[R-G] "This [disaster] has been good for us": Royal Bank

[Anthony Fenton]

http://www.financialpost.com/story.html?id=845231

RBC's humble plans to extend global reach pay off, new bosses say

Eoin Callan,  Financial Post  Published: Sunday, September 28, 2008

Merle Robillard for National Post

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.

Financial Post, with files from Barbara Shecter

ecallan at nationalpost.com