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Overview of 2006 & First Quarter 2007 Financial Results

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Barbara G. Stymiest
Chief Operating Officer
RBC Financial Group
138th Annual Meeting of Royal Bank of Canada

March 2, 2007
Toronto, Ontario

Thanks Gord, and good morning ladies and gentlemen. I'm pleased to present your company's financial results for 2006 and for the first quarter of 2007.

By most measures, these results are outstanding and reflect our employees' efforts and long term commitment to make it easier for our clients to do business with us. At the end of my remarks, I will spend a few moments talking about our Corporate Responsibility activities. This discussion is worthwhile because financial success is made more sustainable when our business creates value for all our stakeholders.

In 2006, RBC's revenue and earnings grew to record levels of 20.6 billion and 4.7 billion dollars, respectively. Over the past five years, our revenue and earnings have risen at compound annual growth rates of 5 per cent and 15 per cent, respectively.

Similarly, diluted earnings per share rose 16 per cent annually over the past five years to $3.59 per share in 2006. Return on common shareholders' equity climbed to 23.5 per cent, the highest level in recent history.

Each of our three business segments delivered strong results last year. Our largest segment, Canadian Personal and Business, focused on initiatives that resulted in a combination of high client satisfaction and even deeper client relationships: A solid foundation for future growth. Gord already mentioned several initiatives that successfully extended our market share lead over our competitors. These market share gains and our employees' daily efforts generated net income of 2.8 billion dollars on revenue of 13.4 billion dollars.

We are pleased with the improved performance of our U.S. and International Personal and Business segment last year. In 2006, this segment grew net income consistently every quarter to 393 million U.S. dollars. In Canadian dollars, earnings rose to 444 million dollars despite the impact of the strengthening Canadian dollar. Both our Wealth Management and Banking businesses outside Canada contributed to the earnings growth, and they did this while investing in infrastructure, opening new branches, and making targeted acquisitions.

RBC Capital Markets had a very good year. Our trading businesses had excellent results and we advised on some of the largest M&A deals ever in Canada. Earnings of our wholesale segment grew to 1.4 billion dollars, which attests to the success of our strategy of building global capabilities in a select set of capital markets businesses. And we are doing this by leveraging our leading Canadian wholesale bank.

Perhaps one of the most significant characteristics of RBC's overall performance last year is that it's broadly based and diverse, reflecting successful growth initiatives around the world. Indeed, our business has become increasingly global. As Gord said, in 2006, one third of our earnings came from outside Canada, as compared to only one quarter of our earnings in 2002.

In addition to differentiating RBC from our competitors, the diversity and strength of our businesses helped us meet or exceed all but one of our 2006 financial objectives. Our EPS growth, ROE, revenue growth and dividend payout ratio all met our targets, and we met our portfolio quality objective. While the strong performance of wealth management and capital markets businesses drove variable compensation higher and affected our operating leverage, their success contributed significantly to our bottom line.

Our financial success allowed us to raise dividends by 22% or 26 cents per common share in 2006, which along with our share price increase, resulted in a total return to you, our shareholders, of 23 per cent.

To satisfy all our stakeholders, including shareholders, regulators and rating agencies, we remain committed to our capital deployment strategy of asset growth, acquisitions, dividends and share buybacks while maintaining a Tier 1 capital ratio comfortably above our objective. We believe this will help us continue generating top quartile returns over the long term, and we set our 2007 financial objectives to help meet this overarching goal.

1st Quarter 2007

Earlier this morning, we released our results for the first quarter of 2007. Before I discuss these results in detail, I'd like to provide some context by commenting on the economic conditions underlying our first quarter performance.

Canada's economic fundamentals have remained stable and stronger than most other G-7 countries. North American economies have been characterized by stable interest rates, strong employment levels and higher incomes, which have offset the weakness in the housing and auto sectors. Solid consumer and business spending have supported loan and deposit growth, and favourable market conditions have increased demand for wealth management products. The capital markets environment, both in Canada and globally, also remained favourable. Equity and debt markets performed well alongside continued strength in merger and acquisitions activity.

Going forward, consumer lending activity should moderate as consumer spending eases, but business lending is expected to remain robust as investments continue. Credit quality may deteriorate moderately, but we expect it will remain well supported by high levels of liquidity.

For the rest of 2007, we expect the Canadian economy to remain healthy and our forecast for real GDP growth is 2.5 per cent, down slightly from its growth level in 2006. We expect real GDP growth in the U.S. to be 2.4 per cent this year, which is also slightly lower than its 2006 growth.

Short-term interest rates should remain below their historic levels as inflation is kept in check. Long term rates continue to be held down by low inflation expectations and reduced inflation volatility, so challenges will continue from a relatively flat yield curve.

With this relatively healthy economic backdrop, let's turn to our performance in the first quarter. Again, the depth and diversity of our businesses have driven our results.

Revenue growth across all of our segments drove overall revenue to 5.7 billion dollars, that's 15 per cent higher than the first quarter of 2006. Earnings this quarter reached a record of 1.49 billion dollars or $1.14 per share.

Each business segment grew its net income by double digits from the prior year and contributed to our earnings growth. We continued to execute initiatives that will help us enhance client service and build for future growth.

For example, during the first quarter, we added more client facing employees in Canada, opened four new bank branches and three insurance branches. We upgraded the security of our ABM network to protect our clients. RBC Asset Management introduced several new products while reducing management fees on international funds. And, RBC Capital Markets was named top dealmaker in Canada in 2006 by the National Post.

In the U.S., RBC Centura completed the acquisition of Atlanta based Flag Financial Corporation and opened five additional branches. RBC Dain Rauscher grew lines of its Premier Line of Credit, a product developed by Global Private Banking, to almost a billion U.S. dollars. And, RBC Capital Markets expanded its capabilities to serve clients in the mining sector by creating a base metals desk in New York to complement the team established in London a year ago.

Globally, RBC Capital Markets completed its first Alternative Investment Market transaction by advising an Australian-based mining company on its listing on the London exchange. We expanded our capabilities in structured products and fixed income throughout Europe and Asia. Our RBC Dexia joint venture grew assets under administration by 18% during the year to reach more than two trillion dollars. It also extended its investor services outsourcing relationship with CI Financial by five years, a relationship that is the largest of its kind in the Canadian market.

At RBC, we'll continue to work hard to do more for our clients, whether it's investing in technologies or introducing new global solutions that our clients need. Our past efforts have gotten us this far, and we know we must do more of the same going forward. As Gord said, we are changing our structure to create four business segments that will support further growth, particularly outside Canada. We believe that global demand for wealth management products and services will continue to increase as global economies develop and demographics shift. We intend to grow this segment aggressively over the next several years. The new structure positions all four business segments very well to generate strong revenue and earnings growth.

Underpinning our client service efforts and financial strength is our prudent risk management. In the first quarter, our gross impaired loans ratio remained stable. Our total average loans are $213 billion and gross impaired loans represent less than half a per cent of our loan book.

We are pleased that our financial performance has allowed us to increase our quarterly common share dividend by 15% to 46 cents per share in the second quarter for shareholders of record on April 25, 2007.

Before turning the floor back to David O'Brien, I would like to spend a few moments speaking about corporate responsibility. Gord already mentioned the external recognition we've earned for our corporate governance, and our leadership in corporate responsibility. But we know we can do much more.

In the last few years, we have seen a dramatic increase in expectations from investors, government, regulators, NGO's, clients, and employees about a range of issues that can be defined by the terms "corporate responsibility", or "sustainability".

At RBC, corporate responsibility has a much larger definition than donating to charities: it means operating with integrity, having a positive economic impact, creating a workplace of choice, promoting environmental sustainability and contributing to communities where we live and work.

Companies like RBC no longer have one or two stakeholders: we have dozens, and they are growing in number, influence and expectations. We frequently receive requests to adopt a cause, develop new policies, create new products, or commit to new external standards, all in the name of addressing the interests of our many stakeholders. It's not easy to balance competing expectations.

The common denominator is that stakeholders expect good companies to minimize their negative environmental and social impacts. And they expect great companies to maximize their positive environmental and social impacts.

We agree. But we know we must prioritize and invest our time and resources wisely so they have the maximum return. This is why, over the last year, we have worked with the Rotman School of Management to apply a framework that will guide RBC's corporate responsibility initiatives going forward.

Our goal is "to sustain our company's long-term viability while contributing to the present and future well-being of our stakeholders." In this important in this important area of corporate responsibility, we will continue to earn the right to be the first choice for investors, clients, employees and communities by operating our businesses with integrity, while providing leadership in select social and environmental areas. I look forward to announcing more details later in 2007 and reporting back to you on our progress and performance next year.

Thank you for your attention.


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03/02/2007 09:13:48