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Address to Shareholders

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Gordon Nixon
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 Halifax.

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 this region.

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 results.

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 are:

  • 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' needs;
  • 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 ones.

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 to innovation.

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 and Asia.

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 needs grow.

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 roles.

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 ago.

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 growth potential.

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 $324 million.

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 realignment charges.

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 controls.

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 developments.

A company's reputation is paramount and we are pleased that our programs and initiatives continued to earn recognition during 2004.

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 competitive advantage.

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.

Thank you.