The secret to RBC and TD’s strong trading profits

Share

They must be laughing in Royal Bank of Canada and Toronto-Dominion Bank's executive offices.

Heading into the current bank earnings season, the worry was that Canadian investment banks would suffer from the same trading slowdown that hit so many global rivals. RBC was particularly in the spotlight, because it has the biggest trading operation of all the Canadian lenders.

Yet their results came in Thursday, and they were surprisingly good considering what the worst case scenarios looked like.

"Everybody knows it's a weak trading environment. U.S. banks have flagged it, other global banks have flagged it, and Canadian banks have… put up strong trading revenues," CIBC World Markets analyst Rob Sedran wrote in a note to clients.

So how'd they do it?

For both banks, it came down to helping more issuers raise debt. Once their origination arms sold new bonds, the banks' traders are then tasked with trading the offerings once they hit the market.

"I would say origination in the fixed income business has really been quite good and continues to be quite good," RBC's capital markets head Doug McGregor said on the bank's conference call Thursday. "And I think that's supporting those [trading] numbers, so you don't see them falling off like some of the other investment banks have reported."

The same goes for equity trading at RBC – although rising markets have certainly helped as well. "On the equity side, that business has improved considerably. I think a lot of it is due to markets and rotation into equities. There's a lot more activity," Mr. McGregor said. "But, again, we're leading and [underwriting] a lot more equity transactions now, which brings secondary trading numbers up as well."

For RBC, the strength stems from its capital markets operations beyond Canada's borders. "The growth is really focused in the U.S., and our [fixed income] Europe business has performed well in the last quarter as well. And I think really it's just more origination in Europe and also the markets are much improved in Europe," Mr. McGregor added.

TD benefited from origination as well, albeit mostly in the domestic market. Asked about the bank's strong trading numbers in the first half of fiscal 2014, capital markets head Bob Dorrance said they're "driven significantly by the origination markets."

"The issuance markets in fixed income, investment grade bonds and non-investment grade bonds, equity et cetera, have picked up significantly in Canada as we got into the latter part of the last calendar year and the first five months of this year," he added.