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During 2004, investors and analysts frequently asked the following questions about RBC and our business environment. Here are the answers we provided.




What is your economic outlook for North America in 2005?

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 expect to 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, with 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 feel we are well positioned to serve the unique needs of our cross-border clients.

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 the company’s 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 loan pricing.


What is your strategy for expansion outside of North America?

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 and sectors.

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 business 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.




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