Gordon M. Nixon
President & Chief Executive Officer
Royal Bank of Canada
141st Annual Meeting of Royal Bank of Canada
March 3, 2010
Good morning ladies and gentlemen, and welcome to your annual meeting.
I want to begin this morning by thanking all of our employees around the world.
While events of the past two years have irreversibly changed our industry, your work has made us a better company than we were at the start of the crisis.
In fiscal 2009, RBC generated cash net income1 of over five billion dollars, eight per cent higher than in 2008.
Our reported results of 3.9 billion dollars included a one-billion dollar goodwill impairment charge that did not affect our ongoing operations.
Our results reflected strong performances in Canadian Banking, Capital Markets, Wealth Management, and Insurance.
At the end of fiscal 2009, we had top quartile shareholder returns for one-, three-, five- and 10-year time horizons compared to our North American peer group.
We exited 2009 with a Tier 1 capital ratio of 13 per cent, among the highest levels in the industry.
Today, we are one of the largest banks in the world based on market capitalization, and one of only five banks in the world with a triple-A credit rating.
I am very proud of how we have managed through the financial crisis, and optimistic about our ability to continue to succeed going forward.
We have healthy businesses, strong corporate values and culture, highly engaged employees, and deep relationships with our clients and our communities all of which will be critical for our future success.
Although Canada was not without its challenges, we should all be proud of how our system managed through the recent crisis.
We were able to work together to solve our problems, and those institutions that suffered substantial losses were able to re-capitalize without injections of capital from governments and restore themselves to financial stability.
Having said that, I believe journalists and commentators are oversimplifying the matter when they say Canada's dullness, conservative culture or less competitive banking environment accounted for our relative success.
Canada's banking market is far more competitive than virtually any developed country in the world, particularly if you measure competitiveness by the level of service offering and the cost of services paid by clients.
Our banks are also more international and diversified than most U.S. banks, particularly those that went under or were bailed out.
And there were no restrictions that prevented us from making the kinds of investments and loans that brought many global institutions to their knees.
It wasn't dullness that caused Canada to outperform, but rather a combination of:
So— notwithstanding significant challenges faced by our markets and specific institutions— our system worked, which, of course, was not the case elsewhere.
The key factors that contributed to RBC's relative out-performance are a healthy respect for risk and a balanced diversified business mix.
At RBC, we believe risk management is a source of our strength.
We manage our risks to ensure that business activities remain within our overall risk appetite and we hold our business leaders accountable.
We insist that risks be balanced by appropriate returns that short-term returns be balanced against long-term vision and that investing and growth initiatives be balanced against the imperative to maintain financial stability.
Throughout the financial crisis, our number one priority was maintaining the safety and soundness of our bank.
Key to managing risk is anticipating and responding to changing business conditions.
In the past couple of years, deteriorating financial markets and declining economies across the G20 challenged our businesses.
Lower interest rates reduced revenue, weak economic conditions produced higher credit losses, and market turmoil caused significant write-downs of securities.
The failure, or near failure, of significant trading counter-parties presented the potential for significant losses.
Our responses to these issues have been decisive and deliberate:
The impact of the economic downturn has also had a material impact on our customers and will be felt for years.
Individuals have had to postpone retirement plans that were made during a ten-year bull market when investment returns and employment conditions were more favourable.
Commercial and corporate clients have seen their businesses suffer and may have lost access to sources of funding.
Throughout the crisis, our staff have been proactive in addressing issues our clients faced, which has strengthened client relationships and reinforced the benefits of doing business with a financial company that can support long term growth.
In 2009, we gained market share in virtually all our businesses, both inside and outside Canada.
Where others have retreated, we have continued to invest, and we have even increased lending, generally unheard of during a recessionary period.
Our brand in Canada has never been stronger, and we have invested to support our brand internationally with campaigns in the U.S. and U.K. promoting our global capabilities and stability.
There has never been a better time for us to grow in these markets.
As a result of the crisis, many of our competitors have been forced to change their business mix and strategies.
But our strategic priorities have remained consistent throughout.
In Canada, we are recognized as a leader.
In 2009, all our businesses continued to build their leadership positions in each market and product category.
We have expanded our network of branches and ATM's, and extended the hours of operation in more than half our branches.
We have also added call centre employees, and expanded our mortgage and investment specialized sales force.
We are gaining more business from both new and existing clients, and seeing higher market shares in consumer lending, business loans, and consumer and business deposits.
Our performance has been acknowledged by industry observers through a variety of recognitions.
Our Canadian wealth management and asset management businesses are the largest in the country and both maintained their leadership positions in 2009.
Our full service wealth management business continued to attract experienced advisors and earned 60 per cent of industry profits during a challenging 2009.
In our asset management business, net sales of our long-term mutual funds continued to increase through 2009, demonstrating the power of our distribution network, rising financial markets, and the confidence that clients have in our fund management expertise, as well as the benefits of our acquisition of PH&N, which was named fund company of the year by Lipper.
Our insurance operations in Canada are growing and providing more value to clients by offering service and advice through a variety of channels.
And as Canada's leading global investment bank, we were again named Dealmaker of the Year by The Financial Post, and received other citations by notable observers— such as Euromoney, Bloomberg, and Thomson Reuters— for our leadership in virtually every area of capital markets.
In the U.S., our reputation for financial strength and stability attracted clients and talent to all of our businesses, and we continued to strengthen our U.S. businesses generating strong revenue growth and positive earnings growth.
Our capital markets division— which is our largest U.S. business— was named as a primary dealer in the U.S. by the Federal Reserve Bank of New York, a significant vote of confidence in the health of our U.S. fixed income trading business and additional muscle to what is a leading global platform.
Our U.S. wealth management business integrated our Ferris, Baker Watts and J.B. Hanauer acquisitions, announced an agreement to acquire J.P. Morgan's Third Party Investment Advisory Servicing Business, and had a record year in recruiting more than 300 financial consultants.
While the weak economic conditions in the U.S. continued to put stress on our U.S. retail banking operations, we have strengthened our management team and are in the midst of restructuring to improve operational efficiency and client service, which I believe will position us well as the credit environment recovers.
Outside North America, we are the only Canadian bank with a global wealth management capability, capitalizing on the sector's long-term growth around the world.
In 2009, our U.K. wealth management operations completed the acquisition of Jersey-based Mourant Private Wealth which enhanced our ability to provide integrated private wealth management services to international clients.
Our global capital markets businesses took advantage of the market dislocation by:
Over 60 per cent of RBC Capital Markets' people and revenues and 40 per cent of earnings were from outside of Canada.
Finally, in our Caribbean banking operation, we are actively integrating our RBTT acquisition to establish a common operating platform to support its growth.
Ladies and gentlemen, our performance in 2009 was among the strongest in the world and it wasn't about making big bets and taking excessive risk.
It was about balance and diversification.
Looking ahead to 2010, we will continue to emphasize resilience and return by:
If I have learned anything throughout my career, it is that serving clients well and building strong relationships are critical activities for all successful enterprises.
The events of the past two years are more proof of these lessons.
Banks paid a heavy price if they chose to grow assets rather than customers, or if they grew revenues as opposed to franchises.
In a world that was flush with liquidity, it was easy for financial companies to expand their balance sheets and finance acquisitions, but in many cases they were not adding value, and the consequences were dramatic.
I am optimistic about our ability to succeed in 2010 and beyond, and to take advantage of the changing global landscape.
This morning we announced our first quarter results and we are off to a strong start with earnings up 35 per cent from last year.
All of our businesses had earnings growth this quarter; generating net income of 1.5 billion dollars, and a return on equity of 17.5 per cent, while maintaining our strong Tier 1 capital ratio of 12.7 per cent.
Canadian Banking performed extremely well and continued to underpin our earnings.
We had strong volume growth and market share gains across most products.
Solid revenue growth coupled with our ongoing focus on cost management drove an efficiency ratio of 45.7 per cent, an improvement of 140 basis points over last quarter.
In Wealth Management, improved market conditions and investor confidence drove higher fee-based assets and higher transaction volumes over last year, continuing the significant earnings recovery in this business from the period of market lows.
We are continuing to leverage our global capabilities to differentiate our product and service offerings to both individual and institutional clients.
Insurance exhibited strong growth across most products and continues to complement our retail product offering.
In International Banking, the net loss in the first quarter was lower than last year and last quarter.
We continue to see signs of improvement in our U.S. banking loan portfolio and we are working hard to restructure the business to improve client service and achieve greater operational efficiency.
In Capital Markets, we benefited from the strength and diversity of our business.
Compared to last quarter, we had stronger investment banking activity driven by improved equity and credit market conditions.
And while we experienced moderating trading revenue in our fixed income and money markets businesses, this was partially offset by higher trading in equities.
Our results this quarter speak to the earnings power of this organization, the strength of our businesses, and our ability to manage costs and capital effectively.
While we see signs of improvement in market and economic conditions, we can't ignore that the world is emerging from a period of financial, economic and regulatory upheaval that will potentially be a watershed for our industry.
The financial industry will never be the same, and the "new normal" will bring with it both significant challenges and unparalleled opportunities.
All financial services firms are wrestling with several problems as they plot their future course.
An environment of more proactive regulation, declining client trust, weak consumer confidence and unprecedented political intervention.
Managing through this period of change is the top strategic and operational issue for every major financial institution and it will, in my view, create winners and losers.
Looking through a long-term lens, it's clear that regulatory reforms now being considered will play a material role in setting the stage for the future prospects of our industry.
I understand that— particularly in the U.S. and U.K.— there is popular outrage about bank bail-outs, compounded by the recent profit levels and bonuses at banks that were bailed out.
Main Street is understandably upset, but unfortunately, political rhetoric is distorting the cause of this recent crisis and potentially distorting the cure.
This crisis was not caused by Wall Street, excessive compensation, nor proprietary trading, although they all played a part.
The root cause of the crisis was the failure of the U.S. residential mortgage market.
Mortgage insurance supplied by government sponsored entities like Freddie Mac, the deductibility of mortgage interest, and the origination and distribution of mortgages in the United States encouraged risky lending and borrowing and created a bubble in the world's largest market.
Wall Street was certainly complicit creating extremely complex syndication structures that allowed lenders to easily sell these high risk mortgages which provided even greater liquidity and lower credit standards to a market that, in hindsight, seems absurd.
The basic requirement to qualify for a large mortgage in the United States was a pulse, and the behaviour of mortgage brokers, financial companies, credit rating agencies, politicians, investors and borrowers resulted in this over-leveraged, high-risk asset class expanding without appropriate risk standards, and ultimately finding its way onto the balance sheets of banks and investors all around the world.
This combined with the growing globalization of financial markets and inter-dependence of global financial institutions, led to a systemic crisis that ultimately required aggressive government action to stabilize.
All banks faced a liquidity crisis, but this was brought on by those banks that faced a solvency crisis.
Those banks that went under, and many that were bailed out, fell victim to far too much concentration of toxic assets and short term wholesale funding.
Many banks were under-capitalized and over-leveraged, and in many cases failed to have appropriate risk standards.
We are now in a period where G20 governments and market regulators are proposing substantial changes to bank regulation.
While new regulation in response to recent events is inevitable, it is critical that new standards not impede the ability of the market to operate efficiently.
As policymakers talk through potential reforms, they must commit to a prudent set of rules, while resisting the temptation to create a program that over-regulates, or one that is punitive rather than stabilizing.
Any reforms must balance the need and urgency for change, with their impact on economic growth, the health of the financial services sector, and the ability for companies to generate shareholder value.
All constituents, including users of banking services, should have some influence in these discussions.
Not all stakeholders are aligned:
But ultimately, a large part of the increased costs associated with new regulations will be borne by corporations, small business and consumers.
If the debate is hijacked by one constituent, the long term impact on the functioning of global capital markets, and on society, could be punitive.
Recent developments show how emerging regulations could create a host of unintended consequences, including smothering the sparks of a fledgling economic recovery.
Reforms proposed in the U.S. seek to reduce risk-taking activities within the banking system by limiting the size of banks and preventing U.S. deposit-taking institutions from operating in potentially lucrative — yet more risky— businesses, such as proprietary trading or private equity.
These reforms are still being digested.
But at first blush, they appear to potentially put at risk future earnings for U.S. banks, while accomplishing little in terms of systemic risk reduction.
Restricting banks from activities like trading would not have prevented the kinds of meltdowns we saw over the past couple years, and the result could be the flight of a variety of activities into unregulated areas or alternative geographies, hardly a way to reduce systemic risk.
The way to control excessive risk taking is to ensure that the appropriate capital is allocated to banking activities that incur the risk.
If more capital is allocated, the returns will be reduced, and the incentive to pursue the activity curtailed.
The largest U.S. bank failures had little, if anything, to do with wholesale bank activities.
In fact many of the largest failures were not even banks, but rather investment dealers, insurance companies, mortgage brokers, consumer finance companies, and government agencies.The bulk of the losses during the crisis arguably resulted from lending practices and excessive concentration related, primarily, to U.S. residential real estate and over-extended consumers, not those activities addressed by the proposed reforms.
One of the pillars of strength of the Canadian regulatory system is its requirement for Canadian banks to operate under binding leverage constraints.
Excessive leverage in the industry was perhaps the greatest contributing factor to the problems at many banks, because capital rules risk-adjust for the quality of assets —and the assets that caused stress in many banks were "highly rated assets" and, therefore, required very little capital.
Since the start of this decade the rate of growth of what was perceived to be low risk assets at many banks, was significantly higher than the rate of growth of capital, a trend that played a great part in the collapse of many financial institutions.
If you have 50 dollars of assets for every dollar of equity, it doesn't take much of a decline in your asset values to wipe out your equity.
Global leverage limits, in my view, are essential.
With regard to capital, I also believe it is important today to be conservatively capitalized and I agree conceptually with the need for increased capital requirements.
Having said that, the current Basel III proposals are so complex and onerous that we run the risk of no agreement being reached.
As these rules are tested, it will become evident, in my view, that many banks around the world cannot meet the standards without impairing their ability to lend money and contribute to economic growth.
And given the uncertainty of new regulations, financial institutions are now forced to take a very cautious approach to investing, growing and deploying excess capital.
How can we make investments without knowing the cost or returns?
If banks seek to offset the impact of these reforms by increasing costs of services and credit policymakers must carefully balance the urgency for these reforms with their potential impact on economies.A
recent report by J.P. Morgan calculates that the cumulative impact of proposed regulations would increase the cost of financial products across the system by close to 40 per cent.
It is also concerning that regulatory reforms are emerging from several sources and authorities, without coordination of content or timing.
This lack of coordination is dangerous.
While a few months ago it appeared as if there was a high degree of co-operation among the Financial Stability Board countries, we are now experiencing a divide with different countries trying to initiate rules that best suit their jurisdiction.
The unified response that was necessary and commendable during the darkest days of the crisis now risks being replaced by regulatory and legislative one-upmanship, as various governments pursue local agendas.
Clearly, we need to find the right balance as governments, regulators and banks need to work together to improve the system.I am confident that if the industry is well capitalized, properly leveraged and has sufficient liquidity, we should be able to rely on good governance and effective local regulation to ensure the system does not fail.
After all, it worked in Canada during the worst crisis since the Great Depression.
If we don't get to the finish line in a reasonable time-frame, and with balanced requirements, we will increase the risks not just to the financial system but to economic growth.
And if that happens then everyone loses.
Finally, I want to briefly comment on an area of emerging significance for shareholders: how banks should be accountable for businesses that affect the environment.
I would encourage shareholders to read our Corporate Responsibility Review that outlines many of our workplace, environmental and community programs but I raise this specific issue because it was the subject of some discussion at last year's annual meeting, and some stakeholders have expressed views about RBC lending to companies in the energy sector, and specifically the Oil Sands.
In the past year, we've done our homework on the issues:
Without doubt, there are extreme views.
One side demands that banks should stop lending immediately to oil and gas companies.
Another side says banks should not be concerned with environmental policy and that role should be left to regulators and governments.
We believe that we have an obligation to all of our stakeholders and have to find the right balance.
We have a responsibility to our shareholders and our economy to provide financial solutions to all types of businesses that behave in a manner consistent with the laws and regulations of the jurisdictions where they operate, but we have standards and policies that commit us to ensuring we are dealing with companies, organizations and projects that meet specific criteria regarding social, ethical and environmental standards.
We provide a wide range of financial services to the energy sector, as we do for all our clients, including many companies producing renewable energy, alternative energy and green technology, all areas in which we are a global leader.
However, because of our size and stature in Canada, we often have to defend ourselves against misrepresentations by groups— primarily non-Canadian— pursuing their own agendas and campaigns.
The facts are that we lend almost 300 billion dollars globally to businesses and individuals.
Of this, less than two per cent are loans to the oil and gas sector, a small share of which is lent to companies operating in the Oil Sands.
We are neither the largest lender, nor do we have any direct investments in the Oil Sands.
But having said that, we are very proud of the relationships and quality of customers that we do deal with in this market— clients that invest billions of dollars to create jobs and create technologies that will ensure responsible development.
We are well-informed, engaged and thoughtful about the environmental issues posed by the energy sector and we understand that if we don't take a long-term view of these issues, we are making a mistake.
But any solution must be balanced.
The Oil Sands are an important natural resource for Canada, and integral to our energy security and our economic strength.
Having said that, there is much work to be done to ensure responsible development that takes into account environmental considerations.
This is not an issue that will go away: Government and industry must work together, and banks must support and fuel best practices and innovation.
The Canadian energy sector is vital to our economy and especially for First Nations communities but, again, not without significant questions that need to be discussed and resolved.
In this matter, I have sought counsel from many people, including Phil Fontaine, former National Chief of the Assembly of First Nations and a Special Advisor to RBC.
He's helped bring clarity to what's required for current and future development.
This reality calls for dialogue, for partnerships, transparency and education— not posturing and extreme demands.
The questions posed by the development of new energy sources will not go away— and they demand an even-handed and balanced response based on fact, not rhetoric.
As shareholders, I'm sure you'll agree that finding a solution here is not within the scope of a bank's role and expertise. Governments, industry, regulators and environmentalists must all come to the table.
That said, we will push for greater transparency and dialogue, so decisions regarding risk can be better informed.
We will continue to be open to financing innovative ideas and entrepreneurs who want to develop renewable energy alternatives and help people embrace change willingly.
We will take a balanced approach to this issue, and we will make decisions based on the facts, and consistent with "best practice" standards.
We have outstanding people who are passionate about social and environmental issues responsible for developing and refining our polices, and rest assured we will maintain the highest of standards and live up to our commitments.
At RBC, we pride ourselves on being able to work with our clients, with governments, NGOs and other stakeholders, to have a constructive discussion on important issues of the day, including broad environmental concerns.
For 140 years, we have listened to our clients and our communities; we have learned about their needs and the causes most important to them; and we have acted.
I'll remind everyone that our commitment to environmental sustainability dates back over 20 years.
We've learned a lot since then, and the scope of our activities has continued to grow.
We're very proud of our community projects, especially the RBC Blue Water Project— which has now committed more than 20 million dollars to 150 projects around the world including one million dollars to provide access to freshwater and sanitation to the people of Haiti.
I am proud that several global organizations have recognized us for our programs and performance related to sustainability and corporate responsibility.
In 2007, we topped Newsweek International's ranking of the 100 global companies considered most capable of adapting to the risks and opportunities presented by climate change.
We have been listed as one of the most sustainable large corporations in the world for six years in a row, according to the annual ranking by Corporate Knights.
For ten consecutive years, RBC has been named to the prestigious Dow Jones Sustainability World Index.
We are also listed on the Jantzi Social Index, the FTSE4Good Index, and the Carbon Disclosure Project Canadian Leadership Index.
We have been recognized as one of Canada's Greenest Employers, one of Canada's 50 Most Socially Responsible Corporations, and on February 15th, of this year, we were ranked 34th in The World's Most Respected Companies by Barron's, one of two Canadian Companies to be on the list and one of two global banks in the top 50.
We are not perfect— we can always improve our contribution to the environment—but I assure you, we know it is a priority and we understand our responsibility.
Ladies and gentlemen, the past two years have been one of the most challenging periods in our history and the most challenging in our careers.
But our success has served to give us the confidence to tackle any challenge in the future.
We've taken a balanced approach to all aspects of our business.
Taking a balanced approach is how we out-performed our competitors in the short and long term.
That's how we continue to provide good careers, and serve our clients to the best of our abilities. While I have emphasized the challenges we face in a changing business environment, I would say the opportunities for RBC to expand its businesses in Canada and globally have never been better.
We have many competitive advantages, including our financial strength and the quality of our people and we'll put them to work to create shareholder value.
I hope you share with me the optimism for our next phase of growth, and I thank you for your confidence.
We have high expectations of our businesses.
And all of our 77,000 employees are committed to our vision of "Always Earning the Right to be our Clients' First Choice".
I want to thank all our employees for their professionalism and dedication along with my Group Executive team, for their leadership.
Finally, I want to thank all of our 18 million individual, corporate and institutional clients— we will continue to earn your trust by providing valuable advice to help you realize your goals.
1 Cash net income is a Non-Gaap financial measure. Cash net income excludes the goodwill impairment charge and the after tax impact of amortization of other intangibles. See our Q4 2009 Earnings Release for more information including reconciliation.
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