If it is possible to have a good pandemic, Royal Bank of Canada may have achieved it. With group revenues down just 2% in the fiscal year to the end of October, the bank was helped by a 34% rise in its equity and fixed income sales and trading business – a jump of almost C$1.6 billion ($1.25 billion).
It was another reminder of the advantage that RBC enjoys from its diverse mix of businesses and in particular from having by far the biggest investment bank franchise among its Canadian peers. That proved its worth in a year when almost every other one of RBC’s business lines was essentially flat.
Years spent patiently building diversity and resilience have paid off.
Group return on tangible common equity dropped nearly 300 basis points in 2020 but still sits just above 17%. Euromoney named RBC not only Canada’s best investment bank in the Awards for Excellence this year but also Canada’s best bank.
“RBC demonstrated the strength and resilience of our franchise, driven by our prudent risk management, strong balance sheet, diversified business model and technology capabilities,” chief financial officer Rod Bolger tells Euromoney. “The Covid-19 pandemic has not changed RBC’s strategic priorities.”
Strong position
The bank also heads into 2021 in a strong capital position. Common equity tier-1 is running at a record level of 12.5%, some C$19 billion above the bank’s regulatory minimum of 9%.
As conditions begin to normalize once the coronavirus pandemic has begun to ease, chief executive Dave McKay reckons that the bank will have the scope to head back to the kind of capital level that prevailed before Covid hit.
He told analysts on the bank’s full-year earnings call in early December that he saw that level as roughly 11%, giving scope for deploying the surplus in buybacks or investing for growth.
The bank looks well covered for loan losses too. It ends 2020 having doubled its allowance for credit losses to about C$6 billion, equivalent to about 4.5 times the bank’s total write-offs for the last year and about 90bp of its entire portfolio of loans.
Provisions for credit losses on impaired loans in RBC’s Canadian banking business clocked in at just 14bp for the fourth quarter of fiscal year 2020, which looks small in comparison to the 23bp to 34bp range seen in the previous eight quarters.
The Covid-19 pandemic has not changed RBC’s strategic priorities
Rod Bolger, RBC
That’s partly a reflection of the fact that support measures have deferred to 2021 much of the pain that borrowers might feel, so new impairments have dropped. But it is also a reflection of the bank’s high-quality client base – it likes to highlight that it focuses on the prime and super-prime segments of the market.
As chief risk officer Graeme Hepworth told analysts, that is not to say that RBC’s client base will not be impacted, but the bank’s approach to client selection puts it “in a very strong place to go through this.”
Bolger argues that the bank’s investments in technology helped position the bank well as it headed into the crisis.
“Our investments have helped us engage with clients differently through new platforms, including Insight Edge, InvestEase, MyAdvisor, Omni, Ventures, AVA and Aiden,” he says. “Our ability to gain market share and grow volumes in the current environment speaks to the value we are creating for clients and our ability to leverage our scale and investments in technology and top talent.”
Aiden, an artificial intelligence-based electronic trading platform that the bank launched in October 2019, traded $65 billion of notional volume in its first 12 months. Meanwhile, the pandemic has driven mobile adoption in many markets, and RBC has captured that well. In its fiscal fourth quarter alone, it saw 90-day active mobile users rise to five million, up 12% year on year.
Perennial challenge
Canada’s banks face a perennial challenge of how to find growth in a highly competitive market that is well banked – and a low or zero rate environment makes this all the harder. RBC’s diversity is again an advantage.
“Non-interest income from our advice and fee-based services provides a meaningful offset in a low rate environment,” notes Bolger.
But the bank has also managed to eke out growth in the least adventurous corners. Over the last two years, it says, it has added 60 basis points of market share in core checking accounts, for example. That might seem less exciting than the outsized gains it can boast in sales and trading, but as McKay notes, it is key to the ability to sell higher-return services.
“We view this as a core relationship product, and our goal remains to add more clients by expanding our digital capabilities and reach, and leveraging our scale to add more relationship value,” he told analysts.
The bank’s results suggest it is doing a lot of things right, and it is not surprising that its strategy – increasing its market share over time – sounds much like a commitment to simply keep doing what it is doing. Certainly, Bolger says, the pandemic itself hasn’t caused a shift in thinking about how the bank should be managed.
“It hasn’t changed the way I think per se, but it did crystallize the importance of our purpose, values and culture in our ability to navigate challenging circumstances,” he says. “It also underscores the strength of our teams and their ability to partner across the bank to achieve collective results.”
