Address to Shareholders
President & Chief Executive Officer
Royal Bank of Canada
139th Annual Meeting of
Royal Bank of Canada
February 29, 2008
Good morning ladies and gentlemen, and welcome to your Annual
It is my privilege to report on our 2007 performance as well
as our plans for 2008 and beyond.
I'd like to begin by thanking our employees for remaining
focused on the needs of our clients and for producing record
financial results during a very challenging year. From the
sub-prime mortgage issue, to slowing economic growth, to the
volatility of stock markets worldwide, 2007 was a tough year
for the financial services sector. And while we're not out
of the woods yet, I'd like to think the performance of RBC
relative to our peers has been and should remain a source
of confidence for our shareholders, and pride for our employees.
I'll talk more in a moment about my view of the current markets.
But first, I want to be clear about how I view our business
and performance. At its core, our approach to our business
is based on a few basic principles.
We want to make it easier for our clients to do business
with us. We want to ensure our business mix continues to be
diversified to protect against shocks to a single business,
product or market. We want to ensure all of our activities
are guided by strategic goals, and are underpinned by a proactive
approach to risk management and a rigorous operational discipline
that makes management accountable for results.
Our focus on doing these things well has helped us withstand
market pressures and allowed us to build on our past performance
and deliver record results. Our strategy has resulted in a
strong and diversified business mix - we monitor and measure
the performance of our business lines and manage them in four
broad segments. Each business pursues a mandate for growth
and is driven by our vision of "Always earning the right
to be our clients' first choice," seeking to leverage
the strengths of each other so they can satisfy all of our
clients' financial needs.
As a global financial services company, we have been exposed
to the difficult market conditions that emerged since the
middle of last year as illustrated by the writedowns we reported
the past two quarters. But our financial performance and stability
have not suffered to the same degree as many of our global
In January, a report by Credit Suisse named RBC as the top
Canadian bank of the past decade based on 10 measures of performance,
including growth in share price, dividends, return on equity,
acquisition spending, and branch investment.
When compared against the top 50 banks around the world,
RBC's mid- and long-term total shareholder returns continue
to be in the top quartile. And based on stock market value,
it is worth noting that just five years ago, RBC was the 51st
largest bank in the world, today we're the 19th — and number
6 in North America1.
I am proud of this short- and long-term performance — especially
in light of the impact that volatile markets have had on other
global banks since the beginning of the decade. But that is
the past and I know that you are more interested in the future.
Before I talk about our performance in detail, I'd like to
make a brief comment on the current state of global markets.
The global financial system has been flush with liquidity
for the last number of years, which contributed to very low
interest rates, reduced risk premiums and an insatiable demand
for financial assets. The net effect of these conditions supported
overall economic growth and rising home ownership rates in
As is often the case in financial markets, however, excesses
Cheap money, fierce competition among U.S. mortgage lenders
and limited regulation all combined to push mortgage rates
to artificially low levels with a total disregard for prudent
lending standards. And demand for high yield product from
investors combined with Wall Street's ability to securitize
and structure these high-risk mortgage loans compounded the
excesses and led to the creation of billions of dollars in
securities, such as CDOs2, whose values were tied to and leveraged
against U.S. real estate.
While investors received higher yields from these structured
products, they did not fully account for the additional risk
they were taking on and relied on what, in hindsight, appear
to be inappropriate credit ratings.
However, when the U.S. housing market weakened beyond anyone's
expectations, the impact was felt not just in the U.S. economy,
but across the world's financial system as these structured
products started to lose value and liquidity.
Earlier financial bubbles — such as the dot-com or emerging
market debt booms — were generally limited to one industry
sector or a specific region, but this one affected hundreds
of billions of dollars in financial assets — and the pain
is being felt across a broad range of financial institutions
and investors in a number of countries.
The liquidity that drove the creation of these financial
assets at very low credit spreads disappeared overnight and
credit spreads have widened dramatically. New mark-to-market
accounting rules have compounded the problem as this lack
of liquidity has resulted in massive writedowns being recorded
even on those structures or securities that are of good credit
quality. This crisis in the credit market has now spread to
the broader economy, with the U.S. facing significant challenges.
Having been in this business for almost 30 years, I can tell
you that this bubble has — in most respects — been different
from all others I have seen. But like all the others it was
based on the folly that asset values — specifically U.S.
real estate — could not fall dramatically. It was fuelled
by vast new sources of capital and during this time of massive
liquidity, people's understanding and appreciation of risk
Well today, following an extended party with far too much
excess, we are experiencing a long and painful hangover.
Since last summer, I have been consistent in saying that
as a result of this correction, risk would be re-priced and
that market participants with financial strength, sound risk
management, and strong balance sheets would ultimately benefit.
While I do believe there are still signs of further weakness
and that it will take years for some of these financial assets
to recover, I do expect the aggressive action by monetary
authorities will provide a floor for markets and eventually
pave the way for a recovery in the latter half of this year.
However, once the recovery takes hold I expect the environment
to be significantly different from the market that we had
before the crisis.
The fallout will lead to a "new normal" for the
global financial system and global economy. This new environment
will include a heightened sense of risk aversion, higher volatility,
increased transparency, a move to product simplicity, reduced
financial leverage, and wider credit spreads.
The period of leverage and bank disintermediation will, for
a time, shift in favour of de-leveraging and a much greater
reliance on banks and banking relationships. The competitive
landscape is changing, and it will reward those firms that
continue to demonstrate market leadership and balance sheet
As you'll agree, it's nearly impossible to predict when bubbles
will burst — but we know they will. This truism argues strongly
in favour of investors placing a premium on solidly diversified
and well managed businesses. Indeed, sitting in the midst
of this market correction, RBC is benefiting from the strength
of our diversified business mix which has been a constant
driver of our success over the long term.
I should point out that, out of all our business lines, very
few of them - in particular, our structured credit and U.S.
residential builder finance businesses — have been affected
by the subprime or CDO meltdowns. And while there remain challenges
in these areas, the broad diversification of our business
platforms provide a solid financial foundation that we will
continue to build upon.
Diversification across our businesses, even in our Capital
Markets segment, has meant that our earnings have been less
volatile, and that we can be more flexible in managing toward
our long-term strategy and goals. Over the past number of
years, I have said that we would like our Capital Markets
segment to represent somewhere between 20 and 30 per cent
of our overall business. In 2007, this segment generated 24
per cent of our overall net income. Even in the midst of these
unsettled conditions during the first quarter, the financial
contributions of our Capital Markets segment have remained
within our target range.
We are also already seeing business opportunities that we
would not have seen a year ago because our competitors are
either unable to compete effectively or serve new client demands.
Over the long term, our Capital Markets segment will continue
to be an integral part of our overall diversified business
mix and we will maintain its target of contributing between
20 and 30 per cent of overall earnings.
As long-term observers and investors know well, we value
and demand strong contributions from each of our four business
segments. Our management teams have a clear understanding
of their existing and prospective clients and they focus on
serving them with outstanding product and service capabilities.
We understand we have competitive strengths in some businesses
more than others and we work hard with our Board to allocate
resources and capital effectively to enhance shareholder value.
By no means are we perfect and without our own challenges.
When we have issues we will address them head on, and as a
management team we will hold ourselves accountable to each
other and to you, our shareholders.
By being accountable, I believe our business leaders and
our employees are even better equipped to put our clients
first and to help them succeed.
2007 Performance and our Strategic Goals
In 2007, our employees delivered record net income of nearly
5.5 billion dollars, 16 per cent higher than the previous
year, and almost double what we earned just three years ago.
This performance clearly demonstrates our leadership in our
core Canadian businesses3 and the growth of our non-domestic
We generated revenue of 22.5 billion dollars last year, which
represented annual growth of nine per cent. And we exceeded
four of our five performance objectives, including earnings
per share growth of 17 per cent and a Return on Equity of
nearly 25 per cent.
Our Canadian Banking and Wealth Management segments continued
to drive growth, delivering better earnings than ever before,
and notwithstanding turbulent market conditions in the second
half of the year, earnings in Capital Markets were down only
five per cent from their record level in 2006.
This performance is a testament to the strong diversification
of our Capital Markets segment and its broad base of revenue
In total, our strong performance translated into top quartile
returns for you — our shareholders. In 2007, we generated
a total shareholder return of 16 per cent, raised dividends
by 26 per cent, and repurchased approximately 12 million common
shares. At the end of our fiscal year, we posted top quartile
total returns for the three and 10 year periods, and second
quartile returns over the five-year period.
We are driving our future success by executing against our
three strategic goals:
- To be the undisputed leader in financial services in Canada;
- To build on our strengths in banking, wealth management
and capital markets in the United States; and,
- To be a premier provider of selected global financial
We made important progress towards achieving these goals
in 2007 and continue to do so.
We have maintained our leadership in Canada, emphasizing
the strength and importance of our domestic operations. We
generated profitable revenue growth and positive operating
leverage in our Canadian banking operations while investing
in client-facing staff, branches, and new product innovation,
including a new suite of personal deposit products.
In 2007, we grew Canadian banking-related lending volumes
by 11 per cent and deposit balances by 6 per cent over 2006.
Our success in this very competitive business is directly
linked to how we serve our clients. The quality of our client
service in Canada has been acknowledged by two notable external
sources — last year Synovate named RBC as the best
among our largest domestic competitors for the service and
value that we provide to clients who visit our branches. And
earlier this month, Forrester Research put us at the
top of their Customer Experience Index ahead of 20 other firms
in five different industries.
In Canadian Wealth Management, we increased assets under
administration by nine per cent over 2006. Our Global Asset
Management business grew assets under management by 13 per
cent and has led the Canadian industry in net sales of long-term
funds for 16 consecutive quarters. Our recent announcement
of our plans to acquire Phillips, Hager & North shows
how we will continue to strengthen our position for future
Our broad-based Capital Markets businesses led in most elements
of the Canadian market and, even during difficult market conditions
late in the year, we continued to differentiate ourselves
from our Canadian peers by leveraging our global capabilities.
Looking at the second goal, our progress in the U.S. continues
as we grow the linkages between our wealth management, capital
markets and our banking platforms, and we move to better establish
our brand position in the country.
In 2007, we made significant steps toward our goal of becoming
the preeminent bank for businesses, business owners and professionals
within our footprint in the U.S. Southeast.
By adding new clients and earning more business from existing
clients, we have grown loans and deposits, and we have invested
to expand our footprint. As we announced earlier this week,
our acquisition of Alabama National BanCorporation has been
completed, further extending our branch network across the
Our U.S. branch network is now more than 40 per cent bigger
than last year with more than 430 branches. We have invested
in our technology platform to support this expansion, and,
as part of our goal of creating a globally recognizable brand
in all our markets, our U.S. retail bank will soon be renamed
While our U.S. residential builder finance business caused
a significant earnings setback for this segment, I am encouraged
by the work being done in our U.S. banking operations, especially
in the face of today's demanding market conditions. We are
committed to our long-term strategy of building a strong retail
banking operation in the U.S. Southeast. And when the housing
downturn begins to stabilize and rebound, we believe we will
be well positioned.
In U.S. Wealth Management, we continued to build scale by
taking advantage of product and service capabilities from
our Capital Markets and Banking businesses, attracting new
financial consultants, and increasing our overall productivity.
Earlier this month, we announced our plan to acquire Ferris,
Baker Watts, a full-service securities broker-dealer based
in Washington D.C. By adding 330 financial consultants to
our business, this transaction deepens our existing wealth
management platform, which will soon be renamed RBC Wealth
Under the RBC Capital Markets banner, our U.S. wholesale
business has again been successful at leveraging our leading
position in Canada to provide expertise and product breadth
to companies in the U.S. mid market. In 2007, three small
acquisitions helped us expand our client base and enhance
our capabilities in cash equities, municipal finance and U.S.
mergers and acquisitions.
Turning to our third goal, the most notable development was
the announcement of our intention to acquire RBTT Financial
Group, which we expect to close in the middle of 2008. This
is a perfect complement to our current footprint in the Caribbean
and will create one of the most expansive and leading bank
networks in the region.
We continued to build our global capital markets business
by focusing on helping clients in the areas where we have
competitive capabilities, including fixed income, infrastructure,
mining and energy. Our core strength in international trust
services is helping to drive our success as a top 20 global
private bank, and we opened new offices in several international
cities, including Mumbai, where I had the pleasure of opening
our office earlier this month.
Ladies and Gentlemen, the progress we made against our strategic
goals along with our financial performance, and the proven
ability of our people to serve our clients give me great confidence
that we have the strength to face current and future challenges.
First Quarter 2008
In the first quarter, the engines of our growth — our core
Canadian businesses — continued to perform extremely well.
And for all the reasons I just described to you our client
first approach, our diversified business mix, and our operational
and risk discipline, I am confident of our ability to manage
We reported net income of 1.2 billion dollars this quarter,
which is down by 249 million dollars from last year. However,
as is highlighted by this slide, there were a number of items
that impacted our results not only this past quarter, but
in Q1 of 2007 as well. Taking these items into consideration,
our earnings continued to be strong. Nevertheless, we are
in a more difficult environment and we are focused on ensuring
we get back on track with respect to our objectives. Despite
a decline in earnings, we generated a healthy Return on Equity
of 21.4 per cent.
I'd now like to go a little more deeply into the quarterly
Canadian Banking reported net income of 762 million dollars.
While this is virtually the same as a year ago and down from
Q4, it does not give you the full picture. As noted on the
slide, net income is eight per cent higher compared to last
year, and seven per cent higher compared to Q4, once you exclude
Our Canadian banking-related businesses continued to do well
and are building momentum. Our results from these businesses
are 15 per cent higher than last year, and 11 per cent higher
over last quarter, again after excluding these items.
Our domestic banking-related operations are running efficiently,
with positive operating leverage and continued growth of market
share in key areas such as residential mortgages and personal
A year ago, we created our Wealth Management segment to capitalize
on the profound global growth expected in this sector over
the next several years. Net income for the segment is virtually
flat when compared to last quarter and a year ago, once you
exclude the Q1/07 accounting adjustments and the impact of
the appreciation of the Canadian dollar.
Our fee-based revenue continued to move higher, up seven
per cent from last year, as we successfully recruited and
retained top performing advisors.
And while today's uncertain markets have pressured sales
of long term mutual funds in Canada, sales of other asset
classes were strong. Taking advantage of our extensive national
branch network, we again led the Canadian industry in overall
net sales by gathering more than four billion dollars of assets
in a record first quarter.
The earnings of our U.S. & International Banking segment
decreased from a year ago primarily due to an increase in
loan loss provisions in our U.S. residential builder finance
Solid business growth from RBC Dexia and our U.S. banking
operations combined to push overall earnings for this segment
higher over last quarter.
The earnings of our Capital Markets segment were affected
by writedowns this quarter, but broad-based revenue growth
helped offset their impact when compared to results from a
year ago. And compared to last quarter, our results were higher,
primarily because of our solid revenue growth.
Our diversified portfolio has allowed us to capitalize on
the increased market volatility and the declining interest
rate environment. Throughout the first quarter, we generated
strong revenues in a number of our businesses, including fixed
income, foreign exchange and equity derivatives trading.
To put this quarter in context, I view it as a stepping stone
to advancing past our competition across all of our businesses.
Despite there being several items impacting our results, the
fundamental strength of our operations remains solid.
I would like to conclude with a few words about the vital
role that our employees play in finding better ways to serve
our clients and our communities. I am well aware that our
success as an organization is made possible because of the
commitment to customer service that our 70,000 employees demonstrate
To support that commitment, we have encouraged a more collaborative
and accountable culture where employees are empowered to create
a superior client experience. This culture is reflected in
our client-centric vision that is built on our core values
of service, teamwork, responsibility, diversity and integrity.
We believe that our corporate responsibility activities,
good governance and our brand are important manifestations
of our values. We take great pride in operating our business
in a manner that creates sustainable prosperity for our clients,
employees, shareholders, and communities.
In this respect, 2007 was a breakthrough year for RBC. We
were the first Canadian bank to launch mutual funds for socially
responsible investors and introduce environmentally sustainable
product options for retail consumers. And we received a record
number of awards for our corporate responsibility efforts,
including being named one of the most sustainable companies
in the world.
While we are proud of how much we have achieved, we know
that corporate responsibility is a journey — not a destination.
Last year we developed a new approach to corporate responsibility
that could be more strategic, have more impact, and encompass
a wider range of stakeholder concerns.
We call it the RBC Blueprint for Doing Better. And
its our plan to put extra resources toward two areas of concern — diversity and the environment.
Diversity of our people is a natural complement to the diversity
we have achieved in our business. A diverse work force is
a competitive advantage not only when it comes to developing
human capital, but also for ensuring the growth and prosperity
of companies and countries.
At RBC, we know we can gain a strategic advantage by having
a workforce that mirrors our population and international
markets. Simply put, if we want to serve the market, we have
to hire the market.
The environment is also an issue that our clients and employees
have told us they care about deeply. So in 2007, we unveiled
a strategy that built on our strong history with a new vision
of how we will move forward with issues like climate change,
biodiversity, forests and water. The RBC Environmental Blueprint
sets out three related priorities for our businesses:
- To reduce the intensity of our environmental footprint,
- To promote environmentally responsible business activities,
- To offer environmental products and services.
We have also committed the strength of our brand behind a
single global cause to make a meaningful social and economic
impact at local, regional and global levels.
The RBC Blue Water Project is a 10-year, 50-million
dollar grant program to support projects related to water
conservation, watershed protection, access to clean drinking
water, and other fresh water-related issues in Canada and
around the world.
While we are directing significant attention to diversity
and environmental initiatives, the large majority of our philanthropic
efforts will remain committed to supporting local communities
through donations, sponsorships and employee participation.
Our Corporate Responsibility Report can be found outside the
meeting room and it showcases our active support for the arts,
athletics, health and wellness, education, and social and
civic causes which we will continue to do.
We have also put our marketing and moral support behind major
sponsorships of interest to our clients — including the Vancouver
Olympic and Paralympic Winter Games, the RBC Canadian Painting
Competition, and most recently, Canada's national golf championship,
now known as the RBC Canadian Open.
I am proud that when there are big opportunities to support
our communities, RBC is there.
RBC's brand is trusted by Canadians, and has been rated as
the most valuable in the country for the past three years.
In 2007, we were named one of Canada's best companies for
corporate governance by The Globe and Mail, and just earlier
this month, we were honoured by the Conference Board of Canada
for our innovations to improve corporate governance. And we
continue to be part of a select group of companies listed
on the Dow Jones Sustainability Index, the FTSE4Good Index
and the Jantzi Social Index.
Ladies and Gentlemen, the various accomplishments I have
mentioned this morning reflect the work of outstanding people,
who are committed to representing our company with integrity,
professionalism, and a commitment to our clients' success.
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 strong performance. I would also like
to thank our Chairman, David O'Brien, and the Board of Directors
for their guidance. And I am grateful to my management team
for their continued support.
Most of all, I would like to thank our 15 million clients
for placing their confidence everyday in our people and our
As we move forward, the financial services industry will
continue to face complex challenges over the next few years
as the impact of slower growth in the U.S. is felt in economies
around the world. But one thing is certain: financial institutions
that have a broad and diversified base of business, combined
with prudent risk management and a client-centric culture
will continue to have the capital necessary to invest in the
future, and will be able to deliver the best long-term returns
This is the company we are building at RBC. This is the company
that will work hard everyday to gain our clients' trust. And
this is the company that will strive to earn your confidence
for years to come.
1Market capitalization rankings as of April 14, 2003 (cited
by Stanley Hartt, Policy Options, May 2004), and February
22, 2008 (source: Bloomberg).
2Collateralized debt obligations.
3Domestic banking, wealth management and capital markets-related
4Amounts excluding these items are non-GAAP financial measures.
Please refer to the Q1 2008 Earnings Release for further information