Royal Bank of Canada's shift to put more emphasis on corporate investment banking and reduce its reliance on trading should lower the volatility of its capital markets business, one of its top executives told Reuters on December 07.
The volatility of trading revenue was highlighted during the summer, when worries about China's economic growth sent global markets into a spin.
RBC, Canada's most valuable company by market capitalisation, would be comfortable if investment banking accounts for about 60 percent of its capital markets revenue, Chief Financial Officer Janice Fukakusa said in an interview, adding that the lender has been allocating more capital to the business in recent years.
Investment banking and lending fees account for about 60 percent of capital markets revenue, compared with roughly 40 percent for trading, spokeswoman Claire Holland said.
In 2010, investment banking and lending fees formed about 47 percent of the capital markets unit.
"We recognise that because there's potential for downside volatility, we need to take as much volatility (as possible) out of our earnings stream, in particular within capital markets," Fukakusa said.
RBC's capital markets division includes a corporate investment banking arm that lends to companies. It has advised Enbridge, Permira Advisers and Informatica Corp, among others, on deals.
It also includes the global markets unit, which is home to fixed income, foreign exchange, equity sales and trading. Fukakusa said the bank began to review the capital markets earnings and revenue breakdown in the aftermath of the financial crisis.
That was when "we said that we needed to more actively move the bar and put more capital into corporate investment banking," she said. "It seemed that the whole movement by regulators to ask for more capital, to want more transparency was a permanent change."
RBC remains comfortable targeting 25 percent of overall earnings from its capital markets segment, she said.
The bank recorded C$2.4 billion in profit from its capital markets division in fiscal 2015, compared with a record C$10 billion for the entire company.
RBC has invested heavily in the US market since the financial crisis and cracked the top 10 in the league tables rankings. Bank of Montreal has made a similar push, while Toronto-Dominion Bank has more recently ramped up its US capital markets presence.
The moves come as global lenders, including Credit Suisse , Barclays and Deutsche Bank, have begun restructuring capital markets operations as market fluctuations add uncertainty to earnings.