The sign for the Royal Bank of Canada is seen on King Street West in Toronto, on Tuesday, May 24, 2016.Eduardo Lima/The Canadian Press
Surging revenue from fixed-income trading powered a big bump in profit at Royal Bank of Canada's capital markets wing in its latest quarter.
RBC reported a profit of $635-million in its capital markets division for the quarter that ended July 31, up 17 per cent year over year. A lower tax rate and foreign exchange gains helped to boost the bottom line, as did a big increase in trading revenue.
"Capital markets had an exceptionally strong quarter," John Aiken, an analyst with Barclays, wrote in a note to clients on Wednesday.
Trading revenue rose more than 20 per cent to $978-million from $812-million. Fixed-income revenue hit its highest level in more than five years, partly because of the impact of Brexit. In a conference call with analysts, chief executive officer David McKay said the injection of liquidity by central banks in the weeks after Britain's shock vote to leave the European Union fuelled a rally in fixed income, which benefited RBC.
During the same call, Doug McGregor, group head of capital markets, said RBC's performance in trading is "repeatable" in future quarters. In Europe, RBC has been able to increase its trading revenue by adding more customers, as opposed to incurring more risk, which is something investors like to see.
"Those [trading] numbers improved the most in Europe," Mr. McGregor said. "We're seeing better market share after a long restructuring of our European operations," he added.
RBC's results echo those of Bank of Montreal, which reported on Tuesday. BMO's profit was up 18 per cent in its capital markets arm, driven, like RBC's, by outperformance in trading.
While fixed income was strong at RBC during the quarter, equity trading was a weak spot, falling both year over year and compared with the previous quarter. Mr. McGregor attributed some of that softness to the dearth of new-issue revenue in Canada and the United States.
The domestic initial public offering (IPO) market has been in a virtual standstill since last fall. There is hope that the IPO market will pick up soon. Last week, Vancouver-based clothing retailer Aritzia Inc. filed for a public offering. If it goes well, bankers are expecting the window for new offerings to open again after Labour Day.
Elsewhere in capital markets, fees from underwriting and advisory services came in at $524-million at RBC, virtually flat year over year. Revenue from broker commissions fell 1.5 per cent.
While the top line in RBC's capital markets division has grown steadily in the past three quarters, some are predicting momentum will slow.
"We anticipate the recent elevated capital markets revenues will ease in the coming quarters, highlighted by moderating trading revenues and advisory fees, but partly offset by slightly stronger commissions," Mr. Aiken wrote.
On Thursday, both Canadian Imperial Bank of Commerce and Toronto-Dominion Bank are due to report their fiscal third-quarter results.
Niall McGee