Canada s banking industry. Presentation at UBS Warburg Financial Services Conference. John E. Cleghorn Chairman & CEO

Transcription

1 John E. Cleghorn Chairman & CEO Presentation at UBS Warburg Financial Services Conference New York June 26, Canada s banking industry Nationwide banking RY has 1,400 service delivery units and 4,700 ABMs coast-to-coast RY has over 975,000 on-line and 1.8 million telephone banking clients Highly efficient clearing system Fierce competition Following partial deregulation in 1980s, entered investment banking brokerage (full service and discount) money management trust insurance (limited powers)

2 2 RY - premier Canadian bank Canada s largest bank by assets and leader in most products Canada s most profitable financial institution (20.3% ROE - Q2/00) Profitable business & geographic mix Committed to ebusiness leadership and profitable international expansion Strong shareholder orientation Attractive valuation 3 Key priorities 1. Strong fundamentals 2. ebusiness leadership 3. Expansion outside Canada 4. Growth of high-return businesses

3 4 Strong fundamentals Profitability return on equity growth in earnings per share Revenue growth Cost control Asset quality and risk profile Capital management Objective: Deliver financial performance in top quartile of North American banks Payout factors: Bonus plan encourages strong fundamentals earnings growth top-line growth expense management performance versus competition customer service vs. other Canadian financial companies EPS growth vs. 15 North American banks 5

4 6 Strong performance versus U.S. banks EPS growth Royal Bank Q2/00 vs. Q2/99 38% US Banks* Q1/00 vs. Q1/99 12% Revenue growth 20% 7% Non-interest revenue growth 31% 12% * Source: Morgan Stanley Dean Witter report of May 2, 2000 US GAAP 7 Solid Q2/00 performance 3-5 year goal Target for 2000 Performance Q2/00 Q2/99 ROE EPS growth (fully diluted) Revenue growth Expense growth Efficiency Specific provision for credit losses/ average loans, BAs & repos Dividend payout ratio Common equity to risk-adjusted assets Tier 1 capital (OSFI) Total capital (OSFI) 17-20% % % 30-40% 7.0% 8.0% % 17-20% 12-14% mid-single digits < revenue growth % % 38% 20% 13% 62.4% 0.30% 31% 7.1% 8.0% 11.1% 15.8% (9)% 4% 8% 66.3% 0.41% 37% 7.0% 7.1% 11.4% *core numbers exclude one-time items - there were one-time items in Q2/98 US GAAP

5 8 Favourable ROE & EPS trends (EPS C$) 20.3% 18.4% $ % 15.8% 16.1% 16.6% $1.57 $1.27 $1.25 $1.33 $1.40 Q1/99 Q2/99 Q3/99 Q4/99 Q1/00 Q2/00 Core fully diluted earnings per share* Core return on common equity* *excludes one-time items - there were no one-time items in Q2/99, Q1/00 & Q2/00 US GAAP 9 Highest Canadian bank ROE Core ROE* 20.8% 19.0% 17.6% 16.8% 16.5% 11.2% RY CM BMO BNS NA TD *excludes one-time items for all the banks Cdn GAAP

6 10 20% top-line growth (Q2/00 vs. Q2/99) Growth by segment 38% 37% 20% 8% = 5% Personal & commercial financial services Royal Investment Services (wealth management) Corporate & investment banking Global Integrated Solutions (transaction processing) Royal Bank Financial Group US GAAP 11 Non-interest revenue continues to grow Non-interest revenue as a % of total revenue* 54.5% 56.1% 45.3% 48.2% 51.1% 40.5% Q1/00 Q2/00 *excluding one-time items (none in Q1/00 & Q2/00). One-time revenues were C$105MM in 1999, C$247MM in 1998, C$115MM in 1997 and C$83MM in 1996 US GAAP

7 Less volatile trading revenues generate more sustainable earnings 12 Growth in trading revenue (Q2/00 vs. 4-quarter trailing average) 116% 73% 82% 48% 54% 25% RY TD BNS CM BMO NA source: banks Q2/00 supplementary financial packages Cdn GAAP 13 Cost savings and revenue growth are improving efficiency Core efficiency ratio* US GAAP 66.3% Cdn GAAP 65.3% 63.3% 62.4% 62.4% 61.9% 59.5% Q2/99 Q3/99 Q4/99 Q1/00 Q2/00 TARGET exiting 2000 *excluding one-time items (none in Q2/99, Q1/00 & Q2/00).

8 14 Strong efficiency ratio Q2/00 core efficiency ratios* 78.8% 71.5% 58.0% 61.9% 62.0% 66.8% BNS RY BMO NA CM TD *includes goodwill amortization and excludes one-time items. Numbers used to derive competitors ratios have been confirmed by them Cdn GAAP 15 Leader in efficiency improvement Change in core efficiency ratios* (Q2/00 vs. Q2/99) 1, RY BMO BNS CM NA TD *includes goodwill amortization and excludes one-time items Cdn GAAP

9 16 Increasing investments in strategic initiatives (C$ millions) $76 $63 $54 $38 $10 Q2/99 Q3/99 Q4/99 Q1/00 Q2/00 US GAAP 17 Share repurchases Share buyback program expanded on Feb. 23, 2000 to 6.0% of common share float (18.7 million common shares) from 3.5%: As at April 30, 2000, 13.3 million shares repurchased for C$853 million Buyback program ended June 23, 2000

10 18 History of dividend growth Dividends per common share in C$ Q2/97 Q3/97 Q4/97 Q1/98 Q2/98 Q3/98 Q4/98 Q1/99 Q2/99 Q3/99 Q4/99 Q1/00 Q2/00 Q3/00 Dividend payout target range 30-40% (31% payout in Q2/00) Above-average dividend increases 19 Percentage dividend increase in past year* 32% 25% 14% 10% 6% 6% Peer average 12% TD RY BNS CM BMO NA *indicated Q3/00 dividend versus Q3/99 dividend

11 20 Priority #2 ebusiness leadership Objective Be leading ebusiness financial institution in Canada, with strong link to the US 21 Priority #2 ebusiness leadership 5 announcements since Q2 results released on May 18 J.V. with Mediagrif Interactive Technologies to build vertical B2B electronic marketplaces J.V. with Bottomline Technologies to develop webbased custody and related product applications Alliance with Chariots.com to provide online auto financing J.V. with Baldhead Systems to launch encrypted wireless banking and brokerage service for Palm organizer Launched e-select, a virtual payment terminal for on-line merchants, that provides on-line businesses with a new, real-time Internet payment service

12 Priority #2 ebusiness leadership SFNB rated best overall Internet bank for 6th consecutive quarter Canadian on-line customers 2,000, , ,000+ 1,000, /31/99 6/23/00 7/31/00 Est. Target 2002 Customer penetration 5.3% 9.8% 10% 20% Priority #2 ebusiness - US platform Security First Network Bank (SFNB) - ranked #1 among 60 US Internet banks by Gomez Advisors ( for 6 consecutive quarters Bull & Bear Securities - on-line discount broker Prism Financial - one of the fastest growing Internet mortgage originators in the US (Internet origination growth of 175% in 1999 to US$336 mm) PrimeStreet - open finance on-line lending for small business in which we have a 34% stake S1 Technologies - 2.8% equity stake VIP Private Capital - open finance on-line private banking for individuals with >US$500,000 in investable assets 23

13 24 Priority #3 Expansion outside Canada Intend to continue expanding outside Canada Each business segment has a global mandate Largely targeting the US through a niche approach: where we have competitive advantage where we can generate top tier value and growth for our shareholders through combination of acquisitions, alliances and expansion of existing operations 25 Priority #3 Expansion outside Canada Global High Performer* Bank Global Performance Score 1. Royal Bank of Canada Bank of Nova Scotia HSBC Chase Manhattan ABN Amro Holding JPMorgan Royal Bank of Scotland American Express Lloyds TSB Morgan Stanley Dean Witter 7.1 Overall Global Performance Score 1. Nortel Networks Glaxo Wellcome Coca-Cola Merck Pfizer Royal Bank of Canada Bank of Nova Scotia Bristol-Meyers Squibb 19.9 * source: Templeton Global Performance Index 2000 published by Templeton College, Oxford University, April Ranking based on the world s leading 214 multinational enterprises (as listed in the Fortune Magazine Global 500 ranking in 1999) according to the performance of their foreign operations.

14 Personal & commercial banking Security First Network Bank* S1 Technologies* AOL Canada* Ernex E-route* PrimeStreet* Priority #3 Substantial investments outside Canada in the past two years Prism Financial* Mediagrif Interactive Technologies* Bank One s credit card business Insurance Mutual of Omaha Prudential Canada Liberty Life & Liberty Insurance Services = international, *= ebusiness Royal Investment Services Credit Suisse Private Banking Coutts Group Bull & Bear Securities* Hartley Poynton Connor Clark Ernst & Young - Guernsey Ernst & Young - Jersey VIP Private Capital* Corporate & investment banking Hambros Bond Business U.S. High Yield Team U.S. Energy Team Total Canadian Total International Total Investments C $ 450 MM C $1,390 MM C $1,840 MM 26 Priority #3 Expansion outside Canada US Expansion - Liberty Life & Liberty Insurance Services RY to acquire Liberty Life and Liberty Insurance Services (the insurance operations of Liberty Corporation) for US $580 million Liberty provides RY a platform in the US to expand into other forms of insurance and distribution, a stable earnings stream, a presence in the growing direct business, a significant presence in the emerging feebased administration business and a well-known brand in the Southeastern US market Opportunities to cross-sell insurance products to customers of Prism, SFNB and Bull & Bear and banking products to customers of Liberty 27

15 28 Priority #3 Expansion outside Canada US Expansion - Prism Financial Acquired for US$115 million in April 2000 Niche entry into the US residential mortgage origination business Growing on-line capability, salesforce of over 1,100 loan officers, 159 branches in 25 states, and a successful acquisition track record Sell SFNB, Bull & Bear and Liberty Life products to Prism s customers Lower Prism s on-balance sheet funding costs Continue its acquisition strategy and expand its national presence Recent American Express alliance to provide white label Internet mortgage origination Priority #3 Expansion outside Canada 29 Corporate & investment banking Build, hire teams or do niche acquisitions (no bulge bracket aspirations) Very successful niche acquisitions: Hambros bond business (London ) global equity derivatives team (New York ) Expanding in US energy, telecom. & technology hired energy team in Houston (Sept 99) formed high-yield group (Oct. 99) Niche expertise globally: credit derivatives build-out of global equity derivatives in Europe

16 30 Priority #4 Royal Investment Services (wealth management) highest priority (50%+ ROE) Niche segments of personal & commercial financial services and corporate & investment banking Newly created segment of Global Integrated Solutions effective Q2/00 31 Priority #4 (C$ millions) Net income contributions - Q2/00 NIAT $292 NIAT growth* 35% ROE 21.8% Efficiency 58.9% Global Integrated Solutions 5% NIAT $29 NIAT growth* 21% ROE 28.1% Efficiency 67.9% *growth over Q2/99 results Personal & commercial financial services 52% Corporate & investment banking 26% Royal Investment Services 21% NIAT $115 NIAT growth* 66% ROE 52.8% Efficiency 72.7% NIAT $149 NIAT growth* 66% ROE 26.9% Efficiency 61.3% US GAAP

17 Priority #4 Have been operating an integrated platform of financial services since the late 1980s Cross-selling success is gaining momentum and is embedded in the organization Total referrals between RBFG businesses 32 Year Business Referred (C $ billions) New Sales (C $ billions) New Sales/ Business Referred 1997* X 1.6 X 3.3 X * Three months - from August 1/97 to October 31/97 33 Priority #4 Royal Investment Services In Canada, #1 in 3 businesses (private banking, full-service brokerage, investment management and trust), #2 in discount brokerage and #3 in mutual funds Targeting earnings growth of 15-20% per year growth of 66% in Q2/00 vs. Q2/99 goal to take earnings to 25%+ of total bank core earnings from 21% Strong ROE (52.8% in Q2/00)

18 34 Priority #4 Strong growth in all RIS businesses (C$ millions) NIAT growth vs. Q2/99 Rev. - Q2/00 Rev. growth vs. Q2/99 AUA growth vs. Q2/99 Action Direct* Private client division** Global private banking Royal Mutual Funds*** Other 127% $ % % Total RIS 66% $666 38% 28% *discount brokerage **full-service brokerage ***growth in assets under management (assets are administered by custody group, now part of GIS segment) US GAAP 35 Priority #4 Personal & commercial financial services (Consisting of Personal & commercial banking and Insurance) Personal & commercial banking Leading Canadian market share in residential mortgages, consumer credit and business loans Highest retail customer satisfaction among 6 largest Canadian banks Significant improvement in efficiency Q2/00 over Q2/ basis points (US GAAP) Performance targets: revenue growth in mid-to-high single digits (8% in Q2/00) significant cost reduction (NIE down 3% in Q2/00) sales targets with linked variable compensation leverage sophisticated datamining & segmentation techniques

19 Priority #4 Insurance - no. 1 Canadian bank-owned insurer One of Canada s fastest growing insurance organizations Becoming a major player in the Canadian marketplace Well-positioned for international expansion Defining new models to add value for shareholders Investment portfolio has expanded significantly RBC Insurance is: 4th in individual life policy sales in Canada* (37,000) 10th in new individual life premiums in Canada* (C $22 million) - 8th with the addition of PruCan acquisition (05/00) #1 in sales of creditor products among Canadian financial institutions (C $293 million) A market leader with C $160 million in travel insurance premiums in 1999 *from 1999 LIMRA surveys 36 Priority #4 Insurance - Q2/00 results* 37 (C$ millions) Q2/00 Change vs. Q2/99 6 Mos Change vs. Q2/99 Net Income After Tax $29 32% $55 37% Premiums $262 15% $523 31% *results included in Personal & commercial financial services

20 38 Priority #4 Corporate & investment banking Global Banking Global Equity Global Markets Origination Sales & trading Fixed income Debt products Research Money markets Equity capital markets Equity derivatives Foreign exchange Mergers & acquisitions Largest securities underwriter in Canada in 1999 Ranked #1 in Canadian syndicated lending Leading securities trader on Canadian exchanges The leading M&A advisor in Canada for the past 11 years Significant improvement in performance in first six months of 2000 (ROE of 24.0%, up 430 b.p. - US GAAP) 2000 targets include revenue growth of >10% and net income growth of >20% reflecting efficiency gains Priority #4 Global Integrated Solutions Newly created (effective Q2/00) Comprises custody, cash management, trade finance, correspondent banking and large value payments Allows for a more integrated sales relationship with business clients Brings together specialized businesses that already have strong client relationships, well established franchises and leading market positions Q2/00 net income up 21% vs Q2/99, and six month up 29% ROE %, 380 basis point improvement from last year Efficiency ratio %, 120 basis point improvement from last year 39

21 40 Priority #4 Highly-rated custody operations Overall Global Custodian Pictet ROYAL TRUST Brown Bros. Harriman Northern Trust Chase Manhattan Deutsche Bank of New York HSBC GIS State Street Citibank Mellon 4.00 Investment Managers Pictet ROYAL TRUST Brown Bros. Harriman Northern Trust Chase Manhattan Bank of New York State Street Deutsche Bank HSBC GIS Citibank Mellon 3.95 * source: R&M Consultants survey, February 2000, ranking custodian performance on customer service, etc. Priority #4 Among top fifteen global custodians Top 12 International Custodians Year-end 1999 (Pro Forma) (US$ billions) 1. Bank of New York (US) 6, State Street (US) 5, Chase Manhattan (US) 5, Deutsche Bank (Ger) 3, Citibank (US) 3, Mellon (US) 1, Northern Trust (US 1, HSBC GIS (UK) 1, BNP/Paribas (Ger) 1, Dresdner (Can) Brown Brothers Harriman (Fra) Royal Bank/Royal Trust (US)

22 42 RY - attractive valuation Royal Bank US Regional Banks Price (06/16/00) C$74.25 US$ E P/E E P/E Price/book 2.1x 2.8x 43 RY a compelling investment Analyst upgrades this year 11 out of 13 analysts rate the bank a strong buy or a buy Canada s most profitable bank Leading market shares in most products Excellent wealth management franchise Targeting ebusiness leadership and international expansion Proven shareholder value orientation

23 44 Share price outperforming peers Relative share price performance (weekly close) 1-Feb 4-Feb 11-Feb 18-Feb 25-Feb 3-Mar 10-Mar 17-Mar 24-Mar 31-Mar 7-Apr RY BMO CM BNS TD S&P Banks Index 14-Apr 20-Apr 28-Apr 5-May 12-May 19-May 26-May 2-Jun 9-Jun 16-Jun RY BMO BNS CM TD S&P Banks Index 45 Forward looking statements This presentation may contain certain forward looking statements with respect to the Canadian economy, Royal Bank s financial condition, results of operations, and strategies and objectives for the coming year(s). 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. Royal Bank cautions 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, changes in Canadian and/or global economic conditions including fluctuations in currencies, interest rates and inflation, regulatory developments, technological changes, the effects of competition in the geographic and business areas where the bank operates. Royal Bank cautions that the foregoing list of important factors is not exhaustive; when relying on forward looking statements to make decisions with respect to the bank, investors and others should carefully consider the foregoing factors and other uncertainties and events.