Overview of 2004 & First Quarter 2005
Barbara G. Stymiest
Chief Operating Officer
RBC Financial Group
136th Annual Meeting of Royal Bank of Canada
February 25, 2005
Halifax, Nova Scotia
Thank you Gord, and good morning ladies and gentlemen. I
will be discussing your company's financial results for 2004
as well as for the first quarter of 2005, prepared in accordance
with accounting principles generally accepted in the U.S.,
or U.S. GAAP. I will also spend a few minutes on our strong
record in the area of corporate responsibility.
We benefited in 2004 from an increase in revenues, a decline
in the provision for credit losses and a lower income tax
expense due to a 250 basis point decline in the effective
income tax rate.
However, we also recorded higher non-interest expenses and
charges in last year's fourth quarter related to our business
realignment and the impairment of goodwill at our U.S. mortgage
origination company, RBC Mortgage. As well, the strengthening
of the Canadian dollar last year had a dampening effect on
our US dollar denominated revenues, expenses and earnings.
As a result, net income was $2.8 billion for 2004, 6% lower
than 2003. On a per share basis, earnings were $4.25, down
Return on common equity, or ROE, was 15.9% compared to 17.0%
With the exception of RBC Banking, four of our five business
segments recorded double-digit growth in their earnings last
Net income from RBC Investments was 19% higher than in 2003,
arising from solid performances from U.S. and Canadian brokerage
and asset management businesses, as well as from Global Private
ROE was 18.4%.
Net income from RBC Insurance rose 19% in 2004, reflecting
higher earnings from the Canadian life and health operations,
the home and auto business and U.S. operations.
ROE was 25.3%.
RBC Capital Markets' net income was up 34% from 2003, reflecting
solid performance in investment banking, higher returns from
private equity investments, and a significantly lower provision
for credit losses.
ROE improved to 18.7%.
RBC Global Services' net income increased 26%, due to strong
earnings growth in all divisions stemming from higher fee-based
revenues and net interest income, as well as a reversal of
the general allowance and recoveries in the provision for
ROE improved to 35.3%.
RBC Banking's earnings declined $267 million or 17%, as lower
earnings in U.S. operations more than offset earnings growth
ROE was 18.4%.
RBC Banking's earnings in Canada improved $66 million or
5%. We recorded strong volume growth in Canadian consumer
products in 2004 with mortgages, personal loans, credit cards
and mutual funds in particular all rising at double-digit
rates. We further strengthened our market share leadership
in mortgages, deposits and business financing.
However, U.S. Banking earnings declined by $324 million,
reflecting the fourth quarter goodwill impairment charge at
RBC Mortgage, lower revenues from both RBC Centura and RBC
Mortgage, and business realignment charges. As Gord Nixon
mentioned, generating better returns from our U.S. and International
Personal and Business segment is one of our important priorities
I am also pleased to report that we performed well in the
areas of portfolio quality and capital ratios and met our
dividend payout ratio objective in 2004. But our revenue,
expense, earnings growth and ROE objectives were not met.
Revenue grew 2%, reflecting weaker results from U.S. Banking
operations. However, excluding the impact of the stronger
Canadian dollar, revenue growth was 5%. An 8% expense increase
for the year largely reflected higher costs for benefits,
higher variable compensation related to higher revenues, and
costs of the Rabobank settlement in the first quarter. Our
performance compared to our 2004 objectives is outlined on
page 7 of our 2004 Annual Report.
In light of our performance last year, we set more aggressive
objectives for 2005 in the areas of revenue growth, expense
control, earnings growth and ROE.
We have made three changes to our medium-term financial objectives
this year. We are raising the earnings per share growth objective,
introducing a new objective for expense control, and raising
the portfolio quality objective, in light of a more meaningful
measurement methodology we are adopting.
We continue to raise our common share dividends and they
were up 17% from 2003 to 2004. Our dividend payout ratio was
47% last year, well within our 40 - 50% target.
First quarter 2005
Now I'd like to turn our attention to the results for the
first quarter of 2005, which we released earlier today.
We delivered very strong revenue growth, improved cost management
and solid asset quality against a backdrop of low interest
rates and healthy economic, capital market and credit environments.
Net income was a record $1,041 million, up 31% from a year
ago. Earnings per share were $1.58, up 34% from last year's
ROE was 22.9% compared to 18.1% a year ago.
Turning now to the results for our new business segments,
net income from the Canadian Personal and Business segment
was $658 million, up 14% from last year, largely reflecting
higher revenues from our disability insurance business, greater
loan and deposit volumes, increases in mutual fund sales and
capital appreciation, and higher revenues associated with
retail foreign exchange activity and credit card transactions.
ROE increased to 44.3%.
The U.S. and International Personal and Business segment's
net income was $100 million, 56% higher than in the first
quarter of 2004, largely as U.S. Banking net income rose $27
million from a year ago, due to better mortgage pricing, wider
margins and volume growth in loans and deposits, as well as
better cost management.
ROE for the segment was 7.3%.
Global Capital Markets had record net income of $253 million,
up 32% from a year ago, reflecting an 8% increase in revenues
from stronger equity underwriting activity and improved returns
from our structured transactions group and our private debt
and equity businesses.
ROE improved to 22.4%.
RBC's total revenues in the first quarter were up $471 million
or 11% from a year ago. Strong performance from all our segments
more than offset a $100 million reduction in revenues due
to the strengthening of the Canadian dollar against the U.S.
Non-interest expense decreased $112 million or 4% from last
year's first quarter, reflecting costs incurred in the first
quarter of 2004 related to the Rabobank settlement which were
not repeated in this quarter. The appreciation of the Canadian
dollar relative to the U.S. dollar from the first quarter
of 2004, reduced non-interest expense by $60 million.
Turning now to portfolio quality. The total provision for
credit losses was $108 million in the first quarter of 2005
compared to a recovery of $28 million a year ago, which reflected
a reversal of $150 million of the general allowance for credit
Nonaccrual loans were $1,053 million, down 41% from last
year, due to the favourable resolution of a number of nonaccrual
loans and few new impairments in the quarter.
Our capital ratios remained strong and well above our target
ranges, with a Tier 1 ratio of 9.2% compared to 9.3% in the
first quarter of last year and 8.9% in the fourth quarter
of 2004. The Total capital ratio was 12.7% versus 12.9% a
year ago and 12.4% a quarter ago.
In the first quarter, we met most of our financial objectives
for 2005. Though our valuation moved to the second quartile
of the S&P/TSX Composite Bank Index from the third quartile
last quarter, it did not meet our objectives of being in the
first quartile. We are determined to improve our performance
on this score. And while we did not meet our dividend payout
objective in light of the high level of earnings this quarter,
we have not changed our objective for the full year.
We also made excellent progress towards achieving our three
key priorities for this year which as Gord mentioned, are:
- Improving revenue growth by meeting more of our clients'
- Enhancing efficiency and effectiveness so that we can
provide better value and service to clients
- Generating better returns from our U.S. and International
Personal and Business segment.
For the balance of 2005, we are determined to move forward
in achieving these priorities.
While I have just reviewed the numbers for our financial
performance, it's appropriate we also spend a few minutes
discussing RBC's record and approach to the area of corporate
responsibility. How we conduct ourselves as citizens is a
critical component of our corporate performance and one that
is measured and scrutinized almost as vigorously as our financial
By investing in companies known for management integrity,
the marketplace has rightly put value in ethical behaviour.
As Gord said earlier, RBC is globally recognized for our achievements
in corporate responsibility. But these awards and recognitions,
while certainly impressive, are not our motivation to act
responsibly. Acting responsibly is good business that has
benefits for all of us.
Running a business that is transparent, sensitive to its
environment and its communities, and open to notions of sustainability
is showing respect for society's expectations of its leaders.
We recognize that our ongoing commitment to sustaining an
ethical and responsible culture is integral to our long-term
success. It makes sense in the context of our employees, our
clients and our shareholders.
But make no mistake: we approach corporate responsibility
as a core discipline that enhances good management and sound
business practices. Our practices are constantly reviewed
to ensure they are fulfilling the objective of helping us
manage the business more responsibly without incurring extra
Evidence of this can be found in all manners of our activities
From how we respond to our communities in crisis, such as
during the catastrophic tsunami that hit South Asia, to our
commitment to diversity in our workplace;
From ethical client service, to how we take steps to protect
our clients from fraud; and
From how our board conducts its affairs on your behalf, to
the way we disclose our financial information.
Ladies, and Gentlemen, everyday the performance of our company
and our people are judged. We are humbled that so many of
our stakeholders have an approving view of what we have done
to date, knowing that there is still room to improve.
We understand that social and environmental factors can be
significant drivers of long-term financial performance. Rest
assured, we are working as hard to maintain our strong performance
in these areas as we are in ensuring solid financial performance.
Thank you for your attention.