Trading frenzy expected to continue driving bank profits, executives say

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The blowout performances of the capital markets divisions of some of Canada’s largest banks could continue for the rest of the year, as long as stimulus measures and market volatility persist, bank executives are forecasting.

“You have, right now, monetary and fiscal policies, and the revolution in technology … that combination is driving a very high level of activity in IPOs, in financing, in mergers and acquisitions,” said Louis Vachon, chief executive of National Bank of Canada , in an interview with The Globe and Mail.

He added that the bank’s deal pipeline will continue to be strong, unless there is an “exogenous shock” to markets or the economy.

Earnings for National Bank’s capital markets division surged 37 per cent in the fiscal first quarter ended Jan. 31 compared with the same period a year earlier, driven by better-than-expected revenue from its trading desk, which generated $393-million.

Royal Bank of Canada also saw its capital markets earnings for the quarter jump 21 per cent year-over-year to a new record of $1.07-billion, mostly because of trading revenue, while BMO Capital Markets recorded an adjusted net income of $489-million, up 35 per cent from last year.

Scotiabank’s Global Banking and Markets division’s earnings swelled 46 per cent to $543-million in the quarter, also driven by the strong performance of its traders and investment bankers.

Trading revenues are usually tied to market volatility. The more frequently stock prices move, the more opportunities trading desks have to profit in a shorter amount of time, although that comes with elevated risk. The strong performance of many of the banks’ capital markets divisions last quarter was essentially a combination of trades going right for the banks and a higher number of deals, as companies looked to take advantage of liquidity in the markets.

“Our M&A pipeline is strengthening, and that sets us up if trading revenue falls back a bit as volatility falls back,” RBC chief financial officer Rod Bolger said in an interview with The Globe and Mail. “That has yet to take place, so right now basically both sides of the business – advisory and trading – are performing well.”

Mr. Bolger however, tempered expectations on RBC’s Wednesday earnings call, saying he expected trading activity to “moderate” over the coming quarters.

The trading business is a quarter-to-quarter type investment, noted Gabriel Dechaine, an analyst with National Bank. In a brief interview with The Globe and Mail, he called trading revenue for the quarter “frothy,” but he does not expect a big drop-off next quarter as long as a “good level of market volatility” remains.

Advisory and investment banking activity are expected to continue growing more predictably in the coming months – especially given the chance of a strong economic recovery in North America, said Daniel Barclay, CEO of BMO Capital Markets.

Canadian bankers had a busy 2020, largely because of injections of liquidity into the economy by fiscal and monetary stimulus, and stock-market driven activity. “Definitely there’s a pandemic dynamic here where we have the fiscal and monetary stimulus in the marketplace that has created a lot of liquidity … and a lot of opportunity,” Mr. Barclay told The Globe and Mail.

But the response to the recovery is going to be “big this year and big next year,” Mr. Barclay predicted, adding that BMO Capital Markets has a busy deal pipeline because of corporate clients that are looking to either “take risks or remove risks.”

“We are going to continue to make money in capital markets, it’s just that how we make money over the next 12 months might change,” Mr. Barclay said.

Not all industry analysts and insiders are as confident that the growth momentum in capital markets will continue for the rest of the year, however. Fiscal 2020 was a unique “banner year” for trading activity and deal activity because of the pandemic’s impact on stock markets and the tech sector in particular, according to Scott Chan, an analyst with Canaccord Genuity Corp.

“There is no doubt that during the pandemic we have seen momentum increase in capital markets segments … but I think it’s safe to say that trading activity will probably moderate from these high levels, and origination activities on the debt side might go down,” Mr. Chan said, adding that he would be “very surprised” if the banks charted the same level of earnings growth in 2021 as they did last year.

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