Doug McGregor, chairman and CEO of RBC Capital Markets.
Bolstered by its successful capital markets expansion in the United States, Canada's biggest investment bank is hiring aggressively across the Atlantic, aiming to position itself as a leading global dealer.
A decade ago, RBC Dominion Securities was largely a Toronto-centric firm. But in the aftermath of the financial crisis the investment bank doubled down in the U.S., particularly in New York, hiring scores of bankers and research analysts.
The goal now is to strengthen the European arm in much the same way; in the past year, RBC has hired 20 managing directors in major cities.
Timing is key: RBC made many of its U.S. hires when there was a surplus of talent after the financial crisis, driven by mass layoffs at rival firms. Now, the bank is snapping up European professionals as global peers, such as Credit Suisse and HSBC, scale back operations amid weak returns.
"In order to be positioned as a Top 10 global investment bank, in order to be relevant to most of our customers, we need to be represented [in Europe]," RBC capital markets head Doug McGregor said in an interview outlining the strategy.
Executives believe it's the next logical step; more Canadian companies and pension funds are striking European deals, and London is a major financial hub.
RBC's capital-markets arm has operated across the Atlantic for decades, but until recently its European arm was largely limited in scope. Historically, the dealer had a fixed-income business there, which it acquired from British investment bank Hambros Bank Ltd. in 1998, and employed some oil and gas and mining bankers to round out its global resource coverage.
Yet RBC, as a broad bank, is putting a new emphasis on Europe. Chief executive officer Dave McKay, who took the reins last August, has stressed a preference for expanding in developed Western countries instead of chasing growth in the highly competitive Asian market.
The broader European expansion has involved acquiring BlueBay Asset Management for $1.5-billion in 2010. More recently, the capital markets arm is on a hiring spree. In the past 12 months the dealer has installed new country heads in Germany and France and it continues to build out sector coverage by adding bankers, research analysts and salespeople, among others, in areas such as consumer products, health care and industrials.
In Europe, RBC now employs 1,300 capital markets professionals and its research arm in London covers 450 companies.
The expansion is unusual. Post-financial crisis, few banks are expanding aggressively in capital markets, after these arms were responsible for landing so many financial institutions in trouble. However, RBC is doing so with a rather simple strategy. Instead of focusing on traders or adding expertise in specialized securitized products, the bank is hiring in areas where less capital is put at risk, such as investment banking, which is fee-driven, and plain vanilla corporate loans.
It is the same strategy that worked in the U.S.
In the aftermath of the financial crisis, American companies had little access to credit as European lenders were fleeing and U.S. banks focused on shoring up their balance sheets. RBC did the opposite: It opened its coffers and dramatically increased the size of its corporate loan book. Since 2011, the bank's U.S capital markets loans have more than doubled to $34-billion.
The move paid dividends. Now RBC not only lends to more American companies, but these same borrowers include the Canadian bank in their underwriting syndicates. That, in turn, drives trading revenues because it allows RBC to work with large money managers such as BlackRock Inc. to help reposition their portfolios to buy shares in the new financing. The U.S. now represents more than half of RBC's $7.4-billion in annual capital markets revenues.
Europe amounts to only 13 per cent – for now.
The bank's European strategy dovetails with a widespread de-risking across global investment dealers. Because of new regulations, investment banks must hold more capital against riskier assets – a costly rule that makes it much harder for these products to be profitable. RBC itself shed tens of billions from its trading inventory and sold off or ring-fenced structured credit and auction rate securities after the financial crisis.
However, Mr. McGregor said he views the current strategy through a slightly different paradigm. "It's not so much a de-risking as it is taking some volatility out of the business," he explained. When investment banks focus on expanding their trading arms, for instance, their profits are subject to wild swings in the market – such as in August, 2011, when European markets went haywire. "That experience reinforced my conviction that we're going to keep pushing into the corporate and lending side," Mr. McGregor said. In 2013, RBC shut down its European government bond trading desk.
But RBC can't simply turn the taps in Europe on overnight and expect success. It's taken almost a decade to deliver strong profits out of the U.S. Before the financial crisis, "we were just trying to get on the ice, get in front of the customers and get some traction," Mr. McGregor explained.
This time around, in Europe, the bank has the power to scale up much more quickly, largely due to better brand recognition. RBC bankers often joke that not long ago, when people in the U.S. or Europe heard "Royal Bank," they assumed someone was referring to Royal Bank of Scotland. David Thomas, RBC's head of capital markets in Europe, joined the firm in London in 1992 and remembers when RBC's name barely registered. "Our access to talent is much better than it was pre-crisis and [even] five years ago," he says.
But that recognition is a double-edged sword. As RBC hires, it is also losing talent to rival firms poaching its professionals.
Despite RBC's ability to hire many more people in Europe, the bank plans to expand in a measured fashion. It won't steal top names by promising big signing bonuses, nor will it build bench strength by guaranteeing certain levels of compensation. Rival firms have done that, and it rarely pays off because these same hires often leave once their guarantees run out. "We don't subscribe to the idea that you pay goodwill in this business for people," Mr. McGregor said.
Tim Kiladze