Friday, April 13, 2007

RBC CM to Expand Its US Fixed Income Business

Bloomberg, Doug Alexander and Sean B. Pasternak, 13 April 2007

RBC Capital Markets, Canada's biggest investment bank, plans to expand its U.S. fixed-income business and is willing to spend as much as $1 billion on acquisitions to do it, said Chief Executive Officer Charles Winograd.

``When you look at what we spend most of our time on, it's figuring out how to grow the businesses outside of Canada,'' Winograd said in an interview. ``We will unquestionably do expansion and, as time goes on, acquisitions.''

The investment banking unit of Royal Bank of Canada, which led all Canadian lenders in stock and bond sales last year, lags behind its bigger rivals in the U.S. and Europe. The Toronto- based bank ranked 19th in U.S. bond sales in 2006, according to data compiled by Bloomberg.

``The global competitors have a nuclear arsenal that is larger than ours by a long shot and so we're fighting for that business,'' Winograd said yesterday from his third-floor office overlooking the bank's trading floor on Bay Street.

Winograd, chief executive since 2001, said the investment bank plans to hire staff, add teams of bankers and make acquisitions to expand its bond sales and trading business in the U.S. He cited that unit as one of his priorities, along with expanding in Europe to provide more lending for infrastructure projects such as roads and hospitals.

``I think that in five years we would have more employees in the U.S. than we would have in Canada,'' said Winograd, Canada's highest-paid investment banker last year, with C$10.4 million ($9.2 million) in salary, bonus and stock options. ``The U.K. and Europe and Asia will probably grow just as fast.''

Canada's biggest bank is targeting international expansion after investment banking profit doubled last year on record trading. RBC Capital's profit rose 27 percent to C$420 million in the fiscal first quarter, led by stock sales and merger advice.

``Given their domestic dominance, the only avenue for growth is outside of Canada,'' said Robert Wessel, an analyst at National Bank Financial in Toronto, who rates Royal Bank shares ``sector perform.''

Winograd, 59, said the bank probably won't make a ``transformational'' acquisition in the U.S., which he defines as more than $1 billion. The bank paid $1.46 billion for Minneapolis-based brokerage Dain Rauscher Corp. in 2001, allowing it to enter the U.S. equities market.

Since then, the bank has made smaller acquisitions, including the brokerage business of New York-based Carlin Financial and Denver-based Daniels & Associates. It also agreed on March 13 to acquire Parsippany, New Jersey-based J.B. Hanauer & Co., which offers fixed-income and wealth-management services.

``Integrating large investments can be very hard and the results are mixed,'' said Winograd. ``We would be very discriminating in looking at any large capital markets deals where the execution risk would put the overall progress of the business at harm.''

A $1 billion spending target rules out most U.S. brokerages and investment banks. Firms worth less than that include Stifel Financial Corp. in St. Louis, and Penson Worldwide Inc. in Dallas.

Royal Bank's investment bankers will also focus more on Canada's ``mid-market'' companies, those smaller than the top 50 to 75 firms, he said.

``This business in Canada is a great business. We love it and we're going to make sure we don't ignore it,'' Winograd said. ``You cannot succeed globally unless you lead domestically.''

Winograd doesn't plan to repeat mistakes in 2003 of letting the investment bank's share of the Canadian market slip by focusing outside the country.

``Frankly, we did it by saying we're going to make it more of a continental business and took our eye off the Canadian aspect of it, and it hurt us,'' Winograd said.

Winograd said he expects equity sales in Canada to slow this year because the market for income trust public offerings has slumped. He expects mergers to remain strong, following a record 2006.

He also expects higher loan defaults as interest rates rise, ending a credit cycle that's allowed Canadian banks to set aside less money for bad loans in recent years. Royal Bank set aside C$429 million last year, compared with C$1.07 billion in 2002.

``It's been an amazing cycle and it's gone on longer than I ever thought it would,'' he said. ``Am I more worried than a year ago? Yeah.''

Winograd, who joined Royal Bank when it bought his former employer Richardson Greenshields of Canada Ltd. in 1996, plans to advance his expansion plans for the U.S., Europe and Asia before he retires. The bank in February promoted Doug McGregor, 50, and Mark Standish, 46, to co-presidents of RBC Capital as part of a ``succession plan.''

``We have a tradition around here that the CEO doesn't stay on and the young blood gets a shot,'' Winograd said, adding he has no set retirement date. ``You don't want to have a succession plan in place for too long and you don't want it to be too short.''

The CEOs at RBC Capital Markets have traditionally stepped down at age 60. Winograd turns 60 in January. RBC Capital Chairman Anthony Fell stepped down as CEO in 1999 when he was 60.