Doomsday market headlines don’t scare RBC, one of the top banks in Canada and North America; while other firms shrink their capital markets units, the bank has taken strides to grow its wholesale sector and beef up its risk management division.
Since 2008, the bank’s added approximately 1,000 people, the majority joining back-office operations like risk management. They’re also rumoured as a lead contender to acquire Bank of America’s global wealth management business.
“All of our acquisitions are made to enhance our global presence and fill holes in our business. They’re all reasonably sized and well chosen,” said a RBC rep during its May 24 Q2 results conference call.
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At the RBC 2012 Investor and Analyst day, which focused on capital markets, the bank defended its unit, reporting it accounts for only 19% of the bank’s bottom line, and is a key component of its long-term growth strategy.
The last two years, RBC did its investor and analyst day in October. This year, it times conveniently after Moody’s threat to downgrade RBC’s rating by two notches, as part of an evaluation of global banks with active capital markets arms.
The rating agency already administered a one-notch downgrade to RBC in 2010, and the bank continues to find Moody’s investigation of its operations unwarranted, said the Globe and Mail yesterday.
During its presentation, the bank explained RBC Capital Markets allows for a “diversified business mix, with the right balance of retail and wholesale components, as well as a competitive advantage.” The bank stresses a strong track record of performance, and posted solid Q2 earnings.
Read: Downgrade would have small impact: RBC
The bank’s also exploring a more client-centric model, with plans to “Shift its balance sheet from away from trading, and toward more lending and traditional investment banking to expand client business.” It also plans to narrow focus and breadth of trading products to optimize capital, namely in fixed income, which has revenue that’s 80%-to-85% client-related, according to RBC’s presentation slides.
On the topic of the types of losses that hit JP Morgan, RBC stresses its business model is different. It doesn’t practice hedging, for instance, which JP Morgan has claimed is the activity that caused its $2 billion loss.
Also, the Canadian bank’s sales and trading focus is based on supporting origination and new issues, rather than proprietary trading. Doug McGregor, co-CEO of Capital Markets at RBC, did say, though, that “prop trading remains important, and helps the bank manage it liquidity and deploy surplus capital.”
When it comes to trading policy changes, RBC reps told callers, “JP Morgan’s downfall wasn’t helpful and we hope it remains a unique circumstance. Changing public policy [and banking rules] must not be directed by the mistakes of one institution, however. We hope smart policy trumps politics.”