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Address to Shareholders

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Gordon M. Nixon
President & Chief Executive Officer
RBC Financial Group
134th Annual Meeting of
Royal Bank of Canada

February 28, 2003

Mesdames et Messieurs, bonjour. Bienvenue à notre assemblée annuelle.

I'd like to speak today about our company's recent performance and our future prospects as one of North America's premier financial institutions.

RBC Financial Group's vision is to be a leading North American financial services organization, pre-eminent in Canada, with specialized global businesses in areas where we have a strong competitive position.

To achieve this vision, we have established three goals:

The first is to be recognized as the undisputed lead provider of integrated financial services in Canada.

We already have the number one or two market position in this country in most of our businesses, and we are committed to retaining our domestic leadership. We plan to do this by increasing our emphasis on the integrated delivery of services, and by strengthening our relationship with each client.

In particular, we are moving aggressively in our retail business to increase the number of client-contact staff in branches, and enhance our distribution channels.

Given our broad range of financial services, we have a unique opportunity to provide financial advice and products that meet our clients' entire financial needs, and in a manner that provides superior value. We are continuing to invest in customer relationship management tools and client segmentation strategies to provide better service, better value and tailor-made solutions.

The success of our business in Canada is critical to our financial performance and provides the equity, market value and franchise strength necessary to successfully expand abroad.

This brings us to our second goal: to be recognized as a best in class provider of select financial services in the United States.

Our strategy is to focus U.S. investment on businesses where we have exportable competency and competitive advantage.

In 2000 and 2001, we made three significant acquisitions in the United States in order to establish a strategic foothold in our priority consumer businesses. Since then, we have focused on enhancing the performance of these companies by integrating their activities, and investing in organic growth and small add-on acquisitions.

Over the past three years, we have added 2.3 million clients in the U.S., and grown our revenues significantly. In 2002, U.S. revenues accounted for 28 per cent of total revenues, up from 7 per cent in 2000. We expect U.S. revenues will continue to rise and, over time, a greater portion will fall to our bottom line as the costs of acquisitions decline and we continue to improve revenues and operational efficiency.

While we will invest in each of our five business platforms, the focus of future growth in the United States will likely be a combination of branch expansion and targeted retail bank acquisitions. We have been pleased with the performance of our personal and commercial banking franchise in the United States, and would like to increase the relative size of RBC Banking in that market.

Our third goal is to be recognized as a premier provider of specialized global financial services.

Outside North America, we will focus on those businesses where we are strong globally, have a competitive advantage and can generate attractive returns. Examples of businesses that meet these criteria are global custody, global private banking and global trading.

Our custody business is the 12th largest in the world with assets under administration of 1.4 trillion dollars, and we are the clear leader in Canada with over 40 per cent market share. In foreign exchange and other trading businesses, we rank among the top global banks, with strong operations in Toronto, London and New York. In Global Private Banking, we have clients in more than 100 countries, and we have been selectively growing this business through niche acquisitions, including the recent purchase of the Americas private banking business of Barclays Bank. These are examples of businesses where we are focused, have competitive strength, global standing, and earn solid returns.

In summary, our goals are to maintain Canadian leadership in all areas, to develop our U.S. consumer franchise, and to continue to build our strong international niche businesses.

To accomplish our goals, we have four strategic priorities:

  • Strong fundamentals;
  • North American expansion;
  • Growth of high-return businesses; and,
  • Cross-platform leverage.

With respect to strong fundamentals, despite operating in a tough environment marked by concerns over global economic growth, financial market uncertainty and geopolitical tensions, we reported record net income of 2.9 billion dollars in fiscal 2002. We also performed well against last year's objectives.

We grew both revenues and earnings per share in double-digits; maintained our focus on cost containment and asset quality; enhanced our capital ratios; and delivered top quartile valuation.

Over the last fiscal year, our common share price rose 16 per cent, compared to a return of minus 9 per cent for the Toronto Stock Exchange, and plus one per cent for the Banks and Trusts Index. We raised our common share dividend by 10 per cent during the year and are now targeting a dividend payout ratio of 35 to 45 per cent. Our strong financial performance has resulted in solid internal capital generation, and we are trying to maintain the right balance between rewarding shareholders through dividends, buying back shares, and investing in future growth.

North American expansion is a key priority relating to growth. While we have always had significant wholesale operations in the U.S., the focus of our recent investment has been on retail businesses that we know well and where we can leverage our Canadian expertise and technology to build a North American franchise.

RBC Centura is our personal and commercial bank in the United States. With about 800,000 clients, 246 consumer and business branches in the Southeast and national mortgage and builder finance businesses, it provides a solid foundation for growth. Eagle Bancshares, acquired last July, and Admiralty Bancorp, acquired this past January, are small but important footprints in two of America's highest growth regions - Atlanta and Florida.

RBC Dain Rauscher, our wealth management business in the United States, is well positioned as a high-quality, mid-sized, full-service investment advisor. With the acquisition of Tucker Anthony Sutro in 2001, we now have approximately 2,000 financial consultants in 142 branches and 39 states. RBC Dain Rauscher has 133 billion dollars of assets under administration and is the 9th largest full-service brokerage in the United States. Combined with our 1,400 advisors in Canada, we now have a North American franchise of 3,400 full-service wealth management advisors. We believe we are well positioned to take advantage of favourable operating leverage and a strong distribution network when capital markets recover.

RBC Liberty Insurance provides life and health insurance in the United States through a sales force of over 600 agents, and direct channels. It has more than two million life policies in force and 367 million dollars of assets under management. Our objective is to grow our life business by capitalizing on our personal and commercial banking and wealth management distribution networks.

Our third priority is to grow high return and high-P/E multiple businesses.

We will invest only in those areas of our core platforms where we see profitable opportunities for growth, and reasonable returns on capital. Personal & Commercial Banking and Wealth Management have been targeted for the greatest long-term expansion, although we have other businesses with selected segments for priority growth.

Our domestic banking business has a long history of generating solid, consistent returns and we believe we can export the principles that underpin this business to the United States. While the performance of our wealth management business has been dampened by the weakness in capital markets, the returns of this business in normal market conditions are strong. We are confident in its long-term prospects, particularly given demographic shifts and the expected intergenerational wealth transfer.

As we have expanded our high-return businesses, we have continued to shrink low-return and capital-intensive operations such as corporate lending. This contributed to a 5.1 billion dollar reduction in total corporate and government loans last year. Since 1998, we have reduced our risk-adjusted assets in our corporate loan book by approximately 30 per cent, mostly outside Canada. While this has a negative impact on top line growth, we believe it is the right thing to do with respect to shareholder value. Our objective is to offset this reduction with growth in commercial and small business lending, where we can generate better returns.

Our five business platforms, RBC Banking, RBC Investments, RBC Capital Markets, RBC Insurance and RBC Global Services provide diversification of earnings and geography, and this diversity was a key factor in last year's performance. Despite continued economic uncertainty, four of our five business platforms produced record double-digit core earnings growth.

In the past, our ability to capitalize on the individual strengths of each of these business platforms has fuelled much of our growth. However, if we are going to achieve our aggressive growth targets, we must also look at ways to leverage our collective strengths by driving greater efficiency and more business across our strong client base.

This brings us to our fourth priority: cross-platform leverage. This priority recognizes that as an integrated financial institution, the whole can be greater than the sum of its parts.

Cross-platform leverage is about working across businesses and functions to grow revenue by sharing best practices and offering our clients a broad array of services. It is also about eliminating duplication from autonomous businesses and using technology to build common and scalable systems.

We have a history of strong cross-selling results in Canada. Over the past six years, we referred 9.3 billion dollars of business between platforms, which generated an incremental 17 billion dollars of new business. That means for every dollar of business referred, we generated almost two dollars of new business.

We believe we can expand this capability across the organization, and have recently rolled out a more robust version of our referral program. We expect this will generate additional revenue growth and profitability, as well as increased client retention.

We are well positioned to take advantage of cross-platform leverage in Canada, with a broad and complementary range of product and service offerings, sizeable client base, strength in customer relationship management, and a philosophy of building long-term, full-service relationships with clients.

We have begun to leverage our Canadian expertise in the United States in a number of areas including sales practices, performance management, client segmentation, and product management -- and we've seen some early gains. For example, last year at RBC Centura our consumer loans were up seven per cent, small business loans were up 18 per cent, and commercial loans grew by 21 per cent -- strong results during a year with modest economic growth.

RBC Centura has also been collaborating with its Canadian colleagues to build its customer relationship management systems and sales automation tools. The fact that it will take them less than two years to build what took five years to develop in Canada underscores the benefit of sharing best practices.

Within the United States, our companies have also instituted programs to increase sales revenues by cross-selling products and services. RBC Liberty Insurance and RBC Mortgage are now selling selected products to clients of RBC Centura. One example is an adjustable rate mortgage, which has generated more than 1 billion dollars in new originations since the beginning of fiscal 2002. RBC Dain Rauscher is leveraging the wealth management activities of RBC Centura as a platform to expand in the Southeast.

We have also focused on a number of potential areas for operational efficiency across the entire organization. A senior management committee representing all businesses and functions meets regularly to breakdown barriers, eliminate duplication and identify centers of expertise that can be leveraged to enhance efficiency and revenues. They initiate and oversee cross-platform projects, and we now have over 50 in progress.

Our three goals and four strategic priorities form the basis for our business and investment decisions. They are what we measure ourselves against, and we will continue to report on our progress.

I would like to conclude with some comments about our employees and the governance of our organization.

One of our objectives is to build greater awareness among employees of the role that values play in powering high-performance organizations. Over the past two years, we've invested a great deal of time and effort re-affirming and communicating with employees our five core values:

  • Excellent service to clients and each other;
  • Working together to succeed;
  • Personal responsibility for high performance;
  • Diversity for growth and innovation; and,
  • Trust through integrity in everything we do.

We believe that adhering to these principles will result in better value creation for our clients and shareholders.

In fiscal 2002, we embedded these values in the annual performance appraisal process for executives, and we are rolling it out this year to other employees. This will allow us to measure and hold people accountable for our values across the organization. We have also made it mandatory for employees to pass a test demonstrating their understanding of RBC's Employee Code of Conduct.

We communicate regularly with our employees about good news and bad, and we engage them in dialogue about ways to strengthen our organization. As a matter of interest, we have just completed a survey of our 60,000 employees, with a response rate of over 80 per cent. While I am pleased to say that the results are quite favourable, it is the level of engagement of our people that is most impressive.

I believe our employees represent our most important asset. We're making significant investments in their development, and we are building on the core values that we believe are essential in a diverse organization like RBC.

We also have a strong commitment to be a socially responsible and well-governed company.

Although we are one of Canada's largest corporate donors, we believe that corporate responsibility is about more than contributing to community causes. It also involves corporate governance, ethical business practices, stewarding the environment, protecting the privacy of clients, and respecting diversity. Many of our policies and activities in these areas are outlined in our 2002 Corporate Responsibility Report, which is in the package you received today.

At RBC, we take great pride in our hard-earned reputation for the integrity of our people, processes and practices. In a national survey by Ipsos-Reid, we were recently named "Canada's Most Respected Corporation", and for the seventh year in a row, Canada's best company for social responsibility. Our Board of Directors has been chosen "Best Board in Canada" for the last two years by Canadian Business magazine. We have been frequently recognized by the investment community as having the best financial reporting in the country. We were selected this year as Canada's best company for people management. And we were recently identified by Reader's Digest magazine as one of Canada's most trusted brands.

Despite this recognition of our leading-edge practices, your board and management will remain vigilant in fostering and reinforcing a culture of continuous improvement in all areas -- particularly in customer relationship management and corporate governance. Notwithstanding our success, we are not satisfied with our client service levels, and we will continue to invest in ways to improve our performance.

We have also invested significant resources to ensure that our risk management, compliance and internal audit standards represent best practices. Our standards and processes have evolved tremendously and are leading edge; however, we are not taking anything for granted. We operate in a world where there is increased operating risk, including dishonest and unethical behaviour. Our best line of defence is to set high standards, employ the very best practices, and be vigilant and intolerant of any inappropriate activity.

We will also continue to keep a close watch on changes in the business and regulatory environment. We will monitor governance initiatives in Canada and elsewhere, assessing our practices against them and adapting as appropriate.

Over the past year, we have made a number of refinements to our governance policies. These include changes relating to senior management and director compensation; stock option grants and senior management exercise rights; share ownership requirements; and independence rules for board committees. We have also been reviewing our governance practices in response to the "Sarbanes-Oxley Act", as well as proposals from the New York Stock Exchange.

On the issue of corporate governance, I believe Canadian companies have significantly benefited from the activities of their more active shareholders, who have been raising issues of good governance for some time. However, I would caution against tying the hands of boards of directors and management with rigid guidelines as a result of well-meaning shareholder proposals. We are beginning to hear this concern from a growing number of investors. It is the primary reason why we and a number of major shareholders are reluctant to support proposals even though we agree with many of the principles behind them. It is important that we not add unnecessary levels of expense and bureaucracy, nor remove the flexibility that management and boards need to do their jobs effectively, particularly in a rapidly changing and dynamic marketplace.

In closing, I would like to recognize the dedication, commitment and hard work of our people in producing solid results during a challenging year. On behalf of our Board of Directors and my partners on Group Management Committee, I would like to thank our employees for their tremendous contribution to our company. In an industry where products can be copied and rates matched in short order, we believe the quality of our employees is truly a differentiating factor.

Ladies and gentlemen, your company is united in its efforts to grow our business in a disciplined manner that reflects positively on our bottom line as well as our corporate reputation. We are well positioned to seize opportunities in Canada, the United States and elsewhere, and to succeed in today's challenging economic environment. By developing and building on our considerable strengths, we believe we can continue to generate value for our shareholders, our clients, our employees and our communities.

Thank you.


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