In July, 2008, as the first sparks of the financial crisis began to fly, Lehman Brothers president Bart McDade told the investment bank's top executive, Richard Fuld, that Lehman was reaching out to Royal Bank of Canada for help.
Although Mr. McDade had no way of knowing it, two months later Lehman, then the fourth-largest investment bank in the United States, would collapse. What he did know was that the beleaguered company needed assistance from a stronger financial institution.
The Canadian bank certainly wasn't the first that Lehman's executives approached. But the answer from RBC's executives was definitive: We have no interest in buying Lehman, nor in making an investment in it.
That's not to say they weren't tempted. RBC's chief executive officer, Gordon Nixon, worked his way up to the company's top job through the ranks of its investment bank and has a strong affinity for that side of the business. But Mr. Nixon is a salesman's nightmare - the type of shopper who would rather buy the pattern and tailor the suit himself than make an off-the-rack purchase.
And, in the aftermath of the meltdown, a funny thing happened: Investment bankers from Lehman and its rivals in the upper echelon of investment banking - who once would have turned up their noses at the thought of working for a Canadian bank - came to RBC asking for a job.
The crisis, for RBC, became a catalyst not to shrink from Wall Street, but to grow. Poaching talent became easier; in the United States alone, RBC's capital markets staff has increased by 24 per cent since 2008, as hundreds of bankers have been added to its ranks. The unit hired about 380 people in Europe just last year and now the bank is ramping up in Asia. Now among the top 12 investment banks globally, ranked by fees, it wants to crack the top 10.
It is an ambitious goal, one that sets RBC apart from other Canadian banks - but not one that is not being greeted with enthusiasm in all quarters.
In December, Moody's Investors Service stripped RBC of its triple-A rating, citing worries that the banks sizable and growing securities business could expose investors to volatility and make it challenging for the bank's executives to manage risk.
"They are one of the firms that's trying to take advantage of the vacuum that was created by the implosion of many U.S. securities firms," said Peter Nerby, a senior vice-president at Moody's.
"Royal is clearly adding people in the U.S., in Europe, and I think has been more explicit that they want to have a global investment banking operation, and we just think that's a tougher thing to manage."
Concerns over the volatility of RBC's investment bank, which makes its money from such activities as selling stock, advising on mergers, and trading, have become a key theme when the bank reports quarterly earnings. Unlike retail banking, capital markets revenue tends to jump around.
When RBC reported second-quarter earnings Friday, the $1.51-billion profit missed Bay Street's expectations by about 10 per cent. The culprit: volatile trading revenue. Turmoil in Europe and the Middle East caused trading revenue to plummet, pushing down profit in the capital markets division by 19 per cent.
"The results this quarter underscore what has been our primary concern on [RBC] earnings volatility," Robert Sedran, an analyst with CIBC World Markets, wrote in a research note Friday.
Speaking on a conference call to discuss the earnings, Mr. Nixon was unapologetic.
"If the earnings were smooth, perhaps the market would like it better," the CEO told analysts. "But unfortunately in that business, we tend to look at it over a longer period of time."
The volatility question
Before the crisis, Mr. Nixon had already made it clear that he wanted the bank to bring in roughly 25 to 30 per cent of its profit and revenue from capital markets, with the remainder coming from retail banking, a target he maintains. But as the financial crisis swirled, RBC's sales and trading boomed.