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View the Euromoney 25 |
RBC has good reason to feel pretty smug about 2017. It ended the year with a record set of results from a strategy that is, on the face of it, fairly straightforward: be number one or two in every domestic banking category and be diversified across businesses and regions.
It ended the year with record earnings of C$11.5 billion ($7.57 billion), up 10% year on year, a return on equity of 17% and common equity tier-1 of 10.9%. It also returned C$8.2 billion to shareholders in dividends and buybacks.
“We are operating in a very competitive environment and have had revenue growth of more than 5% for five straight quarters,” Rod Bolger, chief financial officer at RBC, tells Euromoney, proudly. “One of our strengths is our diversified business model. We have several businesses with double digit earnings growth.”
In truth, that diversification is US-dependent. RBC’s dominant position in its home market is entrenched, so its large southern neighbour is integral to this growth story. Chief executive Dave McKay has made no secret of his desire to build the bank’s US network following the acquisition of Los Angeles-based City National two years ago. The bank’s previous attempt to enter US mass retail was abandoned in 2011.
There is a lot riding on this deal as growing US wealth management is a key focus for RBC. This has been achieved, but margins in this business have steadily declined. Wealth management achieved a ROE of 13.2% in 2017, behind Personal & Commercial banking, which hit 28.3% and insurance with 41.8% (flattered by favourable actuarial assumption updates). Capital markets achieved an ROE of 12.9%.
“Growth is coming from the US where we are really focused on capital markets and private banking. The City National acquisition has been a big part of this as it has complemented our existing business with 1,800 financial advisers,” says Bolger. In the meantime, RBC has scaled back its European wealth management ambitions.
The bank is hoping its strategy of building synergies between wealth management and capital markets in the US will enable it to continue delivering growth.
“In the US, we are more competitive against the large US houses and are getting lead underwriter on a number of bigger deals, more particularly in the mid-market,” Bolger adds.
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| Dave McKay |
The US accounts for more than half of overall capital markets earnings. What RBC needs, however, is another US acquisition, but McKay has indicated his reluctance to move while the political outlook in the US is so volatile.
The focus at home is on technology – no surprise given McKay’s past life as a computer programmer. In 2016, RBC launched its own machine learning and AI research institute and has pushed innovation in retail banking. Daily banking by smartphone, which grew 40% over the year, has now surpassed online banking.
“We invest in digital at a high level and will do so again in 2018. We will benefit from simplification and efficiency by taking more transactions out of branches and manual processes,” says Bolger. Those technology investments are hitting the bottom line, though, particularly in treasury services.
It is important that the focus on US-led growth does not distract from vigilance at home, where RBC has the largest uninsured mortgage book of all the Canadian banks, with loans concentrated in Ontario and British Columbia. The most overheated markets are Toronto and Vancouver, but even there average loan-to-values are only around the mid-40% mark, so perhaps concerns about exposure are premature.
“We are watching the housing market in Canada closely,” says Bolger. “There has been a slowdown in Toronto. What we look at very closely is affordability, and we haven’t seen an escalation in delinquencies. Second-order impacts such as the impact of this on economic growth is something that we monitor very closely as well.
“We distinguish ourselves from other Canadian banks in that we are a prime lender – we don’t do near- or sub-prime. We are a relationship lender through our own distribution channels,” he emphasizes.
So RBC is sitting reasonably pretty. The numbers look good, although they were certainly helped by the change in actuarial assumptions in the insurance division and a reduction in loan provisioning that was possible partly due to the recovery in the oil price.
The bank now expects an annual benefit of more than C$180 million from the July and September Bank of Canada rate hikes. Looking past this, however, earnings in the important segments were respectable rather than stellar. If RBC wants to maintain momentum, it might have to focus rather harder on that crucial additional US acquisition.
