Address to Shareholders

Gordon Nixon
President & Chief Executive Officer
Royal Bank of Canada
137th Annual Meeting of Royal Bank of Canada

March 3, 2006
Toronto, Ontario

Good morning ladies and gentlemen, and welcome to your Annual Meeting. It is a privilege for me to report on our 2005 performance as well as our plans for 2006 and beyond.

I'd like to begin by telling you how proud I am of what we have achieved over the past year in transforming our company and advancing our corporate vision of "Always earning the right to be our clients' first choice."

This transformation began in 2004, a year in which we fell short of some financial objectives despite record performances from four of our five businesses. In order to improve our performance, two issues in particular had to be addressed. The first involved the operations of our U.S. banking business, and I will address our progress on this front later. The second issue involved the amount of bureaucracy, process and territorial issues that were getting in the way of what our employees do best — serving clients.

The impact of these issues was that revenue growth was slowing while our cost base was not and, therefore, our operating leverage was not where we wanted it to be. As an organization we had to re-invigorate and sharpen our focus on providing the highest quality products and service to our customers if we were to maintain the strong returns our shareholders have come to expect. We acknowledged that to build on our strengths we had to better align all parts of the organization, streamline processes, reduce bureaucracy and find new ways to grow.

As a result, we made significant management, cultural and structural changes across RBC, and launched the "Client First Initiative." The most critical elements of "Client First" include a broad series of revenue, expense management, and client service initiatives.

At the beginning of 2005 we re-organized our five business segments into three to better align our products and services around the customer. In addition, we centralized all the activities supporting these businesses, such as finance, treasury, audit and law, into a single global functions group, and we consolidated our technology and operations capabilities at the enterprise level.

By streamlining our processes, we have been able to eliminate approximately 2,000 positions and reinvest in our front-line capacity where we have added resources and expanded our distribution channels. We have enhanced our product offerings, divested non-strategic operations, and made significant changes to our senior management. And we have become more focused on delivering better solutions and quality service to our clients.

All of these initiatives contributed to RBC's strong financial performance last year.

In fiscal 2005, our employees delivered record net income of nearly 3.4 billion dollars, an increase of 21 per cent from the previous year. This solid earnings growth reflects the strong performance turned in by each of our three business segments.

In RBC Canadian Personal and Business, net income was up 261 million dollars or 13 per cent, due to strong revenue growth in all business lines. In RBC U.S. and International Personal and Business, net income was up 176 million dollars or 78 per cent, reflecting strong earnings growth in our banking and wealth management operations. Reported earnings in RBC Capital Markets were down; but if we exclude the after-tax charge of 326 million dollars established as a reserve for our Enron litigation — which was unrelated to last year's activities — net income would have exceeded 1 billion dollars for the first time, a substantial increase over a year ago.

In summary, each of our business segments had strong underlying performance in 2005 and made solid contributions to net income. We generated strong revenue growth, delivered good expense control and benefited from the diversity of our businesses. As a matter of interest, excluding the aforementioned reserve, we generated close to 1 billion dollars of net income after tax from our continuing operations outside of Canada last year, roughly split between the U.S. and international operations. And finally, we met or exceeded most of our performance objectives, which Barb Stymiest, our Chief Operating Officer, will address following my remarks.

In terms of shareholder value, our common share price increased by 31 per cent and we raised dividends three times in 2005, resulting in a total shareholder return in excess of 35 per cent. As this slide shows, over the past 5 and 10 years, our returns have significantly outperformed the top U.S. and international banks.

So as shareholders, you have done well; but that is history, and our responsibility as management relates to future performance.

So, I'd now like to spend a few minutes talking about the strategies and goals we have in place to capitalize on the solid momentum we have created over the past year.

In 2006, we plan to build on our three strategic goals established last year.

With respect to our first strategic goal of leadership in Canada, we strengthened our positions and increased our market shares in most personal and business products during 2005. We also had a strong year in our Capital Markets business, where we earned the "Dealmaker of the Year" title from the Financial Post, and the Canadian Debt and Equity House of the Year award from Euromoney's Awards of Excellence.

In terms of our second strategic goal of building on our strengths in the United States, we divested two non-strategic assets in Liberty Insurance Services and RBC Mortgage Company, to focus on our core businesses of banking, wealth management and capital markets. As I said earlier, we experienced operational issues and disappointing earnings at RBC Centura in 2004. A significant part of that was in the mortgage business that we exited, and we are now more focused on high-growth client segments such as businesses, business owners, professionals and commercial clients. This has resulted in strong growth of both consumer and commercial loans and deposits, and has contributed to a significant improvement in RBC Centura's financial performance.

On the brokerage front, RBC Dain Rauscher grew its fee-based assets by 24 per cent, and in partnership with Global Private Banking, introduced the RBC Premier Line of Credit to meet the complex needs of its high net worth clients. By fiscal year-end, we had approved over 470 million dollars in credit lines with this product.

At RBC Capital Markets, we made considerable progress in building a mid-market client base in the U.S., particularly in energy and real estate. We were co-lead manager and joint bookrunner for the largest equity financing of any U.S. independent oil company, and ranked 6th in senior managed transactions in the U.S. municipal league tables.

With respect to our third strategic goal of being a premier provider of selected global financial services, we achieved a number of significant milestones. We merged the fixed-income business of Dain Rauscher with that of RBC Capital Markets, which raised our visibility among clients as a bank with significant global fixed income capabilities. We also announced a joint venture of our custody business with Dexia Bank International to form RBC Dexia Investor Services. This transaction closed in January of this year, and the combined company ranks among the world's top 10 global custodians.

In Global Private Banking, we opened representative offices in Brazil, California and Texas, and acquired Abacus Financial Services in the Channel Islands. This acquisition increased assets under administration in Global Private Banking by 48 billion dollars. The combination also brought together two organizations with a strong focus on customer service, with Abacus and RBC ranking first and second in a recent Euromoney survey of the best providers of trust services in the United Kingdom.

In addition, a few days ago we opened our Beijing branch where we can now provide a wider range of banking activities, including correspondent banking and trade finance. We can also help Chinese citizens immigrating to Canada arrange their personal financial affairs before they get here. This branch is a good example of how we are collaborating across the enterprise to better meet the needs of our clients.

Going forward, we have established a number of strategic priorities to underpin our enterprise goals and help us improve client loyalty. And we have identified a number of revenue, expense and service initiatives to support them.

In our Canadian Personal and Business segment, we have set three priorities:

  • better optimize our distribution network,
  • continue to simplify our processes and structures; and,
  • focus on areas that offer above-average growth potential.

We currently serve more than 13 million clients in Canada through a network of branches, call centres, electronic channels, our own sales forces and third-party agents. We are managing this network with a view to maintaining our leadership position while maximizing the productivity of each channel and continually improving the client experience. To accomplish this goal, we have expanded our relationship management sales force, opened new insurance and bank branches and augmented our online sales and service capability. We have also put more emphasis locally on client loyalty and breadth of relationship with RBC, and have removed a layer of sales management to bring senior leaders closer to clients.

In order to make it easier for clients to do business with us, we have a number of new initiatives in place and in the pipeline. For example, we have streamlined applications for business account opening, introduced an option so that clients can select electronic versions of their statements, enhanced our travel insurance options for seniors, and improved our credit card program for businesses.

In the high-growth area of wealth management, we are building on the strong performance of RBC Dominion Securities as well as RBC Asset Management, which has led the mutual fund industry in net sales of long-term funds for nine consecutive quarters.

In our U.S. and International businesses, we have three priorities for 2006:

  • focus on businesses, business owners and professionals to build a leading bank position in the U.S. Southeast;
  • enhance our market position in the Caribbean; and,
  • deliver a broad range of integrated advisory and balance sheet solutions for our wealth management clients.

At RBC Centura, we are growing our business by developing value-added products for our target client segments such as our new streamlined suite of personal and business accounts. In the Caribbean, we continue to grow organically by deepening relationships with existing clients, and by offering a superior full-service banking experience. At RBC Dain Rauscher, we are developing enhanced wealth management solutions for our clients, and building a stronger network of financial consultants through our retention and recruitment efforts. And in Global Private Banking, we are deepening our relationships with clients by offering a broader range of products and services.

In RBC Capital Markets, we have four priorities for 2006:

  • advance our leadership in Canada;
  • achieve sustainable leadership in the U.S. mid-market;
  • become a leading trader and manufacturer of converging asset classes; and,
  • continue to build a strong, global fixed income capability.

With these priorities in mind, we are building on several strengths in our capital markets business, including global debt markets, foreign exchange, and our leading investment banking capabilities in technology, energy, and mining and metals, to name a few. In addition, we continue to expand our global platform through the development of new capabilities such as the recently established U.S. treasury trading team in New York, and a new base metals team in London. The latter further strengthens our metals and mining franchise, where we achieved a global top ranking for mergers and acquisitions in the gold mining sector last year.

RBC is a large and complex organization with numerous businesses operating in more than 30 countries. Each of our businesses must invest and grow at a rate exceeding their industry average if we are to achieve top-tier performance collectively. Every member of our management team has taken on senior accountability for planning and executing the strategies to ensure we meet the aggressive targets that each business has established.

We take this accountability seriously, and have developed a robust and comprehensive performance management system to track and monitor our progress. This system provides us with a holistic view of RBC's activities, and with a clear line of sight into our future performance.

I am confident that all of our employees have a clear focus on our strategy in 2006, which is supported by the fact that we are off to a pretty good start. While Barb Stymiest will provide a detailed review of our first quarter results that were released earlier this morning, I am pleased to report that we announced record earnings for the first quarter with net income from continuing operations of 1.17 billion dollars, up 20 per cent from a year ago. In addition we announced a dividend increase of 8 cents or 12.5 per cent, and a stock split by way of stock dividends.

Annual meetings tend to be a time for CEOs to celebrate past achievements or justify past performance. Believe me, I would rather do the former. But as we celebrate a good year, I must also acknowledge the challenges that lie ahead and the fact that we can and must do better.

As you know, we operate in an intensively competitive business in which Canadian banks "duke it out" daily with each other, as well as foreign banks, credit unions, mutual fund companies, insurance companies and many others. It's this daily battle for customers and market share that has made Canada one of the most competitive, efficient and low-cost banking markets in the world. This fact has been supported by several international studies, but is not, particularly well understood by most Canadians.

The success of our financial system has been good for our country's economic development. As things stand, our industry makes the largest contribution to Canada's gross domestic product. The six large banks alone employ approximately 250,000 people - more than half of whom work right here in Ontario. Together, we invest in research and development, spending more than 4 billion dollars on technology annually. We pay approximately 8 billion dollars in taxes each year, which does not include the many billions paid by our employees in personal income tax. We spend 11 billion dollars a year to purchase local goods and services. And we help to make Canada's economy more productive at a time when a nation's success in global markets is measured by how cost effectively it can compete.

But our success in large part has come from our ability to adapt to shifts in the marketplace and to the changing demands of our customers. In the past, timely regulatory changes have enabled us to meet the evolving needs of our clients for services like mortgages, mutual funds, brokerage and investment banking, all products that we were prohibited from selling just a few decades ago. So it is important that regulations continue to evolve and change for the benefit of all Canadians. I'd like to comment on one of those areas of potential change, which is insurance.

Canada is the only developed country in the world that prohibits consumers and small business owners from buying insurance products, or even getting information about insurance from their bank. The absurdity of this is highlighted by the fact that stores like Loblaws and Costco can provide this financial service, but banks that are in the business of providing financial advice, cannot. This simply does not make any sense to us, nor to our customers, who would benefit from the increased competition, greater access, broader choice and better pricing that bank distribution of insurance would provide.

While bank branches are prohibited from selling insurance, similar restrictions on bank products do not apply to the insurance industry. For example, Manulife, which is now larger than five of the six big banks, can sell mortgages and savings accounts to their clients. The network of insurance brokers that owns Alberta-based Bank West can conveniently offer their clients a full range of financial products including insurance, investments and banking. And credit unions in Quebec, which are large and direct competitors of banks, have been able to sell insurance since 1987.

Greater competition for insurance leads to better pricing and more availability, particularly for low-income consumers. For example, in Quebec where credit unions can sell insurance through their branch network, a greater proportion of households with incomes under 30 thousand dollars have life insurance than anywhere else in the country. This is because the high cost of selling insurance through traditional insurance channels such as agents and brokers means low-income consumers often get ignored.

History has also shown that when new competitors enter a market, they actually increase the size of the market for all competitors. For example, when banks began selling mutual funds, access went up, fees went down, and the size of the market increased significantly. Bank entry into the mortgage market also led to greater availability of mortgages across the country as well as more competitive rates. And, in other countries that have opened their insurance markets, not only have consumers benefited, but market expansion has meant that good insurance brokers have thrived — as they do, incidentally, in the Province of Quebec.

Ironically, one of the excuses used by the insurance industry in arguing against allowing banks to compete for insurance business is their concerns about information privacy and tied selling. Yet, the banks are the only financial providers in Canada that are governed by a consistent set of strong, national regulations on both these issues.

There are also a number of important technical amendments that need to be addressed in this year's review of the Bank Act, such as streamlining rules for foreign banks; making changes to the bank holding company structure; and updating regulations governing electronic cheque imaging. But in my view, in a world where financial products are rapidly converging, insurance is a critical issue for those of us in the business of providing financial services, and for those who consume them.

In a globally competitive business like financial services, these types of regulatory and legislative advances are important to the future health of our Canadian industry, and to the contribution we can make to the prosperity of our nation. Yes, banks must do their part by investing in new technologies, more innovative products, better service, and most importantly, people. But governments must also ensure the right economic conditions and industry regulations are in place for growth. Government should support and defend its key industries through good policies, rather than what sometimes makes for good politics.

This point is particularly relevant right now as we expect the Government of Canada will soon be issuing a White Paper on its plans for renewal of the Bank Act - a process that occurs just once every five years. In a world where new technologies and competitors can dramatically change an industry's business model in just a few months, it is important that banks and other financial service providers have the flexibility to compete and deliver innovation to customers.

I would like to conclude with a comment on the ultimate performance driver, client loyalty, which brings us back to our corporate vision of "Always earning the right to be our clients' first choice."

We believe we can grow our business by focusing everything we do around our clients and by helping them succeed. We want to be their first choice for financial services, and we hope our clients are noticing a positive difference in the way we are trying to earn their business.

This "Client First" mission starts with our employees, whose commitment is key to earning the loyalty of our clients. To support that commitment, we are creating a more collaborative, transparent and accountable culture where everyone, no matter where they work or what they do, feel they can create a superior client experience. And we are re-engineering our processes and approach so that employees have the tools to do a better job for their clients.

The behaviour that supports this vision is underpinned by our core values of service, teamwork, responsibility, diversity and integrity. And it is supported by a brand that is trusted by Canadians, and has been rated as the most valuable in the country for the past two years.

We believe that corporate responsibility and good governance are also important to our vision. We are proud of our record, but we understand that no organization - including RBC — is perfect. We have had issues and unfortunately always will; however, we will be judged not only by the mistakes we make, but also by how we respond in dealing with them.

We have dedicated a great deal of management time promoting a culture of integrity. At RBC, it is 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 the needs of our clients, as well as market and regulatory developments.

A company's reputation is paramount and we are pleased that our programs and initiatives continued to earn recognition during 2005.

Once again, Canadian Business magazine and the Globe and Mail newspaper ranked our governance among the best in Canada.

And for the fourth year in a row, RBC was named Canada's Most Respected Corporation in a survey conducted by Ipsos Reid. The same survey ranked RBC first in 6 of 9 sub-categories, including human resources, corporate governance, long-term investment value and social responsibility. We were also ranked highest among all Canadian financial institutions for customer service, an indication that our Client First Initiative is beginning to take root.

The various accomplishments I have mentioned this morning are a reflection of an organization made up of outstanding people. That our people are a competitive advantage may be a well-worn expression, but it is also an important acknowledgement of the driving force behind our corporate vision. If I have learned one thing in my five years as CEO, it is that our most valuable assets enter and leave our buildings every day.

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 2005, and for their ongoing passion for our organization and our clients. I would also like to thank our board of directors for their support and guidance and my management team for their commitment as well as their individual and collective achievements. And I would like to thank our 14 million clients for giving us their business and placing their trust in our people.

Ladies and gentlemen, our 70,000 employees around the world are working hard to transform RBC into an even more client-focused organization. We have aligned our goals and initiatives with our corporate vision. We are developing new products and services that better meet our clients' needs. We are enhancing our processes so that it's easier for clients to do business with us. And we are empowering our people to do more for their clients.

I have no doubt that we have the commitment and the will to succeed.

Thank you.