1. What major changes have you undertaken with your Client First Initiative and do you anticipate further changes?
In 2005, we made great progress towards becoming a more client-focused organization. The significant changes we undertook primarily related to our structure, people, processes and initiatives.

•  Organization – We realigned our business segments from five to three in order to allow us to work better together to anticipate and efficiently serve the distinct needs of key client groups. The changes set the foundation for stronger revenue growth and enhanced efficiency, and our three business segments (RBC Canadian Personal and Business under the leadership of Jim Westlake, RBC U.S. and International Personal and Business under Peter Armenio’s direction, and RBC Capital Markets led by Chuck Winograd) were able to accelerate product and service innovation. We also centralized and streamlined our operations and technology groups and corporate support functions across our businesses (all under the Corporate Support segment), which improved their effectiveness and cost structure.
•  People – Client First Initiative has empowered our people on the front line to meet their clients’ needs better by providing increased resources, creating a faster pace of change to facilitate product and service innovations and simplifying processes. Our employees are partnering across different businesses and bringing the combined capabilities of RBC to those clients who require more complex solutions. Our people are telling us they feel more enabled to realize our vision of Always earning the right to be our clients’ first choice. Our senior leaders are closer to our clients both in the field and in all support activities and they are able to provide stronger support to both clients and employees.
•  Processes – We changed or eliminated a large number of processes to remove redundancy and bureaucracy and make it easier, faster and simpler for clients to do business with us. Whether the processes related to product development, credit approval, problem resolution or simple account opening, the changes we implemented across our business help enhance our clients’ experiences.
•  Initiatives – We launched a series of revenue and cost initiatives in all our businesses and geographic regions during the year to give our clients more choice, better products and faster service while improving our operating leverage (the difference between our rates of revenue growth and non-interest expense growth). The revenue initiatives included improving branch hours and locations, increasing the number of client service staff, developing innovative credit and investment offerings and other measures to enhance our distribution capabilities and products globally. We also improved productivity and implemented numerous cost initiatives such as streamlining head office support areas, consolidating technology and operations groups, and lowering procurement costs with specific targets for which people were accountable.

As a result of these significant changes clients can do business with us more easily, more conveniently and more often. These steps have helped usmove closer to achieving our strategic goals, which are: 1) To be the undisputed leader in financial services in Canada; 2) To build on our banking, wealth management and capital markets platforms in the United States; and 3) To be a premier provider of selected global financial services. We intend to continue to take actions to further meet these goals in 2006 and beyond.




2. To what do you attribute the very strong revenue growth in your RBC Canadian Personal and Business segment and do you believe it is sustainable?
We have been able to differentiate ourselves from our competitors with strong revenue growth this year by successfully executing the following three key revenue growth strategies:

•  Optimizing our extensive distribution capabilities – This includes expanding our sales forces and other distribution capabilities, and simplifying our structure, management and compensation programs to make it simpler for our employees to deliver the right product to the right client through the right channel at the right time. We also successfully opened two multi-line insurance outlets adjacent to retail branches in order to provide clients with greater convenience.
•  Simplifying processes and structures – We are making it easier for clients to do business with us by improving processes across our businesses. For example, we are using new technologies to simplify the account opening process for banking and to expand online capabilities for our Canadian insurance customers. Internally, we have streamlined decision-making, resulting in more effective and efficient implementation.
•  Focusing on high-return markets – We introduced new products and services in businesses where we see strong growth potential. For example, we introduced new investment offerings, launched innovative new cards including the RBC Starbucks Duetto Visa and the RBC Cathay Pacific Visa Platinum cards, and enhanced travel insurance options for seniors. We also continued to provide custom mortgage solutions through our RBC Homeline Plan equity line of credit and introduced targeted offerings to key client groups.

The impact of these initiatives, along with the integration of the Canadian operations of Provident Life and Accident Insurance Company (UnumProvident) acquired in May 2004, can be seen in the segment’s strong volume, market share and margin improvements compared to 2004. We intend to continue to focus on these priorities to enhance our leadership position in our key markets.

3. Now that your capital ratios have improved significantly and are well above both regulatory levels and your own objectives, what is your capital deployment strategy?
Strong earnings, controlled growth in risk-adjusted assets, active balance sheet management and the timely issuance of capital throughout the year have all contributed to our strong capital position, which is in line with the Canadian industry. In our ongoing capital management decisions we consider a variety of factors, including expectations of investors and debt rating agencies, requirements of our regulators, economic and subsidiary capital needs, our capital position relative to our peers, cost efficiencies of various capital instruments, and the need to maintain flexibility in capital management.

Maintaining high debt ratings is very important to us, and we believe we are well capitalized to underpin our risks and execute our business strategies while maintaining these ratings. We have consistently had strong internal capital generation capabilities and cost-effective access to markets that allow us to manage capital flexibility. This flexibility will help as our business environment, strategies and activities evolve and can also allow us to respond to opportunities and absorb unexpected shocks.

In our 2006 capital management plan, our goal is to provide a balance between maintaining solid capital ratios and high debt ratings and providing strong returns to our shareholders. We plan to remain within our 40 to 50 per cent dividend payout target range and to continue to invest in existing operations with high-growth and return potential. As always, we remain open to acquisition opportunities, but only if they meet our financial, strategic and cultural criteria. We resumed share repurchases in the fourth quarter of 2005, under our normal course issuer bid program, and may continue to do so in 2006 at least to offset the dilution from employee stock option exercises. We also intend to review the potential for undertaking securitization transactions and similar initiatives enabling efficient balance sheet management. We will continue our disciplined approach to managing growth in riskadjusted assets in 2006 in order to ensure that our returns thresholds are met. Finally, we will actively manage the structure of our capital through redemptions and issuances so that it remains cost-effective.




4. What is your economic outlook for North America in 2006?
Growth rate disparities between Canada, the U.S. and other G7 economies are in the process of narrowing. Just as Canadian real GDP growth is accelerating, the U.S. economy is set to slow moderately. We expect real Canadian GDP growth to pick up from 2.9 per cent in 2005 to 3.4 per cent in 2006 and U.S. real GDP growth to slow from 3.4 per cent in 2005 to 3.2 per cent in 2006. Lower inflation, a more accommodative monetary policy, and sharply higher energy and non-energy commodity prices are behind the expected improvement in Canadian growth. The U.S. economy is expected to slow down because consumers and businesses are expected to begin saving more in response to higher interest rates.

Lower U.S. investment and consumption growth should lead to less borrowing of foreign funds. As a result more funds are expected to remain in lending countries promoting local investment and consumption. We expect improving Canadian growth in 2006 to result in continued rate hikes and the Bank of Canada overnight rate of interest is expected to reach 4 per cent by April 2006. The U.S. federal funds rate has already been rising for over a year and is expected to peak at 4.25 per cent in the last quarter of 2005 and remain at that level in 2006. The rising cost of raw material inputs along with rising wages pushed the U.S. Federal Reserve to act earlier than the Bank of Canada in hiking rates.

Longer-term interest rates are also expected to rise in both countries alongside slowly mounting core consumer price index inflation pressures, leading mortgage rates to rise. The hot Canadian and U.S. housing markets are expected to soften as demand shifts lower with higher borrowing costs. Unlike prior real estate cycles, however, an implosion of the real estate market in either country is unlikely since construction has only kept pace with demand as speculative construction frenzy in both countries was avoided.

Given our outlook, several offsetting factors should keep the value of the U.S. dollar trading in a narrow range.

Firstly, less borrowing of foreign funds by the U.S. is expected to limit further weakening of the U.S. dollar. At the same time, however, the U.S. dollar could come under downward pressure with expectations of continued interest rate hikes in Canada and other G7 countries offsetting hikes in U.S. shortterm interest rates. Furthermore, the Canada-U.S. exchange rate will also be affected by weaker commodity prices. The Canadian dollar is, therefore, expected to fluctuate in a range of 82 to 85 U.S. cents. Other currencies are also expected to stabilize relative to the U.S. dollar in 2006 giving exporters in these countries a reprieve as they continue to adjust to intense pressure from Chinese exports.

The risks surrounding our North American economic outlook are unusually widespread. The war in Iraq and the threat of civil war if the U.S. pulls out early, increasing friction between China and Japan, not to mention the nuclear proliferation threat coming from North Korea could all lead to another bout of higher oil prices, lower demand, lower interest rates, rising inflation and perhaps a period of stagflation. For now, however, our base case consists of a converging business cycle between G7 economies, particularly between Canada and the U.S.


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