Wednesday, April 30, 2008

Scotia Capital on RBC's Investor Day

  
Scotia Capital, 30 April 2008

RY Investor Day - Widening the Gap over the Competition

• RY held an Investor Day yesterday Tuesday, April 29. The theme was "Widening the Gap over the Competition".

• RY highlighted its brand and financial strength and its plans to capitalize on the market disruption. Presentations were viewed very positively.

• RY's financial strength is its high quality balance sheet, solid liquidity and funding positions and modest term funding needs in the near term.

• RY's financial strengths are expected to enable RY to fund at better spreads than competitors, continue to reinvest and focus on profitable revenue growth in order to:
o Attract clients and advisors.
o Increase market share in key products and services.

Retail and Wealth Management Strength Expected to Continue

• The presentations were focused on the bank's two very powerful operating platforms Canadian Banking (#1 or #2) which represents 50% of total bank revenue and Wealth Management the clear (#1) in the industry.

• RY has already enjoyed significant positive momentum in the past three years in Canadian Banking and Wealth Management with revenue market share gains of 220 bp and 170 bp, respectively.

• RY has made solid market share gains in all its major Canadian banking products over the past three years except core deposits. RY has been losing market share in the very important core deposits for the past four years. However with the introduction of multi product rebates and an online HISA (High Interest Savings Account) the bank has managed to gain 47 bp in market share in core deposits in the past year. The bank has acquired over 500,000 HISA accounts with $7 billion in balances (50% new money).

• The turn around in core deposits is expected to support future revenue market share gains for Canadian Banking.

• In wealth management RY has a truly dominant position. In Canada, RY continues to lead the mutual fund industry in sales and has grown market share to 12.5%. RY advisor channel is strong with the highest revenue and AUA per advisor.

U.S. & International Expansion Adds Scale

• In the U.S., RY continues to add scale and improve operating performance. RY acquired JB Hanauer in Q3/07 with Ferris, Baker Watts pending. The Financial Consultants (FCs) or IAs are expected to be at 2,000 with recent acquisitions up from 1,646 in 2005. RY is now the 7th largest brokerage firm in the U.S. by number of FCs. Revenue per FC has increased to $582 in Q1/08 from $471 in 2005.

• The bank is also continuing to expand its International Wealth platform. The bank has increased presence in select markets, opening offices in Mexico City, Santiago, Beijing and Mumbai. U.K. represents 40% of client base.

RY Reiterates High Risk Exposure Very Manageable

• Prior to the presentations RY briefly repeated its press release from a day earlier in regards to a Citigroup research report. "We believe the analysis contained significant errors of fact and significantly overstates both the risks and the amount of any potential writedown RBC might incur." "Our exposures are within our risk appetite and are very manageable."

• Operative words may be very manageable. However despite RY's response the share price is expected to lag until the matter is fully clarified with the release of earnings on May 29, 2008.

• We expect the potential writedowns or mark-to-market on the securities portfolio to be modest in the $200 million to $400 million range or $0.10 to $0.20 per share.

Recommendation

• Our 2008 and 2009 earnings estimates are unchanged at $4.50 per share and $5.00 per share, respectively. Our share price target is unchanged at $75 per share representing 16.7x our 2008 earnings estimate.

• We maintain our 1-Sector Outperform based on the low relative P/E multiple to the group, high profitability, superior retail and wealth management platforms, and revenue growth prospects based on relatively heavy reinvestment.
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