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Overview of 2002 & First Quarter 2003 Financial Results

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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