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Risk Management

Risk Managementat

RBC Financial Group

Presentation to Institutional Investorson September 4, 2002

by Suzanne Labarge, Vice Chairman & Chief Risk Officer

Good afternoon

•The purpose of this presentation is to provide an overview of how we assess and manage the various risks the Bank is exposed to.

•I have divided the presentation into two parts:

(1) How we look at the various risks and how we mitigate and manage them.

(2) How we look at the management of risk from an organizational perspective.

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Risk Management

• Economic Outlook

First the context in which we look at risk . I thought it worthwhile to give you our economists’ perspective on the economic outlook.

It is a lot brighter than most of us would have thought a year ago.

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Risk Management

CONSENSUS GDP GROWTH FORECAST – 2002/03

Risk Management

-1

0

1

2

3

4

U.S. Japan Eurozone U.K. Canada

2002 2003

Canada seems ready to continue to outperform the US which will grow slowly at least through this year.

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Risk Management

OUTLOOK FOR CANADA’S FINANCIAL SERVICES INDUSTRY

Risk Management

8.0

-7.0

6.020.0

6.76.07.0

FY2002

9.0

6.0

-2.058.0

5.68.04.5

FY2003

Business lending

Current accounts

Household savingsPersonal depositsMutual fund sales ($bln)

Household lendingConsumer CreditResidential mortgages

Year-over-year % change unless otherwise indicated

Source: Bank of Canada, IFIC, RBC Financial Group

• We expect to see a strong demand for credit over the next year.

• New money demand this year has been running about half of 2001 levels.

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Risk Management

As expected, the default rate in 2002 is higher than that experiAs expected, the default rate in 2002 is higher than that experienced over enced over the last 6 years, but is forecasted to improve in 2003.the last 6 years, but is forecasted to improve in 2003.

10000

RBC Annual Corporate Default RateBasis Points

0102030405060708090

100

Q4/

95

Q2/

96

Q4/

96

Q2/

97

Q4/

97

Q2/

98

Q4/

98

Q2/

99

Q4/

99

Q2/

00

Q4/

00

Q2/

01

Q4/

01

Q2/

02

Q4/

02

Q2/

03

Forecasted

Risk Management

CORPORATE CREDIT QUALITY

•Along with the improvement in the economy comes an expected improvement in the level of defaults.

•While these are based on our portfolio they track S&P’s and Moody’s default probabilities.

•A note of caution – these charts only predict the default rates – actual losses are a factor not only of default rates but also of the amount outstanding at default and the loss in event of default

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Risk Management

• Approach to Risk

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Business is about taking and managing risk. What is bad is risk

that is mismanaged, misunderstood, mispriced or unintended.

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Risk Management

Less Control

More Control

Credit Market LiquidityInsurance•Underwriting•Actuarial

Operational•Technology•People•Process

Reputational

Strategic

Competitive Regulatory & Legal

SystemicRISK PYRAMIDRISK PYRAMID

• The Risk Pyramid is the framework we use for assessing risk – whether it be at the business unit level or product level.

• It attempts to classify risks from the perspective of how much control we have over their management and mitigation.

• We use it throughout the organization to ensure consistency in our way of defining and assessing the various risks we are exposed to. It helps to ensure that we have a common language of risk across our multiple platforms.

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Risk Management

PORTFOLIO MIX

Business & gov't loans & acceptances

57%

Residential mortgages

27%Personal

loans14%

Credit cards2%

Significant change in portfolio mixSignificant change in portfolio mix

October 31, 1991

Personal loans18%

Business & gov't loans & acceptances

40%

Residential mortgages

39%

Credit cards2%

July 31, 2002

• Given the size of our balance sheet, credit risk will always be the largest source of risk.

• What we have tried to do over the past decade is to shift the nature of these risks.

- Residential mortgages and personal lending have become a larger part of our portfolio.

- The level of loan losses in these portfolios are relatively stable and more predictable.

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Risk Management

BUSINESS AND GOVERNMENT

Since 1994 the Business & Government portfolio has seen a reductSince 1994 the Business & Government portfolio has seen a reduction in ion in International and Canadian Corporate exposure and an increase inInternational and Canadian Corporate exposure and an increase in US US exposure.exposure.

United States13%

Canada - Corporate

58%

Canada - Small

Business12%

International17%

Q4/94

International13%

Canada - Small

Business13%

Canada - Corporate

45%

United States29%

Q3/02

• We have reduced our Canadian concentration by diversifying corporate exposure internationally

• Different risk profile

• Different opportunities for mitigating risk

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Risk Management

SECTOR EXPOSURELoans and Acceptances by Sector - July 2002

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Telecom

, Medi

a & Cabl

eEner

gy

Automotiv

e

Comm. M

ortgage

s & Real

Estate

Consum

er Good

s

Financial

Services

Forest P

roducts

Indust

rial Prod

ucts

Other Serv

ices

Small Busin

ess & Agric

ulture

Transpo

rtation

& Environm

ental Othe

r

($ MM)

Telecom, Media & Cable($MM)

Telecom 1,836 Media 1,544 Cable 882

4,262

Energy ($MM)

Power & Power Generation 2,022

Natural Gas 1,521 Oil and Gas 3,809

7,352

• What we have also done over the past decade is to shift our industry risk profile.

• While real estate continues to be our largest industry exposure it is still smaller in absolute terms than it was in the early 90’s – despite the growth in our balance sheet and capital.

• It is also a very different profile as much of the portfolio has been acquired as part of our US expansion.

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Risk Management

PEER COMPARISON

• RBC has outperformed its Canadian peers, but lags its US peers.

Gross Impaired Loans as a % of Loans and Acceptances

(RBC and Cdn Peers excluding Residential Mortgages)

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1997 1998 1999 2000 2001 Q2/02

RBC Avg. Cdn Peer Group Avg. US Peer Group

Gross Impaired Loans as a % of Loans and Acceptances

(Including Residential Mortgages)

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1997 1998 1999 2000 2001 Q2/02

RBC Avg Cdn. Peer Group Avg US Peer Group

• When residential mortgages are included, the Canadian average improves and RBC continues to outperform its Canadian peers.

• One of the ways we measure ourselves is by peer comparison.

• Not always apples and apples but it does help us focus on some of the key elements analysts and rating agencies use.

• As we become more North American we have included a number of US peers in our comparisons. We have included approximately 15 of the largest US banks with broad based banking operations.

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Risk Management

PEER COMPARISON – Q2 YTD

• PCL as a % of pre-provision income in the US is lower than the Canadian percentage as a result of (i) large provisions taken by the Canadian banks and (ii) an increase in pre-provision income in the US.

• Wider spreads in the US allow US banks more flexibility in theirRisk/Reward equation.

3.8%2.3%2.4%103NII as a % of average earning assets

21%58%15%31PCL as a % of NII (Q2 YTD)

11%16%7%31PCL as a % of gross revenues

26%49%19%41PCL as a % of pre-provision income

US Average

Canadian Average (excl.

RBC)

RBCRBC Rank in

US

RBC Rank in Canada

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Risk Management

OPERATIONAL RISK

•People

•Technology

•Process

•External

Specific Risks1. Capability & Learning 2. Change Capability 3. Purpose & Communication 4. Work-Life Balance & Wellness 5. Dereliction of Duty 6. Discrimination/Harassment 7. Employee Fraud/Malice Risk 8. Inadequate or Loss of People

Resources 9. Unauthorized/Trading Rouge 10. Client Service 11. Business Continuity 12. Efficiency 13. Information Delivery 14. Documentation or Contract 15. Management Information/Data Integrity 16. Valuation/Model 17. Project 18. Fiduciary/Suitability & Trust 19. Payment or Settlement 20. Transaction Process Failures 21. Internal Management Process Failures 22. Compliance Process Failures 23. Privacy and Confidentiality 24. Accounting & Tax 25. Criminal Activities 26. Money Laundering 27. Public Safety 28. Third Party Performance 29. Disaster 30. Workforce Disruption Risk

• Operational risk has become a major focus of both regulators and bank management partly because of a number of large losses in various institutions and partly because of a concern about controls following a number of years of downsizing in the industry.

• We are implementing a Risk Control and Self Assessment process throughout the organization. It is designed to provide a more rigorous and uniform way of assessing the risks in various operations and ensuring that the right controls are in place at all levels.

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Risk Management

LINKING STRATEGY AND RISK

Corporate StrategyCorporate Strategy

Business Unit Business Unit StrategyStrategy

Risk AppetiteRisk AppetiteLinkageLinkage

The long term success of RBC Financial Group hinges on the need to:

- ensure that the Corporate Strategy of the organization is well communicated and that Business Unit strategies are aligned with the Corporate Strategy;

- ensure that the Bank’s Risk Appetite is aligned with and is an integral part of the Corporate strategy;

- and that Business Unit Strategy and Risk Appetite go hand in hand.

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THE RISK PYRAMID: AN ORGANIZATIONAL PERSPECTIVE

Ow

ners

hip - M

onito

ring –

Esca

latio

n - Ove

rsig

htC

ulture –Fram

ework –

Delegation - A

ccountability

B o ard o f D irec to rs

C o nd uc t R eview & R isk P o lic y C o m m ittee

G rou p R isk C o m m ittee

C h ief R isk O ffice r

G ro u p R isk M an agem ent

B u s in ess P la tfo rm s (R B C )

R o yal B ank Insu rance Inves tm ents C ap ita l M arke ts G lob a l S ervices

R isk M an ag em ent C om m ittee

P o licy R e view C om m ittee

E th ics & C o m p liance C o m m ittee

Ow

ners

hip - M

onito

ring –

Esca

latio

n - Ove

rsig

htC

ulture –Fram

ework –

Delegation - A

ccountability

B o ard o f D irec to rs

C o nd uc t R eview & R isk P o lic y C o m m ittee

G rou p R isk C o m m ittee

C h ief R isk O ffice r

G ro u p R isk M an agem ent

B u s in ess P la tfo rm s (R B C )

R o yal B ank Insu rance Inves tm ents C ap ita l M arke ts G lob a l S ervices

R isk M an ag em ent C om m ittee

P o licy R e view C om m ittee

E th ics & C o m p liance C o m m ittee

•One of our priorities has been to assign clear responsibility for risk management throughout the organization.

• The basic premise is that the business unit owns the risks it takes on in its platform and is responsible for managing them.

• These risks, however, can only be taken on in the context of a risk appetite set by the Board, a risk framework set by Risk Management, and within delegated authorities.

• One of the key roles of Risk Management has been to develop appropriate reporting so that risks can be assessed at the enterprise level and steps taken if the overall risk profile begins to deteriorate.

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� have we identified all the risks?

� do we understand their impact?

� can we limit our risk cost?

� how do we influence judgment?

� how can we measure performance?

� how much shareholder value is at risk?

KEY QUESTIONSKEY QUESTIONS

These are the key questions we ask as we review strategies or new products.

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LINKING STRATEGY AND CREDIT RISKFocus on Single Name Limits:RBC limits should take the following objectives into account:1. Earnings Volatility:

• An average rated name should not destroy the quarterly earnings for RBCCM

2. PCL Target:• An average rated name should not put our corporate PCL goal at

risk3. Peer Comparison:

• Our risk tolerance should be in line with that of our peers and commensurate with our size

4. Capital at Risk:• Economic capital should guide our SNL

A primary link between business strategy and credit risk appetite is management of single name limits. Canadian banks have been viewed as having higher limits than their US peers. In setting new, reduced limits we considered the following elements:

- To minimize earnings volatility, and therefore protect shareholder value; the default of an average rated company (BBB) should not wipe out the quarterly earnings of RBC Capital Markets.

- Our Asset Quality target, which is currently Specific Provisions as a % of Loans, BAs and Reverse Repos of 45 to 55 basis points, should not be put at risk by an average rated name.

- Peer Comparison should serve as a valuable guide to ensure that our limits are consistent with our peers on a relative sizebasis.

- As Capital is a primary driver of our profitability models (ieEconomic Profit, NIACC, ROE) it is important that we know and understand how much capital we are placing at risk for our given limits.

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Risk Management

LINKING STRATEGY AND MARKET RISKRatio of Daily Trading Revenue

to VaR, Fiscal 2001

0% 10% 20% 30% 40% 50% 60% 70%

US Bancorp

Bank One

Mellon

BMO

Bank of America

KeyCorp

Bank of New York

TD

JP Morgan Chase

Barclays

CIBC

Citigroup

BNS

Goldman Sachs

Lehman

MSDW

Merrill Lynch

RBC

Standard and Poor's Revenue Volatility Index

0% 10% 20% 30% 40% 50% 60%

RBC

Goldman Sachs

BNS

TD

CIBC

Citigroup

JP Morgan Chase

Merrill Lynch

Bank of America

MSDW

Lehman

BMO

Market risk is another area where we need to limit volatility and attempt to get the highest revenue for the risk we take. We have a very good track record in this area.

The chart on the left titled: “Ratio of Daily Trading Revenue to Value at Risk” shows the extent to which market risk exposure is incurred to generate trading revenues. More efficient banks have a higher ratio of trading revenue to Value at Risk. RBC ranks 1st out of 19 banks surveyed.

The chart on the right titled: “Standard and Poor’s Revenue Volatility Index” is based on reports released recently by Standard and Poor’s on trading revenue volatility at major U.S. and Canadian banks.

Bank of Montreal has the highest degree of volatility while RBC has the lowest degree of volatility. RBC’s low volatility is a reflection of the bank’s risk appetite and composition of trading revenues. Royal Bank has a relatively high proportion of trading revenues sourced from foreign exchange which tends to be less volatile and fewer significant positions in high yield bonds are held in the trading book.

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LINKING STRATEGY AND OPERATIONAL RISK

• Key Objectives:1. To enhance our ability to achieve our business

objectives2. To enable us to demonstrate externally that we are

“in control”

• Key Initiatives:1. Development and implementation of Risk and

Control Self-Assessment methodology and technology

2. Implementation of Loss Event database

Under our new Risk Control Self Assessment methodology Operational risk is viewed as any risk other than credit or market trading risk that would stop us from meeting our objectives. Since financial results are always part of our objectives identifying those areas where we could lose money through lack of controls is part of the process. But our objectives are usually more than financial and being able to ensure that we have aligned our people, technology and processes to meet these objectives is what aligning strategy and risk appetite is all about.

Getting this right has a number of benefits:

-we improve our efficiency,

-we reduce our sundry losses; and

- we demonstrate to our stakeholders that we are in control.

To develop and ultimately strengthen this link we:

- are in the implementation phase of the Risk and Control Self Assessment methodology, and

- have now implemented the loss event database.

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� understand the risks

� create appropriate risk culture

� support with quantitative tools

� strike the right risk-reward equation

� establish roles and responsibilities

= Enhance shareholder value

ENTERPRISEENTERPRISE--WIDE RISK MANAGEMENTWIDE RISK MANAGEMENT

• Risk Management at RBC is enterprise-wide driven by the Board and the CEO throughout the organization.

• The primary focus is to balance the risk/reward equation to enhance shareholder value.