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Address to Shareholders

Gordon M. Nixon
President & Chief Executive Officer
RBC Financial Group
135th Annual Meeting of
Royal Bank of Canada

Toronto, Ontario

February 27, 2004

Good morning ladies and gentlemen, and welcome to your Annual General Meeting.

I would like to speak today about your company's recent performance and future prospects in the context of our new corporate vision: "Always Earning the Right to be Our Clients' First Choice."

In a year that marks our 135th anniversary as a chartered bank, I think it is appropriate that we are borrowing from our past in implementing this bold new vision for the future. After all, it was by putting our clients first that the Merchants Bank grew from a single branch on the Halifax waterfront in 1869, to Canada's largest and most respected financial institution.

As you have seen in our annual report and the video we just watched, our vision is more than just words. It's a commitment to meeting and exceeding client expectations at every opportunity and through every service channel. It guides our business activities, and reflects our belief that we can give clients an integrated offering of financial services that uniquely addresses their needs.

To accomplish this vision, we have established four key priorities:

  • Strong fundamentals;
  • Superior client experience;
  • Cross-enterprise leverage; and,
  • North American expansion.

Strong Fundamentals

Let's start with "Strong Fundamentals". In 2003, despite ongoing economic weakness in North America and difficult capital markets during the first half of the year, we reported record net income of over three billion dollars. To put this number in perspective, we have tripled our earnings since reaching the one billion dollar mark in 1994, and grown by 50 per cent since crossing the two billion dollar mark just three years ago.

In fiscal 2003, about half our earnings came from our personal and commercial banking business, which generated a strong Return On Equity of 20.8 per cent. A further 14 per cent of earnings were produced by our insurance and transaction processing businesses, which generated returns of 26 and 28 per cent respectively. Our two market-sensitive businesses accounted for 30 per cent of earnings, with RBC Capital Markets achieving a return of 13 per cent, and RBC Investments 15 per cent. We are confident these businesses can provide an additional lift to earnings as markets continue to strengthen.

We believe our diversified business mix provides a competitive advantage for RBC. It reduces earnings volatility and produces more consistent performance. This was quite apparent during the last business cycle when RBC was able to deliver much more stable earnings than our Canadian competition.
Over the last fiscal year, dividends per common share rose by 13 per cent, and our common share price increased by 17 per cent. Over the past 10 years, a one thousand dollar investment in the common shares of RBC has grown to over six thousand dollars, for a compound annual return of 20.3 per cent. This rate of return places us third among the 15 leading North American financial services companies to which we compare ourselves.

Our strong and consistent financial performance continues to result in solid internal capital generation. Our philosophy on capital deployment is to maintain a good balance between dividend payout, share repurchase, and reinvestment for growth. In fiscal 2003, about two-thirds of our 3 billion dollars of profit was repatriated to shareholders through dividends and share repurchases, while 665 million dollars was invested in acquisitions. This balanced approach allows us to reward shareholders in the short term, while continuing to invest in our future.

Superior client experience

Last year we added "Superior Client Experience" as a new priority. This supports our vision, and reinforces our commitment to customer satisfaction, retention and earning more of our clients' business. Our objective is to provide clients with a truly superior experience whether they deal with us through a branch, over the telephone or via the Internet. We want to provide this superior experience in a consistent, proactive and value-added manner.

In order to deliver on this priority, we have been investing in people, branches and technology. Last year, we added 450 new personal bankers in our branches, and we are investing 35 million dollars over the next two years to further upgrade our physical network. In addition, we will be opening approximately 20 new branches in Canada over the next few years.

We are also transforming our processes to be more flexible, simple and efficient. We are using technology in ways that better serve our clients. And we are combining the strengths of our total organization to create integrated financial solutions.

Recognizing that we have a very diverse client base, we have put tremendous focus on delivering superior value for our priority client segments. For instance, we recently launched a series of cash flow portfolios for a group of clients who are retired and want more income than short-term GICs or Money Market Funds provide in the current low interest-rate environment. Our new offer, developed by our Global Asset Management group, is being delivered through more than twenty-six hundred financial planners and account managers across our Canadian network. This targeted value proposition has been well received by clients, and has generated more than 450 million dollars in net sales of mutual funds used in the portfolios.

Last fall, we introduced the RBC Snowbird Package, which addresses the needs of another group of clients - the 1.5 million Canadians who vacation and live in the southern United States during the winter months. This package, which includes banking and insurance products, leverages our growing branch network in the southeast United States to provide our Canadian clients with the same high quality service and advice they expect at home. Once again, clients are rewarding us with increased business, with approximately 4,000 Snowbird accounts sold to date.

We are rolling out a number of other value propositions, including recent initiatives that address the special needs of medical professionals and high-growth small business clients.

We are also combining the strengths of our organization to deliver integrated solutions. Last year, we enhanced the RBC Referrals program to bring our clients a wider range of products and services from across the organization. This increased the number of referrals by 52 per cent, moved 1.1 billion dollars of existing business to a more suitable place within RBC and earned us 2.8 billion dollars of new business from these clients. That's more than two dollars and fifty cents of new business for every dollar referred internally. This is a good example of how doing the right thing for clients can produce great results.

On the institutional side, RBC Capital Markets recently introduced two online trading systems that enable clients to more efficiently execute currency and bond trades directly with the market. And at RBC Global Services we have been developing a number of electronic-based solutions including RBC Express, which provides a suite of cash management products from a single source.

In order to improve both efficiency and client satisfaction, we are developing ways to build a competitive advantage through eBusiness Architecture. This is an ambitious program that will in short, "web-ize" our infrastructure.

For example, we recently introduced digital imaging in service centres and branches in order to improve our efficiency and response time in tracing cheques and other items. We are asked to trace about 1.2 million items per year, and that used to take both time and manual intervention. Today, we can respond immediately.

We have also introduced a new web-based service platform to provide clients with simplified and virtually error-free transaction processing in the branch. This technology provides relevant data so that staff can do a better job of anticipating the financial needs of their clients.

And finally, we are also making a major investment in straight-through processing, which uses a series of web-based tools to streamline all aspects of a product's life cycle from origination to fulfilment. This will create a vastly improved client experience through increased speed, a significant reduction in errors, less manual intervention, and a consistent "look and feel" across service channels and products.

Cross-enterprise leverage

Our third strategic priority, "Cross-Enterprise Leverage," was introduced to encourage greater teamwork and collaboration across the organization. Our objective is to enhance efficiency by eliminating duplication, and increase the number of products and services that we provide to our clients. As our relationship with clients expands across the organization, not only does customer satisfaction and loyalty increase, but the profitability of the relationship grows exponentially.

The RBC Snowbird Package I mentioned earlier is a good example of cross-enterprise leverage. This unique package draws on the products and services of several RBC businesses to address the specific needs of Canadian Snowbirds. On average, the number of products per Snowbird client has grown from 5 to 11.

We have also worked together on a number of initiatives to expand our product offering to American clients. Last year, RBC Centura Bank launched an insurance specialist program in collaboration with RBC Insurance. The results have been encouraging with over 2,000 referrals in 2003. RBC Centura is also working to cross-sell the wealth management services of RBC Dain Rauscher and the home financing capabilities of RBC Mortgage.

In Canada, we combined our insurance and credit underwriting expertise at RBC Insurance and RBC Royal Bank to create the Investment Credit Facility. This product allows high net worth policyholders to borrow up to 5 million dollars against the collateral in their universal life insurance policies. Since the launch, we have approved credit facilities worth more than 121 million dollars.

And in our institutional businesses, RBC Global Services and RBC Capital Markets have worked together to create the Hedge Funds Service Group, which offers clients a wider range of products and services from a single source.

As these examples illustrate, we believe the whole is greater than the sum of the parts when we leverage our full capability as an integrated financial services provider. Our ability to develop higher value propositions, combined with our sophisticated sales and marketing capabilities, position us to grow revenues by doing a better job of serving and attracting clients.

There does remain, however, one area where we cannot provide our clients with the same benefit they are entitled to in almost every industrialized nation in the world - the choice of buying insurance from a bank branch.

Canadians are quite unique in being prohibited from purchasing all the financial products they want from their bank branch. For example, annuities, life policies and auto insurance are not available through our branches even though it would result in wider availability and better value for consumers.

In my view, Canada should be developing policy based on the new market realities of how customers want to be served, and on how all providers can best meet their needs. Restricting competition is not the way to build a 21st century economy that promotes growth, innovation and prosperity.

North American expansion

Our fourth strategic priority is "North American Expansion." In 2000 and 2001, we invested more than 5 billion dollars to acquire Centura Banks, Liberty Life Insurance, and Dain Rauscher, which established a base for our personal and commercial businesses in the United States. Since that time, we have made a number of small, add-on investments to expand our product line, increase our client base, and create opportunities for greater synergies.

This disciplined strategy has increased our U.S. revenues from 7 per cent in 2000, to 27 per cent in 2003. These acquisitions have also increased our total customer base by approximately two and a half million or 25 per cent.

Last year, despite the strengthening Canadian dollar, net income from U.S. operations increased from 210 million dollars to 382 million. This reflects higher earnings in the Capital Markets and Investments divisions, largely due to much stronger performance in full-service brokerage and fixed-income, as well as to sound credit risk management.

In 2003, we continued to grow our U.S. operations in a focused manner. We added 23 new bank branches in Florida through two small acquisitions, and expanded our home financing business with the acquisition of Sterling Capital Mortgage. In addition, we purchased a small insurance and mutual fund company, and announced our intention to acquire a small, full-service investment firm in Florida.

We are committed to the U.S. market and remain confident that we can continue to build on our solid base. Our near-term priority for the U.S. continues to be meeting our operating targets, which frankly have fallen short in some areas. However, we believe we can grow in a disciplined fashion if we invest in markets with good growth prospects and potential for solid returns. We will complement organic growth with acquisitions, but only if they are a good financial, strategic and cultural fit.

Importance of RBC's vision to our stakeholders

Our four strategic priorities provide the foundation for achieving our corporate vision of "Always Earning the Right to be Our Clients' First Choice." As I said earlier, it is a bold vision, but one we feel is critically important in an industry where rates can be matched in a minute and products copied overnight.

"Earning the Right" is primarily about clients, but it also involves other stakeholders.

Our vision starts with our culture and employees, whose commitment is key to earning the loyalty of our clients. Our employees represent our most important resource, and it is only through them that we can succeed.

In 2003, we continued to make significant investments in the development of our employees, and engaging them in delivering a superior client experience. Around the globe, employees were asked for their opinions on how our vision could best be implemented, and they provided us with many good ideas on how to improve service levels, processes, sales techniques and product design. We will continue to tap the creativity and commitment of our employees in implementing our vision.

"Earning the Right" also involves the communities in which we operate. As Arthur Page, the leading corporate communicator of his time once said: "All business in a democratic society begins with public permission and exists by public approval." In an era where fraud, lapses of integrity and disregard for the law by some have created high levels of mistrust in business, we must earn the respect of our communities every single day by demonstrating high levels of ethical behaviour, social responsibility, and good governance.

I wish I could stand here and tell you that we have not had any issues to deal with at RBC - but I cannot. Large organizations are comprised of human beings with all their frailties, and unfortunately almost every company is eventually faced with the consequences of inappropriate activity. However, as a company, I believe we deal with our problems head on, take decisive action, and act in the best interests of our stakeholders.

We have and will continue to invest in ways to reduce the potential for issues to arise in future. We have been committed to good corporate governance and compliance for a long time, and we have made major investments in these areas over the years. For example, we now have more than 500 people with direct compliance responsibilities across our organization. Our management team spends a great deal of time talking to employees about the importance of our corporate values and our ethics. And we have made it mandatory for all employees, including management, to pass a test demonstrating their understanding of RBC's Code of Conduct.

These initiatives continue to pay dividends. We are pleased that, for the second year in a row, RBC was named Canada's Most Respected Corporation in a survey sponsored by KPMG. The same survey ranked us first in several sub-categories, including best for human resources, corporate social responsibility and good governance.

Last year, the Globe and Mail newspaper rated RBC "Number One" in corporate governance, and Canadian Business Magazine ranked our board of directors as among the best in the country. We were also singled out by the Canadian Institute of Chartered Accountants as having the best corporate reporting in Canada, and by a survey of investment analysts as having the best financial reporting.

We are proud of this recognition, but I can assure you that we do not intend to rest on our laurels. The increased complexity of global markets, the changing nature of regulation, accounting and governance, the growing sophistication of organized crime, and the increased transparency under which we operate have made the issues faced by our management team even more challenging.

We already have a number of policies and processes in place to govern our activities, including a risk management framework with a reputational risk component, and an employee ombudsman that facilitates confidential communication and whistle blower protection. We have a number of committees in place to review new products, complex credits and structured transactions. We continue to enhance these to respond to both market and regulatory developments.

Regardless of the governance challenges we face in the future, our objective is to have the best policies and structures in place to maximize prevention, minimize impact, and ensure our businesses have the highest standards of operation. While this involves a lot of process and supervision, it begins and ends with promoting a corporate culture based on integrity and trust.

Conclusion

I would like to conclude my remarks by recognizing the contribution of our employees, and by sharing my sense of optimism for the future.

The past year was a challenging one for our employees, and not just from an economic perspective. The conflict in Iraq, SARS in Toronto, forest fires on the west coast, Mad Cow on the Prairies, hurricanes on the east coast, and power blackouts in the Northeast affected our employees, their families and our clients. I believe that during these times of crisis, our employees have risen above and beyond the call of duty to make our services available, to help clients through tough situations, and to clearly distinguish RBC as an organization that sincerely cares about people and communities.

I've heard many inspiring stories about the wonderful initiative and extraordinary compassion demonstrated by our employees that make me extremely proud. On behalf of our Board of Directors and my colleagues on Group Management Committee, I would like to thank our 70,000 employees around the world for their dedication and commitment.

As we enter our 135th year of operation, we do so with many challenges ahead of us. But as Duncan McDowell wrote in his award-winning book Quick to the Frontier, RBC has always pushed the consensus of Canadian banking to its greatest potential and has been quick to advocate progressive change. RBC has always succeeded, he said, because we have been a "first mover," the first to capture new ideas and new methods for the benefit of our clients, our employees, our shareholders and our communities.

Ladies and gentlemen, this is a legacy that we are united in growing. And it is one that we intend to build upon in "Always Earning the Right to be Our Clients' First Choice."

Thank you.



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