GORD NIXON'S ROYAL BANK INNINGS
The comeback kid is at the plate, learning hardball and
leading the league in a canter

By Kimberley Noble

THERE’S NOTHING BAY STREET loves better than a juicy sporting metaphor. It’s clear, it’s concise and it’s easily understood by everybody from big institutional fund managers to bike couriers. A well-chosen sports metaphor can transform the often-NyQuillian language of regulatory disclosure into active, compelling imagery that jumps off the page: starting gates spring open, downs are earned, runs are batted in, finish lines are crossed. Or, in the case of the Royal Bank of Canada, last year’s long shot has hit the home stretch several lengths ahead of the rest of the field.

A year ago, Royal Bank was everybody’s favourite goat, a once-golden industry leader that had fallen on hard times. Throughout 2004, its shares lost value while those of major competitors rose by percentages in the double digits. The bank appeared to have no game plan for the more than $8 billion it had invested in the U.S. market. And its new management team, the product of a major organizational shakeup led by president and CEO Gord Nixon, was roundly and repeatedly denounced as being too nice, too slow, too soft and too dependent on hired consultants for the rough-and-tumble of the big leagues.

Illustration by Todd Julie

Nevertheless, Royal Bank is definitely 2005’s comeback kid, the undisputed front-runner of the financial services business. Fuelled by rising profitability in the Canadian banking businesses (including a mind-boggling increase in fees generated in the first quarter) and what’s being heralded as solid improvement in the U.S. operations, the shares are trading for close to $85, almost 40 percent higher than a year ago. What’s more, many investment analysts have begun predicting that Royal Bank’s stock will continue to outperform the industry in the year ahead. “The bank has been benefiting from its restructuring initiative and cost savings,” CIBC World Markets’ Quentin Broad wrote in a recent industry roundup that saw him raise his 12-month target for Royal Bank shares to $91. “You’ve got to give them credit where credit is due,” says Anthony Plath, a banking professor with the University of North Carolina Charlotte who pays close attention to RBC Centura, Royal Bank’s problematic U.S. consumer bank. “The numbers have been great all year and they are moving in the right direction.”

This comes as no surprise to The Bay Street Bull. Last year at this time, The Bull took the decidedly contrarian view that whatever trouble Royal Bank was experiencing in the United States, and whatever Nixon’s difficulties in convincing the analytical community that he could fix this by overhauling the bank’s long-entrenched corporate culture, the company was basically in good shape and its CEO on the right track. Right now, the important question is how much progress Nixon and his team have made in the past 12 months, and how far they still have to go. Or, to go back to a baseball analogy, is Royal Bank about to hit one out of the park? Or is this only an early inning, albeit with the bases loaded, and Nixon still at the plate, still getting accustomed to playing hardball?

In any other corporate turnaround, the numbers might speak for themselves. Because they are very good: Royal Bank performed better than any other major bank in 2005; when measured by market capital, it’s back on top with lots of ground—what Nixon likes to call “blue water” between itself ($55.4 billion) and the No. 2 Bank of Nova Scotia ($43 billion). The bank calculates that it has chalked up a total shareholder return of 43 percent in 2005, the second-best performance in the world if one doesn’t include Japanese banks for which figures weren’t available. In Canada, however, it is the uncontested leader, earning a return for investors of what veteran Toronto investment analyst Ross Healy—who uses capital appreciation plus dividend payments to arrive at a number that is different but no less persuasive than the bank’s—says was 28 percent higher in 2005 than in 2004, compared with a 14 percent improvement for the S&P/TSX index. None of its competitors even came close, says Healy: National Bank of Canada came out slightly ahead of the index, while Toronto-Dominion Bank lagged a little behind. “The other three,” he says, referring to Canadian Imperial Bank of Commerce, Bank of Montreal and the much-admired Scotiabank, rose roughly two or three percent, which, in Healy’s view, “is nothing at all.”

Yet, however impressive the scorecard, both Nixon and Royal Bank chief operating officer Barbara Stymiest, whom Nixon hired away in September 2004 from her post as CEO of the TSX Group, insist that it’s too soon to break out the victory champagne. This is the central message of these interviews, which, with the exception of the standard release of the quarterly results, are the first either executive has agreed to do since Stymiest joined Royal Bank more than a year ago. “It’s still early days,” says Stymiest, who as COO has been responsible for consolidating internal functions that previously reported to vice-presidents in five different operating divisions into single co-operative units serving three business groups and reporting to her. Nixon agrees. “We really undertook what we all decided was a three-year plan, and we are a year into it,” he says. “There is still a lot more that we have to achieve, and the last thing I want is for our people to get complacent.”

That said, in the course of several conversations, Royal Bank executives were willing to identify a few things that are starting to pay off. Nixon says the decision to roll the bank’s five businesses—personal and commercial banking; wealth management; capital markets; insurance; and global services—into three operating divisions has already been successful. The new divisions include insurance, brokerage and wealth management; a stand-alone U.S. and international division, encompassing the same range of products and services; and wholesale financial services under RBC Capital Markets. “They are all ahead of where we wanted them to be,” he says.

Nixon is also deeply pleased with the outcome of what he now says was clearly his biggest risk: the management shakeup he launched in the fall of 2004 and his subsequent efforts to streamline internal processes by slashing bureaucracy. This resulted in the departure of several high-profile executives, whose responsibilities were handed to subordinate managers who now report to Stymiest. “That amount of change worried people,” Nixon says—and there are still senior people in the business community who, notwithstanding Royal Bank’s improved profitability, fail to see the wisdom in this move. But there is acknowledgment among those who remain that this is a better use of resources. This comes even from executives who lost managerial territory to Stymiest as she took over all of what are known inside Royal Bank as “the functions” (a lengthy list that includes the bank’s own treasury and legal operations, risk management, regulatory compliance, internal auditing, investor relations and human resources, as well as corporate strategy). “It’s changed my job in that I no longer have a number of functions reporting to me,” says Chuck Winograd, president and CEO of RBC Capital Markets. “So I have lost a bit of control. Do I miss it? I guess a bit. But I can live with it. And I have a lot more time to spend on the front end of my business.”

As one can imagine, Nixon is not as enthusiastic when it comes to talking about what has not gone according to plan. “The best answer I can give you is that we still have a way to go,” he says. “Not everything materializes the way you expect.” For example? The centrepiece of Nixon’s overhaul is his effort to get what have traditionally been warring factions of the bank to share customers. Known as “Client First,” this is not so much a project as a philosophical makeover on a scale never attempted at the Royal or, for that matter, any other major Canadian bank. Nixon calls it a “change of mindset,” and says that while he is personally satisfied with the progress that’s been made in the past year, “I would hate to leave you with the impression that we have achieved all that we want to achieve” in this area. The bank is poised to launch another round of anonymous online surveys designed to determine the extent to which the group executive office is really communicating the urgency of this message to its 60,000-plus employees. “This,” Nixon says, “is the real test.”

Then, of course, there are the U.S. operations. After a year of reorganization and divestiture, the U.S. banking, insurance and brokerage operations are what the bank is cheerfully calling “stable”—meaning that as of the most recent quarter, they were no longer losing money, but neither were they delivering any significant return on Royal Bank’s investment. Observers such as the University of North Carolina’s Plath complain that the new system of rolling results from all the U.S. and international personal and business operations into a single number does not reveal much more than the old system of lumping profits and losses from the individual U.S. business segments in with those from Canada. Says Plath: “I still don’t know how the U.S. is doing”—other than he’s heard from friends at RBC Centura that under new CEO Scott Custer, who has moved Centura’s headquarters from rural Rocky Mount, N.C., to Raleigh, they are happier than they’ve been at any time since Royal bought the bank. They are also reasonably confident that (persistent rumours to the contrary notwithstanding) the Canadians plan to spend some time building their U.S. banking franchise before putting it up for sale.

The best measurement of Nixon’s chance of hitting that home run may well be seen in speculation about what faces the U.S. bank. A year ago, Royal Bank was thought to be contemplating a $1-billion write-down on the U.S. assets, a move that might be followed by a quick fire sale that would have seen Centura sold alongside Royal Bank’s money-losing U.S. mortgage operations. Now, the speculation centres on the possibility that the Canadian parent is more likely to continue to build value—possibly reinvesting profits in the southeastern United States, perhaps by opening branches in North Carolina and/or Florida—with a view to selling Centura to a larger regional player for a controlling interest. “Will it work?” asks Plath. “I don’t know.” If it did, and Royal Bank attracted the right partner, successive deals of this kind could lead to more and bigger mergers, of the kind that might make the Toronto company a significant force in a major U.S. market—which, at the rate the Canadian federal government is going, is as likely a growth scenario for Royal Bank as any that involves merging with a competitor in Canada.

Finally, whatever he may or may not accomplish at the plate, Nixon’s already a skilled fielder. “I don’t think you’ll see us make a major investment in the year ahead,” he says, without being asked. “We recognize that we are going to have to make some strategic decision in the U.S. over the long term, but there is so much going on right now, it’s impossible to speculate.

“What we have with Centura is an asset that’s improving,” during a period when Royal Bank’s more aggressive U.S. competitors—faced with rising interest rates and what many analysts are certain is an imminent bursting of the U.S. housing bubble—could be facing a very tough slog. “Time is our friend. If we can continue to generate improved performance, we will be very well positioned to take advantage of opportunities in the U.S.” Nixon says. “The way I see it, the organizational issues are still the big challenge and the big opportunities for Royal Bank, rather than acquisitions. That’s where I see creating value in this organization.” In other words, don’t expect to see Team Nixon attempting to hit anything out of the park, at least not yet. On the other hand, don’t bet that its surprise winning streak is anywhere near its end.