Fitch: Canadian Banks Lifting Cap Markets Amid US Headwinds

CHICAGO--()--Canadian banks with capital market businesses showed solid segment results in the fiscal second quarter ending April 30, amid a backdrop of contracting revenues for many of the larger U.S. firms, according to Fitch Ratings. The Canadian banks' smaller revenue mix in shrinking fixed income currencies and commodities (FICC) versus U.S. firms, as well as some improvements by the Canadians in advisory revenues help explain the quarter's results.

The recent increases were most notable at Royal Bank of Canada (RY), the bank with the most pronounced expansion effort in global capital markets, which comprises investment banking, corporate lending, FICC, equities, repo and secured financing. Other Canadian banks reporting capital market segments include ScotiaBank, BMO Financial Group (BMO) and CIBC.

Combined, the four Canadian banks reported capital market segment revenues of CAD4.4 billion (USD4.2 billion), up 14.4% over the same three-month period ending one-year prior. Each of the Canadian banks reported year-over-year growth.

RY experienced a 20% change in its overall capital markets segment, which was driven by a 31% change across its FICC, equities and repo businesses. The FICC component, which broadly has been declining for the five major U.S. global trading and universal banks (GTUBs), comprises just 28% of total capital market segment revenues for RY. We view the U.S. GTUBs as more heavily exposed to the currently challenging FICC as this area remains a larger portion of most GTUBs overall capital markets pie. The U.S. GTUBs include JP Morgan Chase, Bank of America, Citi, Goldman Sachs and Morgan Stanley.

U.S. GTUBs experienced a combined year-over-year capital market segment revenue drop of 5.9% to USD28.7 billion. The decline occurred over quarters ending March 31, thus precise comparisons between the Canadians and U.S. GTUBs are slightly more challenging because the banks' fiscal quarters end one month apart.

Quarterly capital market activities for any large investment bank can be very volatile, particularly in trading and advisory activities, and relative to traditional banks' interest and fee income. The credit risk in capital market activities, especially trading, can grow as activity increases. It is noteworthy that lending activities are also becoming a larger component of the Canadian banks' capital markets revenues, potentially further increasing credit risk in these segments over time. As such, growth in capital markets revenues relative to overall revenues has the potential to constrain ratings.

Canadian capital market segments run between 17% (for ScotiaBank) and 24% (BMO) of overall revenues. RY's capital markets revenues were 23% of overall revenue for the fiscal second quarter. Similar measures of revenue mix for capital market segments range from 25% to over two-thirds of total revenues for the U.S. GTUBs.

Commentary on earnings calls about why the Canadian banks enjoyed strong second quarter performances was limited in specificity to points such as improved market conditions compared with last year and achieving greater cross-selling. RY specifically noted that the proportion of its clients using four or more of its products had risen 22% just in the quarter. Several further quarterly gains in RY's results may indicate incremental market share gains.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Contacts

Fitch Ratings
Justin Fuller, CFA
Senior Director
Financial Institutions
+1-312-368-2057
or
Matthew Noll, CFA
Senior Director
Fitch Wire
+1-212-908-0652
33 Whitehall Street
New York, NY
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Justin Fuller, CFA
Senior Director
Financial Institutions
+1-312-368-2057
or
Matthew Noll, CFA
Senior Director
Fitch Wire
+1-212-908-0652
33 Whitehall Street
New York, NY
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com