Overview of 2006 & First Quarter 2007 Financial Results
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Barbara G. Stymiest
Chief Operating Officer
RBC Financial Group
138th Annual Meeting of Royal Bank of Canada
March 2, 2007
Toronto, Ontario
Thanks Gord, and good morning ladies and gentlemen. I'm pleased
to present your company's financial results for 2006 and for
the first quarter of 2007.
By most measures, these results are outstanding and reflect
our employees' efforts and long term commitment to make it
easier for our clients to do business with us. At the end
of my remarks, I will spend a few moments talking about our
Corporate Responsibility activities. This discussion is worthwhile
because financial success is made more sustainable when our
business creates value for all our stakeholders.
In 2006, RBC's revenue and earnings grew to record levels
of 20.6 billion and 4.7 billion dollars, respectively. Over
the past five years, our revenue and earnings have risen at
compound annual growth rates of 5 per cent and 15 per cent,
respectively.
Similarly, diluted earnings per share rose 16 per cent annually
over the past five years to $3.59 per share in 2006. Return
on common shareholders' equity climbed to 23.5 per cent, the
highest level in recent history.
Each of our three business segments delivered strong results
last year. Our largest segment, Canadian Personal and Business,
focused on initiatives that resulted in a combination of high
client satisfaction and even deeper client relationships:
A solid foundation for future growth. Gord already mentioned
several initiatives that successfully extended our market
share lead over our competitors. These market share gains
and our employees' daily efforts generated net income of 2.8
billion dollars on revenue of 13.4 billion dollars.
We are pleased with the improved performance of our U.S.
and International Personal and Business segment last year.
In 2006, this segment grew net income consistently every quarter
to 393 million U.S. dollars. In Canadian dollars, earnings
rose to 444 million dollars despite the impact of the strengthening
Canadian dollar. Both our Wealth Management and Banking businesses
outside Canada contributed to the earnings growth, and they
did this while investing in infrastructure, opening new branches,
and making targeted acquisitions.
RBC Capital Markets had a very good year. Our trading businesses
had excellent results and we advised on some of the largest
M&A deals ever in Canada. Earnings of our wholesale segment
grew to 1.4 billion dollars, which attests to the success
of our strategy of building global capabilities in a select
set of capital markets businesses. And we are doing this by
leveraging our leading Canadian wholesale bank.
Perhaps one of the most significant characteristics of RBC's
overall performance last year is that it's broadly based and
diverse, reflecting successful growth initiatives around the
world. Indeed, our business has become increasingly global.
As Gord said, in 2006, one third of our earnings came from
outside Canada, as compared to only one quarter of our earnings
in 2002.
In addition to differentiating RBC from our competitors,
the diversity and strength of our businesses helped us meet
or exceed all but one of our 2006 financial objectives. Our
EPS growth, ROE, revenue growth and dividend payout ratio
all met our targets, and we met our portfolio quality objective.
While the strong performance of wealth management and capital
markets businesses drove variable compensation higher and
affected our operating leverage, their success contributed
significantly to our bottom line.
Our financial success allowed us to raise dividends by 22%
or 26 cents per common share in 2006, which along with our
share price increase, resulted in a total return to you, our
shareholders, of 23 per cent.
To satisfy all our stakeholders, including shareholders,
regulators and rating agencies, we remain committed to our
capital deployment strategy of asset growth, acquisitions,
dividends and share buybacks while maintaining a Tier 1 capital
ratio comfortably above our objective. We believe this will
help us continue generating top quartile returns over the
long term, and we set our 2007 financial objectives to help
meet this overarching goal.
1st Quarter 2007
Earlier this morning, we released our results for the first
quarter of 2007. Before I discuss these results in detail,
I'd like to provide some context by commenting on the economic
conditions underlying our first quarter performance.
Canada's economic fundamentals have remained stable and stronger
than most other G-7 countries. North American economies have
been characterized by stable interest rates, strong employment
levels and higher incomes, which have offset the weakness
in the housing and auto sectors. Solid consumer and business
spending have supported loan and deposit growth, and favourable
market conditions have increased demand for wealth management
products. The capital markets environment, both in Canada
and globally, also remained favourable. Equity and debt markets
performed well alongside continued strength in merger and
acquisitions activity.
Going forward, consumer lending activity should moderate
as consumer spending eases, but business lending is expected
to remain robust as investments continue. Credit quality may
deteriorate moderately, but we expect it will remain well
supported by high levels of liquidity.
For the rest of 2007, we expect the Canadian economy to remain
healthy and our forecast for real GDP growth is 2.5 per cent,
down slightly from its growth level in 2006. We expect real
GDP growth in the U.S. to be 2.4 per cent this year, which
is also slightly lower than its 2006 growth.
Short-term interest rates should remain below their historic
levels as inflation is kept in check. Long term rates continue
to be held down by low inflation expectations and reduced
inflation volatility, so challenges will continue from a relatively
flat yield curve.
With this relatively healthy economic backdrop, let's turn
to our performance in the first quarter. Again, the depth
and diversity of our businesses have driven our results.
Revenue growth across all of our segments drove overall revenue
to 5.7 billion dollars, that's 15 per cent higher than the
first quarter of 2006. Earnings this quarter reached a record
of 1.49 billion dollars or $1.14 per share.
Each business segment grew its net income by double digits
from the prior year and contributed to our earnings growth.
We continued to execute initiatives that will help us enhance
client service and build for future growth.
For example, during the first quarter, we added more client
facing employees in Canada, opened four new bank branches
and three insurance branches. We upgraded the security of
our ABM network to protect our clients. RBC Asset Management
introduced several new products while reducing management
fees on international funds. And, RBC Capital Markets was
named top dealmaker in Canada in 2006 by the National Post.
In the U.S., RBC Centura completed the acquisition of Atlanta
based Flag Financial Corporation and opened five additional
branches. RBC Dain Rauscher grew lines of its Premier Line
of Credit, a product developed by Global Private Banking,
to almost a billion U.S. dollars. And, RBC Capital Markets
expanded its capabilities to serve clients in the mining sector
by creating a base metals desk in New York to complement the
team established in London a year ago.
Globally, RBC Capital Markets completed its first Alternative
Investment Market transaction by advising an Australian-based
mining company on its listing on the London exchange. We expanded
our capabilities in structured products and fixed income throughout
Europe and Asia. Our RBC Dexia joint venture grew assets under
administration by 18% during the year to reach more than two
trillion dollars. It also extended its investor services outsourcing
relationship with CI Financial by five years, a relationship
that is the largest of its kind in the Canadian market.
At RBC, we'll continue to work hard to do more for our clients,
whether it's investing in technologies or introducing new
global solutions that our clients need. Our past efforts have
gotten us this far, and we know we must do more of the same
going forward. As Gord said, we are changing our structure
to create four business segments that will support further
growth, particularly outside Canada. We believe that global
demand for wealth management products and services will continue
to increase as global economies develop and demographics shift.
We intend to grow this segment aggressively over the next
several years. The new structure positions all four business
segments very well to generate strong revenue and earnings
growth.
Underpinning our client service efforts and financial strength
is our prudent risk management. In the first quarter, our
gross impaired loans ratio remained stable. Our total average
loans are $213 billion and gross impaired loans represent
less than half a per cent of our loan book.
We are pleased that our financial performance has allowed
us to increase our quarterly common share dividend by 15%
to 46 cents per share in the second quarter for shareholders
of record on April 25, 2007.
Before turning the floor back to David O'Brien, I would like
to spend a few moments speaking about corporate responsibility.
Gord already mentioned the external recognition we've earned
for our corporate governance, and our leadership in corporate
responsibility. But we know we can do much more.
In the last few years, we have seen a dramatic increase in
expectations from investors, government, regulators, NGO's,
clients, and employees about a range of issues that can be
defined by the terms "corporate responsibility",
or "sustainability".
At RBC, corporate responsibility has a much larger definition
than donating to charities: it means operating with integrity,
having a positive economic impact, creating a workplace of
choice, promoting environmental sustainability and contributing
to communities where we live and work.
Companies like RBC no longer have one or two stakeholders:
we have dozens, and they are growing in number, influence
and expectations. We frequently receive requests to adopt
a cause, develop new policies, create new products, or commit
to new external standards, all in the name of addressing the
interests of our many stakeholders. It's not easy to balance
competing expectations.
The common denominator is that stakeholders expect good companies
to minimize their negative environmental and social impacts.
And they expect great companies to maximize their positive
environmental and social impacts.
We agree. But we know we must prioritize and invest our time
and resources wisely so they have the maximum return. This
is why, over the last year, we have worked with the Rotman
School of Management to apply a framework that will guide
RBC's corporate responsibility initiatives going forward.
Our goal is "to sustain our company's long-term viability
while contributing to the present and future well-being of
our stakeholders." In this important in this important
area of corporate responsibility, we will continue to earn
the right to be the first choice for investors, clients, employees
and communities by operating our businesses with integrity,
while providing leadership in select social and environmental
areas. I look forward to announcing more details later in
2007 and reporting back to you on our progress and performance
next year.
Thank you for your attention.
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