verview of 2002 & First Quarter 2003 Financial Results
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Peter
W. Currie
Vice-Chairman & Chief Financial Officer
Royal Bank of Canada
134th Annual Meeting
Royal Bank of Canada
Montreal, Quebec
February 28, 2003
Thank you Gord, and good morning ladies
and gentlemen. I will be taking the next few minutes to
discuss with you your company's financial results in 2002
as well as in the first quarter of 2003, prepared in accordance
with U.S. Generally Accepted Accounting Principles, or U.S.
GAAP.
As Gord Nixon has mentioned, we are pleased
with our overall results in 2002, especially considering
the challenging market conditions of the past year.
Net income was a record $2.9 billion,
up 19% from 2001 while fully diluted earnings per share
were $4.12, up 16%. Core net income was up 30% from 2001
and core earnings per share were up 27%. All comparisons
to 2001 results that follow in this discussion are on a
core basis, which means excluding special items. We view
special items as transactions that are not part of normal
day-to-day business operations or are unusual in nature.
We exclude these special items in reviewing our financial
performance, as they obscure or distort our analysis of
trends. Special items in 2001 amounted to $204 million after-tax
and largely related to gains on the sale of non-strategic
businesses and costs related to the restructuring of our
U.S. retail banking business. There were no special items
in 2002. Beginning in 2002, we stopped recording costs for
amortizing goodwill, as required by new accounting standards
in Canada and the U.S.
Net income from our U.S. operations improved
significantly. We earned $232 million in 2002 compared to
a $23 million loss in 2001. This improvement reflected the
contribution of RBC Centura for a full year in 2002 compared
to five months in the previous year, synergies achieved
from the integration of Tucker Anthony Sutro into RBC Dain
Rauscher, strong performance from RBC Dain Rauscher's fixed
income business and the fact that we no longer amortize
goodwill.
Return on common equity, or ROE, which
is an important measure of profitability in our industry,
was 16.6%, up from 15.1% last year.
One of our key strengths is our business
diversification. The benefits of this diversification were
demonstrated once again in 2002, as continuing strong performances
by RBC Banking and RBC Insurance, which accounted for 60%
of our net income, offset the effect of weak capital market
and economic conditions on RBC Investments, RBC Capital
Markets and RBC Global Services.
RBC Banking net income was up 22% from
2001, primarily due to higher net income from U.S. acquisitions,
but also reflecting continued cost discipline in the Canadian
operations. ROE increased to 19.2%.
Net income from RBC Insurance was 10%
higher than in 2001, reflecting solid performance from the
Canadian and reinsurance businesses as well as the fact
that we discontinued amortizing goodwill in 2002. ROE was
25.7%.
Net income from RBC Investments was 48%
higher in 2002, due to improved earnings at RBC Dain Rauscher
and the fact that we no longer amortize goodwill.
ROE was 11.1%, reflecting significantly higher common equity
attributed to the segment.
RBC Capital Markets net income was up
17% from 2001, reflecting continuing cost discipline. ROE
was 10.5%. We would expect the returns from RBC Capital
Markets and RBC Investments to improve when capital markets
strengthen.
RBC Global Services net income decreased
8%, due partially to higher provisions for credit losses
in 2002. ROE was 28.7%.
Overall, I am pleased to report that we
met or exceeded our 2002 objectives in the areas of share
valuation, earnings and revenue growth, expense management,
credit quality and capital management. Our performance compared
to our 2002 objectives is outlined on page 8 of our latest
Annual Report, and I'd urge you to review it.
Gord Nixon discussed earlier our strong
shareholder returns over the five years ended October 31,
2002. Included in these numbers were common share dividends.
We are committed to creating value for you, our shareholders,
and accordingly, we have modified our medium-term dividend
payout goal, raising it to 35-45% from 30-40%. We have raised
our common share dividends 4 times during 2001 and 2002,
for a 33 per cent increase, and we announced this morning
that we would be raising our quarterly dividend from 40
cents per share to 43 cents for the May 23rd payment.
First quarter 2003
Now I'd like to turn my discussion to
our results for the first quarter of 2003, which we released
earlier this morning.
We generated record net income this quarter
of $767 million, up from $734 million a year ago. Earnings
per share were $1.10, up 6% from last year's first quarter.
Our 2003 objective, established last year, was for earnings
per share growth of
10-15%.
Net income from recent U.S. acquisitions
continued to rise, increasing to $81 million from $53 million
a year ago. This increase is largely due to higher net income
at RBC Dain Rauscher, which benefited from significant cost
savings this quarter from the integration of Tucker Anthony
Sutro which occurred last spring, and lower retention compensation
costs.
ROE was 16.9% compared to 17.1% a year
ago and an objective of 17-19% for this year.
Net income from RBC Banking was $412 million,
up 6% from last year, aided by improvements in credit quality
in the personal, small business and commercial loan portfolios.
ROE increased to 21.5%.
RBC Insurance net income was $54 million,
29% higher than in the first quarter of 2002, reflecting
strong performance in all of its business lines, particularly
the property and casualty reinsurance business. ROE rose
to 26.8%.
RBC Investments had net income of $104
million, up 18% from a year ago, reflecting increased earnings
from RBC Dain Rauscher. ROE improved to 14.7%.
Net income from RBC Capital Markets was
$116 million, a decline of 21% from last year, as weak capital
market conditions resulted in lower earnings from equity
sales and trading and investment banking activities. ROE
was 11.1%.
RBC Global Services reported net income
of $48 million, up 20% from a year ago, with stronger revenues
in the treasury management and trade division. ROE increased
to 30.2%.
RBC Financial Group's total revenues were
$4.0 billion, down 2% from a year ago compared to a 5-8%
growth objective for all of 2003. The decline was largely
due to continued poor equity markets and a planned reduction
in corporate loans, largely outside Canada, that have low
returns and low strategic value.
Non-interest expense also fell 2% from
last year's first quarter.
Turning now to portfolio quality - our
specific provision for credit losses was down 30% from a
year ago, with reductions in our consumer, commercial and
corporate loan portfolios. Specific provision for credit
losses as a percentage of loans, acceptances and reverse
repurchase agreements was 0.36% this quarter, compared to
our targeted range of 0.45-0.55%.
Our capital ratios remained strong, with
a Tier 1 ratio of 9.4% and Total Capital ratio of 12.7%.
Finally, in the area of valuation, our
share price to book value and share price to earnings remained
in the first quartile of our comparator index, although,
given our already high relative valuation, our shares did
not perform as well this quarter as the Bank index.
In summary, we had a solid first quarter.
Our performance in the areas of portfolio quality, expense
management and capital ratios were strong this quarter,
with the provision for credit losses ratio well below the
target range for this year, expenses down 2% from a year
ago and capital ratios well above our medium-term goals.
However, revenues were weaker, as reflected in the contribution
of our capital market sensitive and lending businesses.
In the face of these dynamics, we are maintaining our strong
focus on cost management and accelerating programs to enhance
profitable revenue growth.
Before I conclude, I'd like to emphasize
that we remain dedicated to providing the most straightforward
representation of our financial condition and trends. At
times, when special items such as large gains on sale of
operations obscure or distort trends, we identify those
items and disclose our results excluding them even though
it may appear to dampen our performance. We believe candid,
timely, and objective financial reporting are essential
elements in a capital market where investors can deploy
their resources with confidence. I am pleased to say that
your company has been repeatedly recognized as having excellent
financial disclosure and we have every intention of maintaining
this transparency and integrity.
Thank you for your attention. I will now
turn the floor back over to Guy Saint-Pierre.
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