Canada's banking industry
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Canada's banking industry Canada's banking industry Document Transcript

  • John E. Cleghorn Chairman & CEO Presentation at UBS Warburg Financial Services Conference New York June 26, 2000 1 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 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
  • 4 Priority #1 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 5 Priority #1 Bonus plan encourages strong fundamentals Payout factors: • earnings growth • top-line growth • expense management • performance versus competition • customer service vs. other Canadian financial companies • EPS growth vs. 15 North American banks
  • 6 Priority #1 Strong performance versus U.S. banks Royal Bank US Banks* Q2/00 vs. Q2/99 Q1/00 vs. Q1/99 EPS growth 38% 12% Revenue growth 20% 7% Non-interest 31% 12% revenue growth * Source: Morgan Stanley Dean Witter report of May 2, 2000 US GAAP 7 Priority #1 Solid Q2/00 performance Target for Performance 3-5 year goal 2000 Q2/00 Q2/99 ROE 17-20% 17-20% 20.3% 15.8% EPS growth (fully diluted) - 12-14% 38% (9)% Revenue growth - mid-single digits 20% 4% Expense growth - < revenue growth 13% 8% Efficiency 59.5% - 62.4% 66.3% Specific provision for credit losses/ average loans, BAs & repos 0.35-0.40% 0.30-0.40% 0.30% 0.41% Dividend payout ratio 30-40% - 31% 37% Common equity to risk-adjusted assets 7.0% - 7.1% 7.0% Tier 1 capital (OSFI) 8.0% - 8.0% 7.1% Total capital (OSFI) 11.0-12.0% - 11.1% 11.4% *core numbers exclude one-time items - there were one-time items in Q2/98 US GAAP
  • 8 Priority #1 Favourable ROE & EPS trends (EPS C$) 20.3% 18.4% $1.73 16.6% $1.57 16.0% 15.8% 16.1% $1.40 $1.33 $1.27 $1.25 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 Priority #1 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
  • 10 Priority #1 20% top-line growth (Q2/00 vs. Q2/99) Growth by segment 38% 37% 20% 8% + + + = 5% Personal & Royal Investment Corporate & Global Royal Bank commercial Services (wealth investment Integrated Financial Group financial services management) banking Solutions (transaction processing) US GAAP 11 Priority #1 Non-interest revenue continues to grow Non-interest revenue as a % of total revenue* 56.1% 54.5% 51.1% 48.2% 45.3% 40.5% 1996 1997 1998 1999 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$83MM in 1996 US GAAP
  • 12 Priority #1 Less volatile trading revenues generate more sustainable earnings Growth in trading revenue (Q2/00 vs. 4-quarter trailing average) 116% 82% 73% 54% 48% 25% RY TD BNS CM BMO NA source: banks’ Q2/00 supplementary financial packages Cdn GAAP 13 Priority #1 Cost savings and revenue growth are improving efficiency Core efficiency ratio* 66.3% US GAAP Cdn GAAP 63.3% 62.4% 65.3% 62.4% 61.9% 59.5% Q2/99 Q3/99 Q4/99 Q1/00 Q2/00 TARGET exiting 2000 *excluding one-time items (none in Q2/99, Q1/00 & Q2/00).
  • 14 Priority #1 Strong efficiency ratio Q2/00 core efficiency ratios* 78.8% 71.5% 66.8% 61.9% 62.0% 58.0% BNS RY BMO NA CM TD *includes goodwill amortization and excludes one-time items. Numbers used to derive competitors’ ratios have been confirmed by them Cdn GAAP 15 Priority #1 Leader in efficiency improvement Change in core efficiency ratios* (Q2/00 vs. Q2/99) 1,300 180 -110 -300 -340 -340 RY BMO BNS CM NA TD *includes goodwill amortization and excludes one-time items Cdn GAAP
  • 16 Priority #1 Increasing investments in strategic initiatives (C$ millions) $76 $63 $54 $38 $10 Q2/99 Q3/99 Q4/99 Q1/00 Q2/00 US GAAP 17 Priority #1 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$853 million • Buyback program ended June 23, 2000
  • 18 Priority #1 History of dividend growth Dividends per common share in C$ 0.60 0.54 0.54 0.48 0.48 0.46 0.46 0.46 0.46 0.42 0.42 0.39 0.39 0.37 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) 19 Priority #1 Above-average dividend increases Percentage dividend increase in past year* 32% 25% 14% Peer 10% average 12% 6% 6% TD RY BNS CM BMO NA *indicated Q3/00 dividend versus Q3/99 dividend
  • 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 web- based 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
  • 22 Priority #2 eBusiness leadership • SFNB rated “best overall” Internet bank for 6th consecutive quarter • Canadian on-line customers 2,000,000 975,000+ 1,000,000+ 530,000 10/31/99 6/23/00 7/31/00 Est. Target 2002 Customer penetration 5.3% 9.8% 10% 20% 23 Priority #2 eBusiness - US platform • Security First Network Bank (SFNB) - ranked #1 among 60 US Internet banks by Gomez Advisors (www.gomezadvisors.com) 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
  • 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 Overall Global Performance Score 1. Royal Bank of Canada 21.5 1. Nortel Networks 45.5 1. Bank of Nova Scotia 21.5 2. Glaxo Wellcome 37.6 3. HSBC 17.8 3. Coca-Cola 32.5 4. Chase Manhattan 17.3 4. Merck 29.8 5. ABN Amro Holding 12.5 5. Pfizer 28.5 5. JPMorgan 12.5 7. Royal Bank of Scotland 11.8 8. American Express 9.7 18. Royal Bank of Canada 21.5 9. Lloyds TSB 7.6 18. Bank of Nova Scotia 21.5 10. Morgan Stanley Dean Witter 7.1 20. Bristol-Meyers Squibb 19.9 * source: Templeton Global Performance Index 2000 published by Templeton College, Oxford University, April 2000. 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.
  • 26 Priority #3 Substantial investments outside Canada in the past two years Personal & commercial banking Royal Investment Services ü Security First Network Bank* ü Credit Suisse Private Banking ü S1 Technologies* ü Coutts Group • AOL Canada* ü Bull & Bear Securities* • Ernex ü Hartley Poynton • E-route* • Connor Clark ü PrimeStreet* ü Ernst & Young - Guernsey ü Prism Financial* ü Ernst & Young - Jersey • Mediagrif Interactive Technologies* ü VIP Private Capital* • Bank One’s credit card business Corporate & investment banking Insurance ü Hambros Bond Business • Mutual of Omaha ü U.S. High Yield Team • Prudential Canada ü U.S. Energy Team ü Liberty Life & Liberty Insurance Total Canadian C $ 450 MM Services ü Total International C $1,390 MM ü= international, *= eBusiness Total Investments C $1,840 MM 27 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 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
  • 28 Priority #3 Expansion outside Canada US Expansion - Prism Financial • Acquired for US$115 million in April 2000 • Niche entry into the US residential mortgage origination business • Growing on-line capability, salesforce of over 1,100 loan officers, 159 branches in 25 states, and a successful acquisition track record • Sell SFNB, Bull & Bear and Liberty Life products to Prism’s customers • Lower Prism’s on-balance sheet funding costs • Continue its acquisition strategy and expand its national presence • Recent American Express alliance to provide white label Internet mortgage origination 29 Priority #3 Expansion outside Canada Corporate & investment banking • Build, hire teams or do niche acquisitions (no bulge bracket aspirations) • Very successful niche acquisitions: • Hambros bond business (London - 1998) • global equity derivatives team (New York - 1995) • Expanding in US energy, telecom. & technology • hired energy team in Houston (Sept ‘99) • formed high-yield group (Oct. ‘99) • Niche expertise globally: • credit derivatives • build-out of global equity derivatives in Europe
  • 30 Priority #4 Growth of high-return, high-P/E multiple businesses • Royal Investment Services (wealth management) • highest priority (50%+ ROE) • Niche segments of personal & commercial financial services and corporate & investment banking • Newly created segment of Global Integrated Solutions effective Q2/00 31 Priority #4 Growth of high-return, high-P/E multiple businesses (C$ millions) Net income contributions - Q2/00 NIAT $292 NIAT growth* 35% NIAT $115 ROE 21.8% Personal & NIAT growth* 66% Efficiency 58.9% commercial ROE 52.8% financial services Efficiency 72.7% 52% Royal Investment Global Integrated Services Solutions 5% 21% NIAT $29 Corporate & NIAT growth* 21% investment ROE 28.1% banking NIAT $149 Efficiency 67.9% 26% NIAT growth* 66% ROE 26.9% Efficiency 61.3% *growth over Q2/99 results US GAAP
  • 32 Priority #4 Growth of high-return, high-P/E multiple businesses • 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 Year Business New Sales New Sales/ Referred (C $ billions) Business (C $ billions) Referred 1997* 3.0 2.7 .9 X 1998 2.4 4.0 1.6 X 1999 1.2 3.9 3.3 X * Three months - from August 1/97 to October 31/97 33 Priority #4 Growth of high-return, high-P/E multiple businesses 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)
  • 34 Priority #4 Growth of high-return, high-P/E multiple businesses Strong growth in all RIS businesses NIAT growth Rev. growth AUA growth (C$ millions) vs. Q2/99 Rev. - Q2/00 vs. Q2/99 vs. Q2/99 Action Direct* 127% $ 62 131% 64% Private client division** 102 288 36 11 Global private banking 40 100 44 59 Royal Mutual Funds*** 17 101 9 11 Other 77 115 46 10 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 Growth of high-return, high-P/E multiple businesses 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 Q2/99 – 650 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
  • 36 Priority #4 Growth of high-return, high-P/E multiple businesses 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 $160 million in travel insurance premiums in 1999 *from 1999 LIMRA surveys 37 Priority #4 Growth of high-return, high-P/E multiple businesses Insurance - Q2/00 results* (C$ millions) Change Change vs. 6 Mos. vs. Q2/00 Q2/99 2000 Q2/99 Net Income After Tax $29 32% $55 37% Premiums $262 15% $523 31% *results included in Personal & commercial financial services
  • 38 Priority #4 Growth of high-return, high-P/E multiple businesses 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 39 Priority #4 Growth of high-return, high-P/E multiple businesses 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 - 28.1%, 380 basis point improvement from last year • Efficiency ratio - 67.9%, 120 basis point improvement from last year
  • 40 Priority #4 Growth of high-return, high-P/E multiple businesses Highly-rated custody operations Overall Global Custodian - 2000 Investment Managers - 2000 1. Pictet 5.74 1. Pictet 5.70 2. ROYAL TRUST 5.53 2. ROYAL TRUST 5.51 3. Brown Bros. Harriman 5.51 3. Brown Bros. Harriman 5.44 4. Northern Trust 5.28 4. Northern Trust 5.13 5. Chase Manhattan 4.89 5. Chase Manhattan 4.79 6. Deutsche 4.83 6. Bank of New York 4.59 7. Bank of New York 4.79 7. State Street 4.36 8. HSBC GIS 4.74 8. Deutsche Bank 4.20 9. State Street 4.72 9. HSBC GIS 4.20 10. Citibank 4.09 10. Citibank 4.11 11. Mellon 4.00 11. Mellon 3.95 * source: R&M Consultants survey, February 2000, ranking custodian performance on customer service, etc. 41 Priority #4 Growth of high-return, high-P/E multiple businesses Among top fifteen global custodians Top 12 International Custodians Year-end 1999 (Pro Forma) (US$ billions) 1. Bank of New York (US) 6,330 2. State Street (US) 5,952 3. Chase Manhattan (US) 5,576 4. Deutsche Bank (Ger) 3,921 5. Citibank (US) 3,900 6. Mellon (US) 1,874 7. Northern Trust (US 1,538 8. HSBC GIS (UK) 1,035 9. BNP/Paribas (Ger) 1,025 10. Dresdner (Can) 804 11. Brown Brothers Harriman (Fra) 765 12. Royal Bank/Royal Trust (US) 710
  • 42 RY - attractive valuation US Regional Royal Bank Banks Price (06/16/00) C$74.25 US$50.56 2000E P/E 11.5 14.5 2001E P/E 10.4 12.9 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
  • 44 Share price outperforming peers Relative share price performance (weekly close) 140 135 130 RY 125 BMO 120 115 BNS 110 CM 105 100 TD 95 S&P Banks 90 Index 85 80 5-May 12-May 19-May 26-May 10-Mar 17-Mar 24-Mar 31-Mar 2-Jun 9-Jun 3-Mar 16-Jun 7-Apr 14-Apr 20-Apr 28-Apr 1-Feb 4-Feb 11-Feb 18-Feb 25-Feb RY BMO CM BNS 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.