Structurally, the U.S. financial services industry is fragmented, contains a number of monoline service providers and only recently began to move towards the provision of integrated financial services by diversified financial service companies. This is a significant opportunity for us as we have been successfully providing integrated financial services comprising banking, investment banking, brokerage, money management, custody and insurance on a nationwide basis for over a decade. By extending our banking, insurance and wealth management businesses into the U.S. through strategic acquisitions, we are ideally positioned to benefit from this growing trend.

Building a strong U.S. presence

Since April 2000, we have announced 10 U.S. acquisitions for US$5.3 billion in total to lay the foundation for future growth. The 8 acquisitions that have closed have increased our total client base by approximately 2.3 million or 23 per cent in just 30 months with another approximate 170,000 expected upon the close of the Business Men’s Assurance Company of America (BMA) and Admiralty Bancorp acquisitions. We have assembled a diversified platform in the U.S. with an emphasis on retail businesses – personal and commercial banking, wealth management and insurance – all businesses we know well and are very successful at in Canada. Our diversified approach reduces exposure to any one sector and provides us with the flexibility to adapt to changes in the business environment. This approach has helped us avoid significant earnings volatility in both Canada and the U.S. and represents one of our strengths.

We undertook each of our acquisitions because, among other criteria, our models indicated they would be accretive to cash earnings within three years. We have been successful in purchasing businesses that fit strategically, are manageable in size, generate healthy returns and possess strong management teams that share our culture, operating philosophy and aspiration for profitable growth.

The acquisitions of Centura Banks, Inc., Liberty Life Insurance Company, Liberty Insurance Services Corporation (LIS) and Dain Rauscher Corporation (Dain Rauscher), in the 2001 fiscal year, represented the first phase or the “platform extension” aspect of our U.S. expansion strategy. This phase entailed assembling the original building blocks of the businesses we wanted to extend into the U.S. Clearly, our expansion strategy has been a rollout, business line extension strategy, not a “bet-the-bank” strategy.

To assist clients in recognizing that these acquired businesses are all part of the RBC group, in 2001, we adopted a common branding, which uses the prefix RBC. At the same time, by retaining the Centura Banks and Dain Rauscher names, we are capitalizing on the strong brand equity and franchise value built over time by these firms in their local markets. To further enhance brand awareness, in September we acquired the naming right to the Entertainment and Sports Arena in Raleigh, N.C. – home of the National Hockey League’s Carolina Hurricanes and North Carolina State University’s National Collegiate Athletic Association (NCAA) men’s basketball team. Under the terms of this 20-year agreement, the complex is now named the RBC Center.

Building a U.S. platform
U.S. acquisitions since April 2000

RBC BANKING		RBC INSURANCE		RBC INVESTMENTS		RBC CAPITAL MARKETS
Centura Banks, Inc. Retail banking US$2.2 billion June 5, 2001		Liberty Life Insurance Company & Liberty Insurance Services Corporation Insurance and insurance services US$580 million November 1, 2000			Dain Rauscher Corporation Retail brokerage, fixed income and some capital markets US$1.2 billion January 10, 2001
Admiralty Bancorp, Inc. Retail banking approx. US$150 million expected close Jan. 2003		Genelco Incorporated Insurance software and outsourcing assets November 17, 2000		Tucker Anthony Sutro Corporation Primary retail brokerage US$594 million October 31, 2001
Eagle Bancshares, Inc. Retail banking US$149 million July 22, 2002				Barclays Bank PLC Private banking assets in the Americas up to US$90 million June 28, 2002
Prism Financial Corporation Mortgage origination US$115 million April 19, 2000			Business Men's Assurance Company of America approx. US$220 million close subject to regulatory approvals and customary closing conditions
		Variable insurance business		Jones & Babson Inc. Mutual fund company

Executing Phase II of our U.S. expansion strategy

The second phase of our U.S. expansion consists of making follow-on acquisitions in personal and commercial banking and wealth management to realize cost synergies, expand geographic reach and client base in targeted areas, and to grow revenues. The first such acquisition was of Tucker Anthony Sutro, which closed on October 31, 2001. Its presence in California and the northeastern U.S. complemented RBC Dain Rauscher’s presence in most of the remaining U.S., excluding the Southeast. The combination of Tucker Anthony Sutro and RBC Dain Rauscher virtually doubled the size of our U.S. wealth management platform, making it the ninth largest full-service brokerage firm in the U.S. with a national network of 142 brokerage offices in 39 states. Across North America, we now have approximately 3,400 financial consultants and advisors, 316 brokerage offices, $270 billion in assets under administration and $77 billion in assets under management. Further Phase II acquisitions were conducted in 2002, as described below.

Completed small, targeted acquisitions in 2002

We mentioned at the beginning of the year that we intended to limit our U.S. acquisitions in 2002 to $1 billion in aggregate. And indeed, we announced four small targeted acquisitions totalling approximately US$610 million.

In June, RBC Global Private Banking acquired the assets of Barclays Bank PLC’s private banking business in the Americas, and the integration of the businesses began immediately. The total purchase premium offered was approximately US$90 million, of which US$45 million was paid at the time of closing of the transaction in 2002. The remaining amount to be paid will depend on the performance of the acquired business over the one-year period following the acquisition. As part of this transaction, we also acquired private banking on-balance sheet assets and liabilities with a net position of approximately US$66 million. The client base of RBC Global Private Banking in the Americas region grew by approximately 10 per cent, with the addition of US$2.9 billion of client assets consisting of discretionary investment management, investment advisory, trust and banking services. The addition of this business to our existing private banking operations fits with our strategy of growing our specialized global financial services. Clients are located mainly in the U.S., Latin America and the Caribbean. They will be served from RBC Global Private Banking offices in New York, Miami and Toronto, with linked international services from the Cayman Islands, London, Jersey and Geneva.

In July, RBC Centura completed its acquisition of Eagle Bancshares of Tucker, Georgia and its subsidiary, Tucker Federal Bank, for US$149 million. Eagle Bancshares, with its 14 branches, provides us with a valuable presence in the attractive and high-growth metropolitan Atlanta market, provides a retail distribution channel to a high net worth market and further diversifies our U.S. retail network. Former Tucker Federal Bank branches are now operating as RBC Centura branches. We expect this transaction will yield integration cost savings of US$7 million or 25 per cent of Eagle Bancshare’s cost base and be accretive to earnings by the third quarter of 2003.

The following month, RBC Centura announced its proposed acquisition of Admiralty Bancorp, a Florida-based financial holding company with a commercial banking subsidiary, for approximately US$150 million. This purchase further advances our expansion in the southeastern U.S. by securing a footprint in the lucrative and fast-growing southern and central Florida markets. Once this deal closes, which we expect in January 2003, Admiralty Bancorp’s network of 10 branches in southern and central Florida will result in a total of 249 personal and commercial bank branches operating in 5 southeastern U.S. states. This purchase is expected to be accretive to earnings in fiscal 2005, in line with our objective of acquisitions being accretive in 2–3 years.

On the insurance side, RBC Insurance announced in April that it had reached an agreement to acquire certain assets of Generali Group, a Trieste, Italy-based insurer, comprising the operations of BMA and including an inforce block of approximately 150,000 traditional life insurance policies and annuities as well as the infrastructure for manufacturing variable insurance products. In a related transaction, RBC Dain Rauscher is planning to purchase Jones & Babson Inc., BMA’s mutual fund company with US$1.5 billion in assets under administration. These acquisitions are subject to regulatory approvals and approval by the board of directors and shareholders of the mutual funds, and other customary closing conditions.

2002 achievements

In addition to small targeted acquisitions limited to no more than $1 billion in total, our objectives for 2002 were to consolidate and enhance returns from earlier purchases through cost synergies and revenue growth initiatives. We met these objectives. Net income from U.S. acquisitions was $232 million in 2002, up from a loss of $80 million (a loss of $23 million, excluding special items) a year ago. This improvement reflects a full year of results at RBC Centura, improved performance at RBC Dain Rauscher following the acquisition of Tucker Anthony Sutro, cessation of goodwill amortization, benefits attributable to the continued integration of our acquisitions, and our revenue enhancement and cost-saving initiatives. Our U.S. revenues have risen to 28 per cent of total revenues from just 7 per cent in 2000.

Strong performance at RBC Centura

In 2002, RBC Centura achieved net income of $206 million, up from $21 million in 2001, when five months of RBC Centura results were included. RBC Centura achieved approximately 97 per cent of the US$70 million of cost savings targeted for mid-2004 by the end of 2002. The integration of Security First Network Bank (SFNB) into RBC Centura was finished faster and more efficiently than originally planned and the two former SFNB branches in Atlanta, Georgia and Largo, Florida now operate as RBC Centura branches. We have set aggressive 3-year growth goals for RBC Centura – 7–10 per cent growth in revenue and 2–5 per cent growth in non-interest expense, which translates into net income growth in the strong double digits.

Results improving at RBC Dain Rauscher

The third quarter of 2002 represented a turning point for RBC Dain Rauscher, which posted a profit of $10 million during that quarter, reflecting cost reductions from the Tucker Anthony Sutro integration and good performance in fixed income operations. We have so far managed to achieve 50 per cent of the US$60 million in targeted cost savings for this integration, with the remainder expected by the end of 2003. For the year, RBC Dain Rauscher posted net income of $3 million, reflecting losses incurred during the first half of 2002, up from a loss of $73 million in 2001. Retention compensation costs are expected to decline significantly in 2003, and register further reductions over the coming years. With its 2,000 financial consultants, following the very successful integration of Tucker Anthony Sutro, we believe RBC Dain Rauscher is right sized and poised to benefit from a market recovery.

RBC Liberty Insurance continues its progress

We extended our insurance platform into the U.S. with the acquisition of Liberty Life Insurance, LIS and certain assets of Genelco Incorporated in the 2001 fiscal year. These purchases provided us with capabilities in life insurance and insurance administration in the U.S. market. The pending acquisition of BMA will provide variable life and variable annuity capabilities. Liberty Life Insurance and LIS were purchased with little goodwill and earned US$23 million in 2002 compared to US$29 million in 2001. In May, RBC Liberty Insurance completed the migration and consolidation of its business process outsourcing and administration functions, from St. Louis, Missouri, which had been acquired from Genelco, to RBC Liberty Insurance’s operations in Greenville, South Carolina – one month ahead of schedule.

Executing cross-platform leverage

As part of our cross-platform leverage strategic priority, we are assessing opportunities to enhance revenues and reduce costs through the elimination of overlap and improvements in operating efficiency both on a north-south basis within individual platforms and on an east-west basis across platforms in the U.S.

There are numerous examples of cross-platform leverage initiatives that have yielded favourable results. RBC Banking is continuing to export to the U.S. its Canadian expertise in sales practices and performance management as well as segment and product management. This has favourably impacted RBC Centura. Capacity and cost benefits have accrued from the use of Canadian call centres by RBC Centura and we have relocated data processing to Canada. The president of RBC Dain Rauscher, Peter Armenio, who formerly headed our Canadian brokerage platform, is working closely with Irv Weiser and our people in Canada to share best practices within RBC Investments across the border. And, RBC Insurance is sharing its Canadian market-leading creditor insurance expertise with RBC businesses in the U.S. For additional discussion of cross-platform leverage, see pages 16–17.

Future U.S. expansion

So, where do we go next in the U.S.? With approximately 3,400 financial consultants and investment advisors in North America, we are close to our medium-term target of 4,000. Future wealth management acquisitions over the short term will likely be small additions to our existing base. Our focus will be on continuing to grow RBC Centura, with an emphasis on targeted purchases and new branch openings in the southeastern U.S. However, there are a number of considerations that will impact our U.S. growth deliberations. First is the trade-off between our strong fundamentals and North American expansion priorities. In the short term, one inevitably compromises the former to achieve the latter. Still, despite the sizeable investments we’ve made in the U.S. and the current weak brokerage environment, we maintained a strong showing from the profitability standpoint in 2002. We intend to continue to do so. The second consideration is the identification of acquisitions that make sense from strategic, cultural and shareholder value creation perspectives. Although we are always on the lookout for potential acquisitions, we do not intend to invest unless the addition meets our financial and other requirements. Third, bank mergers in Canada will have implications not only for the Canadian franchise but also for the U.S., as each of the Canadian banks has some presence in the U.S. We believe banking consolidation in Canada is inevitable and we would like to be a participant.

Expansion outside North America

In the Caribbean, RBC Global Private Banking completed a small acquisition of clients and staff from UBS AG in the corporate servicing area with client assets of more than US$800 million. Also, in an effort to expand our service offering to our international clients, we have expanded our brokerage offering and now have more than 60 investment advisors servicing our non-North American high net worth client base with total assets of more than $6 billion.

RBC Capital Markets continued to build our international business, largely through the acquisition of expert teams. In 2002, the London-based structured finance team reorganized and expanded, as did the highly successful international bond business. We have also positioned ourselves structurally for future global growth with two of our five divisions now managed from outside Canada. As well, our global asset securitization business, based in New York, moved from its largely North American conduit focus to a more global framework that includes term products.

During fiscal 2002, we completed the successful integration of Australia-based Perpetual Fund Services, acquired in 2001. In addition, RBC Global Services expanded its custody business in the U.K., by signing a number of custody mandates with clients there, including J.O. Hambro and Edinburgh Fund Managers.