Royal Bank of CanadaChris Young/The Canadian Press
If you're a bank making a $1.94-billion quarterly profit, you shouldn't have much to worry about. And that's mostly true for Royal Bank of Canada.
Yet, the bank's bond trading results last quarter are a bit of a head scratcher.
Despite "very strong" fixed-income profits at rival banks, RBC somehow missed the boat. The root of the problem: Europe. "We basically didn't make any money there," Mark Standish, co-CEO of RBC's capital markets arm, said on a conference call last week.
The bank's U.S. bond trading unit also wasn't very fruitful. Last quarter 10-year U.S. Treasury yields plummeted to 1.67 per cent, Mr. Standish said, so there wasn't much secondary (trading) activity to boost the bank's bottom line.
The numbers speak for themselves. The European unit's revenues plummeted 43 per cent from the first quarter and 27 per cent from the same period a year prior. The U.S. unit brought in 23 per cent less revenue than the first quarter – though its results were up 4 per cent from the year before.
Canada, by contrast, saw revenues jump 27 per cent over the first quarter and climb 2 per cent from the year prior.
Chief financial officer Janice Fukakusa addressed the issue in an interview Thursday, noting that the bank can't completely retreat from Europe because it has to support clients in the region. However, that doesn't mean it will continue to do so to the same extent if it's going to keep hurting the bank.
"We're committed to Europe and the business there," she said, "but that doesn't necessarily mean that we have to support every flow."
In most circumstances, a quarterly blip in trading drop wouldn't be all that shocking. But last quarter it was all the more unusual for RBC because rivals such as Toronto-Dominion Bank and Bank of Nova Scotia both had strong earnings from their bond desks.
Pouring some salt on the wound, TD Securities head Bob Dorrance even said that there's a "real tailwind" in fixed-income markets, driven by spread compression, and Scotiabank chief financial officer Sean McGuckin said the bank's fixed-income desk had a "very strong" second quarter.
To calm investors, RBC said that May "is off to a fairly strong start," driven by a recent jump in 10-year Treasury yields. Plus, its U.S. debt capital markets desk, which looks after new debt issuance, now accounts for 45 per cent of total DCM revenue, versus 25 per cent two years ago, and that's a good thing because companies are taking advantage of issuing at these low yields.
Still, it will be interesting to see just how the third quarter's results shake out.
(Tim Kiladze is a Globe and Mail Reporter.)
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Tim Kiladze