Scotia Capital, 29 September 2008
• Royal Bank held an Investor Day on Friday, September 26, 2008 with a focus on its International Banking and Capital Markets segments. Presentations were made by Gord Nixon, President & CEO, Jim Westlake, Group Head International Banking & Insurance, and Mark Standish and Doug McGregor, Co-Presidents of RBC Capital Markets.
International Banking - Long Term Outlook Modest
• RY's International Banking earnings have declined sharply over the last year primarily due to increased loan loss provisions in the bank's Builder Finance portfolio and an extremely difficult operating environment.
• RY's strategy in the U.S. remains to target specific markets and not to try to be everything for everyone as is the case with its Canadian Banking platform. The priorities for the bank going forward are to focus on improving efficiency and filling in product and service offerings for clients.
• Management indicated that it is monitoring retail banking acquisition possibilities but is not willing to sacrifice its capital position or credit rating to complete an acquisition.
• Industry growth has been, and is expected to remain, in the low single digit range over the next few years. RY believes that it can achieve double the industry level of earnings growth in the U.S.
RBC Capital Markets Well Positioned - Outlook Extremely Positive
• RBCCM considers itself a global investment bank with 50% of its revenue coming from outside of Canada (42% U.S., 8% International). RBCCM has enjoyed significant success in Canada, where it is the largest investment bank with top tier market share in virtually all businesses and is considered a "bulge bracket" firm. In the U.S. RBCCM has a wide collection of capital markets businesses, such as municipal finance, debt sales and trading and financial products, focused on mid-market clients with market capitalization of less than $2 billion. Internationally, RBCCM is focused on a select number of client segments, products and markets. U.K. and Europe are the centre for product manufacturing and client origination. The focus in Asia is on distribution and the focus in Australia is debt sales and trading, infrastructure finance, and global mining.
• RBC Capital Markets is extremely well positioned to take advantage of unique opportunities after the dramatic and seemingly-overnight demise of many of its U.S. competitors. For example, RY is becoming the counterparty of choice having access to capital at reasonable levels. RY is also able to participate in businesses, such as leveraged finance.
• RBCCM intends to build up its platform organically as opposed to making acquisitions. In fact, management explicitly stated that RY will not be pursuing wholesale banking acquisitions in the U.S. Rather, the bank will focus on investing in technology to integrate its businesses and recruit talent from now defunct competitors.
• RY remains optimistic on the outlook for the global capital markets industry, stating that industry growth is expected to outpace global GDP growth. As well, RY's position within that industry is being solidified as the bulge bracket divide continues to narrow.
High Risk Exposure Update
• RY indicated its exposure to Washington Mutual is extremely small. The bank also indicated it has made good progress unwinding positions with Lehman and anticipates that the net result of the unwind will be flat to slightly positive. RY has been monitoring and managing its exposures to certain financial institutions for the last few months and seems to have been adequately prepared for the events of this past week.
• RY also addressed the status of its auction rate securities (ARS). The bank stated that the $1 billion of ARS in U.S. retail client accounts as reported at the end of Q3/08 has since been reduced. In addition, the bank has expressed an interest in repurchasing the securities from client accounts but must wait for regulatory approval. The financial impact from this action would be negligible.
Recommendation
• Our 2008 and 2009 earnings estimates remain unchanged at $4.45 per share and $4.90 per share. Our share price target is unchanged at $70 representing a 14.3x our 2009 earnings estimate.
• We reiterate our 1-Sector Outperform rating on shares of RY based on strength of operating platforms, opportunities in wholesale banking, strength of balance sheet and modest premium to the bank group.
• Royal Bank held an Investor Day on Friday, September 26, 2008 with a focus on its International Banking and Capital Markets segments. Presentations were made by Gord Nixon, President & CEO, Jim Westlake, Group Head International Banking & Insurance, and Mark Standish and Doug McGregor, Co-Presidents of RBC Capital Markets.
International Banking - Long Term Outlook Modest
• RY's International Banking earnings have declined sharply over the last year primarily due to increased loan loss provisions in the bank's Builder Finance portfolio and an extremely difficult operating environment.
• RY's strategy in the U.S. remains to target specific markets and not to try to be everything for everyone as is the case with its Canadian Banking platform. The priorities for the bank going forward are to focus on improving efficiency and filling in product and service offerings for clients.
• Management indicated that it is monitoring retail banking acquisition possibilities but is not willing to sacrifice its capital position or credit rating to complete an acquisition.
• Industry growth has been, and is expected to remain, in the low single digit range over the next few years. RY believes that it can achieve double the industry level of earnings growth in the U.S.
RBC Capital Markets Well Positioned - Outlook Extremely Positive
• RBCCM considers itself a global investment bank with 50% of its revenue coming from outside of Canada (42% U.S., 8% International). RBCCM has enjoyed significant success in Canada, where it is the largest investment bank with top tier market share in virtually all businesses and is considered a "bulge bracket" firm. In the U.S. RBCCM has a wide collection of capital markets businesses, such as municipal finance, debt sales and trading and financial products, focused on mid-market clients with market capitalization of less than $2 billion. Internationally, RBCCM is focused on a select number of client segments, products and markets. U.K. and Europe are the centre for product manufacturing and client origination. The focus in Asia is on distribution and the focus in Australia is debt sales and trading, infrastructure finance, and global mining.
• RBC Capital Markets is extremely well positioned to take advantage of unique opportunities after the dramatic and seemingly-overnight demise of many of its U.S. competitors. For example, RY is becoming the counterparty of choice having access to capital at reasonable levels. RY is also able to participate in businesses, such as leveraged finance.
• RBCCM intends to build up its platform organically as opposed to making acquisitions. In fact, management explicitly stated that RY will not be pursuing wholesale banking acquisitions in the U.S. Rather, the bank will focus on investing in technology to integrate its businesses and recruit talent from now defunct competitors.
• RY remains optimistic on the outlook for the global capital markets industry, stating that industry growth is expected to outpace global GDP growth. As well, RY's position within that industry is being solidified as the bulge bracket divide continues to narrow.
High Risk Exposure Update
• RY indicated its exposure to Washington Mutual is extremely small. The bank also indicated it has made good progress unwinding positions with Lehman and anticipates that the net result of the unwind will be flat to slightly positive. RY has been monitoring and managing its exposures to certain financial institutions for the last few months and seems to have been adequately prepared for the events of this past week.
• RY also addressed the status of its auction rate securities (ARS). The bank stated that the $1 billion of ARS in U.S. retail client accounts as reported at the end of Q3/08 has since been reduced. In addition, the bank has expressed an interest in repurchasing the securities from client accounts but must wait for regulatory approval. The financial impact from this action would be negligible.
Recommendation
• Our 2008 and 2009 earnings estimates remain unchanged at $4.45 per share and $4.90 per share. Our share price target is unchanged at $70 representing a 14.3x our 2009 earnings estimate.
• We reiterate our 1-Sector Outperform rating on shares of RY based on strength of operating platforms, opportunities in wholesale banking, strength of balance sheet and modest premium to the bank group.
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Financial Post, Zena Olijnyk, 29 September 2008
Royal Bank of Canada says it is holding steady in the wake of the continuing U.S. financial crisis, which is good enough for Desjardins Securities to maintain its buy rating after attending RBC's annual investor day last week.
“Management stated that it is satisfied with the minimal exposure Royal Bank has with banks in the news recently,” Desjardins analyst Michael Goldberg says in a report. As the bank did not make any material announcements, Mr. Goldberg maintains a target per-share prediction of $57.
RBC also announced it has no plans for a large U.S. capital markets acquisition, but Mr. Goldberg notes the bank's capital markets segment does continue to make up between 20% and 30% of revenues.
In fact, RBC has become a beneficiary of desperate billion-dollar clients looking for a safe haven. “We are doing business with clients that historically we would have struggled to get into. They would have been solely the property of bulge-bracket firms,” co-chief executive of RBC Capital Markets Mark Standish told the Financial Post on Sunday.
“Management stated RBC Capital Markets has been a beneficiary of the recent 'flight to quality.'” Mr. Goldberg says.
Elsewhere, Mr. Goldberg notes that RBC's focus is on improving its operating leverage and reducing its expense/revenue ratio. As well, its U.S. and Caribbean retail segments are each contributing about $50-million in earnings to Royal Bank.
Royal Bank of Canada says it is holding steady in the wake of the continuing U.S. financial crisis, which is good enough for Desjardins Securities to maintain its buy rating after attending RBC's annual investor day last week.
“Management stated that it is satisfied with the minimal exposure Royal Bank has with banks in the news recently,” Desjardins analyst Michael Goldberg says in a report. As the bank did not make any material announcements, Mr. Goldberg maintains a target per-share prediction of $57.
RBC also announced it has no plans for a large U.S. capital markets acquisition, but Mr. Goldberg notes the bank's capital markets segment does continue to make up between 20% and 30% of revenues.
In fact, RBC has become a beneficiary of desperate billion-dollar clients looking for a safe haven. “We are doing business with clients that historically we would have struggled to get into. They would have been solely the property of bulge-bracket firms,” co-chief executive of RBC Capital Markets Mark Standish told the Financial Post on Sunday.
“Management stated RBC Capital Markets has been a beneficiary of the recent 'flight to quality.'” Mr. Goldberg says.
Elsewhere, Mr. Goldberg notes that RBC's focus is on improving its operating leverage and reducing its expense/revenue ratio. As well, its U.S. and Caribbean retail segments are each contributing about $50-million in earnings to Royal Bank.
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Financial Post, Eoin Callan, 28 September 2008
The anticipated flow of clients out of Wall Street's oldest investment houses and into the arms of mid-tier competitors has accelerated to an unprecedented pace in recent days, according to Canada's top investment banker.
"It is unfolding in real time," Doug McGregor, the newly appointed co-chief executive of Royal Bank of Canada's global capital markets business, says.
As titans of the banking industry struggle to extricate themselves from a collapsing web of complex credit transactions, billion-dollar clients that once pledged fealty are fleeing to more peripheral institutions they hope will offer more security.
This means that RBC, and banks like it, have seen humble plans to extend their global reach -- which were meant to take years -- move closer to fruition in mere days.
"We are doing business with clients that historically we would have struggled to get into. They would have been solely the property of bulge-bracket firms," Mark Standish, co-chief executive of RBC Capital Markets, says.
The latest wave of defections from premier clients to the less well-connected has been led by hedge funds, which have been pulling their prime brokerage accounts from top firms like Goldman Sachs Group Inc. and Morgan Stanley. The hedge funds are then moving the accounts to deposit-taking banks with balance sheets that are perceived to be more safe, says a senior investment professional based in Toronto.
Mark Standish, co-chief executive of RBC Capital Markets, confirms the bank has benefited from a sudden in flow of hedge fund clients in the last two weeks.
Institutions like Canada's largest bank are appealing because they are seen as less likely to be crippled by the collapse of big firms that have acted as counterparties on masses of credit transactions.
It is not that RBC has no exposure to credit losses (it does) or is alone in having a big balance sheet (it is not). But the bank's capital markets operation is among those thought less likely to be sucked into the black hole of failing debt insurance contracts that has swallowed the likes of American International Group. RBC's exclusion from Wall Street's inner circle is suddenly a virtue.
The co-chief executives emphasize that while they are not turning hedge fund managers away, the real prize has been the business of big institutional investors in equities and major participants in the market for fixed-income products like corporate bonds.
"We have become a counterpart of choice," Mr. Standish says.
Not only is RBC winning international business it has long coveted, it is able to demand better terms than it could have dared hope because of the ongoing global credit and liquidity squeeze.
"We are seeing a lot more spread in almost all of our core businesses, which is great," Mr. Standish says. "One of the things that has come out of the crisis is we've been given the opportunity to actually prove ourselves and it has allowed us to break into a new level."
The goal of the New York-based executive is to become a legitimate contender for bond issues when businesses want to raise money in U.S. markets and to lose the association with specialist issues in foreign currencies that have defined much of RBC's international success.
It remains to be seen how well these new mainstream clients and better margins will insulate RBC's capital markets operations from mounting credit losses and the lean times ahead for the entire industry.
The fresh in-flow is unlikely to compensate for the appalling year so far, which has seen income at the capital markets operation fall by nearly half, pushed down by $1.4-billion in writedowns on bad bets.
This means the unit will probably make a smaller contribution this year to the overall RBC group, which derives 20-30% of revenue and earnings froms its market operations.
But with about half that revenue coming from outside of Canada, the improving international standing of RBC has important strategic implications for its future.
RBC is already in the top 15 in global rankings for fees collected from investment banking, advising on mergers and acquisitions, and underwriting issues of bonds and equities, according to Bloomberg data.
But in the last two weeks alone the management team have been compelled to lift their expectations of how high their standing might rise as pillars of Wall Street have crumbled around them, says the Toronto-based Mr. McGregor. The top ten beckons.
Some of RBC's elevation in status is by default. The bankruptcy of Lehman Brothers and disappearance of Bear Stearns and Merrill Lynch has already thinned out the top of the table.
"This has been good for us," Mr. McGregor says, pointing to an increase of daily revenues of 40% in straight stock trading.
But RBC appears reluctant to take advantage of this by broadening the range of global industries where it will try to compete for lucrative roles advising on mergers and acquisitions.
Mr. McGregor says he plans to maintain a niche focus on oil and gas, a mainstay of investment banking in Canada amid the energy boom, and to extend this specialization to mining.
This means building up teams in commodity hot spots like Australia. But the head of investment banking is reluctant to commit to venturing beyond these limits. Building capacity to advise on deals in new international industries would probably mean making an acquisition of an investment bank, and this does not appear to be in the cards.
Mr. McGregor has been one of the architects of an alternate strategy to recruit small complimentary teams of bankers instead, which avoids the hassles and risks of buying a firm outright.
This reflects what appears to be the over-arching response of RBC's capital markets team to the credit crisis, that while it will welcome any serendipitous acceleration of its plans, it is very reluctant to fundamentally alter its strategy to win market share amid the historic upheaval on Wall Street.
;
The anticipated flow of clients out of Wall Street's oldest investment houses and into the arms of mid-tier competitors has accelerated to an unprecedented pace in recent days, according to Canada's top investment banker.
"It is unfolding in real time," Doug McGregor, the newly appointed co-chief executive of Royal Bank of Canada's global capital markets business, says.
As titans of the banking industry struggle to extricate themselves from a collapsing web of complex credit transactions, billion-dollar clients that once pledged fealty are fleeing to more peripheral institutions they hope will offer more security.
This means that RBC, and banks like it, have seen humble plans to extend their global reach -- which were meant to take years -- move closer to fruition in mere days.
"We are doing business with clients that historically we would have struggled to get into. They would have been solely the property of bulge-bracket firms," Mark Standish, co-chief executive of RBC Capital Markets, says.
The latest wave of defections from premier clients to the less well-connected has been led by hedge funds, which have been pulling their prime brokerage accounts from top firms like Goldman Sachs Group Inc. and Morgan Stanley. The hedge funds are then moving the accounts to deposit-taking banks with balance sheets that are perceived to be more safe, says a senior investment professional based in Toronto.
Mark Standish, co-chief executive of RBC Capital Markets, confirms the bank has benefited from a sudden in flow of hedge fund clients in the last two weeks.
Institutions like Canada's largest bank are appealing because they are seen as less likely to be crippled by the collapse of big firms that have acted as counterparties on masses of credit transactions.
It is not that RBC has no exposure to credit losses (it does) or is alone in having a big balance sheet (it is not). But the bank's capital markets operation is among those thought less likely to be sucked into the black hole of failing debt insurance contracts that has swallowed the likes of American International Group. RBC's exclusion from Wall Street's inner circle is suddenly a virtue.
The co-chief executives emphasize that while they are not turning hedge fund managers away, the real prize has been the business of big institutional investors in equities and major participants in the market for fixed-income products like corporate bonds.
"We have become a counterpart of choice," Mr. Standish says.
Not only is RBC winning international business it has long coveted, it is able to demand better terms than it could have dared hope because of the ongoing global credit and liquidity squeeze.
"We are seeing a lot more spread in almost all of our core businesses, which is great," Mr. Standish says. "One of the things that has come out of the crisis is we've been given the opportunity to actually prove ourselves and it has allowed us to break into a new level."
The goal of the New York-based executive is to become a legitimate contender for bond issues when businesses want to raise money in U.S. markets and to lose the association with specialist issues in foreign currencies that have defined much of RBC's international success.
It remains to be seen how well these new mainstream clients and better margins will insulate RBC's capital markets operations from mounting credit losses and the lean times ahead for the entire industry.
The fresh in-flow is unlikely to compensate for the appalling year so far, which has seen income at the capital markets operation fall by nearly half, pushed down by $1.4-billion in writedowns on bad bets.
This means the unit will probably make a smaller contribution this year to the overall RBC group, which derives 20-30% of revenue and earnings froms its market operations.
But with about half that revenue coming from outside of Canada, the improving international standing of RBC has important strategic implications for its future.
RBC is already in the top 15 in global rankings for fees collected from investment banking, advising on mergers and acquisitions, and underwriting issues of bonds and equities, according to Bloomberg data.
But in the last two weeks alone the management team have been compelled to lift their expectations of how high their standing might rise as pillars of Wall Street have crumbled around them, says the Toronto-based Mr. McGregor. The top ten beckons.
Some of RBC's elevation in status is by default. The bankruptcy of Lehman Brothers and disappearance of Bear Stearns and Merrill Lynch has already thinned out the top of the table.
"This has been good for us," Mr. McGregor says, pointing to an increase of daily revenues of 40% in straight stock trading.
But RBC appears reluctant to take advantage of this by broadening the range of global industries where it will try to compete for lucrative roles advising on mergers and acquisitions.
Mr. McGregor says he plans to maintain a niche focus on oil and gas, a mainstay of investment banking in Canada amid the energy boom, and to extend this specialization to mining.
This means building up teams in commodity hot spots like Australia. But the head of investment banking is reluctant to commit to venturing beyond these limits. Building capacity to advise on deals in new international industries would probably mean making an acquisition of an investment bank, and this does not appear to be in the cards.
Mr. McGregor has been one of the architects of an alternate strategy to recruit small complimentary teams of bankers instead, which avoids the hassles and risks of buying a firm outright.
This reflects what appears to be the over-arching response of RBC's capital markets team to the credit crisis, that while it will welcome any serendipitous acceleration of its plans, it is very reluctant to fundamentally alter its strategy to win market share amid the historic upheaval on Wall Street.
