200 Bay Street
Company Perspectives
In the face of dramatic changes and challenges, Royal Bank has maintained the entrepreneurial spirit of its Halifax founders, with dedicated people working together to create client and shareholder value. In the social arena, employees continue to participate in their communities and speak responsibly on issues that impact North Americans and reflect the financial services industry's concern for providing clients with the best possible services.
Royal Bank of Canada is Canada's largest financial institution. Operating under the umbrella brand name of RBC Financial Group, the bank maintains more than 1,100 branches and nearly 4,000 automated banking machines in Canada, where it is among the leaders in consumer loans, home mortgages, personal deposits, business loans, money management, and mutual funds. Royal Bank also owns RBC Dominion Securities (also called RBC Capital Markets), Canada's biggest full-service investment dealer, and RBC Action Direct, the nation's second largest self-directed brokerage service. RBC Insurance is one of the ten largest providers of life insurance in Canada and also specializes in health, home, auto, and travel insurance. In the early 21st century, RBC made an aggressive, acquisition-led move into the U.S. market, where it provides retail banking, insurance, full-service brokerage, and corporate and investment banking services through such units as RBC Centura Bank, RBC Builder Finance, RBC Insurance, RBC Dain Rauscher, and RBC Capital Markets. Based in North Carolina, RBC Centura Bank offers personal, business, and commercial banking services in the southeastern United States. RBC also maintains a large Caribbean retail banking network. In Europe, South America, the Middle East, the Asia-Pacific region, and Australia, Royal Bank offers private banking services and provides business customers a variety of services, including corporate and investment banking, trade finance, correspondent banking, and treasury services.
Founding As Merchants Bank in Nova Scotia in 1864
Founded in 1864 by a group of eight businessmen in Halifax, Nova Scotia, the Merchants Bank, as it was then called, began with CAD 200,000 in capital to support local commerce. The bank's establishment coincided with a sharp increase in the area's commercial activity, a result of the American Civil War--Halifax was a thriving center for blockade runners crossing the U.S. border.
The bank made a successful start under these conditions, and was incorporated five years later as the Merchants' Bank of Halifax. Thomas C. Kinnear, one of the original founders, was its first president.
During the next few years, the bank expanded conservatively, opening branches in several more maritime towns. Then from 1873 to the end of the decade, a business depression hit Nova Scotia's shipbuilding industry hard and kept the bank's growth slow.
When the business environment rebounded for a short time in the early 1880s, the bank resumed its growth plan, and in 1882 opened its first branch outside Canada, in Hamilton, Bermuda, before it had even expanded as far as Ontario domestically. Although this branch closed in 1889, the bank remained committed to international operations, opening several branches in Latin America before it was well established in western Canada.
By 1896, Merchants' Bank's assets totaled CAD 10 million. The gold rush in the early 1890s in southern British Columbia gave it the impetus to open agencies there in 1897 and 1898, especially because, with the completion of the Canadian Pacific Railway in 1885, the area seemed ripe for development.
In 1899 two more branches were established in New York and Havana. The bank took a conservative approach in developing its Cuban business and made only a handful of initial loans. As confidence in Cuba's future grew, particularly with the formation of the Republic of Cuba in 1902 and the continuing growth of the sugar industry, the bank gradually expanded, opening several branches around the country. (This business upswing came to a temporary halt when the sugar market suffered its first collapse, in 1920.)
In an effort to distinguish the bank from two other institutions with similar names, the bank was renamed The Royal Bank of Canada in 1901. For the next hundred years, the bank was often referred to simply as "the Royal."
Relocated Headquarters to Montreal in 1907
The dawn of a new century heralded a period of growth and prosperity in Canada, especially in the area between Winnipeg and the Rocky Mountains. The bank grew too, opening more branches and acquiring several smaller institutions. With this growth, the bank decided in 1907 to relocate from Halifax to Montreal, where the general manager was based. The move reflected Montreal's growing importance as a financial center and the relative decline of maritime commerce.
By the following year, Royal Bank had 109 branches and CAD 50 million in assets. This strong base provided the foundation for the bank's acquisition, in 1910, of the 54-year-old Union Bank of Halifax. Subsequent acquisitions of the Traders Bank of Canada and the Bank of British Honduras in 1912 more than doubled the number of operating branches and doubled its asset base by the end of the next year.
At the start of World War I, the Canadian real estate market had collapsed and very little capital was flowing into the country from abroad. In this uncertain atmosphere, the bank could not even promise staff who had enlisted reinstatement upon their return. Soon, however, business expanded sharply as wartime industry geared up, and the bank was forced to break with tradition and hire women.
Although the war put pressure on the Royal's day-to-day operations, the bank continued to grow, buying the Quebec Bank in 1917, the Northern Crown Bank in 1918, and two other banks in British Guiana and Nassau. By the end of the war, the Royal was the second largest bank in Canada, with 540 branches, assets of more than CAD 422 million, and a new foreign trade department to handle its growing international presence.
The Royal Bank weathered the period of economic collapse that followed the end of World War I and, by 1925, had resumed its quest for expansion with the purchase of the Bank of Central and South America and the Union Bank of Canada. The Union Bank was the Royal Bank's largest takeover yet, and strengthened its presence in the three prairie provinces.
The bank's solid structure and leading position in the banking industry helped it survive the stock market crash relatively well, but it was not totally immune. Asset and profit levels fell, branches were closed, staff were laid off, and expenditures and the salaries of remaining employees were cut. Yet, whereas banks in the United States were closing in record numbers, not one Canadian chartered bank failed during this time.
By 1939, total assets were more than CAD 1 billion, for the second time in ten years, and the bank was ready to take advantage of the opportunities World War II offered. In cooperation with other banking institutions, the Royal actively participated in war measures, and it was instrumental in operating a ration coupon system for food and gasoline. Basically the war meant increased government expenditures for the war effort. The bank's domestic business flourished, though internationally its European branches were constrained under German occupation. During the war, specifically in 1941, the Royal gained its longstanding position as Canada's largest bank based on assets, surpassing Bank of Montreal.
After World War II, the Royal led the way in developing the country's oil, gas, and resource exploration industries by providing banking services in remote locations. It opened an oil and gas department in Calgary in 1951, and also established banking services in cities along the British Columbian route of a massive project undertaken by the Aluminum Company of Canada. The bank continued its international expansion with the establishment of the Royal Bank of Canada Trust Company in New York in 1951 as well.
When Fidel Castro came to power in Cuba in 1959, the Cuban banking system was nationalized. The Royal Bank of Canada and the Bank of Nova Scotia were, alone among banks, permitted to operate independently, but the losses they incurred as nationalized businesses transferred their banking to the nationalized system were too heavy, and Royal Bank sold its Cuban assets to the Banco Nacional de Cuba in December 1960.
Offering New Services
In 1962, almost 100 years after its founding, The Royal Bank of Canada adopted a new emblem to replace its original coat of arms. The emblem's design incorporated a lion, a crown, and a globe to symbolize the bank's position as a leading force in international banking. That same year, the bank's offices moved into a new, 42-story skyscraper later known as Place Ville-Marie. The building's construction set in motion a large-scale urban development plan that turned midtown Montreal into a vital commercial district.
At the same time, the bank sharpened its focus on consumer-oriented financial services by entering the market with a product called TermPlan, a package of credit and insurance benefits. Six years later, in partnership with three other banks, the bank introduced Chargex, a credit card that allowed holders to make purchases within a specified credit limit and obtain cash advances through any of four participating institutions.
The 1967 revision of the Bank Act sparked vigorous competition among Canada's chartered banks, which had long operated under a morass of special restrictions. In removing many of these constraints, the new act permitted banks to vie for loans, deposits, and conventional mortgages on an equal basis with other lending and borrowing institutions. By 1967 Royal Bank had written more than half of the residential mortgage loans provided by all of the chartered banks combined.
In the early 1970s, Royal Bank joined forces with five other banks to form Orion, a London-based merchant banking organization designed to enter the financial services market. Although Canadian law prohibited banks from entering this market domestically, Orion competed successfully in placing international bond issues and securities. Orion became a wholly owned subsidiary of the Royal Bank in 1981, enabling the bank to diversify its operations up to the limits imposed by Canada's banking laws and position itself for the possibility of international banking deregulation.
In 1979 Rowland Frazee, who had been with the bank for 40 years, was appointed chief executive officer. He replaced W. Earle McLaughlin, who became chairman after a popular 18-year reign as CEO.
Continuing Diversification
By 1981, Royal Bank was the fourth largest bank in North America, with assets of CAD 53 billion. Although one-third of that total was attributed to its international activities, the bank had lost its early advantage in many foreign markets to other institutions. One of Frazee's first orders of business was to strengthen the bank's influence in the United States. He poured new capital into the Royal Bank and Trust Company, in New York, and increased its staff. A second Frazee priority was the development of a Global Energy Group, based in Calgary, to provide technical consultation as well as capital for energy-related projects on an international basis. To manage its newly aggressive stance, the bank reorganized into four groups, two responsible for Canadian retail and commercial business, and two to handle corporate banking and international operations.
In 1986 Allan Taylor became chairman and CEO of Royal Bank. Taylor's rise from junior clerk at the age of 16 to chairman 37 years later was a remarkable one. His appointment as chairman replaced the bank's traditional conservatism with a more entrepreneurial approach to the challenges the bank faced.
One of the first challenges Taylor met was the relaxation of rules governing the ownership of brokerage firms by banks. The Royal began negotiations with Wood Gundy, a leading Canadian brokerage firm, in the spring of 1987, some months before the law actually changed. That deal fell through, but the Royal went on to acquire Dominion Securities (later renamed RBC Dominion Securities), the largest investment house in Canada, and one with a history dating back to 1901. An agreement on the purchase was struck just after the stock market crash in October that year. Although it was one of the last of Canada's big banks to enter the brokerage market, by waiting, the Royal got the best deal of all, saving a significant amount over pre-crash prices. When the deal closed in March 1988, Royal Bank owned a 67 percent stake in Dominion Securities; full ownership was obtained by 1996. In the meantime, the bank shortened its name to Royal Bank of Canada in 1990.
Focusing on Fee-Based Businesses
Royal Bank was the second largest bank in North America by 1991 and was seeking to defend its strong position, and further raise its profile in the United States, by acquiring a U.S. retail bank. However, the bank was unable to find a suitable prospect at the right price. In 1991, however, RBC Dominion Securities was given permission to participate in stock underwriting by the U.S. Federal Reserve. Still, problems in the domestic economy in 1991 and 1992, which led the bank to set aside CAD 1.29 billion for loan losses in the fourth quarter of 1992, forced a retreat from Royal Bank's ambitious U.S. plans. Concentrating more on augmenting its Canadian operations, the bank in 1991 acquired McNeil Mantha Inc., a Quebec-based investment dealer, for CAD 22 million.
As the 1990s progressed, Royal Bank concentrated on achieving revenue growth through a focus on fee-based businesses. Much of this was growth achieved through additional acquisitions, mainly domestic. The bank moved quickly in response to a June 1992 change in Canadian law that allowed banks to own 100 percent of insurance companies and to offer travel insurance with the early 1993 acquisition of Voyageur Travel Insurance Ltd., the largest provider of travel insurance in Canada. Also acquired in 1993 was Royal Trustco for CAD 1.3 billion, a deal that increased Royal Bank's assets by about CAD 1.1 billion, or 10 percent. Royal Trustco was Canada's largest money manager, including the handling of a large family of mutual funds, and had a strong position in global private banking.
In late 1994, John Cleghorn, a 20-year Royal Bank veteran who had been president and chief operating officer, replaced Taylor as chairman and CEO. Under Cleghorn, the bank continued to acquire fee-based businesses. In 1995 RBC Dominion Securities bolstered its investment banking operation through the acquisition of Kidder Peabody's equity derivatives team. During 1996 and early 1997 Royal Bank made four additional significant acquisitions. In January 1996 Westbury Canadian Life Insurance Company, based in Hamilton, Ontario, was purchased, bringing with it CAD 90 million in annual premiums. In August of that same year, Royal Bank bought the CAD 47-billion-in-assets institutional and pension custody business of Toronto-Dominion Bank and Trust, then in February 1997 acquired Bank of Nova Scotia's institutional and pension custody business and its CAD 120 billion in assets under administration. These deals moved Royal Bank into the top ten worldwide among securities-custody service businesses. Meanwhile, in November 1996 RBC Dominion Securities added to its already strong portfolio the operations of Richardson Greenshields Limited, acquired for CAD 480 million. Richardson Greenshields was a Canadian full-service investment dealer with CAD 16 billion in private client assets.
The strong North American economy of the mid-1990s helped Royal Bank post record 1996 net income of CAD 1.43 billion, a huge increase over the CAD 107 million of 1992 and an indication that the bank's strategy of concentrating on increasing its fee-based businesses through the careful yet aggressive pursuit of acquisitions and alliances was paying dividends. Total assets by this time had reached nearly CAD 218 billion ($163 billion). In late 1995 Royal Bank was listed on the New York Stock Exchange in a move intended as prelude to an anticipated acquisition of a U.S. money-management business. In the meantime, the bank attempted in mid-1997 to acquire London Insurance Group Inc., the fifth largest life insurer in Canada, but its CAD 2.4 billion ($1.74 billion) offer was topped by Great-West Lifeco Inc.'s offer of CAD 2.9 billion ($2.09 billion). Soon after this failure, Royal Bank entered into an agreement with HB Group Insurance Management Ltd. whereby the two companies would share technology, systems, and expertise to help Royal Bank establish and grow a property and casualty insurance business.
In January 1998, shortly after reporting fiscal 1997 profits of CAD 1.68 billion, a record for a Canadian bank, Royal Bank made a stunning announcement. The bank had reached an agreement with Bank of Montreal on what promised to be the largest merger in Canadian history and one creating the second largest bank in North America with CAD 435 billion ($312 billion) in assets. Then in April a second shock wave hit the Canadian financial services industry: Two more of the "Big Six" Canadian banks, the Toronto-Dominion Bank and the Canadian Imperial Bank of Commerce, revealed plans for their own merger. In December 1998, however, Finance Minister Paul Martin rejected both of the blockbuster deals. Ignoring the banks' insistence that they needed to merge in order to compete in the increasingly globalized financial services market, Martin concluded that from the standpoint of Canadians the mergers would create two banks with too much power and would severely reduce competition.
After setting another profit record in fiscal 1998, CAD 1.82 billion, Royal Bank saw its profits fall slightly the following year as revenue increases failed to keep pace with rising expenses. The bank launched a plan to shave CAD 400 million off its annual expenses in part by cutting up to 6,000 jobs from the payroll by the end of 2001, mainly through attrition but also via a retirement program and layoffs. On the acquisition front, in the meantime, Royal Bank remained stymied in its quest to secure a U.S. wealth management company, but in 1999 did complete the CAD 156 million acquisition of Connor Clark Ltd., a Toronto-based high-end money manager.
Big South-of-the-Border Push
Royal Bank had made some small moves into the U.S. market in the late 1990s, such as the 1998 purchase of Atlanta-based Security First Network Bank, the world's first Internet bank. It was in the early 2000s, though, that Royal Bank made a concerted push south of the border via a string of acquisitions. In April 2000 Prism Financial Corporation, a Chicago mortgage broker, was acquired for $115 million. Prism operated 159 retail branches in 25 states. Royal Bank next took a big step into the U.S. insurance industry by acquiring the insurance subsidiaries of Liberty Corporation of Greenville, South Carolina, for $580 million. Through this November 2000 deal, the bank took over Liberty Life Insurance Company and its 625 sales agents and Liberty Insurance Services Corporation, an administrator of third-party life and health insurance and a provider of underwriting, billing, and claims processing services. Also in 2000 Royal Bank's RT Capital Management pension fund unit agreed to pay a fine of CAD 3 million ($2 million) to the Ontario Securities Commission to settle charges of stock manipulation. The unit had admitted artificially inflating the price of 26 stocks in 1998 and 1999 leading not only to the fine but also to the resignation of several top officials at the unit and its sale to UBS AG in 2001.
During 2001 Royal Bank completed three major acquisitions that substantially broadened its presence in the U.S. market. Royal entered U.S. retail banking through the $2.2 billion purchase of Centura Banks, Inc., a midsized regional based in Rocky Mount, North Carolina. Centura had assets of $11.5 billion and operations in North Carolina, South Carolina, and Virginia and ranked as the 14th largest bank in the southeastern United States. The other two big deals of 2001 finally provided Royal Bank with its long-sought toehold in the U.S. wealth-management market. The bank spent $1.23 billion early in the year for Dain Rauscher Corporation, a regional, midsized brokerage firm based in Minneapolis that generated approximately $930 million in revenue in 1999. Later in 2001 Royal Bank paid nearly $600 million for Tucker Anthony Sutro Corporation, another regional brokerage house, this one based in Boston. Tucker Anthony fit nicely alongside Dain Rauscher given that the former's 80 offices were concentrated on the U.S. East and West Coasts, while the latter's 108 offices were in the Midwest, Southwest, and Pacific Northwest.
In August 2001, in the midst of this acquisition spree, Cleghorn retired. At this time, with corporate governance reform much in the air, Royal Bank elected to split Cleghorn's duties. Guy Saint-Pierre was named chairman, while Gordon M. Nixon was promoted to president and CEO. Nixon had previously headed up RBC Dominion Securities. One of Nixon's first initiatives was to oversee the implementation in late 2001 of a new global brand strategy designed to forge a common identity for Royal's ever expanding operations. While keeping Royal Bank of Canada as its legal name, the bank began operating under the umbrella banner of RBC Financial Group. A new logo was unveiled that incorporated this new brand name, and the RBC prefix was added to the name of each business unit and operating subsidiary. For instance, the retail banking operations in Canada became known as RBC Royal Bank, and the U.S. retail bank unit was renamed RBC Centura Banks. The two recently acquired U.S. brokerage houses were merged as RBC Dain Rauscher.
Over the next few years, RBC made several smaller, fill-in type acquisitions, while staying away from any big deals. Results at the U.S. operations were disappointing, and the bank worked to revamp some of its acquired operations and jettisoned a couple of the more troubled ones, including Liberty Insurance Services and RBC Mortgage Company, its U.S. mortgage unit. During the fourth quarter of fiscal 2004 RBC recorded charges of CAD 322 million to write down the value of the mortgage unit and to eliminate nearly 1,700 jobs from the RBC head office. Nixon also shook up the senior management team, bringing Barbara G. Stymiest on board as chief operating officer in November 2004. Stymiest was lured away from the Toronto Stock Exchange, where she had served as president and CEO.
Fiscal 2005 brought more special charges. RBC set aside CAD 591 million to cover potential legal costs associated with several lawsuits alleging that the bank had helped Enron Corporation manipulate its financial statements. Property insurance claims from damage caused by Hurricanes Katrina, Rita, and Wilma amounted to another CAD 203 million. Despite these special items, RBC managed a fiscal 2005 profit of CAD 3.39 billion ($2.87 billion), another record for a Canadian bank and a 21 percent increase over the previous year. The performance of RBC's U.S. and international personal and business operations were much improved, with profits surging from just CAD 22 million to CAD 345 million. In January 2006 RBC and Belgian banking giant Dexia NV/SA merged their administrative services arms that provided various custodial services for institutional investors. The resulting RBC Dexia Investor Services ranked as one of the world's top ten global custodians with assets under custody of about $2 trillion.
Royal Bank of Canada, over its 140-plus-year history, had grown from a modest regional bank into a major domestic and international force, with total assets of more than half a trillion Canadian dollars. With its U.S. business improving, RBC in March 2006 announced plans to expand RBC Centura Banks by opening a dozen new branches in 2006 and then upping this figure to between 15 and 20 annually starting in 2008. RBC was also in the process of expanding its Canadian investment banking and brokerage division, RBC Dominion Securities, which was achieving particularly strong profitability in fiscal 2006.
Principal Subsidiaries
Royal Bank Mortgage Corporation; Royal Trust Corporation of Canada; The Royal Trust Company; Royal Mutual Funds Inc.; RBC Capital Trust; RBC Technology Ventures Inc.; RBC Capital Partners Limited; RBC Dominion Securities Limited; Royal Bank Holding Inc.; RBC Insurance Holdings Inc.; Royal Bank Action Direct Inc.; RBC Asset Management Inc.; RBC Holdings (U.S.A.) Inc.; RBC Dain Rauscher Corp. (U.S.A.); RBC Capital Markets Corporation (U.S.A.); RBC Mortgage Company (U.S.A.); RBC Insurance Holding (USA) Inc.; Liberty Life Insurance Company (U.S.A.); Royal Bank of Canada (Asia) Limited (Singapore); RBC Centura Banks, Inc.; RBC Finance B.V. (Netherlands); RBC Investment Management (Asia) Limited (China).
Principal Operating Units
RBC Canadian Personal and Business (consisting of RBC Royal Bank, RBC Investments, RBC Dominion Securities, RBC Insurance, and RBC Liberty Insurance); RBC U.S. and International Personal and Business (consisting of RBC Centura, RBC Dain Rauscher, RBC Builder Finance, Royal Bank of Canada Global Private Banking, and RBC Royal Bank of Canada); RBC Capital Markets.
Principal Competitors
The Toronto-Dominion Bank; The Bank of Nova Scotia; Bank of Montreal; Canadian Imperial Bank of Commerce; National Bank of Canada.
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