Address To Shareholders
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Gordon M. Nixon
President and Chief Executive Officer
Royal Bank of Canada
to
133rd Annual Meeting
Royal Bank of Canada
at
Toronto, Ontario
February 22, 2002
I am honoured to be with you today to make my first report
to shareholders as President and Chief Executive Officer of
RBC Financial Group.
I am going to spend the next 20 minutes or so discussing
the accomplishments of our organization in fiscal 2001, and
outlining the strategy we've developed to achieve our corporate
vision. That vision is to be a leading North American financial
services organization, pre-eminent in Canada, with global
niche businesses in areas where we have a competitive advantage.
Your company faced significant challenges last year. After
a decade of unprecedented growth, the North American economy
slipped into slow gear and many industries -- including Financial
Services -- were forced to deal with the excess capacity built
up throughout the 1990s.
The weak economy was compounded by the tragic events of September
11th, which resulted in further deterioration of equity markets
and restructuring in many sectors.
In addition, we had to deal with the significant costs associated
with previous acquisitions, higher than anticipated loan losses
and special restructuring charges.
Despite this difficult environment, we produced solid results
and were able to meet the majority of our objectives in fiscal
2001. This performance is the result of our strong client
relationships, our dedicated employees, and our diversified
business base.
The diversification of our business was an important element
of our success.
For example, weak capital markets last year reduced the earnings
of our Wealth Management and Corporate & Investment Banking
businesses -- two segments that have generated significant
growth over recent years.
However, this reduction was offset by our other business
segments, which recorded strong earnings as well as reasonable
growth.
One of our strengths as an organization is our commitment
to each of our stakeholder groups. We believe that the interests
of our clients, shareholders, employees and communities are
intrinsically linked and our goal is to continue to build
relationships with -- and deliver value to -- all of them.
As this is a shareholders' meeting, my main focus today is
on our strategies and performance in creating value for you,
our owners.
However, I will also be referring to our other stakeholders,
because we believe shareholder value can best be created by
committed employees, serving satisfied clients, within vibrant
communities.
Over the past year, we continued to pursue our major business
priorities, which are:
- To generate strong financial performance;
- To expand our business internationally, particularly in
the United States;
- To grow businesses with high returns or high Price/Earnings
multiples; and,
- To leverage cost and revenue synergies across our various
business platforms.
Let's begin with our first priority -- strong fundamentals.
At RBC, we keep a close watch on a number of key financial
measures that underpin our future prosperity and create value
for our shareholders. These include:
- earnings growth,
- return on common equity,
- revenue growth,
- expense control,
- portfolio quality, and
- capital measures.
Every year, we set performance objectives in each of these
areas and we measure ourselves against them. Employee compensation
is significantly influenced by how we perform against our
objectives as well as our relative performance against our
peer group.
In a few minutes, Peter Currie, our Chief Financial Officer,
will give us a detailed account of how we performed against
these measures in fiscal 2001 and the first quarter of fiscal
2002. So, I will simply mention that we had another solid
year in 2001, with net income up by approximately 10 per cent
to more than 2.4 billion dollars and a cash Return on Equity
of 18.6 per cent. And as shareholders, you will be pleased
to know that we've started this year with a good first quarter.
Our focus on generating strong financial performance in the
face of competitive, regulatory and economic challenges, and
our emphasis on building a well-diversified business mix has
rewarded our shareholders.
Over the past five fiscal years, our common shares have generated
an annualized return of 19 per cent. That's more than three
times the return of the TSE 300 stock index, and well above
the 14 per cent return generated by the S&P 500 during
that same period.
There is an inherent tension between investing in long-term
growth and maximizing short-term fundamentals. I believe one
of the key responsibilities of management is to balance these
two critical objectives.
While acquisitions get the headlines, I know our shareholders
will appreciate hearing that we intend to keep our focus on
generating strong fundamentals.
International expansion, our second priority, remains a key
focus of the organization.
This past year, we made significant strides in growing our
US retail banking, full-service brokerage and insurance operations
through acquisitions. We also expanded our international niche
businesses in Transaction Processing and in Corporate &
Investment Banking, through both acquisition and business
expansion.
In November 2000, we completed the acquisition of South Carolina-based
Liberty Life.
RBC Liberty gives us a stable earnings base with insurance
revenue spread across agency sales, direct business, and administrative
services.
Early in 2001, we acquired Minneapolis-based Dain Rauscher
Corporation. And in October, we purchased Boston-based Tucker
Anthony Sutro, which we are merging with RBC Dain Rauscher.
Tucker Anthony Sutro, with its presence mostly on the east
and west coasts, complements RBC Dain Rauscher's largely Midwestern
presence.
The combined company is now the ninth largest retail brokerage
firm in the US, with more than 2,000 Financial Consultants
in over 160 offices. Including RBC's Canadian operations,
our Wealth Management platform is now approaching our target
of 4,000 investment advisors in North America.
Dain Rauscher Wessels -- the equity capital markets arm of
Dain Rauscher -- complements our North American Corporate
& Investment Banking activities and has now been fully
integrated into RBC Capital Markets.
Our purchase of North Carolina-based Centura Banks in June
of 2001 represented a sizeable expansion into the US personal
and commercial banking market. RBC Centura has 239 branches
in three Southeastern US states, along with 14 billion US
dollars in assets.
In aggregate, our US acquisitions have given us more than
two million clients to add to our 10 million in Canada. Moreover,
US revenues were 20 per cent of our total last year, up from
7 per cent in 2000.
In future, we expect more of these US revenues to flow through
to our bottom line as the cost impact of previous acquisitions
declines and we achieve better operational efficiency.
We will continue to look for disciplined and strategic add-on
acquisitions in the US, but our greatest short-term priority
is to meet our operational targets.
We plan to do this in two ways.
On a cross-border basis, each business segment is looking
at opportunities to maximize cost effectiveness and revenue
potential. And on an east-west basis in the United States,
we are also reviewing ways to eliminate duplication and to
build revenue by leveraging our capabilities across different
business platforms.
Our third strategic priority is to grow businesses with high
returns that are less capital intensive and carry higher market
multiples. Although we remain committed to defending our leadership
position in Corporate & Investment Banking, and expect
continued growth from this area, our focus is on consumer
markets such as Personal & Commercial Banking and Wealth
Management, where we believe the long term prospects remain
strong.
Due to weaker capital markets, Wealth Management's contribution
fell to 14 per cent last year, but it's been as high as 21
per cent in the past.
Our goal is to increase this contribution, as we believe
the long-term growth prospects of this business are strong,
its returns are attractive and that we have a competitive
franchise.
Like Wealth Management, our Insurance and Transaction Processing
businesses are relatively immune to asset quality issues and
are less capital intensive. They produced approximately 13
per cent of last year's net income, and our objective is to
also grow their contribution.
RBC is leveraging its strengths in working across business
platforms to provide integrated financial solutions to customers.
This is an area of growing strategic importance to our organization
and we have now made it a fourth strategic priority.
Working across business lines to leverage skills, products
and technology provides substantial benefits to all stakeholders.
Companies that cross-sell or deliver products in a way that's
convenient to the client -- regardless of their own organizational
structures -- end up serving their clients better and are
rewarded with more of their clients' business.
They are also compelled to bring down barriers between businesses,
eliminating duplicate delivery channels, products and functions,
which helps to lower costs.
The trend towards integrated financial services is gathering
momentum, and it is being driven by the client's quest for:
- convenience,
- service,
- quality, and
- value.
We want to be a leader in this field.
RBC Financial Group is ideally positioned for financial services
integration. We have a broadly diversified business mix, which
allows us to offer a wide range of services to our clients.
Our strong market position and customer base in most businesses
in Canada, combined with our leadership in customer relationship
management, also facilitate cross-selling.
RBC's leadership in customer relationship management was
recently recognized by the American Banker, which honoured
us with its prestigious "Innovator of the Year" award.
Let me take a moment to tell you about some of our successful
cross-platform efforts -- first, those underway in Canada
and then those being implemented in the United States.
For several years now, we have had a referral program in
Canada, which tracks and encourages business referrals between
different parts of RBC Financial Group. Between 1998 and 2001,
this program generated approximately 13 billion dollars of
new business.
Last fall, Wealth Management and Personal & Commercial
Banking joined forces to create a streamlined, efficient,
and "best in class" financial planning sales force of over
1,500 people.
We are also dedicating significant resources to customer
segmentation in order to provide higher service quality and
better value to our clients as they progress through different
life cycle stages and require different products and advice.
In the United States, our Personal & Commercial Banking
platform is pursuing initiatives related to integration, product
development and sales management.
For example, by consolidating Security First Network Bank,
RBC Prism and RBC Builder Finance into RBC Centura, we have
generated significant cost reductions. We have also expanded
revenue as a result of having a broader product offering and
distribution network.
We have also launched initiatives across business units in
the United States which -- while not factored into our acquisition
models -- provide attractive opportunities as we grow our
US consumer franchise.
The new "RBC" branding initiative also supports our integration
strategy. We believe we can evolve the brand to a point that,
when clients see the prefix "RBC" attached to any of our businesses,
they will recognize they are dealing with a larger family
that shares the same high standards and values.
Some people mistakenly believe that we have abandoned the
names Royal Bank and Royal Bank of Canada.
We have not.
RBC stands for Royal Bank of Canada. RBC Financial Group
is the umbrella name we use to describe our group of companies.
This name replaced Royal Bank Financial Group to better reflect
the make up of our businesses, which include a number of non-banking
activities.
The legal name of our company remains Royal Bank of Canada,
and the Canadian Personal & Commercial Banking franchise
operates as RBC Royal Bank.
RBC Insurance, RBC Investments, RBC Capital Markets and RBC
Global Services all have significant non-banking businesses
that should not -- and in some cases cannot -- have the word
"bank" in their name.
"RBC" connects all of these businesses and also integrates
our US operations without compromising the strength of their
regional brands.
At RBC, we have a philosophy of building relationships and
delivering value to all of our stakeholders, which in addition
to shareholders includes our:
- clients,
- employees, and
- communities.
We work hard to build enduring relationships with our clients.
We want to provide excellent value no matter what channel,
product or service package a client chooses to use.
One of the defining cultural characteristics within all businesses
of RBC is our focus on client relationships and service. This
is quite different from some of our competitors who focus
on transactions.
But we know that if we can build trusting relationships with
our clients, the transactions will follow. While 85 per cent
of our employees own RBC stock, they don't come to work each
day focused solely on shareholder value. Their main focus
is on their clients -- whether they are a multi-national corporation
or an elderly consumer needing a little extra help.
And while I know we are not perfect and that we can always
improve our customer service, we are making good progress
in focusing everyone's attention on the need to build long-term
client relationships.
We also provide leading-edge workplace practices to attract
and keep the best people.
Our goal is to create a work environment:
- where people respect each other,
- where diversity is valued,
- where performance is rewarded, and
- where a healthy work/life balance is encouraged.
I cannot emphasize enough the importance of values and culture
in shaping our organization. We have five business segments,
each with its own culture -- in some cases many cultures --
and different businesses are motivated and incented differently.
It's critical that we recognize and capitalize on these differences,
but we must also build common cultural threads and consistent
values that bind all of our businesses together.
We need to ensure that employee actions are aligned with
our values of:
- service,
- teamwork,
- responsibility,
- diversity, and
- integrity.
These values are being anchored in our performance management
systems against which all of us -- as employees -- will be
measured.
We also believe that our success as a company is closely
linked with the well-being of the communities in which we
operate. In our view, being socially responsible is not something
a company chooses to do -- it is something a company must
do as an integral part of its relationship with stakeholders.
Corporate citizenship takes many forms. As a founding member
of the Imagine Caring campaign, RBC Financial Group is proud
to be one of the largest corporate donors in Canada.
But we're not just interested in philanthropy. We are a fully
committed corporate citizen. We encourage our employees to
share their professional knowledge and skills with their communities.
We take special pride in knowing that the Globe and Mail's
Report on Business Magazine has named us the country's most
socially responsible corporation for the last six years.
RBC and its people are involved in thousands of worthwhile
causes that are outlined in our 2001 Community Report, which
is in the package you received on your way in today. I encourage
you to read it.
Over the past 10 months since becoming President, and then
Chief Executive Officer, I have had the privilege of traveling
extensively across North America to spend time with our employees
in each of our businesses.
I am always impressed by the dedication and commitment of
our employees to the organization, their clients and their
communities. The common theme I hear from clients is how dedicated
our employees are and how they set themselves apart from others
in their communities.
These special qualities were clearly demonstrated during
and following the tragic events of September 11th. Despite
a tremendous sense of loss, our 700 employees in New York
did everything possible to resurrect our business capabilities
in back-up facilities, and to make paramount the interests
of our clients, our organization, and the financial markets.
The tremendous performance of our employees in New York and
their colleagues around the world who supported them, has
been chronicled in a special edition of our employee magazine,
which is also in your package.
These employees held our New York operations together under
extremely challenging circumstances and in my view, are heroes.
They deserve our recognition and our special thanks.
Before concluding, I would like to comment briefly on an
issue of importance to all stakeholders -- the governance
of public companies and the public's trust in them to support
future growth and prosperity.
The 1990s was a decade of great economic progress but, like
many other such periods, was also characterized by speculative
excess.
Consumers, investors, employees and communities have suffered
and are still suffering through the collapse of many large
companies. These companies failed to meet expectations for
a number of reasons - but mainly due to the fact that these
expectations were unrealistic, and because management and
boards of directors failed to maintain the high standards
set for them.
These events have created a great deal of public cynicism
about our economic system and financial markets. Thus in the
opening years of the 21st century, we find ourselves burdened
by concerns for the integrity of business, the vigilance of
management & boards of directors, and the credibility
of public information and financial statements.
Ensuring public confidence in our system is essential to
maintaining a healthy investment climate, and business leaders
must put greater focus on these critical areas of corporate
governance.
The business community needs to ensure that financial statements
have more credibility and consistency, that compensation structures
properly align the interests of employees and shareholders,
and that business plans take a long-term view based on sound
fundamentals.
You can rest assured that your company, your management,
and your Board of Directors are seized of this issue. While
we take pride in knowing that our Board of Directors was recently
rated as the best in the country by Canadian Business magazine
-- and while we are honoured that RBC has been recognized
by the investment community as having the "Best Financial
Reporting" in Canada -- we will remain vigilant with respect
to corporate governance issues.
I would like to conclude by thanking our 60,000 employees
around the world for their continued hard work. They are successfully
building relationships and delivering value for all of our
stakeholders. And they are providing the intellectual assets
upon which our financial assets rest.
I would also like to thank our talented senior management
team, my partners on Group Management Committee, and our Board
of Directors for their guidance and leadership over this past
year.
And on a personal note, I would like to thank John Cleghorn
for his support and his leadership.
We have lots of challenges ahead of us, but there are also
lots of opportunities. I am confident that we have the organizational
strengths and capabilities to keep generating value for you,
our shareholders.
Thank you.
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