President & Chief Executive Officer
Royal Bank of Canada
138th Annual Meeting of Royal Bank of Canada
March 2, 2007
Good morning ladies and gentlemen, and welcome to your Annual Meeting.
It is a privilege for me to report on our 2006 performance as well as our plans for 2007 and beyond.
I'd like to begin by thanking and congratulating our employees for the progress they made last year in building a more client-focused organization, growing our business in a profitable manner, and producing record financial results. From every employee, in all of our businesses, in 34 countries, it has been a collective effort and a shared accomplishment.
Our corporate vision of "Always earning the right to be our client's first choice" is taking root in everything we do. From our processes to our products, from our service to our technology, we are building a bank that delivers a better experience in the eyes of the people who matter the most - our customers.
Whether a new immigrant, an entrepreneur, a large corporation or a private banking client, our customers have plenty of financial providers to choose from. But we are earning their business through our relentless focus on providing innovative solutions, exceptional service, and advice that meets their changing needs.
While there is still much work to be done, stories like those in the video and our own client satisfaction surveys show that we're heading in the right direction. Our client first approach is reflected in our strong financial performance and superior shareholder returns.
In 2006, our employees delivered net income of more than 4.7 billion dollars, an increase of 40 per cent from the previous year. For the first time, your company earned more than one billion dollars in each quarter, fueled by strong growth in each of our business segments. One-third of our net income - 1.6 billion dollars - came from outside Canada, a milestone that reflects our growing ability to compete internationally.
We generated record revenue, carefully managed our expenses, and strategically invested in our future. And we exceeded six of our seven performance objectives for the year.
I believe one of RBC's strengths is the diversity of our earnings, and I am pleased to report that each of our business segments met or exceeded expectations this past year. In our Canadian Personal and Business segment, net income increased by 21 per cent from a year ago, due to strong revenue growth in each line of business. Notwithstanding a weak U.S. dollar, our U.S. and International Personal and Business segment recorded a 15 per cent increase in net income, reflecting strong growth in both wealth management and banking. And earnings at RBC Capital Markets were extremely strong across the board, and exceeded one billion dollars for the first time.
This performance translated into top quartile returns for our shareholders. In 2006, we generated a total shareholder return of 23 per cent, raised dividends by 22 per cent, and repurchased approximately 14 million common shares.
Both our five and 10 year total returns to shareholders have averaged in excess of 20 per cent per year, ahead of virtually every major bank in the world. In fact, Bloomberg recently ranked RBC as the best investment of all North American banks based on five-year returns. RBC was also named by Global Finance Magazine as the safest bank in Canada, a reflection of the consistency and stability of our earnings.
Our Strategic Goals
Our overall performance is a direct result of our focus on three strategic goals that are both aggressive and ambitious. These goals are:
Let's start with our first goal of leadership in Canada.
Last year, we invested heavily in opening branches, leveraging our distribution channels, developing people and technology, launching new products, and entering new markets.
In our Canadian Personal and Business segment, we helped more Canadians with their banking, borrowing and investing needs than any other provider. We extended our leadership in most major bank product categories. In addition, strong product offerings combined with the diversity and reach of our distribution network have given RBC a leadership position in all areas of wealth management, including mutual funds where we have led the industry in net long-term sales for the last three years.
We also enhanced our products and services, and customized them for different market segments. One example is new immigrants, for whom navigating a new financial system and gaining access to credit can be a challenge. That's why we established our "Welcome to Canada" program, which introduces newcomers to Canadian banking via the web. We have also changed the way credit applications are assessed, and developed new products that are focused on the needs of immigrants, such as our secured Visa card and Equity Mortgage Program.
Our online banking service is now used by more than three million clients to process almost 160 million transactions annually, and we continue to develop new and innovative ways for them to take advantage of it. One example is our virtual agent named "May," who we recently added to our web site to interact with clients and help them find the services they are looking for.
We're also trying to attract more young people, because as anyone with a teenager knows, they interact with the world differently than previous generations. This is one of the reasons we launched the "RBC Next Great Innovator Challenge," a contest where university students tell us what types of innovations they would like to see take place in financial institutions. We plan to keep looking for ways to improve our appeal and relevance to the net generation and the rest of our clients in this era of online and global connectivity.
In Capital Markets, our Canadian trading, investment banking and corporate lending businesses led the industry in almost every category, and our success was recognized by many national and international sources. In addition, we were the leader in the Maple Bond market, and just recently announced the successful completion of the largest bond transaction in the history of Canadian financial markets. We have continued to invest not only in our Canadian infrastructure, but in ways to better serve our Canadian clients in foreign markets.
With respect to our second goal, we continued to grow our banking, wealth management and capital markets capabilities in the U.S. during 2006.
Our banking operations delivered solid results based on a clear strategy of serving small businesses, business owners, and professionals, while investing in infrastructure to support future growth. Last fall, we announced agreements to complete two acquisitions that are excellent strategic, economic and cultural fits with our banking operations in the U.S. Southeast. The acquisition of Flag Financial Corporation, the largest community bank headquartered in Atlanta, increased our client reach in a key growth market. In addition, we announced plans to acquire 39 branches in Alabama owned by AmSouth Bancorporation. This acquisition is expected to close on March 9th, and will make us the seventh largest financial institution in the state as measured by deposits.
In our U.S. wealth management business, we continued to build scale and capability during 2006. We opened 10 new wealth management offices in high-growth cities and recruited high-performing and successful financial consultants. We leveraged our U.S. capital markets capabilities to provide retail investors with greater access to global debt issues and structured products. And our October acquisition of the American Guaranty & Trust Company allowed us to be more effective when offering U.S. trust solutions to high-net worth clients.
Our U.S. investment banking and fixed income capabilities also expanded through a combination of organic growth and acquisitions. We've built a full- service investment banking platform focused on meeting the needs of U.S. mid-market companies. Our municipal finance business is a leader, ranking eighth in the U.S. last year. In January, we acquired Carlin Financial to help us establish a best-in-class North American electronic execution platform. And that same month, we acquired Daniels & Associates, a mergers and acquisitions advisor to the U.S. cable, telecom and broadcast industries. These are just a few of the steps that are bringing us closer to our objective of being a top-tier provider to U.S. mid-market companies.
With respect to our third goal of being a premier provider of selected global financial services, we continued to invest in areas where we can leverage our competitive strengths. For example, we expanded our infrastructure finance capabilities and now have a successful global infrastructure platform with offices in North America, Europe and Australia. We strengthened our ability to serve wealth management clients when we acquired Abacus Financial Services Group, a transaction that made RBC the top provider of international trust services in the United Kingdom. In addition, we successfully completed the first year of integration of our custody business into the RBC Dexia joint venture, which now has more than two trillion dollars of assets under administration.
Finally, we made a number of targeted investments in Asia and the Middle East. We expanded our private banking, full service brokerage and capital markets activities in selected locations including Brunei, Dubai, Hong Kong, Sydney and Tokyo. We upgraded our representative banking office in Beijing to branch status in order to provide a greater range of services to our institutional and individual clients, and we earned a co-lead manager role in the Industrial and Commercial Bank of China's groundbreaking initial public offering. We also invested in a new joint venture in Shanghai with China Minsheng Bank to launch a new Chinese mutual fund management company.
2006 was a good year of solid progress; however, we know we can and must do better, and our efforts will be dedicated to that end in 2007 and beyond.
Looking to 2007 and beyond
No business exists in a vacuum, so in setting our future strategy it is important to look at the economic and regulatory developments affecting all of our operations, especially those in our domestic market. The future prosperity of Canada's key industries, including financial services, are directly linked to the success of our country.
By most economic and social measures, Canada appears to be in good shape and we do have much to be proud of. But there are areas of concern such as the accelerating growth in public spending, a tax structure that is biased against investment, a fragmented and expensive regulatory structure, and deterioration in our relative competitive position. While economic growth has been strong, our productivity is lagging most industrialized countries, and we have witnessed a significant number of foreign acquisitions of our major companies, both issues that are concerning with respect to Canada's future performance.
Over the past year, 116 Canadian public companies were acquired by foreign interests, more than any other major country including much bigger economies such as the United States, the United Kingdom, France and all the Nordic Countries combined. We have not only seen the disappearance of major Canadian household names, but the loss of Canadian presence in industries where we have long had traditional strengths.
With respect to Canada's productivity, our output per hour worked in the manufacturing sector has grown at the fourth slowest rate among fourteen major industrialized countries, while at the same time intense competition from China and other emerging economic powerhouses is posing a severe challenge to the future of our manufacturing base.
Against this backdrop, there is a need for focused leadership and strategic policy-making. If Canada is to continue to succeed, it is essential that our politicians look beyond reactionary policies and short-term politics, to the challenges facing our country's future. It is time to develop a renewed, long-term sense of national direction to ensure the sustainable prosperity of our country.
Government and industry must work more closely together for the benefit of all Canadians. We should be enhancing the ability of Canadian companies - including our financial sector - to compete effectively in the global marketplace. It should be a common goal to shape a domestic policy environment that gives primacy, competitive advantage and sound economics to companies that operate in Canada. Is business accountable for its own success and failure? Absolutely! But we should be creating an environment that helps foster their success.
We need to develop a clear vision of what Canada can achieve over the next five to 10 years and a bold strategy for realizing this vision in ways that will mobilize public support across all sectors and regions. Together, we have to decide which industries are key to our future and ensure they can compete globally on a level playing field.
There are many areas that must be addressed to deal with the issue of Canada's competitiveness including tax policy, regulation, immigration, research, education and infrastructure. Frankly, I don't believe that there is significant disagreement in most quarters with respect to the blueprint needed to move our economic agenda forward, but we must shake off our complacency as a nation, squarely face up to our collective challenges, and take some action.
It is time to put aside short-term differences and think about what our country should look like in a changing global landscape. Canada cannot afford to stand still while its major trading partners improve their productive capacity, economic performance and competitive position in today's global environment. We have some great competitive advantages such as our twin surpluses, abundance of resources, an open society and a well-educated workforce. But as the rest of the world changes, we must adapt. Business leaders must do our part by improving productivity and seizing the opportunities of a global marketplace and governments should support industry by creating an environment that encourages investment, growth and Canadian leadership.
RBC 2007 and Beyond
This productivity and growth challenge is one we grapple with in the financial services industry, so I would like to spend a few minutes talking about the plans we have to grow your company in a sustainable manner. As a Canadian-based global company, our goal at RBC is to keep generating top quartile shareholder returns in relation to our North American peer group, while expanding our business in Canada and abroad. To accomplish this we must:
So far, our results have been strong. Our employees have demonstrated that they understand our strategy and are accountable for execution. While Barbara Stymiest will provide a detailed review of our first quarter results that were released earlier this morning, I am pleased to report record earnings for the quarter with net income of almost 1.5 billion dollars, up 28 per cent from a year ago. In addition we announced a dividend increase of 6 cents or 15 per cent.
These results continue to reflect our effort to abide by a rigorous cost discipline that creates the savings necessary to invest in future initiatives. For example, over the past two years we have taken 860 million dollars in costs out of our system, or eight per cent of our non-interest expense base. This has improved our efficiency ratio by 520 basis points.
More importantly, we have reinvested these cost savings in new initiatives that have generated profitable revenue growth. By eliminating 1,600 positions in non-client facing roles since 2004, we have been able to add significantly more people in sales and service positions. So while our overall staff costs are up by nine and one-half per cent, we have increased revenues by almost 16 per cent, or nearly three billion dollars.
To support further growth, we recently changed our corporate structure and moved from three business segments to four, with three of them clearly focused on growing global businesses where last year we earned one-third of our net income. Global financial assets are expected to almost quadruple by 2020, and we want to be in a position to benefit from this growth.
Our four business segments are Canadian Banking, U.S. and International Banking, Wealth Management, and Capital Markets.
Canadian Banking, which represents about 50 per cent of our earnings, consists of domestic personal and business financial services, cards and payment solutions, and our global insurance operations. These businesses have leading market share positions in almost every retail product, and experienced solid volume growth over the past year.
U.S. and International Banking consists of our banking businesses outside Canada, including RBC Centura in the U.S., and our banking operations in the Caribbean. It also includes our 50 per cent interest in RBC Dexia, our joint venture that supplies custody and investor services to institutional and individual clients on a global basis.
Our new business segment, Wealth Management, is being built on the foundations of our existing full-service brokerage businesses in Canada and the U.S.; our Canadian asset management, trust and discretionary investment management operations; and our global private banking business which operates in 21 countries. At the end of fiscal 2006, this business had approximately 475 billion dollars of client assets under administration, 140 billion dollars of assets under management, and over 3,500 financial advisors.
And finally, our Capital Markets segment consists of a wide range of corporate and investment banking, sales and trading, research and related products and services provided to corporate, public sector and institutional clients around the globe. Not only does our capital markets business enjoy a leading position in Canada, it is a global platform that generates more than 60 per cent of its revenue from outside Canada.
We feel this new structure is a natural evolution and will enable us to be more focused with respect to growth and investments in each of our businesses. All four segments have critical mass, strong leadership, and clear mandates for performance and growth
I would like to conclude with a few words about the vital role our employees play in bringing to life our client first approach, and in generating the achievements that I have discussed this morning.
The cover of our annual report reads Where our vision leads us, which reflects our vision of "Always earning the right to be our clients' first choice." Pursuing this vision begins and ends with our employees.
I am well aware that my job is made easier because of the unflagging commitment to customer service and innovation that our 70,000 employees bring to the workplace everyday.
To support that commitment, we have encouraged a more collaborative and accountable culture where employees are empowered to create a superior client experience. We have re-engineered our processes so that they have the tools to do a better job for their clients. And we have been refining our reward and recognition programs to promote behaviours that help us do a better job for our clients, while enabling our employees to build successful careers.
We believe that corporate responsibility and good governance are important to our vision, and we have dedicated a great deal of management time promoting a culture of integrity and sustainability. The cover of this year's Corporate Responsibility report, which can be found outside the meeting room, reads Where our values lead us. This reflects that our client-centric vision is underpinned by our core values of service, teamwork, responsibility, diversity and integrity.
The concept of sustainability is very much in vogue, but I hope that when you look at RBC and our activities over the last year, and indeed, over the last century-and-a-quarter, you will agree that we have helped create sustainable prosperity for our clients, employees, shareholders, and communities.
Economic, social and environmental sustainability are lofty, but achievable goals for all corporations. We believe companies that demonstrate sustainability in their business practices and provide leadership in social and environmental sustainability, will become increasingly popular choices for investors and clients.
A company's reputation is earned by consistently doing the right things over a long period of time, and we are pleased that our programs and initiatives continued to earn recognition during the past year. RBC's brand is trusted by Canadians, and has been rated as the most valuable in the country for the past three years. We have made major investments in our corporate governance and compliance capabilities and, in 2006, were proud to be named Canada's best company for corporate governance by Investor Relations Magazine, and fourth best by the Globe and Mail. Our corporate culture was ranked the second most admired in Canada in a study that appeared in Canadian Business Magazine. For the third year in a row, RBC was the only Canadian bank named as one of the world's top 100 companies for sustainable development, 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.
The various accomplishments I have mentioned this morning are a reflection of an organization made up of outstanding people, who are committed to representing our company with great integrity, professionalism, and energy.
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 in 2006. I would also like to thank our Chairman, David O'Brien, and the board of directors for their guidance, and, in particular, my management team for their support. I work with an incredible team of executives, and I would ask Peter Armenio, Janice Fukakusa, George Lewis, Marty Lippert, Barb Stymiest, Jim Westlake, Chuck Winograd and the recently retired Elisabetta Bigsby to stand and be recognized. And most of all, I would like to thank our 14 million clients for placing their confidence in our people and for trusting us with their business.
As we look to the future, we will continue to see trends that have the potential to transform our industry including demographic shifts, changing customer preferences, new delivery models, and globalization. But financial services has always been a dynamic industry, and one need only look at the make-up of our balance sheet and income statement today to recognize how much we have changed over the years. I have no doubt that we will continue to transform our company to take advantage of emerging trends, and that we will continue to enjoy the overall growth that the financial services sector is expected to produce.
And while much has changed over the decades, there is one common factor that dates back to our company's humble beginnings on the Halifax waterfront 138 years ago. The business of tomorrow will be built in the same way as the business of yesterday - one client at a time, one great experience after another.
Ladies and gentlemen, this is where our vision is leading us, and I have every confidence that the road ahead will lead to further success for our clients and our shareholders.