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Overview of 2003 & First Quarter 2004 Financial Results

Peter W. Currie
Vice-Chairman & Chief Financial Officer
Royal Bank of Canada
135th Annual Meeting
Royal Bank of Canada
Toronto, Ontario

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. GAAP.

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 earlier today.

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 quarter.

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 volumes.

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 to 24.5%.

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 to 17.2%.

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 dollar.

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 prior periods.

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 0.45%.

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 their needs.

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.


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