Friday, March 03, 2006

RBC Q1 2006 Earnings

Nixon Assails Insurance Rules

The Globe and Mail, Sinclair Stewart, 4 March 2006

Toronto -- Royal Bank of Canada used its annual shareholder meeting yesterday to turn up the heat on Ottawa, urging the federal government to throw open the insurance market to greater competition and to support the financial services sector with sound policies rather than expedient politics.

Chief executive officer Gordon Nixon devoted much of his speech to decrying the "absurdity" of the rules, which prevent banks from selling insurance products -- much less promoting them -- through their branch network. He said Canada is the only developed country in the world where people can't buy insurance directly from a bank.

"This simply does not make any sense to us, nor to our customers," he said, arguing that breaking down barriers would provide better choice and pricing. At the same time, he noted, supermarket chains are allowed to sell insurance, while major life insurers are permitted to offer their customers mortgages and savings accounts.

Mr. Nixon uncorked his lobbying effort shortly after announcing RBC's first-quarter profit of just under $1.16-billion or $1.81 a share: a 20-per-cent improvement from last year, when the bank quickly broke out of a two-year stock market slump. The Canadian retail division powered the quarter, churning out $669-million in profit, and the bank received an added boost from strong trading results and low levels of sour loans.

The country's largest company also announced an 8-cent increase to its quarterly dividend, bringing it to 72 cents a share, and said it would split its stock later this month. The results far exceeded consensus estimates, and investors drove the bank's shares up 3.2 per cent or $3.07 to close at $97.97 on the Toronto Stock Exchange yesterday.

Mr. Nixon told investors he still believes there's room for growth in the crowded and mature Canadian market, and one obvious avenue is insurance.

RBC, which has the largest insurance business of any domestic bank, thrust the issue into the public spotlight yesterday in a last-ditch effort to make it resonate more forcefully with Canadians. Timing is a crucial issue, because the Conservatives must review the Bank Act and introduce new legislation by October.

Mr. Nixon conceded that independent insurance brokers have been much more effective than RBC and its peers when it comes to lobbying Ottawa. Indeed, the brokers have argued that letting banks into the fold could result in tied selling and privacy issues. The banks dismiss those accusations, and readily point out that consumer groups are joining them now in pressing the government for greater competition.

For RBC, that might not be enough. In their pre-election platform, the Tories promised to "maintain the current regulations governing insurance marketing by the chartered banks."

Jim Westlake, who heads RBC's personal banking and insurance operations in Canada, acknowledged it might not be realistic to expect the Tories to renege on their pledge and allow banks to sell insurance out of their branches. But he said there are other things they could do, like introduce policies that would make it easier to market products, or allow the bank to service its customers in a more holistic way. "It defies logic," he said of the current rules. "We're really saying let's knock down all the barriers. We really think we have to be honest and say what's on our mind: anything less does not make sense to us."
Royal Bank splits stock, boosts dividend as Q1 profit jumps 20% to $1.17B

Canadian Press, Tara Perkins, 3 March 2006

Toronto (CP) - After a record first-quarter profit of $1.17 billion, Royal Bank of Canada gave shareholders some good news at the annual meeting Friday, boosting the quarterly dividend 12.5 per cent and splitting the stock two-for-one.

"We started 2006 on a very strong note," chief executive Gordon Nixon told a conference call after the bank's financial report and shareholders' meeting.

And, following the bank's latest performance, the question that faced him again and again was how the Royal plans to fuel even more growth, considering expansions south of the border haven't lived up to expectations.

Nixon doesn't expect domestic bank mergers to be allowed any time soon, but he said there are still plenty of growth opportunities inside and outside Canada.

Domestically, diversifying the bank's business is a key strategy, Nixon said. He pointed to "very significant" growth in areas like mutual funds.

And the Royal Bank CEO called on the federal government to pave another growth path - in the insurance arena.

"Canada is the only developed country in the world that prohibits consumers and small business owners from buying insurance products, or even getting information about insurance, from their bank (branch)," Nixon told shareholders gathered at the Metro Convention Centre.

"The absurdity of this is highlighted the fact that stores like Loblaws and Costco can provide this financial service."

The issue is important now because the government is expected to issue a white paper soon with plans to reform the Bank Act - something that happens only once every five years, Nixon said.

Currently, banks can own insurance operations, but cannot advertise or operate them in a bank branch.

"Government should support and defend its key industries through good policies, rather than what sometimes makes for good politics," Nixon said, adding that Canada's Big Six banks pay about $8 billion in taxes each year.

He appealed to the public, suggesting that allowing banks to expand competition in the insurance arena will reduce the price of insurance.

While it waits for the government's decision this fall, Royal Bank has opened four insurance offices next door to existing bank branches. And it is conducting market research on other opportunities, like putting stand-alone insurance offices in shopping malls, Jim Westlake, group head of RBC Canadian personal and business banking, said in an interview.

Royal Bank's Canadian operations, under the RBC Financial Group banner, represent the vast bulk of its earnings.

"While the strength and size of the domestic operations continues to overshadow the scale and profitability issues at RBC Centura and RBC Dain Rauscher (in the U.S.), management will need to address the long-term objectives of these operations," Credit Suisse analyst James Bantis said.

Struggles at the U.S. operations are magnified the strong Canadian dollar, he noted.

Nixon said RBC has "made good progress" at Centura, bought in 2001. "We still are not where we believe we can get to. And we want to keep our head down and keep focused on improving those results."

And the bank is not ruling growth through further U.S. acquisitions, "but the speed at which we get there will be dictated operating performance and opportunity, not just a burning ambition to expand outside of our home marketplace," Nixon said.

RBC has a "fairly modest" strategy for India, he said, and plans to "very selectively" pursue opportunities in China, where hundreds of foreign banks are scrambling to set up shop.

In the quarter ended Jan. 31, Royal's profits amounted $1.78 per diluted share, compared with earnings of $979 million, or $1.50 per share, in the same period a year ago.

That beat analysts expectations for earnings of $1.61 per share, prior to one-time items, 19 cents on a comparable basis.

But the earnings did not measure up to the bank's own aggressive full-year growth targets for earnings per share or revenue.

First-quarter earnings per share rose 19 per cent, compared with the bank's full-year 20 per cent target, while first-quarter revenue rose four per cent to almost $5 billion but fell short of the bank's target six-to-eight per cent growth.

"We're still comfortable with those targets and we've got another three quarters to deliver on them," COO Barbara Stymiest said after the annual meeting.

Revenue was driven primarily volume growth at banking, wealth-management and insurance operations, the bank said, as North American business conditions remained strong. But it was hurt the strong Canadian dollar.

RBC boosted its quarterly common share dividend eight cents to 72 cents, payable to shareholders of record on April 25.

It also announced it will pay out a "stock dividend," amounting to a two-for-one split of its common shares.

Shareholders of record on March 27 will be entitled to receive the stock dividend on April 6. The move both increases the liquidity of the bank's stock and protects shareholders against paying income tax on the new shares.

Post-split trading in RBC stock will begin March 23. The dividend announced Friday will represent 36 cents a share on a post-split basis.

Also at Friday's meeting, shareholders voted nearly 90 per cent in favour of the bank's proposal to increase the maximum amount that can be paid to its directors, to $4 million from $3 million.

That came as the bank's board grew from 16 directors to 17, as Timothy Hearn, the CEO of Imperial Oil Ltd., was elected.

On the Toronto stock market Friday, Royal Bank shares rose $2.85 to close at $97.75, a gain of three per cent.

The Globe and Mail, Tavia Grant, 3 March 2006

Royal Bank of Canada, the nation's largest bank, said first-quarter profit rose 19.6 per cent to a record, lifted by growth in its personal and business and capital markets divisions. The bank boosted its dividend and announced the equivalent of a two-for-one stock split.

As well, the bank signalled it's getting more serious about growing its insurance business.

Net income available to common shareholders rose to $1.16-billion or $1.78 a share from a year-earlier $971-million or $1.50 a share. The profit beat analysts expectations for earnings of $1.61 per share, prior to one-time items, by 19 cents on a comparable basis.

The shares rose $3.07 or 3.23 per cent to $97.97. Earlier, they reached a record $99.03. They've risen 29.6 per cent in the past year.

“RBC appears to have met high expectations that built heading into the quarter,” UBS Investment Research analysts said in a note. The “outlook remains very solid, but it's not clear what the next major catalyst will be to drive even further out-performance.”

Return on equity rose to 23.9 per cent from 21.9 per cent and the Toronto-based bank raised its dividend by 12.5 per cent to 72 cents a share.

First-quarter revenue rose 4 per cent to almost $5-billion but fell short of the bank's target 6-to-8 per cent growth.

“We're still comfortable with those targets, and we've got another three quarters to deliver on them,” chief operating officer Barbara Stymiest said after the bank's annual general meeting in Toronto.

Revenue growth was driven primarily by “strong volume growth” at RBC's banking, wealth-management and insurance operations, “largely underpinned by favourable North American business conditions and driven by our growth initiatives,” the bank said.

But it was hurt by the strong Canadian dollar.

Chief executive officer Gordon Nixon used Friday's meeting as an opportunity to gather public support for the bank's desire to sell insurance products at its branches.

“Canada is the only developed country in the world that prohibits consumers and small business owners from buying insurance products, or even getting information about insurance, from their bank (branch),” Mr. Nixon said.

“The absurdity of this is highlighted by the fact that stores like Loblaws and Costco can provide this financial service.”

Mr. Nixon said the issue is particularly relevant now because the federal government is expected to soon issue a white paper on its plans to renew the Bank Act — something that only happens once every five years.

“Government should support and defend its key industries through good policies, rather than what sometimes makes for good politics,” Mr. Nixon said, adding that Canada's Big Six banks pay about $8-billion in taxes each year.

The CEO said allowing banks to sell insurance is not currently an issue that's front and centre with the Canadian public, but suggested it should be because it could reduce the cost of insurance by fostering competition.

“We are pleased with the strong earnings growth and return on equity in the first quarter,” said Mr. Nixon, adding the performance of RBC Canadian personal and business segment was “exceptional.”

Among its divisions, net income from continuing operations at the bank's personal and business unit rose 12.1 per cent to $669-million. Net income at the U.S. and international personal and business unit rose 3.1 per cent to $101-million, while at RBC Capital Markets it rose 25.5 per cent to $330-million. Corporate support's profit rose to $72-million from $19-million.

Provision for credit losses from continuing operations fell 56 per cent from a year ago. The decrease was mostly because of a $50-million reversal of the general allowance in the quarter, “resulting from the continuing favourable credit environment and the strengthening of the credit quality of our corporate loan portfolio.”

The bank also announced Friday the election of Timothy Hearn to its board of directors. Mr. Hearn is also chairman, president and CEO of Imperial Oil Ltd.