Overview of 2003 & First Quarter 2004 Financial
Vice-Chairman & Chief Financial Officer
Royal Bank of Canada
135th Annual Meeting
Royal Bank of Canada
Friday, February 27, 2004
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 2003
as well as in the first quarter of 2004, prepared in accordance
with U.S. Generally Accepted Accounting Principles, or U.S.
We had a solid year in 2003 despite the
ongoing weakness in the North American economies and a challenging
capital markets environment during the first half of the
year. In addition, the strengthening of the Canadian dollar
relative to the U.S. dollar during the year resulted in
a lower translated value of U.S. results.
Net income was a record $3 billion in
2003, 5% higher than in 2002. On a per share basis, earnings
were $4.43, up 8%. The strengthening of the Canadian dollar
last year had a dampening effect on both our US dollar revenues
and expenses resulting in a net $60 million negative impact
on 2003 earnings.
Return on common equity, or ROE, which
is an important measure of profitability and shareholder
value in our industry, was 17.0% compared to 16.6% in 2002.
Gord Nixon emphasized our business diversification,
which helps us generate more stable earnings relative to
our competitors despite difficult market and economic conditions.
We are also increasingly diversified on
a geographic basis with 13% of earnings derived from our
U.S. operations and 18% from outside North America.
Each of our business segments grew its
earnings last year.
RBC Banking net income was up $8 million
from 2002 reflecting higher earnings from Canadian operations.
ROE increased to 20.8%.
Net income from RBC Insurance was 20%
higher than in 2002, arising from solid performance from
the reinsurance business, cost-reduction efforts in all
lines of business and improvements in the home and auto
insurance business. ROE was 26.4%.
Net income from RBC Investments rose 19%
in 2003, driven by improved U.S. results, ongoing cost-containment
initiatives and higher earnings from the Canadian self-directed
brokerage and asset management businesses. ROE was 15.1%.
RBC Capital Markets' net income was up
12% from 2002, reflecting a significant reduction in the
provision for credit losses. ROE was 12.6%. We would expect
the returns from RBC Capital Markets and RBC Investments
to continue to improve as capital markets strengthen.
RBC Global Services' net income increased
3%, as higher revenues and lower provisions for credit losses
in 2003 offset higher non-interest expense. ROE was 27.7%.
Overall, I am pleased to report that we
met our ROE, capital management and dividend payout ratio
goals in 2003, and exceeded our objective in the area of
credit quality. Although we were able to keep our expenses
flat in 2003, revenue growth was dampened by the softness
in capital markets during the first half of the year, as
well as the significant strengthening of the Canadian dollar
relative to the U.S. dollar. Our performance compared to
our 2003 objectives is outlined on page 7 of our latest
Annual Report, and I'd urge you to review it.
The regulatory environment surrounding
financial reporting and disclosure, and the related internal
controls, is rapidly changing as precipitated by the US
Sarbanes-Oxley Act and new, similar Canadian requirements.
We are actively responding to these requirements and have
undertaken a company-wide initiative to establish processes
to ensure adequate documentation and ongoing evaluation
of the key controls over financial reporting by Management.
In addition, we have established an internal review process
which supports an assessment by the CEO/ CFO regarding the
quarterly/annual filings and the related disclosure controls
and procedures. As demonstrated previously, RBC continues
to believe that good governance is just good business.
Gord Nixon discussed earlier our strong
shareholder returns over the ten years ended October 31,
2003. Included in these numbers were common share dividends,
which have tripled over the past 10 years and which we raised
by 13% in 2003. This morning, we announced an increase to
our quarterly common share dividend of 6 cents per share
or 13% to 52 cents, payable on May 21, 2004 to common shareholders
of record on April 22, 2004.
The quarterly common share dividend was
last increased by 3 cents per share to 46 cents in the fourth
quarter of 2003.
We also announced an increase in the dividend
payout ratio goal to a range of 40 to 50 per cent from the
earlier goal of 35 to 45 per cent in order to provide even
greater dividend income to our shareholders. Strong capital
ratios and continued solid internal capital generation have
facilitated this increase in the goal.
First quarter 2004
Now I'd like to turn our attention to
the results for the first quarter of 2004, which we released
Net income was $793 million compared to
$767 million a year ago. Earnings per share were $1.19,
up 8% from last year's first quarter.
ROE was 18.1% compared to our objective
of 17 to 19% for 2004, and ROE of 16.9% in last year's first
There were two significant items affecting
first quarter results:
- First, the reversal of a portion of the general allowance
for credit losses added $97 million to net income. This
reversal reflects positive changes in the composition
of our loan portfolio, improving default and loss trends,
better economic conditions and changes to the underwriting
and collection strategies and processes in our businesses.
- Second, a settlement of the dispute with Rabobank relating
to a US$517 million (C$ 820 million) swap transaction,
net of a related reduction in compensation and tax expenses,
reduced net income by $74 million.
Our business segment results for the first
quarter of this year reflected strong credit quality, higher
capital market-related revenues and solid growth in loan
Net income from RBC Banking was $429 million,
up 4% from last year, largely reflecting a $49 million after
tax reversal of a portion of the general allowance for credit
losses, higher loan volumes and lower non-interest expenses
resulting from effective cost management. ROE increased
RBC Insurance net income was $61 million,
13% higher than in the first quarter of 2003, reflecting
a favourable loss experience in the property reinsurance
business that offset adverse claims experience in the home
and auto insurance division. ROE was 23.9%.
RBC Investments had net income of $140
million, up 35% from a year ago, thanks to greater earnings
in U.S. and Canadian full-service brokerage, Canadian discount
brokerage and Canadian asset management operations. ROE
improved to 21.4%.
Net income from RBC Capital Markets was
$150 million, an increase of 29% from last year. This reflects
a $68 million reduction in the specific provision for credit
losses and a $39 million general allowance reversal - both
amounts after-tax. These items more than offset a $74 million
after tax charge from the Rabobank settlement. ROE increased
RBC Global Services reported net income
of $57 million, up 19% from a year ago. This reflects a
$14 million reversal of a portion of the general allowance
for credit losses. ROE increased to 36.6%.
Total revenues were $4.2 billion in the
first quarter, down 3% from a year ago, but up 2% excluding
a $240 million decline in revenues due to the stronger Canadian
Non-interest expenses grew 9% from last
year's first quarter, largely reflecting Rabobank settlement
costs, higher pension and postretirement benefit costs and
higher variable compensation costs.
Turning now to portfolio quality. Our
recovery of credit losses was $28 million, comprising specific
provisions of $122 million and a $150 million reversal of
a portion of our general allowance for credit losses. The
specific provisions were down from $200 million a year ago
as lower provisions were recorded in the business and government
loan portfolios due to a much lower level of new problem
loans, and repayment this quarter of loans written off in
Our allocated specific provisions for
credit losses were 0.22% of loans, acceptances and reverse
repurchase agreements, below our target range of 0.35% to
Our capital ratios remained strong, with
a Tier 1 ratio of 9.3% and Total Capital ratio of 12.9%.
These are above our medium-term goals of 8 - 8.5% and 11
- 12% respectively.
The price of our common shares was $63.19
at the end of the first quarter, up 14% from a year ago.
Including re-invested dividends, shareholders received a
total return of 18%.
In conclusion, we are heartened by the
robustness of our capital markets revenues, continued growth
in loans and improvement in credit quality.
For the balance of 2004, we are determined
to grow revenues at a faster rate while containing costs.
Providing our clients with a superior client experience
and quickly solving their problems to improve our customer
retention are two ways to do this. RBC Royal Bank has launched
a new process across all Canadian branches, business centres
and telephone banking contact centres to strengthen problem
resolution. We are also aiming to earn more of our clients'
business by creating tailored solutions that better meet
In the United States, where our revenues
have dropped at RBC Mortgage, we are working to implement
a number of measures to improve the business model, back
-office processes and controls. For example, RBC Mortgage
is clearing up the backlog that occurred at the end of the
refinance boom last year, is working to reduce costs and
is adopting Sterling Capital Mortgage Company's loan origination
technology, which is superior to its own, as well as Sterling's
business model. RBC Mortgage will also use a more efficient
straight-through process than the current one which requires
frequent manual involvement.
We are also redoubling our attention on
cost management. For example, we are increasingly using
technology to improve efficiency and re-deploying the savings
to better serve our customers.
Thank you for your attention. I will now turn the floor
back over to Guy Saint-Pierre.