Scotia Capital, 28 October 2010
Royal Bank Investor Day - Canadian Banking
• Royal Bank (RY) held an Investor Day yesterday focusing on its Canadian Banking segment. The bank highlighted its track record of outperformance and leading market position, breadth of distribution network and cross-sell ability, and operational efficiency as key areas for the bank in light of the potential for slower volume growth and moderating economic outlook.
Outperformance and Leading Market Position
• Canadian Banking earnings have grown at a CAGR of 10% from 2005-2009 and in 2010 YTD are up 17%.
• In terms of market position, RY highlighted it was #1 in business loans and deposits (next competitor 700 bp behind), consumer lending, and personal investments, and #2 in personal core deposits.
• RY's solid operating performance and market leading position have provided RBC with one of the world's top 50 globally recognized brands (ahead of Mercedes, Pepsi, Nike, and MasterCard). RY believes that this brand stature will allow the bank to remain top of mind with consumers and help the bank achieve its 25% above-market volume growth target.
Breadth of Distribution Network and Cross-Sell Ability
• RY currently has the most branches in Canada, the largest ATM network and active online customer base, which they believe is the largest most integrated distribution network in the country. RY plans on increasing hours and days of business by 15%, opening 20 new branches in 2011, and creating new online and mobile banking functionality.
• RY believes that its scale advantage, depth of product lineup, and channel capabilities, will provide the cross-sell opportunities and sales power to acquire and deepen relationships to drive top line growth despite the industry headwinds.
• RY also unveiled a new prototype of RBC branches, which will be vastly different from the current typical retail outlet. RY's new branch concept will move tellers to the back area of the branch and use the front area to showcase new products and technology, with a goal of attracting non-customers as well as regulars into the branch.
Operational Efficiency
• RY highlighted its better-than-average efficiency ratio, which has been driven by revenue growth and spend control. RY continues to invest in driving further efficiencies and has targeted an efficiency ratio in the low 40s in the medium term, which they believe will help deliver market leading growth at a lower cost.
• RY's plan to achieve market leading efficiency is the following:
1) Simplifying its product offering, policy and procedures to enhance sales capacity by making it easier for clients and staff.
2) Streamlining internal processes to provide opportunities to significantly lower costs.
3) Optimizing internal resources to liberate sales time and enhance sales capacity.
Recommendation
• Overall, the presentations were positive.
• We believe that RY's Canadian Banking segment has a very strong operating platform and is well positioned particularly, in light of the moderating economic outlook. However, our overall near-term concerns remain RY's cost structure in Wholesale Banking given lower capital markets activity, lack of earnings out of the U.S. (retail), and low profitability of Wealth Management.
• We maintain our 2-Sector Perform rating based on decline in relative profitability and near term earnings risk.
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Royal Bank Investor Day - Canadian Banking
• Royal Bank (RY) held an Investor Day yesterday focusing on its Canadian Banking segment. The bank highlighted its track record of outperformance and leading market position, breadth of distribution network and cross-sell ability, and operational efficiency as key areas for the bank in light of the potential for slower volume growth and moderating economic outlook.
Outperformance and Leading Market Position
• Canadian Banking earnings have grown at a CAGR of 10% from 2005-2009 and in 2010 YTD are up 17%.
• In terms of market position, RY highlighted it was #1 in business loans and deposits (next competitor 700 bp behind), consumer lending, and personal investments, and #2 in personal core deposits.
• RY's solid operating performance and market leading position have provided RBC with one of the world's top 50 globally recognized brands (ahead of Mercedes, Pepsi, Nike, and MasterCard). RY believes that this brand stature will allow the bank to remain top of mind with consumers and help the bank achieve its 25% above-market volume growth target.
Breadth of Distribution Network and Cross-Sell Ability
• RY currently has the most branches in Canada, the largest ATM network and active online customer base, which they believe is the largest most integrated distribution network in the country. RY plans on increasing hours and days of business by 15%, opening 20 new branches in 2011, and creating new online and mobile banking functionality.
• RY believes that its scale advantage, depth of product lineup, and channel capabilities, will provide the cross-sell opportunities and sales power to acquire and deepen relationships to drive top line growth despite the industry headwinds.
• RY also unveiled a new prototype of RBC branches, which will be vastly different from the current typical retail outlet. RY's new branch concept will move tellers to the back area of the branch and use the front area to showcase new products and technology, with a goal of attracting non-customers as well as regulars into the branch.
Operational Efficiency
• RY highlighted its better-than-average efficiency ratio, which has been driven by revenue growth and spend control. RY continues to invest in driving further efficiencies and has targeted an efficiency ratio in the low 40s in the medium term, which they believe will help deliver market leading growth at a lower cost.
• RY's plan to achieve market leading efficiency is the following:
1) Simplifying its product offering, policy and procedures to enhance sales capacity by making it easier for clients and staff.
2) Streamlining internal processes to provide opportunities to significantly lower costs.
3) Optimizing internal resources to liberate sales time and enhance sales capacity.
Recommendation
• Overall, the presentations were positive.
• We believe that RY's Canadian Banking segment has a very strong operating platform and is well positioned particularly, in light of the moderating economic outlook. However, our overall near-term concerns remain RY's cost structure in Wholesale Banking given lower capital markets activity, lack of earnings out of the U.S. (retail), and low profitability of Wealth Management.
• We maintain our 2-Sector Perform rating based on decline in relative profitability and near term earnings risk.
