It’s time to acknowledge that when it comes to investment banking, RBC Capital Markets is playing in a different league than its Canadian rivals. The deal-making arm of Royal Bank of Canada churned out $8.4 billion in revenue last year, almost as much as its second- and third-ranked domestic competitors put together. In the same way it seems preordained that football’s New England Patriots will be Super Bowl favourites every year, it now appears certain that RBC Capital Markets will make far more money than any other Bay Street dealer.
What's the secret to this run? Like the most successful coaches in sports, Royal Bank CEO Dave McKay says staying on top in increasingly complex markets starts with keeping things simple. “The beauty of the capital markets strategy is consistency and what I call the simplicity,” he said at a conference in March. “It is [built] around great people, using your balance sheet, creating value, advising and cross-selling, and it takes time to build up those relationships.” To use another gridiron adage, it's also about the team, rather than individual superstars. When that teamwork kicks in, it can turbocharge revenues and earnings.
Like many perennial winners, McKay pushes his team to do better each year, too. RBC Capital Markets earned a $2.8-billion profit in 2018, which translated into a healthy 13% return on equity—a performance any other Canadian bank would envy. But McKay isn't measuring his team mainly against Bay Street rivals such as Bank of Nova Scotia, which posted capital markets revenue of $4.5 billion in 2018. Royal Bank is competing against global players such as JP Morgan Chase, which generated $35.4 billion (U.S.) in revenue from corporate and investment banking.
RBC Capital Markets began to pull away from the rest of the Canadian bank-owned dealers in the late 1990s, when it found itself advising many of its Canadian corporate clients on international expansion plans. The division's leaders in that era, including long-time CEO Anthony (Tony) Fell, decided that to stay relevant to those clients, it needed to grow with them abroad, with an initial focus on the U.S. market.
In 2000, Royal Bank spent $1.5 billion (U.S.) to acquire a technology-focused investment bank, Minneapolis-based Dain Rauscher Corp. When the tech bubble burst in 2001, Dain Rauscher started losing money. Royal Bank also targeted relatively small growth companies, which was out of step with its focus on large-cap clients in established industries. Veteran real estate banker Doug McGregor was dispatched from the head office in Toronto to Minneapolis to turn things around.
McGregor and his colleagues stuck with a U.S. expansion strategy, but eschewed another acquisition, opting to take a slow-and-steady approach by hiring individuals and some entire teams from U.S. banks. They did the same with British, French and German rivals in Europe.
If Dave McKay is Royal Bank’s head coach, the role of quarterback falls to the 61-year-old McGregor, who’s chair and CEO of RBC Capital Markets and head of the bank’s investor and treasury services. A champion wrestler in his university days, McGregor looks like he could still pin an opponent, and he is disarmingly blunt and direct. He says the big-ego Masters of the Universe financiers made famous by author Tom Wolfe were never welcome at RBC Capital Markets. McGregor has hired 31 senior bankers in recent months, and says his goal in every interview has been ensuring the new partners are a “safe” cultural fit, which means “understated and team-oriented.”
As the bank has expanded internationally—RBC Capital Markets now has 3,300 employees in the U.S., 2,700 in Canada and 1,300 in Europe—McGregor and his colleagues say the concept of teamwork became more essential. No one player can do everything for large and complex corporations.
Take health care. Derek Neldner, RBC Capital Markets head of global investment banking, says that a generation back, one banker could be the sole contact with a pharmaceutical company. Now, he says, “if you are going to offer serious coverage to a health care client, you need an analyst who can talk authoritatively on medical devices, an expert on pharmaceuticals, one on biotech and so on.”
To cover the cost of employing all those specialists, a bank needs global scale, Neldner says. He adds that one of RBC Capital Markets' most significant internal accomplishments in recent years was devising a compensation system that ensures bankers and traders get paid for helping on a transaction even if they don't have direct ties to that client.
RBC Capital Markets' reach now vastly exceeds that of any domestic rival. The firm played a role in $1.5 trillion (U.S.) worth of syndicated loans last year, $74 billion (U.S.) in stock sales and $764 billion (U.S.) in bond offerings for Canadian and international clients.
Teamwork often boosts revenues, which is why McKay fixates on cross-selling. Jonathan Hunter, RBC global head of fixed income currencies and commodities, remembers working on an acquisition in British Columbia for a German client. Along with helping negotiate the deal, RBC arranged debt financing and used derivatives to hedge currency risk. “If our fee was a dollar on a conventional advisory assignment, we were able to earn a buck-sixty here by providing extra services while also doing a better job for the client,” Hunter says.
Size and outsized profits in capital markets also bolster the premium valuation for Royal Bank stock, analysts say. “When the waves pick up, we prefer to be on a bigger boat,” said CIBC World Markets analyst Rob Sedran in a recent report on Royal Bank. Like the Patriots, in good markets and bad, McKay’s team just keeps winning.