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RBC’s capital markets strength masked by equity trading woes

The sign for the Royal Bank of Canada is seen on King Street West in Toronto, on Tuesday, May 24, 2016.


Royal Bank of Canada recorded its "best year ever" for fees earned from advising on mergers and acquisitions, but a fourth-quarter drop in total profit from its capital markets overshadowed the success.

The unit's net income fell to $482-million, a drop of 13 per cent from the same period a year ago.

Some of the decrease stems from a higher tax rate and compensation expenses in the fourth quarter, but weak equity trading across most regions also dented earnings – something that's plagued the capital markets business for the entire year.

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In the fourth quarter, revenues from equity trading slumped 43 per cent from the same period in 2015. For the full year, equity trading revenues dropped to $1.2-billion, down from $1.6-billion in 2015.

Asked on a conference call Wednesday what contributed to the most recent quarter's drop, Doug McGregor, who runs RBC Dominion Securities, partly blamed a dearth of new issues, and particularly those in which RBC was a lead underwriter. When companies turn to the stock market to raise money, it spurs trading activity for the lead investment banks behind the deal because there is a surge of client orders to execute.

"There was actually a month last quarter where we didn't book-run a deal in Canada, which hasn't happened, I think, for many years," Mr. McGregor added. (A bookrunner is another name for the lead underwriter on an offering.)

A quieter market for new issues was also felt for much of 2016. "The cash equities business, in particular, is quite influenced by new issue activity," Mr. McGregor said, "and new issue activity has been pretty slow, really, throughout the year."

While Canada's new issue market has been strong this calendar year, RBC's capital markets business has a large footprint in the United States, as well as a smaller one in Britain.

Equity trading in the fourth quarter was also impacted by November's U.S. election. Companies hit the pause button on new issues heading into it, Mr. McGregor said, and investors who manage pension and mutual funds stood still and held onto their positions as election day drew closer.

Fixed-income trading, meanwhile, was a bright spot for the bank. Fiscal 2016 revenues from interest rate and credit trading jumped 29 per cent from the year prior.

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M&A fees were also strong. Chief executive officer Dave McKay called it the bank's "best year ever" for this business, which stems from advising on several blockbuster transactions including Dell Inc.'s $67-billion (U.S.) acquisition of EMC Corp. and Enbridge Inc.'s $37-billion purchase of Spectra Energy Corp.

For the fiscal year ended Oct. 31, the capital markets posted a total profit of $2.27-billion, down slightly from the $2.3-billion earned in 2015.

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About the Author
Capital Markets Reporter

Christina Pellegrini is a reporter at The Globe and Mail and a regular contributor to Streetwise, covering capital markets, the exchange business and market structure.She writes about the capital markets divisions of BMO, CIBC and National Bank; independent brokerages such as Canaccord Genuity; and the Canadian operations of foreign dealers including JP Morgan, Goldman Sachs, Credit Suisse and Citigroup. More


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