Buoyant stock markets, rising interest rates and robust economic growth are helping Canada’s major investment banks turn the corner, after four straight quarters in which they posted year-over-year declines in profit.
Royal Bank of Canada, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada all reported higher third-quarter earnings from their capital markets segments. Earnings at Bank of Nova Scotia’s capital markets arm were flat from a year ago. In total, the corporate and investment banking divisions of those five banks earned a combined $1.88-billion in the quarter, up 7.7 per cent from the same quarter last year, according to Scotia Capital data. Toronto-Dominion Bank will report its earnings on Thursday.
“We’ve certainly seen a rebound of late in investment banking activity on both sides of the border, and higher interest rates have improved the revenue contribution from the corporate loan book," said Sumit Malhotra, a financial services analyst at Scotia Capital in Toronto.
Capital markets earnings – which include trading revenue, underwriting and advisory fees and the profit earned on corporate loans – tend to be less predictable than other business segments. But the recent strength in the Canadian market – the S&P/TSX Composite Index is up about 9 per cent since hitting its low point for the year in February – has been good for equity underwriting and other parts of the business. And corporate loan losses are relatively low, thanks in part to a strong economy in most of North America.
Collectively, the investment dealers of Canada’s six biggest banks have had a volatile few years, starting with the oil crash of 2014-15. Earnings rebounded as the commodity price recovered, according to data from Scotia Capital, then dipped again over the past year, largely because of lighter client activity in fixed-income trading and sluggish Canadian equity underwriting.
That appears to be changing, as the capital markets units enjoyed a strong three-month period that ended on July 31. BMO Nesbitt Burns Inc., Bank of Montreal’s capital markets division, reported quarterly net income of $301-million, up 7 per cent from a year ago, while Royal Bank’s RBC Dominion Securities Inc. grew by 14 per cent to $698-million. CIBC World Markets Inc. saw its earnings climb 5 per cent to $265-million.
National Bank reported Wednesday that its investment dealer raked in $178-million of net income during the third quarter, an increase of 8 per cent.
Scotiabank was the only one of the five banks that have reported that didn’t see year-over-year growth in its capital markets earnings in the third quarter. Scotia Capital Inc.'s net income was flat at $441-million.
When asked about the segment’s performance during the bank’s quarterly conference call on Tuesday, Dieter Jentsch, head of Scotiabank’s global banking and markets division, noted that efforts are under way to transform the business. Those efforts include a restructuring of its metals business, ScotiaMocatta, as well as a growing focus on building corporate lending relationships and the bank’s mergers and acquisitions advisory practice, Mr. Jentsch said.
“We do anticipate the markets will generally be more constructive in the fall,” Mr. Jentsch said, noting that ScotiaMocatta is also expected to benefit from higher commodity prices over the coming quarters.
National Bank chief executive Louis Vachon noted that certain larger trends – such as the pools of private capital waiting to be deployed and the changing demographics of Canadian entrepreneurs – are expected to fuel a flurry of merger and acquisition activity.
“Your typical business owner is a baby boomer, and he or she is turning 60 to 70 and looking to pass the baton over to the next generation,” Mr. Vachon said.