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Trading revenues at the Big Six are far less volatile than you’d think

Corner of Bay Street and Adelaide streets in Toronto. July 25, 2013.

Gloria Nieto/The Globe and Mail

There is a widely-held belief when it comes to bank earnings: investors should be wary of trading revenues, because they are wildly volatile.

The underlying premise is that it's simply too hard to predict how markets will perform. The fears are then reinforced by blockbuster blunders that steal headlines, like JP Morgan's $6-billion 'London Whale' trade.

However, the Canadian numbers tell a different story. Once you aggregate trading revenues across the Big Six banks, which National Bank Financial analyst Peter Routledge did, there's been barely any movement in the past two years.

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For eight straight quarters, Mr. Routledge calculated, the Big Six banks reported aggregate total trading revenues of between $2.0-billion and $2.3-billion (Canadian). So much for the theory that they can't be relied upon in earnings assumptions.

To be clear, trading revenues at individual banks can fluctuate quite significantly. Over the past four quarters, Bank of Montreal's figures have ranged from a low of $328-million to $439-million. But if you track the whole sector, the banks have consistently offset each other to smooth out their aggregate earnings.

There are two major implications from this. First, rating agencies – particularly Moody's Investor Service – have called out over-exposure to trading as a reason for investor caution. That point still holds weight. But maybe we don't need to be as wary as they say we should be – at least not right now.

This very point is something National Bank of Canada chief executive officer Louis Vachon has been arguing for years. In an interview last month, Mr. Vachon stressed that his bank is consistently knocked for having too much exposure to the capital markets. Yet, he said, the bank keeps putting up good profits, so will the naysayers ever change their minds?

Second, most Big Six banks are pushing to ramp up in wealth management, hoping it will help to offset any cooling in personal and commercial banking. CIBC, for instance, said it wants to make wealth management contribute 15 per cent of its earnings – up from 11 per cent today.

These strategies still make sense. But considering that trading revenues have remained pretty consistent for the past eight quarters, some of which had rocky markets, there's a decent chance they can be counted on to give a bit of an earnings boost as the Fed Reserve tapers its bond-buying program and stocks become more attractive.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More


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