What is your economic outlook for North America
The global economy has entered a period
of slower, more sustainable growth following robust expansion.
This behaviour is typical for economies as they moderate under
the weight of rising interest rates and a less supportive fiscal
environment. Not only is this typical, it is also desirable because
such a moderation in growth keeps any backup in inflation – and therefore interest rates – relatively
muted. Overall planning assumptions for much of 2005 should be
consistent with an environment of sustainable economic growth alongside
steady interest rates in Canada, rising interest rates in the U.S.
and a still-competitive pricing environment overall.
After an impressive estimated 4.4 per cent pace
in 2004, we look for economic growth in the United States to ease
to an estimated 3.7 per cent in 2005. The moderation is expected
to be broadly based
with most sectors of the economy experiencing a slowdown, led by
the consumer sector, which is likely to ease following a number
of surprisingly strong years. Another area expected to put a brake
on growth will be the government sector, as the unsustainably large
U.S. fiscal deficit is put on a more stable footing. One area expected
to provide a lift to growth is the inventory component as inventories
are rebuilt to levels consistent with overall sales. Although we
see the rate of growth ease somewhat, the U.S. Federal Reserve
will continue to adjust rates up to levels more consistent with
an expanding economy.
The Canadian economy has weathered the rapid
appreciation of the Canadian dollar relative to the
U.S. dollar and the recent deceleration in growth of the world
economy with surprising resilience, registering real growth of
approximately 2.7 per cent in 2004.
A slight acceleration to an estimated 3 per cent is
expected in 2005. Unlike the apparently tapped out U.S. consumer,
the Canadian consumer seems better positioned for further spending
in the period ahead given firm job markets and rising incomes.
The government sector in Canada also appears to be
in good shape to support overall economic activity given a solid
fiscal position. These two sectors, combined with firm business
investment, add up to decent growth in the coming year. However,
inflation risks low and an uncertain outlook for Canada’s
trade sector, the Bank of Canada is likely to hold interest rates
steady through much of 2005.
Our base case forecast is for a Canadian dollar
ending 2005 around the 80 U.S. cent mark. However, there are risks
that the U.S. dollar could weaken further due to ongoing concerns
about the large
and growing fiscal deficit and the widening current account deficit.
With your already sizeable market shares in Canada, how will you
generate earnings growth?
With 10 to 20 per cent market share in our key business and product
areas such as residential mortgages, total personal deposits and
mutual funds, business deposits and business financing, we do not
believe our growth is capped; it is a great base to build upon.
As discussed earlier, as part of our Client First Initiative, we
intend to grow earnings by accelerating revenue growth and exercising
tighter control over expenses.
Our overall strategy for our personal and business
clients in Canada is to be either the market leader or close to
it in each of our key businesses within banking, investments and
insurance. This will entail leveraging our core strengths in product
design, sales and relationship management, and client insight and
knowledge to truly earn the right to be our clients’ first choice.
We will focus on a number of key initiatives
to meet the needs of our clients at every stage of
their lives and will build on integrated product and distribution
capabilities to extend relationships with our existing client base.
We have the highest household penetration among Canadian financial
institutions and intend to leverage these relationships by delivering
benefit to our clients through our strong capabilities in financial
planning and advice. In addition, with our north-south capabilities,
we are well positioned to serve the unique needs of our cross-border
Our focus on distinct groups of clients has
improved our understanding of their unmet needs and our ability
to deliver a better solution. For example, our RBC
Plan for Medical & Dental Students provides
financial solutions designed to meet the unique needs of this client
group. In the past year, we have significantly increased our market
share of the medical and dental student population in Canada.
We plan to continue strengthening our product
lines to accelerate revenue growth. For example,
in the area of credit cards, we introduced our no fee
RBC Rewards Visa Classic card in 2004 and have expanded our mortgage
product offerings with the introduction of RBC Homeline Plan, RBC
Vacation Home Mortgage, and RBC No Down Payment Mortgage.
Our strategy is to explore all opportunities to further integrate
insurance products, where permitted, with those of other RBC business
segments. We intend to build on our distribution strengths, which
include enterprise networks, franchise and product-specific teams,
career sales forces and third-party distribution to reach as many
of our clients as possible through
the channels that best meet their needs.
On the institutional side, our strategy is to
deepen our relationships with top-tier corporate, institutional
and government clients. We also plan to further penetrate the Canadian
mid market and continue to improve the quality of our research.
As always, we will focus on developing new product, channel and
market opportunities and creating differentiated value-added solutions
to address the unique needs of our clients. To this end, we continue
to integrate our Canadian dollar correspondent banking business
with our Canadian sub-custody operation to present a single face
to foreign financial institutions, facilitating further cross-enterprise
revenue opportunities through a single relationship management
channel. Moreover, the unique combination of strengths embodied
in our Hedge Fund Services group will position us to capitalize
on the trend toward alternative investment strategies.
We plan to manage our costs better by eliminating
duplication and low-value activities, streamlining the layers within
structure and centralizing all our operations and technology. Our
Client First Initiative has made cost management one of our
key objectives. We intend to continue to rigorously focus on the
management of credit, operational and compliance risk, including
fraud management initiatives and strengthened credit-scoring capabilities.
How will you enhance the performance of your
U.S. banking operations?
The performance of our U.S. banking operations
at RBC Centura and RBC Mortgage did not meet our expectations in
2004. We are taking measures that we believe will result in better
performance and expect that the positive impact of these changes
will be realized in 2005. Our overall objective is to generate
much stronger financial returns for our shareholders.
Our new structure, which has placed our U.S.
and international segment under one leadership, will allow us to
leverage our capabilities and work together to maximize returns.
It will also increase accountability and flexibility to manage
our various businesses.
Plans to enhance performance at RBC Centura
are already underway. In 2005, we are reducing our costs in support
areas and closing 10 low-return branches from our network of 275
branches. Meanwhile, we are continuing to open new branches selectively
in high-growth markets and enhancing loan and deposit volumes and
mix. We believe that these changes will result in a significant
improvement in profitability in 2005 at RBC Centura.
We are taking a number of actions to improve
RBC Mortgage’s performance. We are consolidating the Chicago
headquarters into our Houston office, which we acquired through
our acquisition of Sterling Capital Mortgage Company (Sterling)
in September 2003, and closing 38 of our less profitable branches.
At this point, a further nine branches are expected to close later
in 2005. These steps will not only generate cost savings, but will
also improve the effectiveness and control as the dual head office
is closed. We have also taken steps to reduce earnings volatility
by migrating sales of adjustable rate mortgages to a flow basis
from bulk delivery, meaning that the loans are sold as they close,
and the hedging risk transferred to the investor.
And we have completed the rollout of Sterling’s loan origination
technology, which will lead to better control and management of
What is your strategy for expansion outside of
Several of our businesses have successful, profitable
operations outside of North America and we plan
to continue our pursuit of opportunities in key high-growth markets
On the consumer side, Global Private Banking
intends to continue exploring growth opportunities in the Americas,
Europe and Asia with increasingly aggressive sales and marketing
programs. The addition of our Open Architecture approach to money
management in 2004 and the adoption of RBC Capital Markets’ structured
product expertise in design and marketing new solutions for private
clients, is expected to accelerate revenue growth in the future.
On the institutional side, our businesses focus
on areas where our market insight and professional capabilities
differentiate us and contribute to profitable growth. In London,
our bond business and structured products/credit derivatives
have delivered growth in global revenues of over
260 per cent ($57.4 million to $209.4 million) over the past five
years as a result of effective delivery to our clients. Our custody
business, which was named the best overall global custodian in
Global Investor magazine’s 2004 Global Custody Survey, plans
to continue leveraging its leadership position in the Canadian
market to expand internationally, with a focus on serving fund
managers, financial institutions and private banks. We expect to
grow fee-based revenue streams in our custody operations by selling
newly developed products and services to existing clients and expanding
our client offerings in Europe and Asia. We will also explore alliance
and acquisition opportunities as well as look to take advantage
of the growing outsourcing trend among fund companies.