total CMRR as a % of Gross Revenue 17.5% 17.1% 15.9% 15.2% 19.8% 17.6% 16.7% 14.6% 16.8% 16.0% 15.6% 15.4% Variable Compensation Ratio 66.8% 74.2% 77.8% 76.0% 66.7% 69.1% 78.8% 84.3% 75.4% 82.1% 77.0% 77.0% Lending Net Interest Income Net Interest Income $14,408 $14,992 $16,303 $17,554 $3,681 $3,578 $3,745 $3,988 $3,916 $3,969 $4,172 $4,246 % Change 16.4% 4.1% 8.7% 7.7% 1.0% (2.8%) 4.7% 6.5% (1.8%) 1.4% 5.1% 1.8% Non-trading Average Earning Assets $816,666 $863,281 $957,391 $1,005,855 $843,758 $860,419 $869,645 $879,302 $942,691 $950,836 $962,246 $973,792 % Change 17.7% 5.7% 10.9% 5.1% 2.0% 2.0% 1.1% 1.1% 7.2% 0.9% 1.2% 1.2% Net Interest Margin (on non-trading AEA) 1.76% 1.74% 1.70% 1.75% 1.73% 1.71% 1.71% 1.80% 1.65% 1.71% 1.72% 1.73% Net Loans & BAs Outstanding $534,447 $559,076 $581,808 $611,230 $535,969 $546,761 $549,280 $559,076 $554,407 $567,046 $574,372 $581,808 % Change 10.0% 4.6% 4.1% 5.1% 0.3% 2.0% 0.5% 1.8% (0.8%) 2.3% 1.3% 1.3% Fixed Non-Interest Expenses Fixed Non-Interest Expenses $15,851 $16,548 $17,044 $17,750 $4,043 $4,045 $4,184 $4,276 $4,216 $4,140 $4,240 $4,448 % Change 12.3% 4.4% 3.0% 4.1% (0.8%) 0.0% 3.4% 2.2% (1.4%) (1.8%) 2.4% 4.9% Fixed Compensation Expenses $7,793 $8,126 $8,193 $8,501 $2,047 $2,012 $2,091 $1,976 $2,118 $1,986 $2,030 $2,059 % Change 10.6% 4.3% 0.8% 3.8% 9.2% (1.7%) 3.9% (5.5%) 7.2% (6.2%) 2.2% 1.4% Other Expenses $8,058 $8,422 $8,850 $9,249 $1,996 $2,033 $2,093 $2,300 $2,098 $2,154 $2,210 $2,388 % Change 14.1% 4.5% 5.1% 4.5% (9.4%) 1.9% 3.0% 9.9% (8.8%) 2.7% 2.6% 8.1%

Other Income (Excluding Capital Markets Related Revenue) Other Income (Ex. CMRR & Secur. Rev.) $13,103 $14,436 $15,480 $15,867 $3,483 $3,635 $3,739 $3,579 $4,025 $3,800 $3,808 $3,847 % Change 7.2% 10.2% 7.2% 2.5% 3.2% 4.4% 2.9% (4.3%) 12.5% (5.6%) 0.2% 1.0% Investment Securities Gains (Losses) $76 $172 $178 $180 $27 $54 $44 $47 $39 $49 $45 $45 % Change (48%) 126% 3% 1% 1250% 100% (19%) 7% (17%) nmf nmf nmf Fee-based Income $13,027 $14,264 $15,302 $15,687 $3,456 $3,581 $3,695 $3,532 $3,986 $3,751 $3,763 $3,802 % Change 7.8% 9.5% 7.3% 2.5% 2.5% 3.6% 3.2% (4.4%) 12.9% (5.9%) 0.3% 1.0% Source: Company reports and CIBC World Markets Inc.

5 Good Quarter Against High Expectations - Q2/F18 Earnings - May 24, 2018

Our EPS estimates are shown below:

1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly 2016 Current $1.64A $1.71A $1.76A $1.69A $6.80A 2017 Current $1.87A $1.89A $1.89A $1.92A $7.57A 2018 Prior $2.17A $2.03E $2.12E $2.11E $8.43E 2018 Current $2.17A $2.10A $2.14E $2.09E $8.50E 2019 Prior ------$8.99E 2019 Current ------$8.99E

Our BV/share estimates are shown below:

1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly 2016 Current ------$43.29A 2017 Current ------$46.41A 2018 Prior ------$49.18E 2018 Current ------$50.11E 2019 Prior ------$53.98E 2019 Current ------$54.90E

6 Good Quarter Against High Expectations - Q2/F18 Earnings - May 24, 2018

IMPORTANT DISCLOSURES:

Analyst Certification: Each CIBC World Markets Corp./Inc. research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report.

Analysts employed outside the U.S. are not registered as research analysts with FINRA. These analysts may not be associated persons of CIBC World Markets Corp. and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets Corp./Inc. are compensated from revenues generated by various CIBC World Markets Corp./Inc. businesses, including the CIBC World Markets Investment Banking Department. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets Corp./Inc. generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets Corp./Inc. generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers.

In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, CIBC World Markets Corp./Inc. may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon.

Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.

Important Disclosure Footnotes for (RY)

 CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from Royal Bank of Canada in the next 3 months.  Royal Bank of Canada is a client for which a CIBC World Markets company has performed non-investment banking, securities-related services in the past 12 months.  CIBC World Markets Inc. has received compensation for non-investment banking, securities-related services from Royal Bank of Canada in the past 12 months.  CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by Royal Bank of Canada.

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CIBC World Markets Corp./Inc. Stock Rating System

Abbreviation Rating Description Stock Ratings OP Outperformer Stock is expected to outperform similar stocks in the coverage universe during the next 12-18 months. NT Neutral Stock is expected to perform in line with similar stocks in the coverage universe during the next 12-18 months. UN Underperformer Stock is expected to underperform similar stocks in the coverage universe during the next 12-18 months. NR Not Rated CIBC World Markets does not maintain an investment recommendation on the stock. R Restricted CIBC World Markets is restricted (due to potential conflict of interest) from rating the stock. Stock Ratings Prior To December 09, 2016 SO Sector Outperformer Stock is expected to outperform the sector during the next 12-18 months. SP Sector Performer Stock is expected to perform in line with the sector during the next 12-18 months. SU Sector Underperformer Stock is expected to underperform the sector during the next 12-18 months. NR Not Rated CIBC World Markets does not maintain an investment recommendation on the stock. R Restricted CIBC World Markets is restricted (due to potential conflict of interest) from rating the stock. Sector Ratings (note: Broader market averages refer to S&P 500 in the U.S. and S&P/TSX Composite in Canada.) O Overweight Sector is expected to outperform the broader market averages. M Marketweight Sector is expected to equal the performance of the broader market averages. U Underweight Sector is expected to underperform the broader market averages. NA None Sector rating is not applicable. "Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues.

Ratings Distribution*: CIBC World Markets Corp./Inc. Coverage Universe (as of 24 May 2018) Count Percent Inv. Banking Relationships Count Percent Outperformer (Buy) 155 48.3% Outperformer (Buy) 147 94.8% Neutral (Hold/Neutral) 148 46.1% Neutral (Hold/Neutral) 129 87.2% Underperformer (Sell) 13 4.0% Underperformer (Sell) 13 100.0% Restricted 5 1.6% Restricted 5 100.0% Ratings Distribution: Financials Coverage Universe (as of 24 May 2018) Count Percent Inv. Banking Relationships Count Percent Outperformer (Buy) 11 37.9% Outperformer (Buy) 11 100.0% Neutral (Hold/Neutral) 18 62.1% Neutral (Hold/Neutral) 16 88.9% Underperformer (Sell) 0 0.0% Underperformer (Sell) 0 0.0% Restricted 0 0.0% Restricted 0 0.0%

*Although the investment recommendations within the three-tiered,relative stock rating system utilized by CIBC World Markets Corp./Inc.do not correlate to buy, hold and sell recommendations, for the purposes of complying with FINRA rules, CIBC World Markets Corp./Inc. has assigned buy ratings to securities rated Outperformer, hold ratings to securities rated Neutral, and sell ratings to securities rated Underperformer. The distributions above reflect the combined historical ratings of CIBC World Markets Corp. and CIBC World Markets Inc.

Important disclosures required by applicable rules can be obtained by visiting CIBC World Markets on the web at http://researchcentral.cibcwm.com/. Important disclosures for each issuer can be found using the "Coverage" tab on the top left of the Research Central home page. Access to the system for rating investment opportunities and our dissemination policy can be found at the bottom of each page on the Research Central website. These important disclosures can also be obtained by writing to CIBC World Markets Corp., 425 Lexington Avenue, New York, NY 10017 (212- 856-4000) or CIBC World Markets Inc.,161 Bay Street, 4th Floor, Toronto, ON M5H 2S8, Attention: Research Disclosures Request.

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CIBC World Markets Corp./Inc. Price Chart

HISTORICAL PERFORMANCE OF CIBC WORLD MARKETS CORP./INC. RECOMMENDATIONS FOR ROYAL BANK OF CANADA (RY)

Date Change Type Closing Price Rating Price Target Coverage 05/28/2015 80.05 SO 87.00 Robert Sedran, CFA 05/31/2015 79.07 SO 86.00 Robert Sedran, CFA 08/16/2015 75.97 SO 84.00 Robert Sedran, CFA 08/31/2015 73.34 SO 83.00 Robert Sedran, CFA 10/02/2015 71.97 R - Robert Sedran, CFA 10/04/2015 71.97 SO 83.00 Robert Sedran, CFA 01/07/2016 70.25 SO 80.00 Robert Sedran, CFA 02/15/2016 67.98 SO 79.00 Robert Sedran, CFA 02/24/2016 67.81 SO 78.00 Robert Sedran, CFA 05/16/2016 77.01 SO 81.00 Robert Sedran, CFA 08/09/2016 80.22 SO 82.00 Robert Sedran, CFA 08/24/2016 81.86 SO 84.00 Robert Sedran, CFA 09/01/2016 81.46 SO 87.00 Robert Sedran, CFA 11/15/2016 86.02 SO 95.00 Robert Sedran, CFA 12/09/2016 90.30 OP 98.00 Robert Sedran, CFA 02/14/2017 97.46 OP 99.00 Robert Sedran, CFA 02/26/2017 96.61 OP 101.00 Robert Sedran, CFA 03/06/2017 99.13 OP 106.00 Robert Sedran, CFA 08/13/2017 92.51 OP 103.00 Robert Sedran, CFA 11/12/2017 99.84 OP 113.00 Robert Sedran, CFA 01/31/2018 105.32 NT 114.00 Robert Sedran, CFA The chart above reflects the combined historical recommendations of CIBC World Markets Corp. and CIBC World Markets Inc.

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Legal Disclaimer

This report is issued and approved for distribution by (a) in Canada, CIBC World Markets Inc., a member of the Investment Industry Regulatory Organization of Canada (“IIROC”), the , the TSX Venture Exchange and a Member of the Canadian Investor Protection Fund, (b) in the United Kingdom, CIBC World Markets plc, is Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, (c) in Australia to wholesale clients only, CIBC Australia Ltd, a company regulated by the ASIC with AFSL license number 240603 and ACN 000 067 256, and (d) in Japan, CIBC World Markets (Japan) Inc., a registered Type 1 Financial product provider with the registration number Director General of Kanto Finance Bureau #218 (collectively, “CIBC World Markets”) and (e) in the United States either by (i) CIBC World Markets Inc. for distribution only to U.S. Major Institutional Investors (“MII”) (as such term is defined in SEC Rule 15a-6) or (ii) CIBC World Markets Corp., a member of the Financial Industry Regulatory Authority (“FINRA”). U.S. MIIs receiving this report from CIBC World Markets Inc. (the Canadian broker-dealer) are required to effect transactions (other than negotiating their terms) in securities discussed in the report through CIBC World Markets Corp. (the U.S. broker-dealer). CIBC World Markets Corp. accepts responsibility for the content of this research report. This report is provided, for informational purposes only, to institutional investor and retail clients of CIBC World Markets in Canada, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. This document and any of the products and information contained herein are not intended for the use of Retail investors in the United Kingdom. Such investors will not be able to enter into agreements or purchase products mentioned herein from CIBC World Markets plc. The comments and views expressed in this document are meant for the general interests of wholesale clients of CIBC Australia Ltd. This report has been prepared by the CIBC group and is issued in Hong Kong by Canadian Imperial Bank of Commerce, Hong Kong Branch, a registered institution under the Securities and Futures Ordinance, Cap 571 (the “SFO”). This report is intended for “professional investors” only (within the meaning of the SFO) and has been prepared for general circulation and does not take into account the objectives, financial situation or needs of any recipient. Any recipient in Hong Kong who has any questions or requires further information on any matter arising from or relating to this report should contact Canadian Imperial Bank of Commerce, Hong Kong Branch at Suite 3602, Cheung Kong Centre, 2 Queen's Road Central, Hong Kong (telephone number: +852 2841 6111). Orders for Hong Kong listed securities will be executed by Canadian Imperial Bank of Commerce, Hong Kong Branch. Canadian Imperial Bank of Commerce, Hong Kong Branch has entered into an arrangement with its broker-dealer affiliates worldwide to execute orders for securities listed outside of Hong Kong for Hong Kong clients. This report is intended for distribution in Singapore solely to “institutional investors” (within the meanings of the Financial Advisers Act (Chapter 110 of Singapore)). The securities mentioned in this report may not be suitable for all types of investors. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of CIBC World Markets. Recipients should consider this report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. The analyst writing the report is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the report. Before making an investment decision with respect to any security recommended in this report, the recipient should consider whether such recommendation is appropriate given the recipient's particular investment needs, objectives and financial circumstances. CIBC World Markets suggests that, prior to acting on any of the recommendations herein, Canadian retail clients of CIBC World Markets contact one of our client advisers in your jurisdiction to discuss your particular circumstances. Non-client recipients of this report who are not institutional investor clients of CIBC World Markets should consult with an independent financial advisor prior to making any investment decision based on this report or for any necessary explanation of its contents. CIBC World Markets will not treat non-client recipients as its clients solely by virtue of their receiving this report. Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this report. The price of the securities mentioned in this report and the income they produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investments in such securities, including the loss of investment principal. CIBC World Markets accepts no liability for any loss arising from the use of information contained in this report, except to the extent that liability may arise under specific statutes or regulations applicable to CIBC World Markets. Information, opinions and statistical data contained in this report were obtained or derived from sources believed to be reliable, but CIBC World Markets does not represent that any such information, opinion or statistical data is accurate or complete (with the exception of information contained in the Important Disclosures section of this report provided by CIBC World Markets or individual research analysts), and they should not be relied upon as such. All estimates, opinions and recommendations expressed herein constitute judgments as of the date of this report and are subject to change without notice. Nothing in this report constitutes legal, accounting or tax advice. Since the levels and bases of taxation can change,

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Legal Disclaimer (Continued) any reference in this report to the impact of taxation should not be construed as offering tax advice on the tax consequences of investments. As with any investment having potential tax implications, clients should consult with their own independent tax adviser. This report may provide addresses of, or contain hyperlinks to, Internet web sites. CIBC World Markets has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient's convenience and information, and the content of linked third party web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. Although each company issuing this report is a wholly owned subsidiary of Canadian Imperial Bank of Commerce (“CIBC”), each is solely responsible for its contractual obligations and commitments, and any securities products offered or recommended to or purchased or sold in any client accounts (i) will not be insured by the Federal Deposit Insurance Corporation (“FDIC”), the Canada Deposit Insurance Corporation or other similar deposit insurance, (ii) will not be deposits or other obligations of CIBC, (iii) will not be endorsed or guaranteed by CIBC, and (iv) will be subject to investment risks, including possible loss of the principal invested. The CIBC trademark is used under license. © 2018 CIBC World Markets Inc. and CIBC World Markets Corp. All rights reserved. Unauthorized use, distribution, duplication or disclosure without the prior written permission of CIBC World Markets is prohibited by law and may result in prosecution.

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