Another year, another set of
record results from Royal Bank of Canada’s domestic retail unit.
David McKay, group head of Canadian Banking at Royal Bank of
Canada, discusses with Douglas Blakey the reasons behind record
revenue growth at the unit in 2010 and sets out his priorities for
the New Year.

 

Bar chart showing Royal Bank of Canada revenue 2006-2010Royal Bank of Canada
(RBC), the country’s largest bank by assets, is widely regarded as
having come through the global economic crisis in rude health.

But, while it remains Canada’s most
profitable bank, it has enjoyed a mixed year. Its share price
performance in 2010 is the weakest of Canada’s Big Five banks. In
each of the last five quarters, profits at RBC have missed analyst
forecasts and it continues to face serious challenges in turning
around the performance at its US-based subsidiary.

RBC was also the only lender of
Canada’s Big Five to report a fall in total group revenue in fiscal
2010 (see table, opposite page).

The position at its domestic,
retail-focused Canadian Banking segment, is a different matter
altogether.

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Canadian Banking net income for the
12 months to 31 October was C$3.04bn ($3bn) – a record for the
unit, an increase of C$381m or 14% from last year, reflecting
revenue growth in all businesses.

These results were driven by strong
volume growth in home equity and personal deposit products,
increased credit card transaction volumes and higher mutual fund
distribution fees.

Profits would have been even higher
but for two clouds on the horizon: higher pension and
performance-related compensation expenses and increased marketing
costs to support RBC’s business growth, hit the bottom line.

David McKay, group head of Canadian
Banking at RBC, told RBI: “We had an outstanding year. We
made significant market share gains in consumer deposits and in
consumer lending. In 2010, we were firing on all cylinders.

Pie chart showing Royal Bank of Canada's Canadian Banking retail lending by product in Q410“We are very happy
with our credit performance through the entire credit cycle. The
only area where we lost a little market share – and we will get it
back – was in commercial real estate lending, such as
agriculture.”

In contrast to lenders south of the
border, RBC has benefited from its traditionally conservative
approach to mortgage lending, with an entrenched ‘origination and
hold’ mortgage model. It has also adopted a fundamentally more
conservative approach to credit cards; the Canadian Bank Act has
also helped, with loan-to-value deals higher than 80% having to be
insured by a government-sponsored or government-owned insurer.

Looking back at 2010, three of the
four biggest new product launches highlighted by McKay as
contributing to the record year for his business unit, relate to
mortgages and the cards sector:

  • RBC Visa Cash Back Card –
    offering 1% cashback on all purchases;
  • WestJet RBC World MasterCard
    – offering a $100 WestJet dollars as a welcome bonus on the first
    purchase; and
  • RBC RateCapper mortgage –
    offering a variable rate mortgage with a maximum capped rate for a
    five-year-term, the product provides protection from rate increases
    if mortgage rates go up beyond the maximum “capped”
    rate.

The fourth new product hit of 2010
– a fixed monthly fee account for small businesses, was so
successful that sales of the product increased by 50% during the
year.

McKay attributed the success of the
product launches to RBC’s drive to offer value for money, one of
the bank’s four core customer pillars, the others being
convenience, advice and service.

Bar chart showing Royal Bank of Canada's net income between 2006 and 2010The drive to
highlight RBC’s convenience offering, is evident from its ongoing
multi-channel investment. McKay was animated about RBC’s channel
initiatives: a doubling of spend on its revamped online channel;
the country’s largest mobile sales force; further investment in
what is already the country’s biggest telephone banking service,
and RBC’s new Retail Store Concept.

To this mix can be added – in the
week prior to Christmas – the launch of RBC’s mobile banking
service.

“We have moved to the number one
position in Canada in terms of internet banking and are very proud
of our online investment,” he said. “We have made a significant
investment in improving the customer experience, such as creating
MyFinance Tracker.”

All customer transactions are
loaded onto the tracker, an online budgeting tool, and to date,
results far exceed the bank’s initial expectations.

As for the branch, not content with
the largest network of outlets among the Big Five Canadian lenders,
RBC will ramp up opening hours in the New Year, offering the
equivalent of a 10% increase in sales capacity.

McKay’s ambitions for the branch
channel are evidenced by his aim to “reinvent the concept of the
branch”, via its Retail Store outlets.

Table showing Royal Bank of Canada market shares in Canada, Q409 vs Q410

In November, Wayne Bossert,
executive vice president, sales, told RBI that the Retail
Stores will offer:

  • A casual, no-risk atmosphere
    where clients can ask questions or gather information on their own
    and get personal tailor-made advice;
  • State-of-the-art interactive
    technology. RBC has spent heavily on developing a more inviting
    customer environment with such features as touch-screen computer
    displays explaining product offerings;
  • Increased staff interaction
    to assist clients with their banking needs; and
  • Events and seminars, open to
    customers and non-customers, offering expert financial
    advice.

One month on, and McKay is excited
by the initial results from the new branches.

“The early signs are way beyond our
initial expectations, especially the way that staff have engaged
with consumers,” he said.

“We asked staff in the Discovery
Zone and Innovation Zone to engage with visitors just as if they
were in an Apple store. Conversations they are having with
customers and non-customers, are completely different to those they
would have in a traditional store.

“Large numbers of non-RBC customers
are coming in because of the uniqueness of the store.

“For example, we ran a direct mail
campaign to customers and non-customers. We saw almost an 800%
increase in take-up to the campaign compared to a traditional
direct mail campaign.

“Visitors are coming in to try out
the Microsoft surface level computing – it really is a best in
class use of surface level computing and highlights the Innovation
Zone.

“It is fantastic to see people
walking through the investment Discovery Zone. The branches are a
tangible example of how we can integrate our brand promise into the
service we are offering.

“The challenge will be to see how
fast we can accelerate growth of the Retail Stores and present a
business case to expand – it is something we really want to run
with pretty hard. We are certainly ahead of where we thought we
would be.”

RBC’s multi-channel offering
received a timely boost with the 20 December launch of the bank’s
m-banking service.

“We have taken our time to get the
service right,” McKay said.

“We think our iPhone and BlackBerry
app will leapfrog the market. An Android platform service is in the
building and testing phase and will be released next year.

“This channel is taking off faster
than anyone would have thought.”

The RBC mobile app allows clients
to access a full range of services, including the ability to:

  • View account balances for
    all personal and business accounts, credit cards, mortgages and
    loans;
  • Pay bills and send
    third-party payments;
  • View transaction and payment
    history;
  • Transfer funds between all
    RBC accounts;
  • Send internet email money
    transfers;
  • Locate RBC branches and
    ATMs.

Looking ahead, McKay forecast mid
single digit growth of 4% to 6% in consumer lending – down from 10%
to 12% just 18 months ago – and said that RBC is comfortable that
Canadians are carrying an appropriate amount of debt.

“We do a lot of stress testing,” he
said. “I would say that we are in a good place.”

McKay identified two principal
priorities for 2011: continued expansion of RBC’S sales power and a
continued drive to remove costs from the network.

McKay concluded on an extremely
upbeat note. Average sales per full time RBC employee, increased by
an impressive 15% in the past year.

“In 2011, we can beat that,” he insisted.

Table showing the Big 5 Canadian banking groups ranked by assets