Speeches

Address to Shareholders

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Gordon Nixon
President & Chief Executive Officer
Royal Bank of Canada
139th Annual Meeting of
Royal Bank of Canada

February 29, 2008
Toronto, Ontario

Good morning ladies and gentlemen, and welcome to your Annual Meeting.

It is my privilege to report on our 2007 performance as well as our plans for 2008 and beyond.

I'd like to begin by thanking our employees for remaining focused on the needs of our clients and for producing record financial results during a very challenging year. From the sub-prime mortgage issue, to slowing economic growth, to the volatility of stock markets worldwide, 2007 was a tough year for the financial services sector. And while we're not out of the woods yet, I'd like to think the performance of RBC relative to our peers has been and should remain a source of confidence for our shareholders, and pride for our employees.

I'll talk more in a moment about my view of the current markets. But first, I want to be clear about how I view our business and performance. At its core, our approach to our business is based on a few basic principles.

We want to make it easier for our clients to do business with us. We want to ensure our business mix continues to be diversified to protect against shocks to a single business, product or market. We want to ensure all of our activities are guided by strategic goals, and are underpinned by a proactive approach to risk management and a rigorous operational discipline that makes management accountable for results.

Our focus on doing these things well has helped us withstand market pressures and allowed us to build on our past performance and deliver record results. Our strategy has resulted in a strong and diversified business mix - we monitor and measure the performance of our business lines and manage them in four broad segments. Each business pursues a mandate for growth and is driven by our vision of "Always earning the right to be our clients' first choice," seeking to leverage the strengths of each other so they can satisfy all of our clients' financial needs.

As a global financial services company, we have been exposed to the difficult market conditions that emerged since the middle of last year as illustrated by the writedowns we reported the past two quarters. But our financial performance and stability have not suffered to the same degree as many of our global competitors.

In January, a report by Credit Suisse named RBC as the top Canadian bank of the past decade based on 10 measures of performance, including growth in share price, dividends, return on equity, acquisition spending, and branch investment.

When compared against the top 50 banks around the world, RBC's mid- and long-term total shareholder returns continue to be in the top quartile. And based on stock market value, it is worth noting that just five years ago, RBC was the 51^st largest bank in the world, today we're the 19^th — and number 6 in North America¹.

I am proud of this short- and long-term performance — especially in light of the impact that volatile markets have had on other global banks since the beginning of the decade. But that is the past and I know that you are more interested in the future.

Before I talk about our performance in detail, I'd like to make a brief comment on the current state of global markets.

The global financial system has been flush with liquidity for the last number of years, which contributed to very low interest rates, reduced risk premiums and an insatiable demand for financial assets. The net effect of these conditions supported overall economic growth and rising home ownership rates in the U.S.

As is often the case in financial markets, however, excesses quickly emerged.

Cheap money, fierce competition among U.S. mortgage lenders and limited regulation all combined to push mortgage rates to artificially low levels with a total disregard for prudent lending standards. And demand for high yield product from investors combined with Wall Street's ability to securitize and structure these high-risk mortgage loans compounded the excesses and led to the creation of billions of dollars in securities, such as CDOs², whose values were tied to and leveraged against U.S. real estate.

While investors received higher yields from these structured products, they did not fully account for the additional risk they were taking on and relied on what, in hindsight, appear to be inappropriate credit ratings.

However, when the U.S. housing market weakened beyond anyone's expectations, the impact was felt not just in the U.S. economy, but across the world's financial system as these structured products started to lose value and liquidity.

Earlier financial bubbles — such as the dot-com or emerging market debt booms — were generally limited to one industry sector or a specific region, but this one affected hundreds of billions of dollars in financial assets — and the pain is being felt across a broad range of financial institutions and investors in a number of countries.

The liquidity that drove the creation of these financial assets at very low credit spreads disappeared overnight and credit spreads have widened dramatically. New mark-to-market accounting rules have compounded the problem as this lack of liquidity has resulted in massive writedowns being recorded even on those structures or securities that are of good credit quality. This crisis in the credit market has now spread to the broader economy, with the U.S. facing significant challenges.

Having been in this business for almost 30 years, I can tell you that this bubble has — in most respects — been different from all others I have seen. But like all the others it was based on the folly that asset values — specifically U.S. real estate — could not fall dramatically. It was fuelled by vast new sources of capital and during this time of massive liquidity, people's understanding and appreciation of risk diminished greatly.
Well today, following an extended party with far too much excess, we are experiencing a long and painful hangover.

Since last summer, I have been consistent in saying that as a result of this correction, risk would be re-priced and that market participants with financial strength, sound risk management, and strong balance sheets would ultimately benefit.

While I do believe there are still signs of further weakness and that it will take years for some of these financial assets to recover, I do expect the aggressive action by monetary authorities will provide a floor for markets and eventually pave the way for a recovery in the latter half of this year.

However, once the recovery takes hold I expect the environment to be significantly different from the market that we had before the crisis.

The fallout will lead to a "new normal" for the global financial system and global economy. This new environment will include a heightened sense of risk aversion, higher volatility, increased transparency, a move to product simplicity, reduced financial leverage, and wider credit spreads.

The period of leverage and bank disintermediation will, for a time, shift in favour of de-leveraging and a much greater reliance on banks and banking relationships. The competitive landscape is changing, and it will reward those firms that continue to demonstrate market leadership and balance sheet strength.

As you'll agree, it's nearly impossible to predict when bubbles will burst — but we know they will. This truism argues strongly in favour of investors placing a premium on solidly diversified and well managed businesses. Indeed, sitting in the midst of this market correction, RBC is benefiting from the strength of our diversified business mix which has been a constant driver of our success over the long term.

I should point out that, out of all our business lines, very few of them - in particular, our structured credit and U.S. residential builder finance businesses — have been affected by the subprime or CDO meltdowns. And while there remain challenges in these areas, the broad diversification of our business platforms provide a solid financial foundation that we will continue to build upon.

Diversification across our businesses, even in our Capital Markets segment, has meant that our earnings have been less volatile, and that we can be more flexible in managing toward our long-term strategy and goals. Over the past number of years, I have said that we would like our Capital Markets segment to represent somewhere between 20 and 30 per cent of our overall business. In 2007, this segment generated 24 per cent of our overall net income. Even in the midst of these unsettled conditions during the first quarter, the financial contributions of our Capital Markets segment have remained within our target range.

We are also already seeing business opportunities that we would not have seen a year ago because our competitors are either unable to compete effectively or serve new client demands.

Over the long term, our Capital Markets segment will continue to be an integral part of our overall diversified business mix and we will maintain its target of contributing between 20 and 30 per cent of overall earnings.

As long-term observers and investors know well, we value and demand strong contributions from each of our four business segments. Our management teams have a clear understanding of their existing and prospective clients and they focus on serving them with outstanding product and service capabilities. We understand we have competitive strengths in some businesses more than others and we work hard with our Board to allocate resources and capital effectively to enhance shareholder value.

By no means are we perfect and without our own challenges. When we have issues we will address them head on, and as a management team we will hold ourselves accountable to each other and to you, our shareholders.

By being accountable, I believe our business leaders and our employees are even better equipped to put our clients first and to help them succeed.

2007 Performance and our Strategic Goals

In 2007, our employees delivered record net income of nearly 5.5 billion dollars, 16 per cent higher than the previous year, and almost double what we earned just three years ago. This performance clearly demonstrates our leadership in our core Canadian businesses³ and the growth of our non-domestic operations.

We generated revenue of 22.5 billion dollars last year, which represented annual growth of nine per cent. And we exceeded four of our five performance objectives, including earnings per share growth of 17 per cent and a Return on Equity of nearly 25 per cent.

Our Canadian Banking and Wealth Management segments continued to drive growth, delivering better earnings than ever before, and notwithstanding turbulent market conditions in the second half of the year, earnings in Capital Markets were down only five per cent from their record level in 2006.

This performance is a testament to the strong diversification of our Capital Markets segment and its broad base of revenue generation.

In total, our strong performance translated into top quartile returns for you — our shareholders. In 2007, we generated a total shareholder return of 16 per cent, raised dividends by 26 per cent, and repurchased approximately 12 million common shares. At the end of our fiscal year, we posted top quartile total returns for the three and 10 year periods, and second quartile returns over the five-year period.
We are driving our future success by executing against our three strategic goals:

• To be the undisputed leader in financial services in Canada;
  
• To build on our strengths in banking, wealth management and capital markets in the United States; and,
  
• To be a premier provider of selected global financial services.

We made important progress towards achieving these goals in 2007 and continue to do so.

We have maintained our leadership in Canada, emphasizing the strength and importance of our domestic operations. We generated profitable revenue growth and positive operating leverage in our Canadian banking operations while investing in client-facing staff, branches, and new product innovation, including a new suite of personal deposit products.

In 2007, we grew Canadian banking-related lending volumes by 11 per cent and deposit balances by 6 per cent over 2006.

Our success in this very competitive business is directly linked to how we serve our clients. The quality of our client service in Canada has been acknowledged by two notable external sources — last year Synovate named RBC as the best among our largest domestic competitors for the service and value that we provide to clients who visit our branches. And earlier this month, Forrester Research put us at the top of their Customer Experience Index ahead of 20 other firms in five different industries.

In Canadian Wealth Management, we increased assets under administration by nine per cent over 2006. Our Global Asset Management business grew assets under management by 13 per cent and has led the Canadian industry in net sales of long-term funds for 16 consecutive quarters. Our recent announcement of our plans to acquire Phillips, Hager & North shows how we will continue to strengthen our position for future growth.

Our broad-based Capital Markets businesses led in most elements of the Canadian market and, even during difficult market conditions late in the year, we continued to differentiate ourselves from our Canadian peers by leveraging our global capabilities.

Looking at the second goal, our progress in the U.S. continues as we grow the linkages between our wealth management, capital markets and our banking platforms, and we move to better establish our brand position in the country.

In 2007, we made significant steps toward our goal of becoming the preeminent bank for businesses, business owners and professionals within our footprint in the U.S. Southeast.

By adding new clients and earning more business from existing clients, we have grown loans and deposits, and we have invested to expand our footprint. As we announced earlier this week, our acquisition of Alabama National BanCorporation has been completed, further extending our branch network across the Southeast U.S.

Our U.S. branch network is now more than 40 per cent bigger than last year with more than 430 branches. We have invested in our technology platform to support this expansion, and, as part of our goal of creating a globally recognizable brand in all our markets, our U.S. retail bank will soon be renamed RBC Bank.

While our U.S. residential builder finance business caused a significant earnings setback for this segment, I am encouraged by the work being done in our U.S. banking operations, especially in the face of today's demanding market conditions. We are committed to our long-term strategy of building a strong retail banking operation in the U.S. Southeast. And when the housing downturn begins to stabilize and rebound, we believe we will be well positioned.

In U.S. Wealth Management, we continued to build scale by taking advantage of product and service capabilities from our Capital Markets and Banking businesses, attracting new financial consultants, and increasing our overall productivity.

Earlier this month, we announced our plan to acquire Ferris, Baker Watts, a full-service securities broker-dealer based in Washington D.C. By adding 330 financial consultants to our business, this transaction deepens our existing wealth management platform, which will soon be renamed RBC Wealth Management.

Under the RBC Capital Markets banner, our U.S. wholesale business has again been successful at leveraging our leading position in Canada to provide expertise and product breadth to companies in the U.S. mid market. In 2007, three small acquisitions helped us expand our client base and enhance our capabilities in cash equities, municipal finance and U.S. mergers and acquisitions.

Turning to our third goal, the most notable development was the announcement of our intention to acquire RBTT Financial Group, which we expect to close in the middle of 2008. This is a perfect complement to our current footprint in the Caribbean and will create one of the most expansive and leading bank networks in the region.

We continued to build our global capital markets business by focusing on helping clients in the areas where we have competitive capabilities, including fixed income, infrastructure, mining and energy. Our core strength in international trust services is helping to drive our success as a top 20 global private bank, and we opened new offices in several international cities, including Mumbai, where I had the pleasure of opening our office earlier this month.

Ladies and Gentlemen, the progress we made against our strategic goals along with our financial performance, and the proven ability of our people to serve our clients give me great confidence that we have the strength to face current and future challenges.

First Quarter 2008

In the first quarter, the engines of our growth — our core Canadian businesses — continued to perform extremely well. And for all the reasons I just described to you our client first approach, our diversified business mix, and our operational and risk discipline, I am confident of our ability to manage the headwinds.

We reported net income of 1.2 billion dollars this quarter, which is down by 249 million dollars from last year. However, as is highlighted by this slide, there were a number of items that impacted our results not only this past quarter, but in Q1 of 2007 as well. Taking these items into consideration, our earnings continued to be strong. Nevertheless, we are in a more difficult environment and we are focused on ensuring we get back on track with respect to our objectives. Despite a decline in earnings, we generated a healthy Return on Equity of 21.4 per cent.

I'd now like to go a little more deeply into the quarterly results.

Canadian Banking reported net income of 762 million dollars. While this is virtually the same as a year ago and down from Q4, it does not give you the full picture. As noted on the slide, net income is eight per cent higher compared to last year, and seven per cent higher compared to Q4, once you exclude these items⁴.

Our Canadian banking-related businesses continued to do well and are building momentum. Our results from these businesses are 15 per cent higher than last year, and 11 per cent higher over last quarter, again after excluding these items.

Our domestic banking-related operations are running efficiently, with positive operating leverage and continued growth of market share in key areas such as residential mortgages and personal deposits.

A year ago, we created our Wealth Management segment to capitalize on the profound global growth expected in this sector over the next several years. Net income for the segment is virtually flat when compared to last quarter and a year ago, once you exclude the Q1/07 accounting adjustments and the impact of the appreciation of the Canadian dollar.

Our fee-based revenue continued to move higher, up seven per cent from last year, as we successfully recruited and retained top performing advisors.

And while today's uncertain markets have pressured sales of long term mutual funds in Canada, sales of other asset classes were strong. Taking advantage of our extensive national branch network, we again led the Canadian industry in overall net sales by gathering more than four billion dollars of assets in a record first quarter.
The earnings of our U.S. & International Banking segment decreased from a year ago primarily due to an increase in loan loss provisions in our U.S. residential builder finance business.

Solid business growth from RBC Dexia and our U.S. banking operations combined to push overall earnings for this segment higher over last quarter.

The earnings of our Capital Markets segment were affected by writedowns this quarter, but broad-based revenue growth helped offset their impact when compared to results from a year ago. And compared to last quarter, our results were higher, primarily because of our solid revenue growth.

Our diversified portfolio has allowed us to capitalize on the increased market volatility and the declining interest rate environment. Throughout the first quarter, we generated strong revenues in a number of our businesses, including fixed income, foreign exchange and equity derivatives trading.

To put this quarter in context, I view it as a stepping stone to advancing past our competition across all of our businesses. Despite there being several items impacting our results, the fundamental strength of our operations remains solid.

Corporate Responsibility

I would like to conclude with a few words about the vital role that our employees play in finding better ways to serve our clients and our communities. I am well aware that our success as an organization is made possible because of the commitment to customer service that our 70,000 employees demonstrate everyday.

To support that commitment, we have encouraged a more collaborative and accountable culture where employees are empowered to create a superior client experience. This culture is reflected in our client-centric vision that is built on our core values of service, teamwork, responsibility, diversity and integrity.

We believe that our corporate responsibility activities, good governance and our brand are important manifestations of our values. We take great pride in operating our business in a manner that creates sustainable prosperity for our clients, employees, shareholders, and communities.

In this respect, 2007 was a breakthrough year for RBC. We were the first Canadian bank to launch mutual funds for socially responsible investors and introduce environmentally sustainable product options for retail consumers. And we received a record number of awards for our corporate responsibility efforts, including being named one of the most sustainable companies in the world.

While we are proud of how much we have achieved, we know that corporate responsibility is a journey — not a destination. Last year we developed a new approach to corporate responsibility that could be more strategic, have more impact, and encompass a wider range of stakeholder concerns.

We call it the RBC Blueprint for Doing Better. And its our plan to put extra resources toward two areas of concern — diversity and the environment.

Diversity of our people is a natural complement to the diversity we have achieved in our business. A diverse work force is a competitive advantage not only when it comes to developing human capital, but also for ensuring the growth and prosperity of companies and countries.

At RBC, we know we can gain a strategic advantage by having a workforce that mirrors our population and international markets. Simply put, if we want to serve the market, we have to hire the market.

The environment is also an issue that our clients and employees have told us they care about deeply. So in 2007, we unveiled a strategy that built on our strong history with a new vision of how we will move forward with issues like climate change, biodiversity, forests and water. The RBC Environmental Blueprint sets out three related priorities for our businesses:

• To reduce the intensity of our environmental footprint,
  
• To promote environmentally responsible business activities, and
  
• To offer environmental products and services.

We have also committed the strength of our brand behind a single global cause to make a meaningful social and economic impact at local, regional and global levels.

The RBC Blue Water Project is a 10-year, 50-million dollar grant program to support projects related to water conservation, watershed protection, access to clean drinking water, and other fresh water-related issues in Canada and around the world.

While we are directing significant attention to diversity and environmental initiatives, the large majority of our philanthropic efforts will remain committed to supporting local communities through donations, sponsorships and employee participation. Our Corporate Responsibility Report can be found outside the meeting room and it showcases our active support for the arts, athletics, health and wellness, education, and social and civic causes which we will continue to do.

We have also put our marketing and moral support behind major sponsorships of interest to our clients — including the Vancouver Olympic and Paralympic Winter Games, the RBC Canadian Painting Competition, and most recently, Canada's national golf championship, now known as the RBC Canadian Open.

I am proud that when there are big opportunities to support our communities, RBC is there.

RBC's brand is trusted by Canadians, and has been rated as the most valuable in the country for the past three years. In 2007, we were named one of Canada's best companies for corporate governance by The Globe and Mail, and just earlier this month, we were honoured by the Conference Board of Canada for our innovations to improve corporate governance. And we continue to be part of a select group of companies listed on the Dow Jones Sustainability Index, the FTSE4Good Index and the Jantzi Social Index.

Ladies and Gentlemen, the various accomplishments I have mentioned this morning reflect the work of outstanding people, who are committed to representing our company with integrity, professionalism, and a commitment to our clients' success.

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 strong performance. I would also like to thank our Chairman, David O'Brien, and the Board of Directors for their guidance. And I am grateful to my management team for their continued support.

Most of all, I would like to thank our 15 million clients for placing their confidence everyday in our people and our company.

As we move forward, the financial services industry will continue to face complex challenges over the next few years as the impact of slower growth in the U.S. is felt in economies around the world. But one thing is certain: financial institutions that have a broad and diversified base of business, combined with prudent risk management and a client-centric culture will continue to have the capital necessary to invest in the future, and will be able to deliver the best long-term returns to shareholders.

This is the company we are building at RBC. This is the company that will work hard everyday to gain our clients' trust. And this is the company that will strive to earn your confidence for years to come.

Thank you.

1Market capitalization rankings as of April 14, 2003 (cited by Stanley Hartt, Policy Options, May 2004), and February 22, 2008 (source: Bloomberg).

²Collateralized debt obligations.

³Domestic banking, wealth management and capital markets-related businesses.

⁴Amounts excluding these items are non-GAAP financial measures. Please refer to the Q1 2008 Earnings Release for further information at rbc.com/investorrelations.

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