Address to Shareholders
President & CEO
RBC Financial Group
136th Annual Meeting of Royal Bank of Canada
February 25, 2005
Halifax, Nova Scotia
Good morning ladies and gentlemen, and welcome to your Annual
Meeting. I am delighted to be in Halifax, a city where our
roots stretch back more than 136 years. On a personal note,
one of my daughters is in her second year of the commerce
program at Dalhousie and consequently, I am regularly reminded
of the wonderful qualities of Halifax and Nova Scotia - from
the downtown nightlife to surfing at Lawrencetown, with hopefully
a little work along the way. I do hope that the citizens of
this city enjoy the students as much as the students love
It was on this city's waterfront - just down the street on
Bedford Row - that eight entrepreneurs opened a single bank
branch in 1869 with the goal of helping local merchants become
more successful with their international trade. At the time,
there were bigger and more established banks in the region.
But the founders of the "Merchants Bank" believed
there was room for another institution - especially one that
could anticipate the financial needs of a growing population,
and move quickly to meet them.
And they were right. Almost from day one, the bank struck
out boldly, often beating the competition in pursuing new
business along the arteries of developing trade. Aggressive
expansion across the continent to British Columbia as the
century closed was an outstanding example of the boldness
and vision of this small bank from Halifax.
By 1910 the up and coming "Merchants Bank of Halifax"
had grown into a national institution and changed its name
to "The Royal Bank of Canada." By 1925, we had established
a significant international presence in the Caribbean, South
America and Europe, and a national presence across Canada.
By the 1960s, we had become the nation's largest bank, with
leading market shares in nearly every line of business - a
position we are proud to maintain today. And throughout the
years, we have remained committed to Nova Scotia and Atlantic
Canada, and have maintained a leading presence throughout
We are grateful for our legacy, but we also know it cannot
be taken for granted. A key lesson from our long history of
success is that it is important to challenge the assumptions
that led to success, and to recognize the need to change and
adapt. If there is one recurring theme throughout our history,
it is that Royal Bankers have always pushed into new frontiers,
and moved quickly to develop new and better ways to serve
their clients. And when we've had setbacks, we have not hesitated
to change our approach.
Today, we find ourselves in a similar situation, with new
challenges, but also new opportunities. This is what I would
like to discuss today - the challenges and opportunities we
are facing as a business, and the steps we are taking to address
them for the benefit of our clients, our employees, our shareholders
and our communities.
I'd like to start by briefly reviewing our performance in
fiscal 2004, which Barbara Stymiest, our Chief Operating Officer,
will address in more detail following my remarks. Then I will
outline major initiatives that we have taken to enhance our
performance, including the realignment of our businesses and
the actions we are taking to grow revenue, manage costs and
improve the experience of our clients.
For RBC, 2004 was a challenging year that produced mixed
On the positive side, we delivered solid earnings growth
in four of our five businesses, with only RBC Banking suffering
a decline due in large part to lower earnings in the United
States. RBC Capital Markets, RBC Global Services, RBC Investments,
and RBC Insurance grew earnings by 34 per cent, 26 per cent,
19 per cent, and 19 per cent respectively. In addition, the
domestic component of RBC Banking had a reasonable year, with
earnings up 5 per cent. We achieved market share gains in
each of our business segments and most consumer and business
products, and our credit quality remained strong. Notwithstanding
our year-end restructuring charges, we still generated close
to $3 billion in net income during 2004.
However, we failed to meet our overall corporate targets
and missed our 2004 objective for revenue growth and expense
control, which resulted in earnings growth and return on equity
below expectations. As a result, while our total return to
shareholders was up modestly in 2004, we under performed our
peer group. We also concluded during the year that, in addition
to addressing our underperformance at RBC Centura, we had
to make some substantial changes across all businesses if
we were going to deliver the returns that our shareholders
have come to expect.
To address this challenge, we took strong action in the fourth
quarter by realigning our businesses, and by launching a number
of initiatives to accelerate revenue growth and improve efficiency.
These actions are designed to focus our efforts on delivering
better value, more innovative products and improved service
to our clients, and we refer to them internally as our "Client
First Initiative." The realignment resulted in the consolidation
of our five business units into three, built around common
customer segments and geographies. The three business segments
- Canadian Personal and Business;
- U.S. and International Personal and Business; and
- Global Capital Markets.
In addition, we consolidated all of our technology and operations
activities across the enterprise into a single Global Technology
and Operations division, and placed all of our functional
units including finance, treasury, risk and strategic planning
under a newly appointed Chief Operating Officer.
As part of the corporate restructuring, we took realignment
charges in the fourth quarter, and recognized a goodwill impairment
charge at RBC Mortgage, both of which affected our results
last year, but positioned us better for the future.
Our top priorities for 2005 are focused on three areas:
- Improving revenue growth by meeting more of our clients'
- Enhancing our efficiency and effectiveness so that we
can provide better value and service to clients; and
- Generating better returns from our U.S. and International
Personal and Business segment.
The first two priorities, revenue growth and efficiency,
involve our Client First Initiative, which is broad-based,
is being driven by a number of specific initiatives, and has
a clear set of deliverables.
Improving revenue growth
I'd now like to spend a few minutes providing some detail
around each area of focus, starting with revenue growth.
Our objective in 2005 is to grow revenues by 6 to 8 per cent,
bearing in mind that had it not been for the significant strengthening
of the Canadian dollar, revenues would have been up 5 per
cent in 2004. This year, we expect to benefit from significantly
better results in our U.S. banking operations and from the
full year of results from our acquisition of the Canadian
operations of Provident Life and Accident Insurance Company.
We are anticipating moderately higher economic growth and
capital markets activity, and some revenue growth from our
Client First Initiatives.
Let me talk briefly about specific revenue generating activities
at each of our three segments.
Our Canadian Personal and Business segment brings together
our domestic banking, investments and insurance businesses.
This provides our Canadian clients with easier access to a
full range of services and products in an integrated fashion.
We believe these clients have broad financial needs, and that
we have an opportunity to earn more of their business by working
together across our various units to deliver the right mix
of products and services.
Our objective is to grow revenue in this segment by attracting
new clients, and by growing our share of business with existing
We are also making it easier for customers to deal with us
by streamlining processes and offering a broad range of products
through service channels and sales people that best suit their
needs and provide the best value. Our extensive Canadian distribution
network of physical channels, electronic channels, financial
planners, investment advisors, mobile sales forces, and third-party
distributors provides plenty of choice for our clients. And
by managing this segment as a single market, we have increased
our ability to provide more integrated financial solutions
across a full range of products.
We also plan to increase our capacity to better manage clients
with more complex financial needs that require a higher level
of advice and products.
In addition, we are putting a greater emphasis on product
innovation so that we are quicker to market with new products
and services that meet emerging client needs. Products like
our Avion credit card, our no down-payment mortgage, critical
illness insurance, our principal protected notes for RSP investors,
our cross-border debit cards, and the recently launched Starbucks
Duetto Visa Card are some examples of our client focused approach
In our U.S. and International Personal and Business segment,
our strategic focus is on banking and wealth management. We
believe these areas have the most opportunity for growth,
and present the best potential for RBC in light of our competitive
strengths and capabilities.
This segment includes banking and retail brokerage in the
U.S., banking in the Caribbean and Bahamas, and private banking
internationally. We've brought these businesses together as
one segment recognizing that each of them is quite distinct
from our operations in Canada. We believe this structure will
not only increase accountability, but also result in greater
focus and more dynamic management of these businesses. Furthermore,
consolidating the management of our U.S. and International
consumer businesses will make it easier to leverage each other's
product and distribution strengths, where appropriate.
In banking, we are growing revenue by strategically expanding
Centura's branch network in high-growth areas, which is resulting
in strong growth of new client households. We are also increasing
the number of products per household, growing our core deposits
and loans, and benefiting from improved spreads as a result
of rising interest rates. We will also continue to invest
in the Caribbean, which has a stable and strong network.
In wealth management, we intend to build our U.S. brokerage
presence through RBC Dain Rauscher and through the acceleration
of a full balance sheet product portfolio for wealth management
clients, which will include investments, deposits, credit
and insurance. In addition, we continue to grow our global
private banking business, which is well established and ranks
among the best in the world. To grow this business, we have
installed a globally consistent set of client relationship
management practices that will improve our ability to cross
sell, provide a more consistent level of service, and allow
a common supporting technology.
Our Global Capital Markets segment serves institutional,
corporate and large commercial clients around the globe, and
has substantial operations in the U.S., Europe and Asia. Last
year, 41 per cent of this segment's revenues came from Canada,
37 per cent from the United States, and 22 per cent from Europe
We intend to grow revenues in this segment by retaining our
leadership in all sectors of Canadian investment banking business,
expanding our mid-market U.S. business, investing in our U.S.
fixed income and structured products businesses, and continuing
to expand our global footprint in trading, structured products
and other selected niche businesses.
In Canada, our priority is to continue being a leading advisor
to corporations and governments, and in 2004, we ranked at
the top of the overall debt and equity league tables. In addition,
we continue to grow our domestic fixed income, money market
and equity businesses.
As part of our business realignment, we moved approximately
300 large commercial banking accounts and their account managers
into Global Capital Markets. This is an area where more sophisticated
investment advice and treasury services are needed to support
the growth of these clients and our ability to serve them.
Our investment banking penetration has traditionally been
less focused with commercial customers, and we believe this
move will enhance our ability to serve these clients as their
In the U.S., we are focused on growing our market share with
mid-market clients. In 2004, we ranked 12th in the U.S. equity
league tables. We also have a significant presence in the
U.S. fixed income market and, as an example, in 2004 we raised
over US$13 billion for U.S. municipalities and ranked eighth
among U.S. dealers in that sector.
In Europe and Asia, we continue to invest in growing specialized
businesses, which have become important contributors to what
is a North American-based global business. RBC Capital Markets
has grown its participation in new debt issues almost threefold,
and we have helped clients raise funds in a broad range of
currencies, including Canadian dollars, Australian dollars,
Sterling and U.S. dollars. Total funds raised for clients
increased from $22 billion in 2000 to over $74 billion in
2004. Our global equity derivatives group has established
operations in Japan and grown in Europe by adding new trading
strategies and activities.
Across all of RBC businesses we continue to see opportunities
for growth. As our first quarter results indicate, the various
measures we have taken are beginning to have a positive impact
on growth, with revenues up by 11 per cent, and net income
up by 31 per cent from a year ago.
Enhance our efficiency and effectiveness
In addition to growing our top line, we also plan to better
manage our cost structure by enhancing our efficiency and
effectiveness. Slowing down our overall rate of expense growth
will not only improve margins, it will also allow us to redeploy
resources to client-facing activities.
Last year's 8 per cent expense growth contained some unusual
items, but the bottom line is that we believe it is imperative
to address our costs in order to improve our efficiency ratio
and narrow the gap with best in class competitors.
We have set an objective for expense growth in 2005 of below
3 per cent, less than half of revenue growth. As we announced
at year-end, we have commenced streamlining resources, begun
consolidating our operations and technology platforms and
eliminated a number of executive and senior management positions.
The goal is to simplify internal structures and streamline
our operations so that we make it easier for clients to do
business with us.
Our businesses, functions and operations areas have all identified
numerous cost initiatives with specific targets for which
we are accountable and which have been built into our current
business plans. And we have made good progress with our plans
to eliminate approximately 1,600 positions in non client-facing
These types of initiatives are taking root throughout the
organization, and we have already started to see some positive
impact on our costs, and in the first quarter our efficiency
ratio improved to 57 per cent from 66 per cent from a year
Generate better returns from the U.S.
Our third area of focus in 2005 is to improve the returns
from our U.S. and International Personal and Business segment,
particularly in our U.S. banking and mortgage businesses.
Our new U.S. banking management is focused on improving profitability
through both revenue growth and cost management. It's important
to understand that while our U.S. banking operations receive
significant attention, we have other U.S. and international
consumer businesses including brokerage, global private banking,
and our Caribbean operations, as well as U.S. and international
wholesale businesses such as capital markets, custody and
reinsurance that all performed well in 2004 and have good
That said, our U.S. operations have not performed to the
standards that we - nor you - would like. In 2004, U.S. earnings
dropped, due primarily to weaker performance at RBC Banking.
Including both the goodwill write-down and restructuring charges,
the swing in U.S. banking earnings between 2003 and 2004 was
Much of this decline can be attributed to RBC Mortgage. This
business struggled with lower origination volumes and margins,
as well as with operational and hedging challenges. In addition
we wrote off half the goodwill primarily associated with Prism
Mortgage, which we acquired in 2000. We also recorded lower
returns from RBC Centura, which was impacted by spread compression,
lower returns from its investment portfolio, and business
At RBC Mortgage, we have taken a number of actions to improve
performance. We changed management, began consolidating the
Chicago headquarters into our Houston office, and have closed
48 of its less profitable branches. These steps have not only
generated cost savings, they have also improved operational
RBC Centura has also experienced significant changes, including
senior management. We took a $13 million charge in the fourth
quarter for planned staff reductions in 2005. In the first
quarter we closed 11 low-return branches from the network
of 275, and we have slowed the pace of branch openings until
we achieve stronger financial performance.
We are also enhancing loan and deposit volumes and mix, and
have shifted the mix in Centura's investment portfolio to
enhance yield and help mitigate any increase in funding costs.
We are confident that these steps will lead to improved financial
results in the U.S. in 2005 and beyond. Once again, our first
quarter results indicate we are on the right track, with strong
performances from all of our U.S. businesses. Earnings were
up $27 million in U.S. banking, and up 56 per cent overall
in our U.S. and International Personal and Business segment.
Better performance in 2005
The positive impact we expect from initiatives across the
organization have caused us to set more aggressive financial
objectives for 2005 in the areas of revenue growth, cost control,
earnings growth and return on equity. Our short and mid-term
financial objectives are outlined in the Annual Report.
I am well aware that the challenges in 2004, particularly
as they related to U.S. banking, not only affected our operating
performance, but our relative share price performance as well.
Relative to the Canadian bank average, we have lost the premium
valuation we enjoyed in 2002 and 2003 and, as a result, on
a comparative basis our shares have underperformed even relative
to our fundamentals. But this is an organization that has
consistently generated strong growth. In 1994, RBC crossed
the one billion dollar earnings mark; in 2000 we surpassed
2 billion dollars; in 2003 we earned over 3 billion dollars;
and we just announced quarterly earnings of more than one
billion dollars for the first time. As a matter of interest,
our earnings per share of $1.58 in the first quarter compares
to $1.59 per share for a full year in 1994.
Living the vision
We have a solid foundation to build upon. Our three business
segments produce a strong diversity of earnings across a wide
range of corporate, institutional and retail clients in more
than 60 countries. The strength of our Canadian franchise,
which does business with more than one third of the population,
is unrivalled. Our brand was recently rated as the most valuable
in the country. And we are the largest bank in Canada and
the 7th largest in North America in a strong and growing industry.
We are focused on our core values of service, teamwork, responsibility,
diversity and integrity, and we are proud of our reputation
for corporate responsibility and good governance. We are by
no means perfect, and we've had some difficult issues of our
own to deal with and, unfortunately, I'm sure we will again.
But I believe RBC has faced our challenges head on, dealt
with issues in a responsible manner, and acted in the best
interests of all of our stakeholders.
This does not happen by accident. We have dedicated a great
deal of management time promoting a culture of integrity.
We have made it mandatory for all of our employees to pass
a test demonstrating their understanding of our Code of Conduct.
We have made major investments in our corporate governance,
and our compliance capabilities. And we continue to enhance
our policies and processes in response to market and regulatory
A company's reputation is paramount and we are pleased that
our programs and initiatives continued to earn recognition
Once again, our board was ranked among the five best by Canadian
Business and Report on Business magazines.
For the third year in a row, RBC was named Canada's Most
Respected Corporation in a survey by Ipsos Reid. The same
survey ranked us first in six of nine sub-categories, including
best for corporate governance and social responsibility, and
we were ranked second highest among all Canadian companies
for customer service.
At the recent World Economic Forum in Davos, RBC was named
one of the world's top 100 companies and the only Canadian
bank for sustainable development. The award is based on criteria
such as strategic governance, environmental initiatives, and
human capital practices.
We also continue to be part of a select group of companies
chosen for the Dow Jones Sustainability Index, the Jantzi
Social Index, and the FTSE4Good Index.
All of these achievements are a reflection of an organization
made up of outstanding people.
Our people are the driving force behind everything we do
at RBC. They were the inspiration for our new corporate vision
of "Always earning the right to be our clients' first
choice." They are the creative energy behind our "Client
First Initiative." They are the source of the positive
momentum building throughout RBC and they are our greatest
On behalf of our Board of Directors and my colleagues on
Group Executive, I would like to thank all of our employees
worldwide for their hard work in 2004, and for their ongoing
passion for client service.
I began this morning by acknowledging the challenges we faced
in 2004, and by explaining to you some of the steps we are
taking to transform our organization to better serve our clients.
I have no doubts that we have the people, the commitment and
the culture to succeed.
More than 136 years ago in Halifax, our founders - James
Merkel, William Cunard, John Duffus, Edward Kenny Sr., Thomas
Kinnear, George Mitchell, Jeremiah Northup, and John Tobin
- had a similar challenge. With only a handful of talented
employees in a single branch, they set out to create a new
bank - one they hoped could flourish by anticipating the needs
of an expanding population, by pushing into new frontiers,
and by moving quickly to adopt new ideas and methods for the
benefit of clients and shareholders.
It was this spirit of cautionary boldness that propelled
the "upstart bank" on the Halifax waterfront to
Canadian and international success. And it is this same spirit
that will take us forward in 2005 and beyond.