ROYAL BANK REPORTS FOURTH QUARTER 1999 RESULTS

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1 ROYAL BANK REPORTS FOURTH QUARTER 1999 RESULTS TORONTO, November 19, 1999 Royal Bank of Canada today reported its financial results for the fourth quarter and year ended October 31, The bank s financial results and discussion are prepared in accordance with U.S. generally accepted accounting principles (GAAP). Canadian GAAP financial statements, financial highlights and results by business segment are also provided on pages 28-35, while earnings numbers are shown in the tables on pages 1 and 2. To facilitate comparability, an explanation of significant differences between U.S. and Canadian GAAP is provided on pages Quarterly Highlights Q4/99 Q3/99 Q4/98 U.S. GAAP Net income reported (millions) $479 $452 $423 Net income core* (millions) $479 $462 $435 Fully diluted EPS reported $1.40 $1.30 $1.22 Fully diluted EPS core* $1.40 $1.33 $1.26 Return on equity reported 16.6% 15.6% 15.9% Return on equity core* 16.6% 16.0% 16.4% Canadian GAAP Net income reported (millions) $484 $466 $435 Net income core* (millions) $484 $476 $435 Fully diluted EPS reported $1.39 $1.33 $1.25 Fully diluted EPS core* $1.39 $1.36 $1.25 Return on equity reported 16.6% 16.2% 16.5% Return on equity core* 16.6% 16.6% 16.5% * Excluding one-time items shown on page 21 (U.S. GAAP) and page 30 (Canadian GAAP). As shown above, in the fourth quarter of 1999, core net income (i.e., excluding one-time items) was $479 million, up 10% from a year ago and up 4% from the third quarter of Core fully diluted earnings per share were $1.40, up 11% from a year ago and up 5% from last quarter. The increase in earnings compared to a year ago resulted from strong growth in non-interest revenues (other income), while the increase from last quarter reflected lower core provisions for credit losses and also solid revenue growth. Core return on common shareholders equity was 16.6%, up from 16.4% a year ago and 16.0% last quarter. ROYAL BANK OF CANADA Fourth Quarter 1999 Report 1

2 Full Year Highlights U.S. GAAP Net income reported (millions) $1,725 $1,772 Net income core* (millions) $1,813 $1,789 Fully diluted EPS reported $4.97 $5.17 Fully diluted EPS core* $5.25 $5.22 Return on equity reported 15.3% 17.6% Return on equity core* 16.1% 17.8% Canadian GAAP Net income reported (millions) $1,757 $1,824 Net income core* (millions) $1,859 $1,827 Fully diluted EPS reported $5.01 $5.30 Fully diluted EPS core* $5.32 $5.31 Return on equity reported 15.6% 18.4% Return on equity core* 16.6% 18.5% * Excluding one-time items shown on page 21 (U.S. GAAP) and page 30 (Canadian GAAP). As shown above, for the full year, core net income was $1,813 million, up 1% from 1998, while core fully diluted earnings per share were $5.25, also up 1%. Core return on common shareholders equity (ROE) was 16.1% (16.6% using Canadian GAAP), compared to 17.8% in 1998 (18.5% using Canadian GAAP). Net income from international operations accounted for 35% of total core earnings in The highest contribution was from Europe, where the bank has strong private banking operations. The bank also has profitable retail operations in the Caribbean, an expanding presence in the United States, and focused Latin American and Asian operations. This quarter, the bank sold its 33 non-branch, multi-tenant buildings to Oxford Properties Group Inc. and Ontario Municipal Employees Retirement System for $827 million (pre-tax). Under the terms of the sale, the bank has leased back from the purchasers all the space that it presently occupies in these buildings. The sale of the properties resulted in a gain of approximately $350 million with associated human resource expenses of $5 million for a net pre-tax gain of $345 million ($195 million after-tax), of which $90 million ($51 million after-tax) was recognized in the fourth quarter. A similar $90 million general provision was recorded in the quarter. The remaining net gain of $255 million ($144 million after-tax) will be deferred and amortized over the approximately 10-year average term of the leases. In the fourth quarter, specific provisions for credit losses fell by $170 million from the level in each of the first three quarters of 1999, reflecting improvement in the quality of the personal and commercial loan portfolios. Accordingly, specific provisions for credit losses declined to $530 million from $555 million in The bank recorded a $230 million general provision in the fourth quarter, including the $90 million mentioned above. The general allowance (accumulated general provisions) at October 31, 1999 was $1,080 million or.72% of risk-adjusted assets, up from $850 million or.54% a year ago. ROYAL BANK OF CANADA Fourth Quarter 1999 Report 2

3 FULL YEAR 1999 PERFORMANCE VERSUS OBJECTIVES (U.S. GAAP, except for capital ratios) Objective 1: Valuation Maintain valuation levels (share price/book value and share price/earnings) that are in the top quartile of the TSE Banks and Trusts Index. Performance: Share price/book value of 1.9 times at October 31, 1999 in top quartile. Share price/earnings of 10.9 times (based on analysts average earnings estimate for 2000), also in top quartile. Objective 2: Earnings growth Grow fully diluted earnings per share by 4-7%. Performance: Core fully diluted earnings per share (i.e., excluding one-time items) up 1% from Objective 3: Revenue growth Achieve revenue growth in the mid-single digits and maintain or enhance market shares in personal banking products and mutual funds. Performance: Core revenue growth of 7%, at the higher end of the objective. Market shares (compared to all financial institutions in Canada) increased to 15.3% from 14.8% a year ago for residential mortgages and to 16.6% from 16.0% for personal loans, but declined to 15.8% from 16.1% for personal deposits and to 8.6% from 8.8% for mutual funds. Objective 4: Expense growth Contain expense growth to a rate lower than the rate of revenue growth. Performance: Core expense growth of 9% versus core revenue growth of 7%. Objective 5: Portfolio quality Achieve a ratio of specific provisions for credit losses to average loans (including reverse repurchase agreements and bankers acceptances) of.35% -.40%. Performance:.30%, better than target range. Objective 6: Capital management Maintain strong capital ratios through careful growth in risk-adjusted assets. Performance: Common equity to risk-adjusted assets of 7.1%, up 90 b.p. from October 31, 1998, Tier 1 capital ratio of 8.1%, up 70 b.p., and Total capital ratio of 11.2%, up 70 b.p.. Risk-adjusted assets down 5% from year-end ROYAL BANK OF CANADA Fourth Quarter 1999 Report 3

4 2000 OBJECTIVES Objective 1: Valuation Maintain valuation levels (share price/book value and share price/earnings) that are in the top quartile of the TSE Banks and Trusts Index. Objective 2: Earnings growth Grow core fully diluted earnings per share (i.e. excluding one-time items) by 12-14%. Objective 3: Return on common shareholders equity Achieve a return on equity within medium-term goal range of 17-20%. Objective 4: Revenue growth Achieve revenue growth in the mid-single digits and maintain or enhance market shares in personal banking products and mutual funds. Objective 5: Expense growth Contain expenses to a level that allows achievement of a 59.5% efficiency ratio (using Canadian GAAP) exiting the fourth quarter of Objective 6: Portfolio quality Achieve a ratio of specific provisions for credit losses to average loans (including reverse repurchase agreements and bankers acceptances) of.30% -.40%. Objective 7: Capital management Maintain strong capital ratios while completing the 3.5% share repurchase program announced in May ROYAL BANK OF CANADA Fourth Quarter 1999 Report 4

5 CHAIRMAN S MESSAGE The fourth quarter was marked by several positive developments. First, core earnings per share were up 11% from a year ago and 5% from last quarter. Second, specific provisions for credit losses were reduced by $170 million from the level in each of the previous three quarters, mainly due to an improvement in our personal and commercial loan portfolios. We used a large portion of this reduction, together with a one-time gain of $90 million, to record a $230 million general provision. This brings our total general allowance (accumulated general provisions) to $1,080 million or.72% of risk-adjusted assets, up from.54% a year ago. Our impaired loans fell by a further 9% this quarter. Third, we repurchased 4.4 million common shares during the fourth quarter, bringing total repurchases since the end of June to 5.2 million shares, while keeping capital ratios in line with our medium-term goals and up substantially from a year ago. Our objective for next year is to maintain strong capital ratios while completing the 3.5% (10.9 million shares) repurchase program announced in May We may consider renewing the repurchase program if circumstances permit. Fourth, revenue growth was very strong this quarter, with core revenues up 12% over a year ago and 4% from last quarter. Full-year revenues were up 7% from 1998, at the higher end of our mid-single digit growth objective for Core non-interest revenues or other income, in particular, showed exceptional growth, rising 22% from a year ago, 4% from last quarter and 13% for all of Non-interest revenues now account for over half of our total revenues. This reflects not only a stronger capital market environment than a year earlier, but steps we ve taken to grow our high-return and high-p/e multiple businesses particularly wealth management. In 1999, wealth management s earnings rose 14% from 1998, with solid performances from global private banking, global custody, full-service brokerage and discount brokerage operations. We ve made several international acquisitions and alliances in wealth management over the past year and a half, the latest addition being Ernst & Young s private banking operations in Guernsey. In corporate & investment banking, we ve streamlined our international infrastructure, focused on more profitable relationships and generated much higher revenues from Hambros bond operations in the UK, bought last year, and from the global equity derivatives team acquired in the US in The provision for credit losses has fallen from last year as well. In all, corporate & investment banking s earnings were up more than 50% over Our international earnings represented 35% of our total core earnings in This was despite substantial investments in Security First Network Bank which continues, for the fourth successive quarter, to be rated number 1 among 78 internet banks in the United States. Personal & commercial banking grew core earnings by 14% over last year s fourth quarter. In 1999, net income was up 1%, but would have been up 5% over 1998, excluding investments in Security First Network Bank, Canadian electronic commerce and insurance activities this year. ROYAL BANK OF CANADA Fourth Quarter 1999 Report 5

6 We will continue to make these necessary investments for future growth. To allow for that, and yet achieve a 59.5% efficiency ratio exiting the fourth quarter of 2000, we intend to take over $400 million of costs out of our base by the end of next year. Among our other aggressive objectives for 2000 are growth in fully diluted earnings per share of 12-14% and a return on common shareholders equity of 17-20%. I look forward to reporting on our progress next year. John E. Cleghorn Chairman and Chief Executive Officer ROYAL BANK OF CANADA Fourth Quarter 1999 Report 6

7 RESULTS BY BUSINESS SEGMENT (Tables on pages 20-22) Contributions to this quarter s core net income were 71% from personal & commercial banking, 19% from wealth management, 23% from corporate & investment banking and (13)% from the other segment. These compared to 69%, 19%, 15% and (3)%, respectively, a year ago. The net gain this quarter of $51 million after-tax on the real estate sale was recorded in the other segment, while the one-time general loan loss provision of $51 million after-tax was recorded in personal & commercial banking ($20 million) and corporate & investment banking ($31 million). For the full year, core net income contributions were 61% from personal & commercial banking, 18% from wealth management, 25% from corporate & investment banking and (3)% from the other segment, compared to 61%, 16%, 16% and 7%, respectively, in Core business segment results are provided on page 22. The discussions below refer to those core numbers (i.e., excluding one-time items). Personal & commercial banking Fourth quarter net income was $340 million, up 14% from a year ago, as revenue growth of 11% far outpaced expense increases of 4%. Return on equity (ROE) for the segment was 27.1%, down from a year ago largely due to the reallocation of some capital from the other segment to the three major operating segments, including personal & commercial banking, in the first quarter of For the full year, net income was up 1% from 1998 and return on equity was 23.4%. Net income would have been up 5% excluding investments in Security First Network Bank, Canadian electronic commerce and insurance. Wealth management Fourth quarter net income was $89 million, up 10% from a year ago, with substantially higher earnings from the private client division (full-service brokerage), global private banking, and Action Direct (discount broker). Action Direct s revenues, number of accounts and assets under administration were up 54%, 25%, and 38%, respectively, over a year ago. Total assets under administration were up 17% from a year ago to $968 billion, while assets under management rose 12% to $82 billion at October 31, ROE was 48.5%, down 260 b.p. from a year ago due to higher capital allocation in the first quarter of this year. Full-year 1999 net income of $322 million was up 14% from 1998 and accounted for 18% of the bank s total earnings, up from 16% last year. Wealth management s objective is to raise its earnings contribution to 25% in less than five years. ROYAL BANK OF CANADA Fourth Quarter 1999 Report 7

8 Corporate & investment banking Other Fourth quarter net income was $111 million, up 68% from a year ago, reflecting very strong revenue growth and a decline in the provision for credit losses. Return on equity strengthened to 22.3% from 13.7% in the fourth quarter of Full year 1999 net income was $448 million, up 52% from 1998, due to substantially lower provisions for credit losses and solid revenue growth. Net income in the fourth quarter was $(61) million versus $(11) million a year ago. Full year net income was $(58) million compared to $125 million in RESULTS OF OPERATIONS Revenues Total revenues were $2.8 billion in the fourth quarter, excluding this quarter s one-time gain of $95 million from the real estate sale. Core revenues were up 12% from a year ago. In 1999, total core revenues were $10.5 billion, up 7% from Net interest income Taxable equivalent net interest income was $1.3 billion in the fourth quarter, up 4% from a year ago. The net interest margin was 1.94%, up from 1.89% a year ago and 1.86% last quarter. In 1999, taxable equivalent net interest income was $5.2 billion, up 1% from The net interest margin was 1.91%, down from 1.95% in Non-interest revenues In the fourth quarter, core non-interest revenues were $1.4 billion, up $254 million or 22% from a year ago. Fees from capital markets, card services, trading, insurance, and investment management and custodial activities all showed very solid growth, reflecting healthier capital markets and the bank s growth initiatives. As a percentage of total revenues, non-interest revenues were 51% this quarter, up from 48% a year ago. For the full year, core non-interest revenues were $5.4 billion, up 13% from As a percentage of total revenues, non-interest revenues were 51% this year, up from 48% in The bank s objective is to continue to grow the proportion of non-interest revenues. ROYAL BANK OF CANADA Fourth Quarter 1999 Report 8

9 Non-interest expenses Core non-interest expenses increased 14% from the fourth quarter of The real estate sale resulted in one-time expenses of $5 million this quarter. For the full year, core non-interest expenses were up 9%. These growth rates reflect substantially higher expenses this quarter, and in 1999, for strategic initiatives largely expansion of the Atlanta-based internet bank, Security First Network Bank, the insurance business and wealth management operations. The bank incurred expenses on strategic initiatives totaling $70 million in the fourth quarter and $151 million in 1999, up from $12 million in the fourth quarter of 1998 and $27 million in The higher expense growth rates also result from the acquisition, in this year s first quarter, of the outstanding participating preferred shares of RBC Dominion Securities Limited held by certain key employees. This has resulted in higher non-interest expenses of $26 million in the fourth quarter and $104 million in 1999 since the former holders of the participating preferred shares now receive direct compensation instead. Greater performance-based compensation costs, relating largely to much better results in the corporate and investment banking segment compared to a year ago, also led to higher expenses. The core efficiency ratio was 68.1% in the fourth quarter versus 67.2% a year ago, and was 66.2% in 1999 compared to 64.9% in Base non-interest expenses (i.e., excluding expenses related to strategic initiatives, the acquisition of the participating preferred shares of RBC Dominion Securities, performance and one-time items) were up 3% between the fourth quarters of last year and this year, and from 1998 to On this basis, the base efficiency ratio improved substantially to 52.9% in the fourth quarter from 57.7% a year ago, and to 52.8% in 1999 from 54.9% in The bank is targeting a 59.5% core efficiency ratio (using Canadian GAAP) exiting the fourth quarter of This will require cost savings of more than $400 million by the end of next year. The bank is aiming for savings of over $100 million from reduced overhead functions. The removal and centralization of after-sales servicing and administrative activities from the bank s branches should result in cost savings of about $100 million. Another $100 million of savings are expected to come from a reduction in the amount spent on acquiring goods and services. Savings of approximately $75 million are expected from the reduction of international corporate banking and global financial institutions operations. The branch network will continue to be rationalized and restructured, resulting in a further $35 million of cost savings. These changes will result in fewer people somewhere between 3,000 and 4,000 less next year and another 1,000 to 2,000 less in 2001, using full-time equivalent numbers. The annual attrition level has historically run around 5%, or 2,500 people. CREDIT RISK MANAGEMENT Impaired loans Impaired loans (before deducting the allowance for credit losses) were $1.7 billion or 1.1% of related loans at October 31, 1999, down $173 million from $1.9 billion or 1.2% last quarter. ROYAL BANK OF CANADA Fourth Quarter 1999 Report 9

10 Impaired loans in Canada were $1.4 billion or 1.1% of related loans at October 31, 1999 compared to $1.5 billion or 1.1% last quarter. International impaired loans were $.3 billion or 1.3% of related loans versus $.4 billion or 1.6% in the third quarter of this year. Impaired loans in Asia fell to $127 million from $198 million last quarter, while impaired loans in Latin America were $10 million, unchanged from last quarter. The bank continued to lower its emerging market exposures, bringing its net Asian exposure down by 9% from last quarter and 47% from the height of the Asian crisis a year ago to $3.9 billion at October 31, The net Latin American exposure was brought down 12% from last quarter and 45% from a year ago to $2.2 billion. Provision for credit losses ($ millions) Q4/99 Q3/99 Q4/ Specific provision $ 5 $175 $100 $530 $555 General provision Country risk provision (80) Total provision for credit losses $235 $175 $100 $760 $575 Core provision for credit losses* $145 $175 $100 $670 $425 * Excluding one-time items As shown in the table above, specific provisions for credit losses fell significantly during the quarter, to $5 million from $175 million last quarter. This reflected an improvement in the quality of the personal and commercial loan portfolios. Accordingly, specific provisions for credit losses declined to $530 million from $555 million in The general provision this quarter was $230 million, including the $90 million referred to on page 2. This brings the bank s total general allowance (accumulated general provisions) to $1,080 million or.72% of risk-adjusted assets at October 31, 1999, up from $850 million or.54% a year ago. As a percentage of average loans (including reverse repurchase agreements and bankers acceptances), the specific provision for credit losses was.30% in 1999, better than the bank s objective of.35%-.40% for The allowance for credit losses totalled $1.9 billion or 1.2% of total loans (including reverse repurchase agreements and bankers acceptances) at October 31, 1999 compared to $2.1 billion or 1.3% a year ago. ROYAL BANK OF CANADA Fourth Quarter 1999 Report 10

11 BALANCE SHEET AND CAPITAL MANAGEMENT Assets Total assets were $273 billion at October 31, 1999, down 3% from a year ago and 2% from last quarter. Compared to last quarter, securities increased and all other asset categories declined. Total loans (before deducting the allowance for credit losses) declined by $1.3 billion from July 31, Business and government loans and acceptances fell by $2.0 billion as the bank continued to streamline its international corporate lending portfolio. However, personal loans were up $1.4 billion or 5%. Residential mortgages declined $.7 billion this quarter, but were up $1.5 billion or 2% excluding the impact of $2.2 billion of securitizations this quarter. Deposits Total deposits at October 31, 1999 were $188 billion, down 1% from last quarter, largely in international interest-bearing deposits. Capital Total capital (shareholders equity and subordinated debentures) at October 31, 1999 was $17.0 billion, up $1.1 billion from a year ago and down $550 million from last quarter. The decline from last quarter occurred as $290 million of internally generated capital was more than offset by $278 million of common share repurchases, a $410 million decline in preferred stock due largely to the redemption of noncumulative first preferred shares series F and series G, an $80 million reduction in debentures and a $70 million decline in accumulated other comprehensive income. In May, the bank announced its intention to repurchase up to 3.5% of its public common share float in a normal course issuer bid through the facilities of the Toronto and Montreal stock exchanges. During the one-year period beginning June 25, 1999 and ending June 23, 2000 the bank may purchase up to 10.9 million shares in the open market at market prices. During the fourth quarter, the bank repurchased 4.4 million common shares for $278 million, at an average price of $62.76 per share. Total repurchases in 1999 were 5.2 million common shares for $333 million, at an average price of $63.54 per share. Capital strength for Canadian banks is regulated pursuant to guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI) based on standards issued by the Bank for International Settlements. OSFI believes that a Canadian bank should attain Tier 1 and Total capital ratios of at least 7% and 10%, respectively. ROYAL BANK OF CANADA Fourth Quarter 1999 Report 11

12 At October 31, 1999, using OSFI guidelines and Canadian GAAP financial information, the bank s Tier 1 capital ratio was 8.1%, up from 7.4% a year ago. The Total capital ratio was 11.2%, up from 10.5% a year ago. Both ratios met the bank s medium-term (3-5 year) capital goals of 8% for Tier 1 capital and 11-12% for Total capital. The bank also met its third medium-term capital ratio goal of 7% for common equity to risk-adjusted assets, with a ratio of 7.1% at October 31, 1999, up from 6.2% a year ago. Riskadjusted assets were $149.1 billion, virtually unchanged from last quarter and down 5% since the end of Using guidelines issued by the Board of Governors of the Federal Reserve Board in the U.S. and U.S. GAAP financial information, the bank s Tier 1 and Total capital ratios at October 31, 1999 were 7.6% and 10.7%, respectively. ROYAL BANK OF CANADA Fourth Quarter 1999 Report 12

13 U.S. AND CANADIAN GAAP SIGNIFICANT DIFFERENCES Three months ended October 31, 1999 Year ended October 31, 1999 (in millions of Canadian dollars) As at October 31, 1999 Shareholders Net Income Equity Assets Canadian GAAP $484 $1,757 $12,615 $270,650 Reclassification of securities (1) - - (85) (85) Postretirement benefits other than pensions (2) (11) (37) (128) 97 Pension benefits (3) 5 (6) (27) (27) Trade date accounting (4) ,327 Merger consummation costs (5) Other (6) 1 (3) U.S. GAAP $479 $1,725 $12,408 $273,298 Three months ended October 31, 1998 Year ended October 31, 1998 (in millions of Canadian dollars) As at October 31, 1998 Shareholders Net Income Equity Assets Canadian GAAP $435 $1,824 $11,892 $274,399 Reclassification of securities (1) Postretirement benefits other than pensions (2) (6) (33) (91) 70 Pension benefits (3) (4) (21) (21) (20) Trade date accounting (4) ,520 Merger consummation costs (5) (14) (14) (14) (23) Other (6) U.S. GAAP $423 $1,772 $11,858 $281,074 (in millions of Canadian dollars) Three months ended July 31, 1999 As at July 31, 1999 Shareholders Net Income Equity Assets Canadian GAAP $466 $13,017 $278,563 Reclassification of securities (1) - (18) (23) Postretirement benefits other than pensions (2) (9) (116) 88 Pension benefits (3) (4) (33) (33) Trade date accounting (4) Other (6) (1) U.S. GAAP $452 $12,882 $278,748 (1) Under U.S. GAAP, securities are classified as trading account (carried at estimated current market value), available for sale (carried at estimated current market value) or held to maturity (carried at amortized cost). The net unrealized gain (loss) on available for sale securities, net of hedging activities and related income taxes, is reported as other comprehensive income within shareholders equity. Under Canadian GAAP, securities are classified as investment account (carried at amortized cost) or trading account (carried at estimated current market value). Classifying securities in accordance with U.S. GAAP decreased securities by $150 million, increased the related deferred income taxes included in other assets by $63 million, increased other assets by $2 million as a result of marking to market the instruments which hedge available for sale securities, and decreased shareholders equity by $85 million as at October 31, ROYAL BANK OF CANADA Fourth Quarter 1999 Report 13

14 (2) Under U.S. GAAP, the costs of postretirement benefits other than pensions are accrued over the working lives of employees in a manner similar to pension costs. Under Canadian GAAP, these costs are charged to income as incurred. The after-tax cost of providing postretirement benefits other than pensions in excess of the expenditures recognized under Canadian GAAP decreased net income under U.S. GAAP by $11 million for the three months ended October 31, 1999 and by $37 million for the year then ended. The cumulative pre-tax cost increased other liabilities by $225 million, the related deferred income taxes increased other assets by $97 million and shareholders equity decreased by $128 million as at October 31, (3) Under U.S. GAAP, the assumed discount rate used to determine pension costs reflects the rate at which the pension benefit obligation could effectively be settled at the beginning of the fiscal year. Under Canadian GAAP, a long-term weighted average discount rate is used to determine pension costs. The application of U.S. GAAP to the bank s pension accounting increased net income by $5 million for the three months ended October 31, 1999 (due to timing differences in expense recognition in the first three quarters) and decreased net income by $6 million for the year then ended (due to a lower discount rate under U.S. GAAP). The cumulative pre-tax cost decreased other assets by $48 million, the related deferred income taxes increased other assets by $21 million and shareholders equity decreased by $27 million as at October 31, (4) Under U.S. GAAP, trade date accounting for securities is used for both the balance sheet and the income statement. The bank s practice under Canadian GAAP is settlement date accounting for the balance sheet and trade date accounting for the income statement. The application of trade date accounting to the bank s balance sheet increased securities and other liabilities by $2,327 million as at October 31, (5) Under U.S. GAAP, costs incurred to effect a business combination accounted for as a pooling of interests are expensed as incurred. As a result, merger consummation costs of $24 million incurred in 1998 to effect the proposed merger with Bank of Montreal were charged to income in 1998 under U.S. GAAP. Under Canadian GAAP, these costs were deferred as other assets, and were to be charged directly to retained earnings when the merger was consummated. Following the rejection of the proposed merger by the Minister of Finance in December 1998, the deferred costs amounting to $24 million plus additional costs of $12 million were charged to income in the first quarter of 1999 under Canadian GAAP. The $36 million charged to income under Canadian GAAP exceeded, by $24 million, the $12 million charged to income under U.S. GAAP in the first quarter of This resulted in net income under U.S. GAAP being $14 million higher for the year ended October 31, (6) There are other differences between U.S. and Canadian GAAP which affect net income, shareholders equity and total assets. These include the marking to market of unsold mortgage-backed securities, valuations of insurance assets and liabilities, and other minor items. These increased net income under U.S. GAAP by $1 million for the three months ended October 31, 1999, and decreased net income by $3 million for the year then ended, and increased shareholders equity by $33 million, other assets by $336 million, and other liabilities by $303 million as at October 31, ROYAL BANK OF CANADA Fourth Quarter 1999 Report 14

15 In addition to the U.S. and Canadian GAAP differences noted above, there may also be, in certain circumstances, different applications of similar U.S. and Canadian GAAP. For example, U.S. banks may charge-off problem loans more quickly than is the practice in Canada. As a result, beginning in the second quarter, the bank accelerated the rate of charging off problem loans to be more in line with U.S. practice while still adhering to Canadian GAAP. This difference in practice has no effect on loans net of the allowance for credit losses, nor on net income and shareholders equity. FOURTH QUARTER OPERATING HIGHLIGHTS Personal & commercial banking In August, RBC Insurance made home and auto insurance products and services available to Quebec consumers. These products were previously available to customers in Ontario and Western Canada, and should be available to customers in the rest of Canada early in In September, the bank introduced six Small Business & Entrepreneur Advisory Councils across Canada to provide advice and expertise to the bank on the financial needs of small business owners. E-commerce initiatives In August, the bank signed four utilities to an electronic bill presentment pilot operated by e-route inc., a technology company jointly owned by Royal Bank and five other Canadian financial institutions. Full rollout is expected in 2000 and operation and support is being provided by BCE Emergis on a Microsoft Canada and TransPoint technology infrastructure. Electronic bill presentment allows customers to receive delivery of bills over the internet. In September, the bank joined an international group of banks in the establishment of the Global Trust Authority (GTA) to facilitate secure worldwide payments over the internet. The GTA s goal is to provide reliable online identification and authentication of both participants in a transaction, regardless of their location. In September, the bank announced the launch of an internet resource for Canada s small and mediumsized import and export businesses. The International Business Centre at provides around-the-clock information and services, while providing educational and networking opportunities for new and seasoned traders. In October, Security First Network Bank was rated as number one among 78 US internet banks for personal finance for the fourth consecutive quarter by U.S. e-commerce authority, Gomez Advisors Inc. ROYAL BANK OF CANADA Fourth Quarter 1999 Report 15

16 Wealth management In September, the bank s global private banking division announced the acquisition of the private client trust and fiduciary services businesses of Ernst & Young in Guernsey, Channel Islands. The deal comprises approximately $3.7 billion in client assets administered by the two companies being acquired, Monument Trust Company Limited and Bridgewater Administration Limited. In October, global securities services introduced a leading edge tri-party repurchase service in response to increased international market demand. With the launch of RepoExchange, the bank s global securities services becomes the first Canadian institution to deliver convenient, efficient, cost-effective solutions and expanded capability to buyers and sellers of repurchase agreements. Corporate & investment banking In September, RBC Dominion Securities hired a team of investment bankers and equity research analysts based in Houston. This will advance its strategy for the U.S. energy sector and will build upon its leadership in the Canadian energy market. In October, RBC Dominion Securities announced the formation of a full-service group to originate, distribute and trade high yield bonds. The group will encompass sales, trading, research, capital markets and origination and will be based in Greenwich, Connecticut. Other In October, the bank finalized the sale of 4.9 million square feet of gross leaseable area in 33 office buildings, processing and operations centres across the country. The buildings were sold to Oxford Properties Group Inc. and Ontario Municipal Employees Retirement System for $827 million (pre-tax). Under the terms of the sale, the bank has leased back from the purchasers all the space that it presently occupies in these buildings. The Year 2000 issue The Year 2000 issue arises from many computer systems expressing years by two digits rather than four, with the assumption that the first two digits are always 19. Such systems, if not modified or replaced, could misinterpret the year before and after January 1, 2000 (e.g. read 00 as the year 1900 rather than the year 2000). The results could range from miscalculations to system failure causing a temporary inability to process transactions or engage in normal business activities. The Year 2000 issue presents a significant risk and challenge to the bank because its business is highly dependent on complex systems and technology which have date-sensitive aspects. ROYAL BANK OF CANADA Fourth Quarter 1999 Report 16

17 The important computer systems that support the principal businesses within personal & commercial banking, wealth management and corporate & investment banking have undergone an extensive process of coding changes and testing, which included testing of related computer hardware and vendor software products. The last phase of testing was in a time machine environment used to test the ability of systems to roll-over from 1999 to 2000 before they were certified as Year 2000 ready. All of these systems and related technology components (many of which involved testing with external service providers) were modified and tested and certified by June 30,1999. The bank's Year 2000 program also covers other computer systems, hardware, and software programs throughout the bank, as well as embedded computer chips that are used in the operation of facilities such as vaults, security systems and premises. All of these systems and technology were modified or replaced (where required) and certified for Year 2000 readiness by June 30,1999. The bank has not deferred any material information technology projects as a consequence of its Year 2000 program. However, as a precautionary measure, it has restricted the development of new systems or changes to existing systems during the period July 2, 1999 to March 6, The impact of the Year 2000 issue also depends on the Year 2000 readiness of other parties, including financial institutions, governmental agencies, payment systems, exchanges, depositories, telecommunication companies, and other entities worldwide which provide data to, receive data from, or process data for, the bank. It also depends on the readiness of customers, counterparties and suppliers whose financial condition or operational capability is important to the bank. The bank has been working with external parties to mitigate the risk the Year 2000 issue poses to it and to the global financial community. Key external parties were identified and contacted to determine their Year 2000 plans and target dates, and the process is ongoing. In particular, the securities brokerage, mutual fund, investment management, custody and trading businesses have been working closely with exchanges, clearing agents, depositories and payment associations. Industry-wide street testing was completed by June 30, In addition, credit risk associated with the bank s borrowers and other counterparties may increase as a result of their individual Year 2000 issues. This could give rise to increases in impaired loans and provisions for credit losses in future years. The bank has taken certain steps to assess the Year 2000 risk to its major borrowers and counterparties and has incorporated a Year 2000 risk factor into its regular process for assessing borrower risk. However, it is not possible at this time to estimate the amounts of any increases in impaired loans and provisions for credit losses in future years. The bank s liquidity risk may also increase if the Year 2000 issue results in higher than normal drawdowns on loan commitments or withdrawals of deposits. The bank has taken certain steps to mitigate this increased liquidity risk, including increasing its holdings of liquid assets, lengthening the term of its funding, and arranging additional lines of credit with key central banks. All organizational units have prepared and tested contingency plans and the bank s Year 2000 program management office has co-ordinated these plans. However, there can be no assurance that the bank s contingency planning will fully mitigate the risks and uncertainties associated with the Year 2000 issue. ROYAL BANK OF CANADA Fourth Quarter 1999 Report 17

18 The bank believes that by modifying or replacing its systems where required and by monitoring the Year 2000 readiness of key external parties, and by developing contingency plans, it is mitigating its Year 2000 risks. However, due to the general uncertainty inherent in the Year 2000 issue, resulting in part from the uncertainty of the Year 2000 readiness of other parties, the bank is unable to determine at this time whether the Year 2000 issue will have a material and adverse impact on the bank s results of operations, liquidity and financial condition. The total cost of the bank s Year 2000 program over the period since 1995 is $170 million, of which $30 million represents the cost of new assets to be depreciated over their estimated useful lives, and $140 million represents operating costs being expensed as incurred. Approximately 98% of the cost of new assets and 91% of the operating costs have been incurred as at October 31, 1999, up from 25% and 55%, respectively, as at October 31, Caution regarding forward-looking statements Royal Bank, from time to time, makes written and oral forward-looking statements, included in this press release, in other filings with Canadian regulators or the US Securities and Exchange Commission, in reports to shareholders and in other communications. Such forward-looking statements include objectives for 2000 and the medium-term, and strategies to achieve those objectives, set forth herein. 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 economic conditions including fluctuations in interest rates and inflation, regulatory developments, technological changes and 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. Royal Bank (RY) is a global financial services group and a leading provider of personal and commercial banking, insurance products, wealth management, and corporate and investment banking. The bank and its key subsidiaries Royal Trust, RBC Dominion Securities, RBC Insurance, and Royal Bank Action Direct have approximately 52,000 employees (on a full-time equivalent basis) serving 10 million clients through more than 1,400 branches and offices in over 30 countries. Contacts: Nabanita Merchant, Senior Vice President, Investor Relations, (416) Stephen Dyck, Assistant Manager, Media Relations, (416) ROYAL BANK OF CANADA Fourth Quarter 1999 Report 18

19 R O Y A L B A N K O F C A N A D A Selected Financial Highlights U.S. GAAP (in millions of Canadian dollars, except per share and percentage amounts) Change from October As at and for the three months ended For the year ended Change from October 31 July 31 October 31 October 31 October 31 October Earnings Net interest income (1) 4 % $ 1,344 $ 1,283 $ 1,292 1 % $ 5,152 $ 5,101 Non-interest revenue 30 1,520 1,357 1, ,491 4,997 Gross revenues (1) 16 2,864 2,640 2, ,643 10,098 Provision for credit losses Non-interest expenses 13 1,892 1,722 1, ,141 6,510 Net income (3) 1,725 1,772 Return on common shareholders equity 70 bp 16.6% 15.6% 15.9% (230) bp 15.3% 17.6% Goodwill-adjusted return on common shareholders equity (2) 60 bp 18.3% 17.3% 17.7% (270) bp 16.9% 19.6% Balance sheet and off-balance sheet data Loans (2) % $ 154,050 $ 155,397 $ 157,392 Assets (3) 273, , ,074 Deposits 4 187, , ,005 Common shareholders equity 7 10,435 10,497 9,748 Assets under administration , , ,200 Assets under management 11 81,600 81,400 73,400 Capital ratios (Canadian basis) (3) Common equity to risk-adjusted assets 90 bp 7.1% 7.1% 6.2% Tier 1 capital 70 bp 8.1% 8.4% 7.4% Total capital 70 bp 11.2% 11.6% 10.5% Capital ratios (U.S. basis) (4) Common equity to risk-adjusted assets 90 bp 7.0% 7.0% 6.1% Tier 1 capital 80 bp 7.6% 7.7% 6.8% Total capital 60 bp 10.7% 11.1% 10.1% Common share information Shares outstanding (thousands) end of period - % 308, , ,791 - % 308, ,791 average basic 1 311, , , , ,662 average fully diluted (1) 313, , , , ,813 Earnings per share basic 13 $ 1.41 $ 1.31 $ 1.25 (5) $ 5.01 $ 5.27 fully diluted (4) goodwill-adjusted basic (2) (5) Share price high (17) $ $ $ (9) $ $ low close (11) (11) Dividends per share Book value per share period end Market capitalization ($ billions) (11) (11) Number of: Employees (full-time equivalent) ,026 52,246 51, ,026 51,776 Automated banking machines 268 4,585 4,556 4, ,585 4,317 Service delivery units: Canada (12) 1,410 1,360 1,422 (12) 1,410 1,422 International (5) (7) (7) (1) Taxable equivalent basis. (2) Goodwill-adjusted return on common shareholders' equity and goodwill-adjusted basic earnings per share are computed by adding back goodwill amortization after tax charged to net income in each period and reducing average common shareholders equity by the unamortized goodwill. (3) Represents the capital ratios under guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI), calculated based on Canadian GAAP financial information. (4) Represents the capital ratios under guidelines issued by the U.S. Federal Reserve Board, calculated based on U.S. GAAP financial information. (5) International service delivery units include branches, specialized business centers, representative offices, agencies and subsidiaries. ROYAL BANK OF CANADA Fourth Quarter 1999 Report 19

20 Earnings by Business Segment (1) (unaudited) U.S. GAAP (In millions of Canadian dollars, taxable equivalent basis) PERSONAL & CORPORATE & COMMERCIAL WEALTH INVESTMENT MANAGEMENT OTHER TOTAL Q4 Q3 Q4 Q4 Q3 Q4 Q4 Q3 Q4 Q4 Q3 Q4 Q4 Q3 Q Net interest income $ 1,170 $ 1,134 $ 1,099 $ 100 $ 91 $ 88 $ 131 $ 133 $ 159 $ (57) $ (75) $ (54) $ 1,344 $ 1,283 $ 1,292 Non-interest revenue ,520 1,357 1,171 Gross revenues 1,602 1,523 1, (46) (5) 2,864 2,640 2,463 Provision for credit losses (1) (21) (14) (40) Non-interest expenses (17) 68 1,892 1,722 1,675 Income taxes (2) (22) 4 (10) Net income $ 320 $ 273 $ 299 $ 89 $ 82 $ 81 $ 80 $ 116 $ 66 $ (10) $ (19) $ (23) $ 479 $ 452 $ 423 Net income as a % of total (3) (4) (6) Return on equity (%) (2.8) (3.4) (4.2) Efficiency ratio (%) (3) Average assets ($billions) Average loans ($billions) (1.5) (1.6) (1.3) Average deposits ($billions) (In millions of Canadian dollars, taxable equivalent basis, for the year ended October 31) PERSONAL & CORPORATE & COMMERCIAL WEALTH INVESTMENT MANAGEMENT OTHER TOTAL Net interest income $ 4,492 $ 4,224 $ 369 $ 347 $ 527 $ 689 $ (236) $ (159) $ 5,152 $ 5,101 Non-interest revenue 1,607 1,376 1,960 1,828 1,712 1, ,491 4,997 Gross revenues 6,099 5,600 2,329 2,175 2,239 1,988 (24) ,643 10,098 Provision for credit losses (43) (115) Non-interest expenses 3,764 3,491 1,841 1,701 1,431 1, ,141 6,510 Income taxes (2) (51) 111 1,017 1,241 Net income $ 1,068 $ 1,058 $ 322 $ 282 $ 370 $ 217 $ (35) $ 215 $ 1,725 $ 1,772 Net income as a % of total (2) Return on equity (%) (2.4) Efficiency ratio (%) (3) Average assets ($billions) Average loans ($billions) (1.5) (0.6) Average deposits ($billions) Earnings by Geographic Segment (unaudited) (In millions of Canadian dollars, taxable equivalent basis) Q4/99 Q3/99 Q4/ Canada Int'l Total Canada Int'l Total Canada Int'l Total Canada Int'l Total Canada Int'l Total Net interest income $ 1,164 $ 180 $ 1,344 $ 1,095 $ 188 $ 1,283 $ 1,109 $ 183 $ 1,292 $ 4,402 $ 750 $ 5,152 $ 4,409 $ 692 $ 5,101 Non-interest revenue 1, ,520 1, , ,171 4,277 1,214 5,491 3,729 1,268 4,997 Gross revenues 2, ,864 2, ,640 2, ,463 8,679 1,964 10,643 8,138 1,960 10,098 Provision for credit losses Non-interest expenses 1, ,892 1, ,722 1, ,675 6,054 1,087 7,141 5, ,510 Income taxes (2) ,017 1, ,241 Net income $ 332 $ 147 $ 479 $ 310 $ 142 $ 452 $ 284 $ 139 $ 423 $ 1,099 $ 626 $ 1,725 $ 1,091 $ 681 $ 1,772 (1) Personal & commercial banking comprises personal financial services, card services, insurance and business banking; Wealth management consists of global private banking, Royal Mutual Funds, RT investment management, DS private client division, global securities services, personal wealth management, and Action Direct; Corporate & investment banking comprises the corporate and investment banking business, global equity and global markets. Other consists largely of real estate operations, corporate treasury, distribution and service delivery, systems and technology and the discontinued LDC business. (2) Includes non-controlling interest and taxable equivalent adjustment. (3) Non-interest expenses as a percentage of gross revenues. ROYAL BANK OF CANADA Fourth Quarter 1999 Report 20