Doug McGregor contends that he knows exactly what it would take to quickly vault Royal Bank of Canada’s capital markets business into the very top ranks of global investment dealers.
“All we would have to do is take on more risk, or accept lower profitability,” Mr. McGregor says. And as he begins his second decade as CEO of RBC Capital Markets, Mr. McGregor is quick to explain why he has absolutely no interest in either strategy as he continues a slow-but-steady push to build Canada’s largest investment bank into an international powerhouse.
RBC is grinding its way to the top of the mountain. By a number of measures − lending, advising on takeovers − the dealer now ranks among the top 15 players worldwide, with aspirations to climb higher. Parent Royal Bank is a top-10 global player by most measures. But the 61-year-old CEO says growth is always about improving bottom-line results and "we never set targets based on market share.”
Over a four-decade career in finance, Mr. McGregor watched a series of rivals, including Royal Bank of Scotland, Deutsche Bank and most memorably, Lehman Brothers, expand rapidly by aggressively deploying their own capital and diving into new sectors and regions. None built platforms and cultures that could survive a market downturn.
Having had a front-row seat for the global financial crisis when he began his tenure as CEO in 2008 has clearly shaped Mr. McGregor’s approach to expansion. Over the course of an hour-long interview on the bank’s global growth strategy, the CEO uses the word “safe” at least a dozen times. RBC is recruiting aggressively in the U.S. and Europe − landing 31 senior bankers in recent months − but Mr. McGregor says the bank’s goal is to ensure new hires are a “safe” cultural fit, which means “understated and team-oriented.” RBC is spending hundreds of millions on technology and compliance, to ensure "we keep out of trouble.”
The quick route to expansion into new markets is through acquisitions. It’s a proven tactic in manufacturing, where you’re buying factories, but far more difficult to execute in investment banking, where the asset you acquire goes up and down the elevator each day.
RBC tried to bulk up in the United States in 2000 by buying Minneapolis-based brokerage Dain Rauscher Wessels, which catered to technology companies. Looking back on the move, Mr. McGregor said it proved difficult to integrate the U.S. firm’s focus on small capitalization companies with RBC’s expertise in serving large corporate clients. On Mr. McGregor’s watch, RBC has eschewed acquisitions, opting instead to hire individual bankers or teams from the largest U.S. and European firms, and build organically around these financiers.
RBC now has roughly the same number of bankers in the Canada and the U.S. − there are 3,000 employees in the home market and 2,800 in the U.S. − along with 1,100 staff in Europe and 113 bankers in Australia. Everyone covers the same sectors.
The next step in RBC’s growth plan is to back bankers outside Canada with the capital and services they need to deepen relationships with global clients. It’s a subtle transition, but one that can be hugely lucrative.
A decade back, RBC’s European bankers would have targeted secondary roles in deals. For example, they would strive for a role as one of a dozen big banks lending money on a takeover, in a process known as syndication. On these sorts of deals, fees are minimal and profits are measured in fractions of a percentage point.
By upgrading talent and committing more capital, RBC moved to the centre of the action. RBC advised on tactics and lined up financing last year on an £8-billion ($13.6-billion) takeover of GKN PLC by Melrose Industries, the largest hostile British deal in a decade. In the U.S. market, RBC was a leading player last year in transactions from some of the world’s largest companies, including The Walt Disney Co., T-Mobile USA Inc. and Blackstone Group L.P. Roles like these translated into an impressive 17 per cent return on the investment dealer’s capital.
In 2008, Mr. McGregor’s first year at the helm, RBC’s capital-markets unit earned $1.2-billion. Last year’s profit was a record $2.8-billion − more than the second and third largest Canadian investment banks put together. But sticking to his theme of safe growth, Mr. McGregor points out that the group’s profits are consistently less than 25 per cent of RBC’s total earnings. That’s right at the median point for investment-banking earnings at the six largest Canadian banks, which means Royal Bank’s exposure to sometimes volatile capital markets is in line with that of domestic rivals.
For the CEO, building a global business one banker and one client at a time translates into endless hours on an airplane. In the four weeks ahead of a brief Christmas vacation – he planned to golf in South Carolina – Mr. McGregor made business trips to Australia, Britain, San Francisco, New York and Montreal. He’ll be back on the road in early January, grinding out a proven growth strategy.
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