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Surging activity after U.S. election a boon for RBC capital markets arm

A Royal Bank of Canada logo is seen on Bay Street in the heart of the financial district in Toronto.

© Mark Blinch / Reuters

A surge in client activity after the U.S. election helped bolster the capital markets arm of Royal Bank of Canada in its fiscal first quarter, setting the stage for more growth over the coming months.

Capital-markets earnings accounted for almost 22 per cent of RBC's total quarterly profit of $3-billion. Net income for the division climbed to $662-million in the period, rising 16 per cent from the same period last year.

Stabilizing oil prices, strong credit markets – particularly in the high-yield space in the United States – as well as robust equity markets on both sides of the border have many bankers on Bay Street feeling optimistic about the remainder of 2017.

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"When you have that kind of backdrop and you're getting elevated M&A activity, it's a pretty good environment," Doug McGregor, head of RBC Capital Markets, said on Friday during a conference call with analysts. "It looks pretty good looking forward."

In its first quarter, RBC posted higher revenue in fixed-income trading across all regions, as investors placed bets on the direction of interest rates and rushed to adjust their portfolios after the surprise election of Donald Trump as U.S. President. It also saw an increase in loan syndication activity largely in its U.S. business, and higher debt origination across North America.

A recovery in Canada's battered oil patch meant RBC set aside less money for bad loans.

The bank's first-quarter results come on the heels of a sluggish end to fiscal 2016. In its fourth quarter, RBC reported a 13-per-cent drop in profits in its capital markets segment due to a higher tax rate and compensation expenses, as well as a slump in equities trading across most regions.

But in the first quarter, which spans the three months ended Jan. 31, 2017, RBC reaped the benefits of the increase in trading activity after the U.S. election and positive outlook that has since taken shape.

RBC was the second Canadian bank to report results for the industry's first quarter. On Thursday, Canadian Imperial Bank of Commerce kicked off the reporting season by posting capital-markets earnings of $371-million, a 52-per-cent increase from the year-ago period.

Similar to RBC, CIBC attributed its strong performance to higher revenue in areas such as trading and corporate banking and lower loan losses. During a conference call with analysts on Thursday, the company said its robust results were partly offset by higher expenses and lower advisory revenue.

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"Q1 was exceptional. Very good market conditions, strong client activity," said Harry Culham, head of CIBC World Markets, "and Q2 is off to a good start. The pipeline is strong."

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