RBC Pushes Efficiencies at Investment Bank Amid Trading Slump

(Bloomberg) -- Royal Bank of Canada is betting its efforts to keep a lid on costs and pull back on trading risk will counter a drop in revenue in its investment bank amid an industrywide slump.

Revenue at RBC Capital Markets fell to C$2.03 billion ($1.53 billion) in the fiscal third quarter, down 5.7% from a year earlier and less than the second quarter’s C$2.17 billion. Investment-banking fees declined amid slowing stock sales and acquisition activity globally.

“If fee pools and revenue pools are down, that is something that we are going to have to contend with by driving efficiencies, investing in technology and making sure that we continue to attract talented people,” Chief Financial Officer Rod Bolger said in a phone interview last week.

Profitability within RBC Capital Markets is down, with return on equity of 11.1% in the quarter ended July 31, the second-lowest level in at least two years and the worst performance among Royal Bank’s major divisions. Meanwhile, its ratio of compensation to revenue was at 37.9% in the quarter, higher than the annual average over the past two years.

Read more: RBC misses estimates as capital markets weigh on results

The bank also is taking steps to reduce risks in its trading book. The average value at risk, a probabilistic measure of potential losses in a daily trading session, decreased to C$23 million from C$34 million at the end of April due to reduction of fixed-income inventories in the second quarter and lower market volatility in the first half of the year, a bank official said by email.

RBC is further paring risks as more than $16.1 trillion of bonds trade with a negative yield, while stock prices remain fairly lofty, meaning investors have to decide which market is correctly assessing economic and geopolitical developments. Inverted government yield curves in several developed economies suggest the chances of recession are increasing, even as investors keep bidding for new corporate bonds at historically low coupons.

While investment-banking fees are down this year, Royal Bank “has a strong investment-banking pipeline,” including a number of “marquee deals,” Bolger said. In terms of large deals RBC is expecting to handle in the next two quarters, the bank is in “much better shape than we were coming into this quarter,” Doug McGregor, head of RBC Capital Markets, told analysts last week.

Also, Royal Bank’s trading desks in equities and fixed income outperformed the broader market in the first half -- something Bolger sees continuing.

“Our expectation,” he said, “would be that we would perform at or above market going forward.”

To contact the reporters on this story: Esteban Duarte in Toronto at eduarterubia@bloomberg.net;Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, ;Michael J. Moore at mmoore55@bloomberg.net, ;David Scanlan at dscanlan@bloomberg.net, Daniel Taub, Steve Dickson

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