Royal Bank of Canada reports record third quarter 2009 results

TORONTO - Royal Bank of Canada reported record net income of $1,561 million for the third quarter ended July 31, 2009, up $299 million or 24% from a year ago. Earnings were driven by strong results from Capital Markets and solid performances in Canadian Banking, Wealth Management and Insurance. Market environment-related losses continued to subside reflecting improving capital market conditions.

"Our record results this quarter reflect the strength of our franchise, and our ability to take advantage of opportunities and drive efficiencies," said Gordon M. Nixon, RBC President and CEO. "We are building on our strong competitive positions and successfully executing against our long term strategy. Our performance this quarter demonstrates the competitive advantage of our diverse business mix," Nixon said.

Third quarter 2009 compared to third quarter 2008

- Net income of $1,561 million (up from $1,262 million)

- Diluted earnings per share (EPS) of $1.05 (up from $.92)

- Return on common equity (ROE) of 19.5% (unchanged) - Tier 1 capital ratio of 12.9%

First nine months of 2009 compared to first nine months of 2008

- Net income of $2,564 million (down from $3,435 million)

- Cash net income of $3,699 million (up from $3,520 million)(1)

- Diluted EPS of $1.70 (down from $2.57)

- Cash diluted EPS of $2.51 (down from $2.63)(1)

- ROE of 10.7% (down from 18.8%)

- Cash ROE of 15.3% (down from 19.1%)(1)

(1) We compute "cash" measures by excluding the goodwill impairment charge in Q2 2009 and the after-tax impact of amortization of other intangibles. Cash measures are non-GAAP measures. See page 2 of this release for more information including a reconciliation.

Canadian Banking net income was $669 million, down $40 million from last year due to higher provision for credit losses (PCL) and spread compression reflecting sharply lower interest rates. Compared to last quarter, earnings were up $88 million primarily reflecting seasonal factors, continued volume growth and higher mutual fund distribution fees due to capital appreciation. We drove operating leverage of 3% and an efficiency ratio of 47.1%, with expenses flat compared to last quarter and slightly down from last year.

"Canadian Banking grew volumes by 11% over last year and continues to profitably gain market share. Importantly, we have been able to support this double-digit growth without increasing operating costs, reflecting our ongoing cost discipline," Nixon said.

Wealth Management net income was $168 million, down $18 million from last year mainly due to the impact of the market decline. Compared to the prior quarter, net income was up $42 million due to higher transaction volumes and fee-based client assets reflecting an improvement in capital market conditions.

"In our Wealth Management segment, we started to see asset levels recover and investor confidence return to the market. We had industry-leading long term fund sales in Canada and added over 100 experienced advisors globally," Nixon said.

Insurance net income was $167 million, up $30 million over last year reflecting growth in all businesses and lower funding charges. Net income was up $54 million from last quarter due to favourable actuarial adjustments reflecting management actions and assumption changes, favourable claims experience, business growth and the impact of a new U.K. reinsurance annuity arrangement.

"Insurance contributes to our diversified earnings stream and complements our retail product offering. We continue to grow across all businesses and expand our distribution network," Nixon said

International Banking net loss of $95 million compares to a net loss of $16 million last year and a net loss of $1,126 million last quarter. The change from last year is due to higher PCL, largely in U.S. banking and reduced revenue at RBC Dexia IS. The change from last quarter is largely due to a goodwill impairment charge of $1 billion (US$838 million) taken in the second quarter of 2009 and lower PCL in U.S. banking this quarter.

"The credit profile in our US retail operations is showing signs of improvement as the rate of deterioration in our loan portfolios slowed. We remain committed to refining our U.S. banking operating model to become more efficient and competitive. Our Caribbean banking business continues to perform well," Nixon said.

Capital Markets net income was $562 million, up $293 million from a year ago due to stronger trading revenue particularly in U.K., U.S. and Canadian fixed income and money markets, and U.S.-based equity businesses. Lower market environment-related losses also contributed to the increase. Compared to last quarter, net income was up $142 million primarily due to higher trading revenue, particularly in our U.S.-based equity and fixed income businesses and lower market environment-related losses.

"Capital Markets again displayed the benefits of its robust and diverse platform. RBC Capital Markets continues to rank number one or two domestically in virtually every league table. Moreover, as Canada's only global investment bank, we believe we are extremely well positioned to take advantage of market opportunities," Nixon said.

Credit quality - Total PCL of $770 million increased $436 million from a year ago largely due to higher specific PCL of $384 million, reflecting higher loss rates consistent with the current economic environment, and an addition of $61 million to the general provision in the current quarter. Compared to last quarter, total PCL decreased $204 million as discussed below.

In Canadian Banking, specific PCL of $340 million decreased $11 million over last quarter due to lower business lending provisions, partially offset by higher loss rates in unsecured retail portfolios including credit cards.

In International Banking, specific PCL of $230 million decreased $59 million compared to last quarter mainly attributable to U.S. banking, particularly in our residential builder finance, residential mortgages and lot loan portfolios as a result of the declining pace of credit deterioration. The impact of the stronger Canadian dollar on U.S. dollar denominated PCL also contributed to the decrease. These factors were partially offset by higher impaired loans in our commercial portfolio.

In Capital Markets, specific PCL of $177 million increased $32 million from last quarter primarily related to a single loan as well as a few other impaired loans mainly in our Canadian corporate lending portfolio.

The general provision of $61 million ($40 million after-tax) related to U.S. banking. This compares to $223 million ($146 million after-tax) last quarter, which reflected higher provisions predominately in U.S. banking and, to a lesser extent, our Canadian retail lending portfolio.

Non-GAAP measures

We believe that excluding the goodwill impairment charge and the impact of amortization of other intangibles from net income will provide readers with a better understanding of management's perspective on our performance. Cash measures do not have standardized meanings under GAAP and are not necessarily comparable with similar information disclosed by other financial institutions. The calculation of these cash measures found in the following table should also enhance the comparability of our financial performance with the corresponding prior periods.