Peter Currie Vice-Chairman & CFO

Transcription

1 Peter Currie Vice-Chairman & CFO Schroder Salomon Smith Barney International Banking Conference New York November 2, 2000

2 Agenda 1. Canadian Economy 2. Canada s Banking Industry 3. Overview of Royal Bank 4. Strengths 5. Priorities 6. Investment Merit 1 Good morning/ Good afternoon. I ll be talking to you about Royal Bank s strengths, strategy and key priorities. Following that, my colleague Jim Rager, who s Vice-chairman Personal and Commercial Banking, will discuss the retail banking initiatives which we believe represent an important competitive advantage for Royal Bank. Before turning to Royal Bank, I d like to provide a quick synopsis of the Canadian economy and the banking industry in Canada.

3 Robust Canadian Economy Soft landing highly likely Canada s economy is poised for strong growth (3.5%), low inflation (2.8%) and flat interest rates (90 day T-bill rate of 5.5%) in 2001 Federal government running fiscal surplus, C$12 billion in fiscal year Tax rates coming down, with a five year commitment from the federal government Canada's technology sector was the driving force behind the economy's 4.7% overall growth in the second quarter There are encouraging signs that productivity is improving in Canada, similar to the U.S. 2 The Canadian economy is expected to continue to grow at a strong pace. We are expecting growth of 3.5% in Interest rates are expected to remain flat with the 90-day T Bill rate at 5.5% during 2001 and inflation is expected to run at 2.8%. Our inflation performance has been good, with September s core inflation of 1.3% down from 1.5% in August. Our productivity continues to improve as well, similar to the U.S. These economic indicators bode well for the Canadian banking industry.

4 Canada s Banking Industry Nationwide banking RY has 1,600 service delivery units and 4,500 ABMs coast- to-coast RY has over 1.2 million 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) Developed model 3 The banking model in Canada is well developed. We have full nationwide banking, and a highly efficient clearing system which ensures that there s virtually no float one of the reasons our margins are narrower than in the US. Competition is fierce and we ve learnt to be competitive and to generate solid returns even in that environment. Since partial deregulation in the 1980s, Royal Bank, through acquisitions, has broadened its range of financial services to include investment banking, brokerage, money management, trust and insurance. We have a long history of successfully operating a diversified business platform and integrating acquisitions. We allow functional autonomy where the acquired company has competencies we lack or need. And our current top leadership includes employees of acquired companies.

5 Overview of Royal Bank RY - premier Canadian bank Canada s largest bank by market capitalization and assets, and leader in most products and businesses personal & commercial financial services (including insurance), wealth management, corporate & investment banking, and transaction processing Canada s most profitable bank (19.5% ROE - Q3/00) Profitable and well diversified business & geographic mix Successful cross-selling culture 4 Royal Bank is Canada s largest bank by market capitalization, and assets, and the leader in most businesses -- within personal and commercial banking, insurance (among banks), wealth management, corporate and investment banking and transaction processing. We re also Canada s most profitable bank as measured by ROE. We have a well-diversified business and geographic mix, which I will show you shortly. And we have a successful cross-selling culture, which Jim Rager will discuss later.

6 Strength #1 Shareholder orientation Reflected in our focus on financial performance and returns acquisition discipline sound risk and capital management 5 I d like to spend a few minutes outlining what we believe are Royal Bank s major strengths. First, a strong shareholder orientation. It s reflected in our focus on financial performance and returns, acquisition discipline, and sound risk and capital management.

7 Strength #2 Distribution capabilities Personal & Commercial Banking mobile sales force - 1,100 people meet customer on their premises and at their convenience sell mortgages and investment products Wealth management 1,500 investment advisors Insurance division 400 agents Largest distributor of mutual funds in Canada (3rd largest mutual fund manager) 6 Second, our distribution capability. In personal and commercial banking we have a mobile sales force of 1,100 people selling mortgages and investment products. This results in better customer service and sales, and low fixed costs. Add to that 1,500 investment advisors in wealth management and another 400 agents in our insurance division. We are also the largest distributor of mutual funds in Canada.

8 Strength #2 Distribution capabilities Canadian on-line customers growing rapidly 1,067,000 customers at July 31, 2000 (812,000 banking and 255,000 brokerage) Growing at a rate of 12,000-14,000/week 2,000, , , ,000 1,067,000 10/31/99 1/31/00 4/30/00 7/31/00 Target 2002 Customer penetration 5.3% 6.5% 8.8% 10.7% 20.0% 7 Internet banking has taken off, with a customer base in Canada of 1.1 million, double the level at the end of This represents an 11% customer penetration level, and we re targeting 20% in 2002.

9 Results in more stable returns and less volatile earnings Q3/00 Strength #3 Well diversified business mix NIAT growth* 30% ROE 20.2% Personal & commercial financial services 55% Wealth management 17% NIAT growth* 39% ROE 41.6% Transaction processing 7% NIAT growth* 45% ROE 43.2% Corporate & investment banking 22% NIAT growth* 23% ROE 18.5% *growth over core Q3/99 results US GAAP 8 A third strength is our well-diversified business mix. This results in more stable returns and less earnings volatility than is the case for some of our competitors. Our family of businesses have lived together for over a decade and learnt to help each other succeed, resulting in high cross-sales numbers that Jim will show you shortly.

10 Strength #4 Leadership in most products in Canada #1 wealth management organization in Canada #1 in 3 businesses (full-service brokerage, private banking, investment management and trust) #1 in mutual funds among the banks (#3 overall in the country) Global private banking among top 20 in the world and rated #1 best offshore bank (Financial Times) #2 in discount brokerage ROE in this segment >40% 9 A fourth strength is our leadership in most products in Canada We are the #1 wealth management organization in the country, with leading positions in full-service brokerage, global private banking, investment management and trust. Our private banking operations rank among the top 20 in the world and were rated by Financial Times as the best offshore bank last year. In mutual funds, we re the #1 manufacturer among the banks but #3 overall in the country, and #2 in discount brokerage.

11 Strength #4 Leadership in most products in Canada 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 (Fra) 1, Dresdner (Ger) Brown Brothers Harriman (US) Royal Bank/Royal Trust (Can) We believe we re the largest processing bank in the country, and our custody operations rank among the top 12 in the world.

12 Highly-rated custody operations Strength #4 Leadership in most products in Canada 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. 11 We consistently receive very high rankings from money managers and consultants alike.

13 Strength #4 Leadership in most products in Canada Market Share 1 RY Ranking Residential mortgages Consumer credit 2 Personal deposits 15.3% 17.0% 15.7% #1 #1 #2 1 of all financial institutions in Canada 2 consists of personal loans and credit cards 12 In retail banking, we have the highest market shares of mortgages and consumer credit and are #2 in personal deposits.

14 Strength #4 Leadership in most products in Canada Top-ranked underwriter of debt and equity securities in Canada for the past 11 years Largest provider of syndicated loans in Canada, among the top 25 in North America and among the top 10 non-us banks globally The leading mergers & acquisitions advisor in Canada for the past 11 years, advising on 11 of the 25 largest transactions involving Canadian corporations in 1999 Among the world's top 10 energy banks 13 And our corporate and investment bank, RBC Dominion Securities, has been the top-ranked securities underwriter in Canada for the past 11 years, in addition to winning other accolades mentioned on this slide.

15 Strength #5 Strong customer information & cross-sales One of the first Canadian banks to create customer database 20+ years of data (developed in 1970 s) 10 million customers, segmented by profitability and life cycle focus on lifetime profitability of customer 14 A fifth strength is our strong customer information and cross-selling abilities, as mentioned on this slide. Jim Rager will provide details about this in his remarks.

16 Key Priorities 1. Strong fundamentals 2. ebusiness leadership 3. Expansion outside Canada 4. Growth of high-return or high P/E businesses 15 Four priorities It s with the intention of building upon these strengths and capitalizing on other opportunities that we ve adopted four key priorities -- strong fundamentals, ebusiness leadership, expansion outside Canada, and growth of high-return or high-p/e businesses. 1. Strong fundamentals With regard to fundamentals, we aim to be in the top quartile of North American banks in financial performance that is ROE, EPS growth, topline growth, cost control, asset quality measures and capital management.

17 Priority #1 - Strong fundamentals Demonstrated track record of profitable growth EPS (C$) (1,2) and ROE (1) 18.4% 20.3% 19.5% 16.0% 15.8% 16.0% 16.6% $0.87 $0.87 $0.78 $0.64 $0.62 $0.67 $0.70 Q1/99 Q2/99 Q3/99 Q4/99 Q1/00 Q2/00 Q3/00 Core fully diluted earnings per share Core return on common equity 1 excludes one-time items - no one-time items in Q2/99 and the 9 months of reflects impact of recent stock dividend (same impact as 2 for 1 stock split) US GAAP 16 The trends in our ROE and EPS are very favourable.

18 Priority #1 - Strong fundamentals Highest EPS growth rate among Canadian Banks Change in core EPS 1 (Q3/00 vs. Q3/99) 29.4% 28.6% 20.5% 12.5% 4.6% -34.4% RY CM BNS NA BMO TD 1 excludes unusual items (restructuring charges, gains on dispositions and writedowns) for all the banks and based on accrual (not cash) EPS Cdn GAAP 17 Among Canadian banks, our core EPS growth was the strongest in the third quarter, ended July 31.

19 Priority #1 - Strong fundamentals Strong performance versus U.S. banks Royal Bank Q3/00 vs. Q3/99 US Banks* Q2/00 vs. Q2/99 EPS growth 32% 16% Revenue growth 13% 7% * Source: Goldman Sachs report of August 11, 2000 US GAAP 18 In our third quarter, both earnings and top line growth were about double the level of US banks second quarter performance.

20 Priority #1 - Strong fundamentals Highest Canadian bank ROE Q3/00 Core ROE % 20.1% 19.7% 17.8% 18.1% 15.8% 15.0% 14.7% 15.1% 14.5% 15.3% 9.7% RY BNS NA CM BMO TD ROE Cash ROE 1 excludes unusual items (restructuring charges, gains on dispositions and write-downs) for all the banks Cdn GAAP 19 And we also had the highest core ROE in the industry, on both an accrual and a cash basis.

21 Priority #1 - Strong fundamentals Consistently highest Canadian bank ROE Core ROE % 19.6% 18.5% 16.6% 18.7% 20.8% 19.7% 15.9% 16.7% 17.0% 16.2% 16.7% 14.7% 13.7% Q1/00 Q2/00 Q3/00 Royal Bank's core ROE Other Canadian banks' core ROE RY ROE Ranking #1 #1 #1 #1 #1 #1 #1 1 excludes unusual items (restructuring charges, gains on dispositions and write-downs) for all the banks Cdn GAAP 20 We ve consistently recorded the highest ROE among Canadian banks, and well above the average for our competitors.

22 Priority #1 - Strong fundamentals 13% top-line growth (Q3/00 vs. Q3/99) Growth by segment 25% 12% 14% 14% 13% = Personal & commercial financial services Wealth management (Royal Investment Services) Corporate & investment banking Transaction processing (Global Integrated Solutions) Royal Bank Financial Group US GAAP 21 I spoke earlier about the strength of our diversified business base. It s evident in our broad-based top-line performance. Each business segment generated double-digit revenue growth in the third quarter, with wealth management leading the way.

23 Priority #1 - Strong fundamentals Retail margin widens 14 bp expansion 3.68% 3.54% Q2/00 Q3/00 US GAAP 22 And our retail margin widened in the quarter due to better pricing discipline and a wider spread between the prime rate and core deposit costs.

24 Priority #1 - Strong fundamentals Substantial cost savings Already met objective of C$400 million of annual cost savings on a run-rate basis targeted for end of 2000 Q3/00 expenses about C$100 million lower than they would have been without cost savings base* costs up 1% while revenues up 13% over Q3/99 *base costs exclude costs for strategic initiatives and performance-related costs US GAAP 23 On the cost front, we d mentioned early last year that we were targeting annual savings of $400 million on a run-rate basis by the end of 2000, and indeed we ve already met that objective. Had it not been for the cost savings program we embarked upon last year, our expenses in the third quarter would have been about $100 million higher than they were. It is these savings that resulted in our base costs rising just 1% over a year ago, compared to revenue growth of 13%.

25 Priority #1 - Strong fundamentals Competitive efficiency ratio Q3/00 core efficiency ratios % 71.7% 63.0% 64.5% 65.9% 55.9% BNS RY BMO NA CM TD 1 excludes unusual items (restructuring charges, gains on dispositions and write-downs) and based on accrual (not cash) numbers. Cdn GAAP 24 We now rank second in the industry and have improved our standing despite the fact that the higher-efficiency ratio wealth management segment now accounts for 17% of our earnings, up from 15% a year ago.

26 Priority #1 - Strong fundamentals Stable asset quality in Q3/ % 0.39% $ % 0.38% 0.37% $175 $173 $172 $172 Q3/99 Q4/99 Q1/00 Q2/00 Q3/00 Provision for credit losses (C$millions) PCL as % of average loans, BAs, and reverse repos US GAAP 25 Asset quality remains stable, with the provision for credit losses largely unchanged over the last few quarters.

27 Priority #1 - Strong fundamentals Capital ratios strengthen 3-5 year goal Q3/00 Q2/00 Q3/99 Common equity/ risk adjusted assets 7.0% 7.2% 7.1% 7.1% Tier 1 capital ratio 8.0% 8.5% 8.0% 8.4% Total capital ratio % 11.5% 11.1% 11.6% Issued $650 million of RBC TruCS TM (Trust Capital Securities) in Q3/00, included in Tier 1 and Total capital Cdn GAAP 26 Our capital ratios compare favourably to our goals, and have benefited from strong internal capital generation and the issuance of innovative Tier 1 capital.

28 Priority #2 - ebusiness leadership Objective to be leading ebusiness financial institution in Canada, with strong link to the U.S. Each business segment has ebusiness leadership mandate ebusiness group supports each segment s ebusiness strategies 27 ebusiness leadership Our second priority is to be the leading ebusiness financial institution in Canada, with a strong link to the US. Each of our business segments has a mandate to achieve ebusiness leadership. We also have an ebusiness group, to support and enable our various business segments ebusiness strategies.

29 Priority #2 - ebusiness leadership ebusiness objectives Build essential relationships with customers and partners Create and distribute selected world class ebusiness products and services Continually improve organizational cost efficiencies through the deployment of ebusiness technologies Create new ebusinesses 28 Our four key ebusiness objectives are to: One, build essential relationships with customers and partners, Two, create and distribute selected world class ebusiness products and services, Three, continually improve organizational cost efficiencies through the deployment of ebusiness technologies, and Four, create new ebusinesses.

30 Priority #2 - ebusiness leadership ebusiness initiatives Strategy Relationships Products & Services Reduce Base Cost Innovation Self-enrollment for on-line banking Initiative AOL Canada Sona Innovations Microcell Mediagriff Entrust Qpass ERNEX e-route Inc YouDecide.com SFNB DirectAg.com Magnet Bull & Bear Securities CashEdge VLINX.com PrimeStreet Prism S1 Technologies 29 Our various ebusiness initiatives support these strategies, as you can see on this chart. Press releases about these are available on our website.

31 Priority #2 - ebusiness leadership Recent announcements J.V. with Mediagrif to build vertical B2B electronic marketplaces J.V. with Bottomline Technologies to develop web-based custody Alliance with Chariots.com to provide on-line auto financing J.V. with Baldhead Systems to launch encrypted wireless banking and brokerage service for Palm organizer Launched e-select to provide on-line businesses with a new, real-time Internet payment service Preparing, with CashEdge Inc., a Q1/01 launch of an on-line account aggregation service to Canadian Internet banking users. Royal Bank also acquired approximately 10% of CashEdge s total equity Announced the creation of TradeMC, a global electronic procurement market, with IBM and Fluor Corporation, to allow businesses on-line purchases of supplies and capital goods. Royal Bank will acquire an equity stake in the new venture. 30 Some of our recent e-business announcements are listed on this chart.

32 Priority #3 - Expansion outside Canada Geographic diversification Net income contribution - 9 months 00 Domestic 67% International 33% Solid contribution from Europe - strong private banking operations profitable Caribbean retail operations growing U.S. operations focused Latin American & Asian operations US GAAP 31 Our third priority is international expansion. One-third of our nine-month earnings was international, and within Canada our operations are geographically well diversified.

33 Priority #3 - Expansion outside Canada Building integrated U.S. platform through focused acquisitions Personal & Commercial Financial Services SFNB Internet Banking U.S.$20 million Prism Financial Mortgage Origination U.S.$115 million Liberty Life & Liberty Insurance Services Insurance U.S. $580 million Wealth Management Bull & Bear Discount Broker Private Client Group Dain Rauscher Corp. US$1.5 billion Corporate & Investment Banking Teams in: - Global equity derivatives - High yield - Energy - Technology & communications Equity Capital Markets & Fixed Income 32 We re building an integrated US platform through focused acquisitions in our various business lines. These acquisitions have all been conducted within the last 2 years, with the largest 3 Dain Rauscher, Liberty Insurance, and Prism Financial this year. We have in our US stable now: the #1 internet bank in the United States (rated so for 6 consecutive quarters by Gomez Advisors) a mortgage origination company with strong internet origination capabilities insurance operations to be acquired through Liberty Life a small discount broker teams in targeted segments of investment banking and now, with Dain Rauscher, full-service brokerage and greater capabilities in investment banking

34 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 with 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 fee-based 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 33 The acquisition of Liberty Life and Liberty Insurance Services provides us with a stable earnings stream, a presence in the growing direct business, a significant presence in the emerging fee-based administration business and a well-known brand in the Southeastern US market. Liberty also provides opportunities to cross-sell insurance products to customers of Prism, SFNB and Bull & Bear and banking products to customers of Liberty.

35 Priority #3 - Expansion outside Canada US expansion - Prism Financial Acquired for US$115 million in April niche entry into US residential mortgage origination Growing on-line capability, salesforce of over 1,100 loan officers, 180+ branches in 27 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 Announced deal to buy AMRESCO Builder Finance Group (ABFG), from AMRESCO Inc. - potential cross-selling opportunities 34 Chicago-based Prism Financial Corporation, originates, sells and brokers residential mortgage loans. It s been one of the fastest growing mortgage companies in the $4.5 trillion US mortgage market and has grown over 100% annually in the last three years. It adds to our US network with over 180 offices. It has a rapidly growing Internet origination capability and a successful private labeling strategy on-line. It originates the same amount of mortgages as we originate here in Canada. The company has a strong service orientation driven by its experienced sales force of over 1,100 and a good cost culture.

36 Priority #3 - Expansion outside Canada US expansion - Dain Rauscher RY to acquire Dain Rauscher for US $1.456 billion. DRC s Private Client Group 14th largest U.S. retail brokerage firm based on investment advisors (1,100+) 83 offices in 21 mostly Western states - many in Minnesota, Washington and Texas Assets under administration of U.S. $68 billion Approximately 500,000 active customer accounts in 250,000 households DRC s Equity Capital Markets & Fixed Income 42 analysts covering 420 companies Seasoned distribution team and market maker in 400 stocks Focus on bond sales, underwriting, and research services to middle-market investors and issuers Largest municipal underwriter of any regional firm; #9 nationally in first half And our latest acquisition, announced September 28, is Dain Rauscher. It s private client group is the 14 th largest U.S. retail brokerage firm with over 1,100 investment advisors. It has approximately 500,000 active customer accounts, and assets under administration of US $68 billion. It has a footprint of 83 brokerage offices spread across 21 states, with many of those offices in Minnesota, Washington, and Texas. Dain Rauscher s investment banking group has substantial capabilities in equity capital markets and fixed income. In fact, Dain Rauscher has over 40 analysts covering more than 400 companies.

37 Priority #3 - Expansion outside Canada US expansion - Dain Rauscher Private Client Group Doubles size of RY s North American fullservice brokerage operation Represents important step in building a North American wealth management platform Provides a platform to grow internally and through future acquisitions Equity Capital Markets & Fixed Income Enhances RY s ability to serve domestic clients in the US Provides stronger US equity origination and distribution and allows us to build a more global investment banking boutique DRC has a strong position in the technology and energy sectors, both areas we ve targeted for expansion in the U.S. 36 The combined company will double the size of our North American fullservice brokerage operation. We intend to grow the wealth management platform internally and through future acquisitions On the investment banking side, Dain allows us to build a better U.S. investment-banking boutique with a strong position in the technology and energy sectors, both areas we ve targeted for expansion in the U.S. It enhances our equity research, origination and distribution capability in the U.S.

38 Priority #4 - Grow high-return, high-p/e businesses Primary focus on wealth management, but all segments have selected businesses for priority growth Continue to identify business lines warranting special attention (example Global Integrated Solutions segment created this year) Lower performing business lines to be restructured or sold Outsourcing opportunities to be pursued 37 Our fourth priority is growth of high-return, high-p/e multiple businesses The primary focus is on wealth management, but all the business groups have selected segments for priority growth. We will continue to identify business lines warranting special attention, such as the processing businesses which were brought together in a separate segment this year. At the same time, lower performing business lines will be re-structured or sold, for example the commercial cards portfolio which was sold in the second quarter. We will also continue to outsource activities that do not represent core competencies, as we did with card processing which was outsourced to Total Systems in Georgia.

39 RY - Attractive Valuation Price C$46.00 (10/27/00) US$30.19 Bank Indices* U.S. U.K. S&P FTSE Royal Bank Regional Retail 2000E P/E E P/E Price/book 2.5x 2.9x 3.7x * Source: IBES 38 Although our share price has improved, we continue to be undervalued relative to banks around the world. Also, Canada s economic prospects look better on a comparative basis than they have for years.

40 RY - a Compelling Investment Several analyst upgrades this year 11 out of 13 analysts rate the bank a buy or higher Canada s most profitable bank, aiming for even better performance Leadership in most products Excellent wealth management franchise Successful cross-selling culture Commitment to ebusiness leadership and disciplined international expansion Positioned for continued growth 39 Most analysts rate us strong buy or buy. As Canada s most profitable bank, we re aiming for even better performance. With leadership in most products, an excellent wealth management franchise, commitment to ebusiness leadership, disciplined international expansion and successful cross-selling culture, we re positioned for continued growth. I ll now turn it over to Jim Rager, Vice-chairman Personal and Commercial Banking, to discuss our successful retail banking initiatives. Jim

41 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. 40