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MorganMorgan StanleyStanley FixedFixed IncomeIncome 20032003 BanksBanks andand InsuranceInsurance CapitalCapital ConferenceConference
Nabanita Merchant Senior Vice President Investor Relations RBC Financial Group
London January 29, 2003
[Slide 1.] Good afternoon everyone. At the advice of our legal counsel, our first slide is a safe harbor statement.
I’d like to take this opportunity to talk to you about the performance, strategy and future prospects of RBC Financial Group, Canada’s largest corporation and a growing North American financial services company. I will address those in the context of our four key priorities and three key goals. But before doing so, I’d like to provide a little background about our company and the Canadian economy.
[Slide 2.] We are the largest company in Canada by market capitalization and the largest bank by total assets. We have #1 or #2 market positions in virtually all of our Canadian businesses and are committed to retaining our strong positions, particularly in retail businesses, which account for a sizeable share of our total earnings. We have a well diversified business mix and strong debt ratings.
[Slide 3.] Our business diversification is reflected in this pie chart. You’ll note that more than half of our earnings are from personal and commercial banking and approximately one-quarter of our earnings are from asset quality-immune businesses – wealth management, insurance and transaction processing. Wealth management’s results have suffered due to weak capital markets but, as markets recover, its contribution should rise.
[Slide 4.] Our loan portfolio is well diversified across industry sectors, which reduces our credit risk.
[Slide 5.] It is in recognition of our strong franchise, prudent risk management and consistent performance that rating agencies have accorded us high debt ratings. Our credit ratings are a competitive advantage, which we do not want to compromise.
[Slide6.] Turning now to the Canadian economy – it continues to out-pace the U.S. economy, a trend that has run virtually uninterrupted for the last four years. We expect the pattern of out-performance to continue in 2003 with Canadian growth expected to come in at 3.7% compared to a more moderate 3.0% for the U.S. The relative out- performance of the Canadian economy can be traced to a number of factors, some structural and some cyclical. The structural forces reflect earlier restructuring initiatives including broadening trade agreements, a move to low inflation and fiscal restraint. Cyclical support for the Canadian economy has come in the form of higher energy prices, a more moderate investment boom/bust cycle and a weak Canadian dollar. These forces, in combination with low interest rates and buoyant employment, have contributed to a release of pent-up demand in both the auto and housing markets. The firm growth has put the Bank of Canada on a tightening track as they adjust interest rates to more sustainable levels.
[Slide 7.] Firmer commodity prices, strong growth, solid fiscal position, current account surplus and interest rate premiums have helped the Canadian dollar turn the corner from all-time lows in 2002. All these forces should remain supportive for the currency in the year ahead, particularly as risk aversion diminishes, allowing further appreciation of the currency by year-end.
[Slide 8.] RBC Financial Group’s four key strategic priorities are strong fundamentals (that is, financial performance), international expansion (largely in the United States), growth of high-return and high-P/E multiple businesses and cross-platform leverage (meaning, leveraging the capabilities of our various platforms to realize cost and revenue synergies).
[Slide 9.] We’ve been consistently meeting the strong fundamentals priority. Our core ROE continues to surpass the average of our North American peer group and with our cross-platform leverage initiatives gaining traction the potential exists to further enhance our relative earnings performance going forward.
[Slide 10.] We’ve produced the leading EPS growth in the last year among our Canadian banking peers by generating strong revenue growth as a result of our U.S. expansion, continuing to control costs and recording reasonable asset quality.
[Slide 11.] And our earnings have been very stable relative to other major Canadian and U.S. banks, as you can see on this slide.
[Slide 12.] Part of our success stems from our disciplined approach to risk management. Since the end of 1999, we’ve recorded the lowest increase in non-accrual loans among our Canadian peers and our non-accrual loans ratio is also the lowest. This improvement partially reflects the fact that, since 1998, we have reduced our corporate loans outstanding by approximately 35%.
[Slide 13.] And the non-accrual loan ratio isn’t much above the 1998 level.
[Slide 14.] Our conservative risk management has also resulted in a provision for credit losses ratio that was the lowest among the Canadian banks in 2002 and also relatively consistent over the past three years, despite the difficult credit environment facing our industry.
[Slide 15.] We are maintaining a focus on cost management and, last year, reduced operating expenses (excluding U.S. acquisitions) by 5%. Since 1999, when we embarked on a serious cost-reduction effort, we have lowered the core efficiency ratio of RBC Banking by 670 basis points, bringing it down to 59% last year. We are targeting a ratio in the low 50’s in three years time. We intend to realize cost savings through technology initiatives such as straight through processing while at the same time continuing to leverage economies of scale through centralized environments for managing our sourcing and spending. We’ve developed a scaleable model that allows us to make additional investments in our sales resources with savings garnered through streamlining of our back office and service delivery processes. Over the past three years, nearly half of RBC Banking’s cost base was directed to customer and sales activities and we expect to increase that number. This should enhance our customer service, customer satisfaction and top-line revenue growth.
[Slide 16.] We have also been successful at growing our top-line - achieving a compound annual growth rate in revenues of over 11% between 1997 and 2002.
[Slide 17.] And in the past five years our capital ratios have increased substantially.
[Slide 18.] Our strong financial performance has resulted in solid internal capital generation – $1.8 billion in 2002 after paying out over $1 billion in common share dividends and almost $100 million in preferred share dividends. We repurchased $764 million of common shares last year and committed to acquisitions totaling approximately $900 million. In deciding how to deploy our capital, we balance our need for strong capital ratios and high credit ratings against our desires to grow the business through acquisitions and investment in our existing businesses, and to enhance returns through share repurchases and higher dividends. In 2003, we expect to continue to deploy our internally generated capital through a combination of share repurchases, dividends, capital investment and targeted acquisitions.
[Slide 19.] Our shareholders have also benefited from our strong financial performance through a 33% increase in common share dividends over the past 2 years. We have a long history of uninterrupted and growing dividends that we expect to continue.
[Slide 20.] In 2002, we met almost all of our objectives despite ongoing concerns about global economic growth, financial market uncertainty and geopolitical tensions. While adjusting our businesses to perform well in the short term, we also continued to expand our capabilities and take action to position ourselves for sustained long-term growth and consistent performance. We remain highly committed to our priority of strong fundamentals and are very focused on managing the balance between long-term growth and short-term returns.
[Slide 21.] In terms of our 2003 financial objectives, we have increased our EPS growth target to 10-15% from 5-10% and reduced our revenue growth target to a more realistic 5-8% from 7-10% last year, when we had benefited from a full year of revenues at RBC Centura, which was acquired seven months into 2001. These changes reflect our expectation that the capital markets will pick up slightly in 2003 and cost management efforts will allow expenses to grow at a lower rate than revenues.
[Slide 22.] We have also modified some of our medium-term goals. We have raised our dividend payout goal to 35-45% from 30-40%, underscoring our commitment to rewarding our shareholders. Our payout ratio was 37% in 2002 and we raised our common share dividends by 10 per cent during the year. We have also increased our Tier 1 capital ratio goal to 8-8.5% from 8% to make our capital ratios more comparable to those of other well-capitalized North American banks. Finally, we have raised our specific provision for credit losses ratio goal to .35-.45% from .30-.40% to reflect the uncertain economic environment, the growth of our Canadian and U.S. consumer loan book, which has loss ratios above the earlier goal range, and the expected growth of our small business and commercial loan portfolios.
[Slide 23.] Turning now to our international expansion priority, we’ve put together a diversified platform in the U.S. with a focus on retail businesses. Our investment emphasis has been in Personal & Commercial Banking and Wealth Management – businesses we know well and in which, over time, we believe we will become recognized in the U.S. as being best in class. RBC Centura forms the base from which we are building our personal and commercial banking business. The focus of our growth efforts will likely be a combination of targeted acquisitions and branch openings in the Southeast U.S. Eagle Bancshares, acquired last July, and Admiralty Bancorp (which should close shortly), though both relatively small acquisitions, give us important footprints in two of America’s highest growth regions – Atlanta and Florida, respectively. RBC Dain Rauscher forms the foundation on which we are building our wealth management business. Further wealth management acquisitions will likely be small additions to our existing business base.
[Slide 24.] Through a common branding, which uses the prefix “RBC” for each U.S. company, customers will recognize that these companies are part of the RBC group. At the same time, by retaining the Centura and Dain Rauscher names, we are capitalizing on the strong brand equity and franchise value built over time by these two firms in their local markets.
[Slide 25.] These acquisitions have resulted in an increase in the proportion of our U.S. revenues. In 2002, U.S. revenues were 28% of the total, up from 7% in 2000. In that time, the number of U.S. clients has risen to 2.3 million from around 700,000. We expect U.S. revenues to continue to rise and over time a greater proportion to fall to our bottom line as the costs of acquisitions decline and we continue to enhance revenues and improve operational efficiency.
[Slide 26.] Our third priority is the growth of high-return and high-P/E multiple businesses. While our primary focus is on Personal & Commercial Banking and Wealth Management, all business platforms have selected segments for priority growth. However, we will invest only in those areas of our core platforms where we see profitable growth opportunities and reasonable returns on capital. We have also shrunk businesses, such as corporate lending, that utilize a disproportionate amount of capital relative to return such as corporate lending.
[Slide 27.] And finally, we added cross-platform leverage as a strategic priority in 2002 in recognition of the fact that at an integrated financial services company such as RBC Financial Group, the whole has the potential to be much greater than the sum of the parts. Cross-platform leverage is about working across our businesses and functions to grow revenues by sharing best practices and offering our broad array of products and services in an integrated fashion to our clients. It’s also about cutting costs by eliminating duplication that arises when businesses and functions operate autonomously. We are well positioned for cross-selling with our broadly diversified business mix, strong market positions in most businesses in Canada, sizeable customer base as well as strengths in customer relationship management and a philosophy of deepening customer relationships.
[Slide 28.] We have generated strong cross-selling results in Canada and plan, over time, to pick up momentum on that front in the U.S. as well. We generated almost $17 billion of new business from referrals within the group between 1997 and 2002. That’s $1.82 of new business for every dollar of business referred or cross-sold. We recently rolled out a new and much more robust referral program – RBC Referrals. It includes more employee incentives and information for making referrals. We expect it will result in improved client retention, revenue growth and profitability.
[Slide 29.] Turning now to our three key goals. Our first goal is to be recognized as the undisputed lead provider of integrated financial services in Canada. In Canada, we have #1 or #2 market positions in virtually all of our businesses and are committed to retaining our strong positions, particularly in retail businesses, which account for a sizeable share of our total earnings. We are re-doubling our efforts on that front – increasing the number of salespeople in the branches, improving customer service through better problem resolution and other initiatives and investing in our network.
[Slide 30.] We intend to retain our leadership positions in Canada by continuing to offer our products and services in an integrated manner, differentiating ourselves from our competitors. By increasing the degree of integration of our product and service offering, we can better meet the needs of our customers, improve customer satisfaction and as a result be rewarded with more of their business.
[Slide 31.] Our strong brand name, strong customer relationship management and customer segmentation capabilities and proven expertise in cost reduction initiatives and large project management are some of the factors behind our success.
[Slide 32.] Now turning to our second key goal - to be recognized as a best in class provider of select financial services in the United States. When we embarked on our U.S. expansion strategy, we did so in a very deliberate manner. We adopted a platform extension strategy, focusing on businesses where we could become recognized in the U.S. as a best in class provider, namely, personal and commercial banking and wealth management. These are businesses in which we have considerable exportable know- how and in which we feel we possess a competitive advantage. Significant platform investments were made in 2000 and 2001, with smaller add-on acquisitions in 2002. We have worked hard at integrating our recent acquisitions, sharing best practices within and between platforms – all geared to becoming recognized as a best in class provider over time.
[Slide 33.] Our recent U.S. acquisitions have started to pay off. Net income was $232 million in 2002, up from a loss of $23 million in 2001.
[Slide 34.] This improvement reflects the acquisition of Centura Banks in June 2001, better performance at RBC Dain Rauscher and the fact that a lot of the upfront acquisition costs are absorbed in the earlier years of an acquisition. While we are encouraged by the results to date, we are striving to further improve operating results.
[Slide 35.] With its approximately 800,000 personal and commercial clients, 246 retail and business branches in 5 Southeastern states and strong national mortgage and builder finance businesses, RBC Centura provides a solid foundation for growth in retail and business banking in the fast-growing Southeast U.S. and niche business lines across the U.S.
[Slide 36.] From a North-South perspective (that is, working between Canada and the U.S.), RBC Centura has leveraged our Canadian expertise in sales practices, performance management as well as segment and product management. It realigned its reporting structure along Personal & Small Business Banking and Commercial Banking lines and its retail branch model to be consistent with the Canadian structure. Each business has dedicated sales management committed to rapidly evolving sales routines to grow revenues and enhance efficiency. And RBC Centura has also increased the level of specialization of its sales force with the introduction of new positions such as Account Manager Investments in the Personal & Small Business segment and industry segment specialists in the Commercial segment. Early gains are accruing as a result of the adoption of a more focused approach. In the Personal & Small Business Banking segment, consumer loans were up 7% and scored small business loans were up 18% for the one-year period ended October 31, 2002. RBC Centura’s Commercial Markets team acquired 240 new client relationships in 2002, a 31% increase over 2001 and also grew commercial loans by 21% in what was a tough environment.
RBC Centura has also been collaborating with its Canadian colleagues to build its CRM information infrastructure and sales automation tools to accelerate revenue growth. The fact that it will take less than 2 years to build the CRM information infrastructure at RBC Centura when it took approximately 5 years to develop RBC Royal Bank’s CRM information infrastructure underscores the benefit of sharing best practices. In terms of new products, RBC Centura recently introduced two new wrap account products and a rising rate CD, just to name a few. Sales of the Rising Rate CD, which was introduced in July 2002, hit $160 million as of October 31, 2002, far surpassing the initial sales goal of $60 million. What’s important is that it has resulted in over 8,200 new account openings bringing in over $40 million of new money.
[Slide 37.] In addition to revenue-oriented initiatives, cost benefits are also beginning to accrue from the centralization of certain aspects of operations and information technology, sales and functional units. For example, RBC Centura in-bound calls and branch service support is being handled by RBC Royal Bank’s call center in Moncton, New Brunswick. This change is not only delivering cost savings but it has also freed up time at the RBC Centura call center to make out-bound revenue generating calls.
[Slide 38.] On an East-West basis (that is, within the U.S.), RBC Centura has also been working hard with its sister companies in the U.S. to increase sales revenues by cross-selling products and services. For example, RBC Centura has been working with RBC Liberty Insurance to offer insurance solutions to its clients through the recently- introduced life specialist program. Under this program, a mobile RBC Liberty Insurance specialist is assigned to approximately 5 RBC Centura branch locations from which they receive insurance leads. The results to date have been very encouraging with nearly 2,000 referrals in fiscal 2002. Another cross-selling initiative that is yielding favorable results is the sale of the RBC Mortgage adjustable rate mortgage to RBC Centura clients. Prior to partnering with RBC Mortgage, RBC Centura did not have a capability in this area. Since rolling out this product in November 2001, RBC Centura achieved new mortgage originations totaling $900 million, for the year ended October 31, 2002. RBC Centura also introduced RBC Dain Rauscher to a number of governmental entities
in the Southeast U.S., which resulted in RBC Dain Rauscher securing a considerable amount of public sector finance and investment management business. Also, Centura Securities has been transitioned to RBC Dain Rauscher, with similar plans for RBC Centura’s trust and asset management groups. These are just a few examples of cross-selling initiatives that have improved our top-line growth and improved the degree of integration of our product and service offerings.
[Slide 39.] RBC Centura intends to continue to expand its footprint in the Southeast U.S. through a combination of branch openings and selective acquisitions. Additional growth will also come from the expansion of niche business lines such as RBC Builder Finance and RBC Mortgage.
[Slide 40.] Our acquisition of RBC Dain Rauscher provided us with a wealth management foundation on which to build. Following the Tucker Anthony Sutro acquisition, RBC Dain Rauscher has 2,000 financial consultants operating out of 142 branch offices in 39 states and CDN$133 billion of assets under administration. RBC Dain ranks as the 9th largest full-service brokerage firm in the U.S. based on the number of financial consultants.
[Slide 41.] The third quarter of 2002 represented the turning point for RBC Dain Rauscher, which posted a profit of $10 million, reflecting cost-take outs from the Tucker Anthony Sutro integration and good performance in its fixed income business. The acquisition and integration of Tucker Anthony Sutro has been very successful.
[Slide 42.] Retention compensation costs are expected to decline significantly in 2003, and register further reductions over the coming years, which should further enhance RBC Dain Rauscher’s performance.
[Slide 43.] Similar to RBC Centura, RBC Dain Rauscher is working hard with its Canadian counterpart to enhance operating performance. RBC Dominion Securities, as many of you are aware, was an early adopter among the Canadian bank-owned investment dealers of the more holistic advisory approach to wealth management in place of the traditional product-oriented transaction approach, contributing to their broadening and deepening client relationships and increasing fee-based revenues. RBC Dain Rauscher has adopted this approach and is showing early gains. To date, approximately 750 RBC Dain Rauscher Financial Consultants have completed the new wealth management business development course. The top 35% who took this course last year saw their business increase on average 29%, while those who haven’t yet taken the course saw their revenues decline on average by 16%. That is a significant gain.
RBC Dain Rauscher also expects to increase its client base and assets under administration through expansion of the existing branch office network, recruitment of experienced Financial Consultants and small opportunistic acquisitions of existing brokerage operations or assets.
[Slide 44.] Our near-term priority for the U.S. continues to be on meeting our operating targets and adopting best practices to enhance revenues, efficiency and profitability. Additional acquisitions in the near term will likely be focused on Personal & Commercial banking, largely in the Southeast U.S. We will only make acquisitions that make sense from strategic, cultural and financial perspectives.
[Slide 45.] Our third goal is to be recognized as a premier provider of specialized global financial services. Outside North America, we will focus largely on those businesses where we are strong globally, have a competitive advantage and can generate attractive returns. Global custody, global private banking and the foreign exchange business are examples of global businesses that meet our criteria.
[Slide 46.] Our custody business is the largest in Canada with a 46% market share and the 12th largest globally with assets under administration of C$1.4 trillion. The business is highly rated by our customers and is very profitable. In foreign exchange, we are ranked among the top 15 Global FX banks by revenue and #1 in Canada. As for Global Private Banking, it is a fragmented business that is profitable all the same. We have private banking operations in more than 100 countries. We have made a number of niche acquisitions over the years – the most recent of which was Barclays Bank PLC’s private banking business in the Americas. We intend to continue to grow this business through additional niche acquisitions, by establishing alliances with other global private banks and through an open architecture approach to money management.
[Slide 47.] I would like to conclude by saying that our management team is united in its efforts to grow the company in a disciplined manner, maintain a diversified business base, continue our strong risk management focus, watch costs, judiciously manage capital and maintain leadership in our various businesses by winning more of our customers’ business. We also want to continue to perform in the top quartile of North American financial companies so that we can further generate superior returns and continue to reward our shareholders.
Thank you for your attention, and I’ll now take your questions.
Caution regarding forward-looking statements
From time to time, we make written and oral forward-looking statements, included in this presentation, in other filings with Canadian regulators or the U.S. Securities and Exchange Commission, in reports to shareholders and in other communications, which are made pursuant to the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements with respect to our objectives for 2003, and the medium and long terms, and strategies to achieve those objectives, as well as statements with respect to our beliefs, plans, expectations, anticipations, estimates and intentions. The words “may,” “could,” “should,” “would,” “suspect,” “outlook,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” and words and expressions of similar import are intended to identify forward-looking statements. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, the strength of the Canadian economy in general and the strength of the local economies within Canada in which we conduct operations; the strength of the United States economy and the economies of other nations in which we conduct significant operations; the effects of changes in monetary and fiscal policy, including changes in interest rate policies of the Bank of Canada and the Board of Governors of the Federal Reserve System in the United States; changes in trade policy; the effects of competition in the markets in which we operate; inflation; capital market and currency market fluctuations; the timely development and introduction of new products and services in receptive markets; the impact of changes in the laws and regulations regulating financial services (including banking, insurance and securities); changes in tax laws; technological changes; our ability to complete strategic acquisitions and to integrate acquisitions; unexpected judicial or regulatory proceedings; unexpected changes in consumer spending and saving habits; the possible impact on our businesses of international conflicts and other developments including those relating to the war on terrorism; and our anticipation of and success in managing the risks implicated by the foregoing. We caution that the foregoing list of important factors is not exhaustive. When relying on forward-looking statements to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on our behalf. 1
Company overview
Largest Canadian company Î market capitalization of C$38.5 billion1 Î total assets of C$377 billion2 #1 or #2 positions in most Canadian businesses Diversified business mix Strong credit ratings
1 as at January 22, 2003 2 as at October 31, 2002
2 Cdn GAAP A diversified business mix
Net income contribution Wealth (FY 2002) Management 12% Insurance 7% Transaction Processing 6%
Personal & Commercial Banking Corporate & 53% Investment Banking 15%
Other 7% 3 U.S. GAAP
Priority #1 – Strong fundamentals Well-diversified loan portfolio1
Diversified exposure across industry sectors reduces credit risk Commercial real estate Energy 4% 4%
Other consumer Consumer goods loans 2% 21% Small Agriculture business 2% 5% Bus & Industrial products Gov' t 2% Residential 39% Transportation and mortgage Financial environmental 41% services 2% 5% Gove r nm e nt 1% Telecommunication Other 1% Commercial mortgages 8% Media and Cable 1% 1% 1 Diversification of loan portfolio based on percentage of total loan outstandings as at October 31, 2002
4 U.S. GAAP Priority #1 – Strong fundamentals Strong senior debt ratings
Compared to 9 largest (based on market capitalization) North American bank holding companies: Moody’s S&P Citigroup Aa1 AA- Royal Bank Aa2 AA- Fifth Third (P)Aa21 AA- Bank of America Aa2 A+ Wells Fargo Aa2 A+ Wachovia Aa3 A Bank One Aa3 A US Bancorp Aa3 A JP Morgan Chase A1 A+ FleetBoston A1 A
1 prospective rating for shelf registration 5
Canadian economy expected to continue to out-perform U.S. in 2003
Canadian and U.S. real GDP % change, year-over-year 6 6 U. S. 5 Canada 5 4 4 3 3 2 2 1 1 0 0 -1 -1 97 98 99 00 01 02 03 Source: Bureau of Economic Analysis, Statistics Canada, RBC Financial Group
6 Canadian dollar expected to strengthen further
Outlook for the Canadian dollar U.S. cents 90
85
80
75
70
65
60 81 83 85 87 89 91 93 95 97 99 01 03 Source: Statistics Canada, RBC Financial Group
7
Our key strategic priorities
Strong fundamentals
International expansion
Growth of high-return & high-P/E multiple businesses
Cross-platform leverage
8 Priority #1 – Strong fundamentals Strong ROE performance relative to North American peer group Core ROE
Royal Bank Peer Group1 19.3% 18.1% 17.8% 17.9% 16.6% 16.1% 17.5% 17.4% 15.1% 15.9%
13.5% 11.8% 2 1997 1998 1999 2000 2001 2002
1 selected peer group consists of: Bank of New York, Wells Fargo, PNC Financial, Bank One, JP Morgan Chase, US Bancorp, Wachovia, Bank of America, FleetBoston, KeyCorp, Power Financial, TD Bank, CIBC, Scotiabank, Bank of Montreal 2 full year 2002 core ROE for Canadian banks and 9 months 2002 core ROE for U.S. banks 9 U.S. GAAP (where available)
Priority #1 – Strong fundamentals Leadership in EPS growth continues Reported EPS growth 1 Core EPS growth 1 23% 11% 11% 1%
-19% -15%
-66% -78%
-112% -113% TD CIBC BNS BMO RBC TD CIBC BNS BMO RBC
1 full year 2002 over full year 2001. Core EPS excludes unusual items (such as restructuring charges and gains on dispositions) and includes the impact of Argentina for all the banks 10 Cdn GAAP Priority #1 – Strong fundamentals Less earnings volatility than North American peers
1 EPS Volatility 172%
138% 133% 114%
75% 77% 65% 66%
34% 37% 29% 32% 33% 20% 15%
a p o k e k p e a C c S r g O r C s n r D n i B ri N o r o B a o n T to v R e B c a M Y I a O s o F B C h B C h m n w C y k o c A a s e C e n B a B ll n N K a t f e N a P B e W o S f rg le k U W o o F n k a n M B a . .P B J 1 standard deviation of EPS over 15 quarters ended October 31, 2002 for Canadian banks and ended September 30, 2002 for U.S. banks compared to 14 leading North American banks 11
Priority #1 – Strong fundamentals Strong credit culture
Reputed to have strong credit culture Lowest gross impaired loans (GILs) ratio and lowest growth of GILs of Big 5 Canadian banks
(C$ millions) Growth GILs/loans Q4/99 Q4/02 % $ & BAs-Q4/021 BNS $2,380 $3,987 68% $1,607 2.02% TD $ 709 $2,525 256% $1,816 1.72% BMO $1,092 $2,337 114% $1,245 1.54% CIBC $1,482 $2,275 54% $ 793 1.40% RBC $1,704 $2,288 34% $ 584 1.06%
1 gross impaired loans as a % of total gross loans and bankers’ acceptances 12 Cdn GAAP Priority #1 – Strong fundamentals Nonaccrual loans ratio1 trending back down
1.52% 1.36% 1.41% 1.27% 1.32% 1.27% 1.11% 1.00%
1998 1999 2000 2001 Q1/02 Q2/02 Q3/02 Q4/02
1 gross nonaccrual loans as a percentage of total loans 13 U.S. GAAP
Priority #1 – Strong fundamentals Lowest and consistent loan loss ratio Total provision for credit losses as a % of average loans, BAs and reverse repos
2.00% TD1 1.75%
1.50%
1.25%
1.00% CM2 3 0.75% BNS BMO 0.50% RBC 0.25%
0.00% 2000 2001 2002
1 Using estimated average annual reverse repo balances based on average of reported quarter-end balances. TD excluding reverse repos: 2002 - 2.24%; 2001 - 0.71%; 2000 - 0.39%. 2 Using estimated average annual BA balances based on average of reported quarter-end balances. CM excluding BA’s: 2002 - 0.94%; 2001 - 0.73%; 2000 - 0.79% 3 BNS including Argentina loans: 2002 - 1.05%. 14 Cdn GAAP Priority #1 – Strong fundamentals Continuing to watch costs
Operating expenses1 (ex. U.S. acquisitions) down 5% in 2002 versus flat operating revenues RBC Banking core efficiency ratio down 670 b.p. since 1999 to 59% in 2002 – targeting low 50s in 3 years C$580 million taken out of cost base in 1999- 2000 Continuing cost management focus Îtechnology and straight through processing 1 operating expenses exclude special items, costs of Stock Appreciation Rights, and certain acquisition expenses such as retention compensation 15 U.S. GAAP
Priority #1 – Strong fundamentals Acquisitions drive revenue growth
Core revenues1 (C$ millions) $15,770 .4% = 11 GR $14,239 CA 5-yr $11,987 $10,538 $9,851 $9,205
1997 1998 1999 2000 2001 2002
1 excluding one-time revenues in 1997, 1998, 1999 & 2001 16 U.S. GAAP Priority #1 – Strong fundamentals Strengthened capital ratios1
12.7 Total Capital 12.0 11.8 11.2 3-5 yr target: 11-12% 10.5 9.3 Tier 1 Capital 8.6 8.7 8.1 3-5 yr target: 8- 8.5% 7.4 Tangible 7.5 Common Equity 6.7 6.9 6.7 5.9
1998 1999 2000 2001 2002
1 capital as a percentage of total risk adjusted assets 17 Cdn GAAP
Priority #1 – Strong fundamentals Generating substantial capital internally
Internal capital generation increased to C$1.8 billion in 2002 from C$1.4 billion in 2001 Paid $764 million for common share repurchases in 2002 (bought back 14 million shares) and committed to acquisitions totalling $900 million Can repurchase an additional 10 million shares up to June 2003 Will continue to invest for long-term growth, while balancing need for short-term returns
18 U.S. GAAP Priority #1 – Strong fundamentals Dividends up 33% since Q4/00
Steady dividend increases (C$ per share) 0.40 0.38 0.38 0.36 0.36 0.36 0.33 0.33 0.30
Q4/00 Q1/01 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Q3/02 Q4/02 History of uninterrupted dividend payments Target payout goal increased to 35-45% (was 30-40%) 2002 payout ratio of 37% 19 U.S. GAAP
Priority #1 – Strong fundamentals Solid overall financial performance in 2002 2002 objectives1 2002 performance
EPS growth 5 - 10% 27% 13% excluding goodwill amortization in 2001
ROE 17 - 19% 16.6%
Revenue growth 7 - 10% 11%
Expense growth Operating expense growth Op. exp. growth of 8% < operating revenue growth vs. op. rev. growth of 11% Excl. U.S. acquisitions, op. exp. down 5% and op. rev. flat
Specific provision ratio2 0.45 - 0.55% .51% .49% net of credit derivatives
Capital management2 Maintain strong 9.3% Tier 1 capital ratio capital ratios 12.7% Total capital ratio versus medium-term goals of 8% 1 based on core results and 11-12%, respectively 2 based on Canadian GAAP financial information 20 U.S. GAAP Priority #1 – Strong fundamentals 2003 objectives
2003 objectives1 EPS growth 10 - 15% ROE 17 - 19% Revenue growth 5 – 8% Expense growth Operating expense growth < operating revenue growth Specific provision ratio2 0.45 - 0.55% Capital management2 Maintain strong capital ratios
1 based on core results 2 based on Canadian GAAP financial information 21 U.S. GAAP
Priority #1 – Strong fundamentals Aggressive 3-5 year goals
3 - 5 year goals1 EPS growth 10-15%+ ROE 20%+ Revenue growth 8 - 10% Specific provision ratio2 0.35 - 0.45% (was .30-.40%) Dividend payout ratio 35 - 45% (was 30-40%) Capital management2 Tier 1 capital 8-8.5% (was 8%) Total capital 11 – 12%
1 based on core results 2 based on Canadian GAAP financial information 22 U.S. GAAP Priority #2 – Expansion outside Canada Building sizeable U.S. platform
U.S. acquisitions since April 2000 RBC RBC RBC RBC Capital Banking Insurance Investments Markets
Centura Banks, Inc. Liberty Life Dain Rauscher Corp. US$2.2 billion Insurance & Liberty US$1.2 billion June 5, 2001 Insurance Services January 10, 2001 US$580 million Tucker Anthony Sutro Admiralty November 1, 2000 Bancorp, Inc. US$594 million approx. US$150 million Genelco assets October 31, 2001 expected close Jan. 2003 Insurance software and outsourcing Barclays’ Americas Eagle Bancshares, Inc. November 17, 2000 private banking ops. US$149 million up to US$90 million July 22, 2002 June 28, 2002
Prism Financial Corp. Business Men’s Assurance Co. Mortgage approx. US$220 million Origination expected close subject to regulatory approvals US$115 million April 19, 2000 Variable insurance Jones & Babson business (mutual fund company) 23
Priority #2 – Expansion outside Canada Branding
24 Priority #2 – Expansion outside Canada Proportion of U.S. revenues growing
2000 revenues 2002 revenues
U.S. 7%
U.S. Canadian Canadian 28% 83% 62%
Other Int’l Other 10% Int’l 10%
# of U.S. clients: .7 million # of U.S. clients: 2.3 million
25 U.S. GAAP
Priority #3 – Grow high-return or high P/E businesses Grow high-return or high-P/E businesses
Primarily focusing on personal & commercial banking and wealth management, but all business platforms have select segments for priority growth Lower performing or non-strategic business lines to be restructured or sold Building solid, highly-profitable U.S. platform a key priority
26 Priority #4 – Cross-platform leverage Cross-platform leverage
Cross-platform leverage entails working across businesses and functions to: Î grow revenues by sharing best practices and offering products and services in an integrated fashion Î cut costs by eliminating duplication RBC Financial Group ideally positioned: Î diversified business mix Î strong market positions in Canada Î sizeable customer base (12+ million) Î strengths in CRM
27
Priority #4 – Cross-platform leverage Excellent cross-selling results in Canada
RBC has demonstrated cross-sell capability in Canada Cross-selling record Î referrals resulted in new sales of over $16.8 billion between 1997 and 2002 Î $1.82 of new externally generated sales for $1 of business referred internally Enhanced referral program expected to yield better results
28 Goal #1 – Undisputed integrated leader in Canada Undisputed lead provider of integrated financial services in Canada
#1 or #2 in virtually all businesses in Canada On retail side, increasing sales people in branches, improving customer service and re-investing in our network
29
Goal #1 – Undisputed integrated leader in Canada Undisputed lead provider of integrated financial services in Canada
Committed to retaining our leadership positions in all our businesses Will achieve this goal by offering our products and services in an integrated manner to: Î differentiate us from our competitors Î better meet the needs of customers and improve customer satisfaction
30 Goal #1 – Undisputed integrated leader in Canada Some success factors
Strong brand Strong CRM and customer segmentation capabilities Proven cost reduction and project management capabilities
31
Goal #2 – Best in class in United States Best in class provider of select financial services in the U.S.
Focus on growing personal & commercial banking and wealth management Î businesses in which we have exportable know- how and experience Î businesses in which we have a competitive advantage Goal to become recognized as a best in class provider over time
32 Goal #2 – Best in class in United States Higher earnings from U.S. acquisitions1
(C$ millions)
$232
($23) 2001 2002
1 represents core net income of RBC Centura (includes RBC Mortgage and what was previously SFNB), RBC Liberty Insurance and RBC Dain Rauscher (includes Tucker Anthony Sutro) 33 U.S. GAAP
Goal #2 – Best in class in United States Strong contributions from RBC Centura
(C$ millions)
2002 2001 RBC Centura1 $206 $ 21 RBC Liberty 23 29 RBC Dain Rauscher2 3 (73)
Total U.S. acquisitions $ 232 $(23)
NOTE: 2001 core numbers included 4 months and 3 weeks of results for RBC Centura, 11 months of results for RBC Liberty Insurance and 9 months and 3 weeks of results for RBC Dain Rauscher 1 RBC Centura (acquired in Q3/01) includes RBC Mortgage and what was previously SFNB 2 Includes Tucker Anthony Sutro beginning October 31, 2001 34 U.S. GAAP Goal #2 – Best in class in United States RBC Centura provides a solid foundation for RBC Banking growth
800,000 personal and commercial clients RBC Centura Î 246* retail and business branches in five Southeastern states (North Carolina, South Carolina, Virginia, Georgia and Florida) Î strong player in one of the fastest growing banking areas in the U.S. Strong national niche business lines: Î RBC Mortgage – 215 offices in 28 states Î RBC Builder Finance – 17 offices in 13 states
*Pending close of Admiralty Bancorp transaction 35
Goal #2 – Best in class in United States North-South initiatives delivering revenue and efficiency gains
Exporting Canadian expertise to the U.S. Î sales practices, performance management, segment and product management and retail branch model Î dedicated sales management and specialized sales forces Revenue gains Showing early gains from adoption of Canadian sales approach Î consumer loans up 7% Î scored small business loans up 18% Î commercial loans up 21% (240 new client relationships) Success of new products - Rising Rate CD example Î surpassed initial sales goal by $100 million in 4 months Î 8,200+ new account openings and $40 million of new money 36 Goal #2 – Best in class in United States North-South initiatives delivering revenue and efficiency gains
Efficiency gains Cost and efficiency gains accruing from the centralization of certain aspects of RBC Centura operations and information technology, sales and functional units with RBC Royal Bank Î RBC Centura using Canadian call centres for in-bound calls and branch service support
37
Goal #2 – Best in class in United States East-West initiatives strengthen revenue synergies
Examples of initiatives •recently-introduced life specialist program has resulted in nearly 2,000 referrals in 2002
•offering adjustable rate mortgage to RBC Centura clients •RBC Centura achieved new mortgage originations totaling $900 million in 2002
•RBC Dain Rauscher introduced to governmental entities in Southeast U.S., resulting in considerable public sector financing and investment management business 38 Goal #2 – Best in class in United States RBC Centura to continue disciplined growth strategy
Selective acquisitions and branch expansion focused on high growth U.S. Southeast Expanding national lines of business Î RBC Mortgage Î RBC Builder Finance
39
Goal #2 – Best in class in United States RBC Dain Rauscher provides foundation to build on
RBC Dain Rauscher is 9th largest U.S. full- service brokerage firm by number of financial consultants Î 2,000 financial consultants operating out of 142 branch offices in 39 states Î assets under administration of C$133 billion in approximately 800,000 client accounts
40 Goal #2 – Best in class in United States RBC Dain Rauscher benefiting from Tucker Anthony Sutro integration
Net income (C$ millions) $17 $10
-$8 -$15 -$22 -$25
Q3/01 Q4/01 Q1/02 Q2/02 Q3/02 Q4/02
41 U.S. GAAP
Goal #2 – Best in class in United States Retention compensation expenses to fall1
(C$ millions) $176 $158
RBC Capital Markets $87
$53 RBC Investments $31
2001 2002 2003F 2004F 2005F
1 estimate based on fiscal Q4/02 C$/US$ exchange rate 42 U.S. GAAP Goal #2 – Best in class in United States RBC Dain Rauscher – key growth strategies
Broaden and deepen client relationships Î 750 Financial Consultants have completed wealth management business development course - already showing strong business gains Increase client base and AUA through: Î expansion of branch office network Î recruitment of experienced Financial Consultants Î opportunistic acquisition of existing brokerage operations or assets
43
Goal #2 – Best in class in United States What next in the U.S.?
Near-term focus • Meeting operating targets and adopting best practices to enhance revenues, efficiency and profitability • Additional acquisitions will likely focus on personal & commercial banking, largely in the Southeast U.S.
44 Goal #3 – Premier provider of specialized global services A premier provider of specialized global financial services
Focus on expanding businesses where we are: Î strong globally Î possess a competitive advantage Î can generate attractive returns
Global private banking, custody and foreign exchange businesses meet these criteria and are targeted for growth
45
Goal #3 – Premier provider of specialized global services Strong global businesses
Custody business #12 globally, highly-regarded and profitable with AUA of C$1.4 trillion FX business is among top 15 globally, #1 in Canada Global Private Banking in 100+ countries, will expand through targeted acquisitions, alliances and open architecture approach to money management Î i.e. Barclays Bank PLC’s private banking business in the Americas
46 Conclusion
Will maintain clear focus on shareholder value creation through unwavering commitment to: Î disciplined growth Î diversification Î business leadership Î continued vigilant risk management Î efficiency improvements Î judicious capital management Î superior returns
47