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Address To Shareholders

Gordon M. Nixon
President and Chief Executive Officer
Royal Bank of Canada
133rd Annual Meeting

Royal Bank of Canada
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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