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Overview of 2005 & First Quarter 2006 Financial Results

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Barbara G. Stymiest
Chief Operating Officer
RBC Financial Group
137th Annual Meeting of Royal Bank of Canada

March 3, 2006
Toronto, Ontario

Thank you Gord, and good morning ladies and gentlemen. I am pleased to present your company's financial results for 2005 and for the first quarter of 2006. I will also add to what Gord said about our commitment to corporate responsibility.

We had record earnings in 2005, with net income rising 21 per cent over 2004 to $3.4 billion and earnings per share also rising 21 per cent to $5.13. Since 2001, both net income and earnings per share have risen by over 45 per cent. The return on common shareholders' equity also climbed to 18 per cent in 2005, the highest level in 5 years.

We successfully executed on a number of revenue and cost initiatives across RBC in a favourable economic environment, both of which drove last year's strong performance. We delivered solid revenue growth across our lending, deposit, insurance and wealth management businesses, together with lower specific provision for credit losses in a continued benign credit environment. Our Insurance related expenses were impacted by higher business volumes in the disability insurance business (which included the Canadian operations of UnumProvident since May 1, 2004) and reserves for estimated net claims related to hurricanes of $203 million. Our cost control was very good considering that we took a reserve of $591 million for Enron related litigation matters. We also had lower business realignment charges and a lower effective income tax rate. Our 2004 results had been impacted by a few items such as a goodwill impairment charge for RBC Mortgage Company and a reversal of the general allowance.

We are pleased with the strong performance in all of our business segments last year. In our Canadian Personal & Business segment, net income grew 13 per cent to a record $2.3 billion in 2005. This largely reflected strong revenue growth in all business lines, leading to record revenues of $12.5 billion, up 11 per cent over 2004.

Net income from our U.S. & International Personal & Business segment's continuing operations grew 94 per cent in U.S. dollars. However, as a result of a stronger Canadian dollar, earnings rose 78 per cent in Canadian dollars to a record $401 million. Both our Banking and Wealth Management operations in this segment saw strong earnings growth. Revenues grew 11 per cent in U.S. dollars but were up only 3 per cent in Canadian dollars due to the stronger Canadian dollar. The growth was driven by higher investment management fees in Wealth Management and strong loan and deposit growth in Banking. The segment also demonstrated excellent cost discipline.

Capital Markets' net income of $746 million in 2005 was impacted by the Enron litigation reserve of $326 million after-tax. Excluding this reserve, the segment's net income would have reached over $1 billion largely due to revenue growth of 3 per cent, a lower effective tax rate and lower compensation costs.

With respect to RBC's overall performance, we met most of our objectives in 2005. While shareholders benefited from a 31 per cent increase in our common share price during fiscal 2005, we finished in the 2nd quartile for share price to earnings and share price to book value compared to the S&P/TSX Banks Index. Our expense control, as previously mentioned, was impacted by the Enron litigation reserve, without which we would have met our objective.

We delivered a 16 per cent increase in our common share dividends to our shareholders in 2005. Our dividend payout ratio was 45 per cent, right in the middle of our 40-50 per cent target range. Since 2001, we have raised our dividends at a compound annual rate of 14 per cent.

We believe our 2006 financial objectives are aggressive. They are also somewhat modified from last year's. We have raised the ROE objective to greater than 20 per cent and replaced the expense control objective with an operating leverage objective of greater than 3 per cent as we believe it is more meaningful to look at an expense growth rate in relation to a revenue growth rate. We have also changed the portfolio quality objective as we believe this year will present fewer recovery opportunities. In addition, we have set a floor for the Tier 1 capital ratio of 8 per cent.

We have also narrowed our medium-term objectives down to one: To consistently generate top quartile total shareholder returns in relation to our Canadian and U.S. peer group, which consists of 20 top North American financial institutions. As Gord said, over the past five and ten years, our returns have significantly outperformed the top U.S. and international banks.

First quarter 2006

Our first quarter results, which I will turn to shortly, reflected strong North American economic conditions and our success in executing on our strategies. The economic conditions were characterized by relatively low but rising interest rates, solid household and business balance sheets, and strong consumer confidence. In addition, businesses continued to invest in inventories and more productive infrastructure. These factors resulted in strong consumer spending and demand for consumer loans, as well as higher levels of business lending and continued strong credit quality. Equity markets performed well in the quarter, resulting in strong sales and capital appreciation in mutual funds and higher volumes in the full-service brokerage business. Looking forward, the Canadian economy is expected to remain strong in 2006 with real GDP growth forecast at 3.4 per cent, up from 2.9 per cent in 2005. U.S. economic growth is also expected to remain solid for 2006 with real GDP growth forecast at 3.2 per cent, which is down moderately from 3.5 per cent in 2005.

As Gord said, in the first quarter, we delivered record net income of $1.17 billion, which was 20 per cent higher than the first quarter of 2005. Earnings per share increased 19 per cent to $1.78, and ROE climbed to 23.9 per cent. We recorded good growth in revenues, a decline in the provision for credit losses and lower income taxes.

Each of our business segments grew its net income from the prior year and contributed to our record earnings.

Net income from our Canadian Personal & Business segment was $669 million, up 12 per cent from a year ago. This reflected higher revenues, which rose 10 per cent to a record $3.3 billion as we successfully grew our personal and business loans and deposits as well as our wealth management and insurance operations. Non-interest expenses grew only 6 per cent to support our growing businesses, a far lower rate than revenues.

First quarter net income from the U.S. & International Personal & Business segment increased 9 per cent in U.S. dollars. However, the continued strengthening of the Canadian dollar versus the U.S. dollar reduced the growth rate in Canadian dollars to 3 per cent. Revenues were up 10 per cent in U.S. dollars but 5 per cent in Canadian dollars.

RBC Capital Markets had record earnings of $330 million in the first quarter, up 25 per cent from a year ago, attesting to the success of our strategy to structure and build a diverse full-service wholesale bank while limiting volatility of earnings. The increase in net income was due to a variety of factors including higher merger and acquisition activity, higher earnings from subsidiaries operating in jurisdictions with lower income tax rates and improved credit quality, where we benefited from a $50 million reversal of the general allowance. Revenues declined 8 per cent as trading revenues, although at the highest level in four quarters, were down from a very strong level a year ago.

Altogether, RBC's first quarter revenues grew 4 per cent, reaching a record level of nearly $5 billion with growth across most lines of business. Non-interest expenses also grew 4 per cent. The stronger Canadian dollar reduced revenues by $60 million and expenses by $35 million in the first quarter.

Turning now to portfolio quality, which remained strong in the first quarter, the total provision for credit losses was $47 million, down $61 million from a year ago, with $50 million attributable to a reversal of a portion of the general allowance. Gross impaired loans were $800 million, down 24 per cent from a year ago due to continued favourable business conditions, which I already mentioned, and strong collection efforts on corporate and commercial accounts.

Our capital position has strengthened over the past year and at 9.5 per cent, our tier 1 capital ratio remains well above our objective of 8 per cent plus.

We are pleased with the 45 per cent total return to common shareholders over the past twelve months, including a 41 per cent increase in our share price. Our common share dividends were up 16 per cent between the first quarters of 2005 and 2006. And as Gord mentioned, this morning we announced an 8 cent increase in our quarterly common share dividend to 72 cents per share in the second quarter, or 36 cents on a post stock dividend basis, for shareholders of record on April 25, 2006.

Before I hand the meeting back to David O'Brien, I would like to spend a few minutes discussing RBC's focus on corporate responsibility. One of the guiding principles in RBC's code of conduct states that "It is our duty as a corporate citizen to add value to society while earning a profit for our shareholders."

From our perspective, corporate responsibility is not just a program managed by a single department, nor is it about a single policy. It is about operating our businesses with integrity, supporting the environment and our communities, and sustaining our long-term viability while contributing to the present and future well-being of all our stakeholders. The importance of behaving with integrity every day, in every transaction, in every part of our business is why corporate responsibility was such a fundamental part of our Client First transformation over a year ago.

We understand that 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 numbers. And acting responsibly is good business that has benefits for all of us.

What does commitment to good business mean? It means that all of us, including directors, management and employees are committed to:

  • Good governance and ethical behaviour
  • Respect for diversity
  • Respect for the environment
  • Respect for employees, and
  • Delivering responsible products and services to all of our clients

We are proud to be recognized for our commitment to communities and causes, both locally and globally, and Gord mentioned a few achievements and recognitions earlier. In addition, at the recent World Economic Forum in Davos, RBC was named to the "Global 100" list for the second year in a row. This list celebrates the 100 companies in the world that are best managing environmental, social and governance risks and opportunities. RBC was the only Canadian bank on this list. We also continue to be part of a select group of Canadian companies included on the Dow Jones Sustainability Index, the Jantzi Social Index, and the FTSE4Good Index, all recognizing the world's financial, social and environmental leaders.

But rest assured, we know that corporate responsibility is a journey, not a destination. So we continue to look at ways to improve our performance as a good corporate citizen while producing strong financial results.

Thank you for your attention.