Royal Bank of Canada Capital Markets' co-CEOs Doug McGregor and Mark Standish explain why the bank will emerge from the crisis stronger than ever.

If the turmoil of the past two years has taught us anything, it is that success in banking demands both skill and luck. Royal Bank of Canada Capital Markets (RBC) is one of the handful of firms to get the balance of that recipe right, and it is now gaining market share at a speed that would have been impossible before the financial crisis.

In the first place, Canada's strict leverage constraints have left it in good shape while competitors have been fire-fighting or rebuilding capital. The acknowledgement a couple of years ago that it was struggling to compete effectively in areas such as structured credit and commercial mortgage-backed securities led to a rethink and an early exit from those businesses. Moreover, pre-crisis, RBC's lack of traction in the hedge-fund business looked like a weakness; now, its focus on real money accounts is where everybody wants to be.

Going forward, the bank's strong capital base is attracting a lot of business and plenty of good bankers, who would not have been available to RBC in the good times.

"We are winning business with a lot of new clients and getting more business from existing clients - especially in the US and the UK - either because the competition has stopped calling or they cannot provide the services that they used to," says Doug McGregor, chairman and co-CEO of RBC capital markets. "Both the customers and the labour markets are terrific for us."

Team building

Of a raft of recent new staff, an 11-person team, who joined in September 2008 from the defunct Bear Stearns, has formed the basis of a new US institutional equity sales and trading team based in London and Switzerland, which Mr McGregor says has paid off in terms of client perception and commissions.

"Our standing with major clients in the cash equities business - especially in the US - has improved dramatically," he says. "We review the large mutual fund complexes quarterly on our standing, our research and our share of the commission pool, and we have gone from a mid-teens player to well into the top 10 for most of our targeted clients. That kind of market-share gain would normally have taken years, but it has been achieved in the past 18 months."

It is a similarly positive story on the fixed income side. Historically, the bank had a second or third tier-focused fixed income business but three to four years ago it began to restructure the business, moving it upmarket, changing the model, and improving the quality of the coverage and trading. As a result, RBC moved from a niche fixed income business (outside of Canada), largely in non-dollar currencies, to being an increasingly serious player in the US dollar market.

"Our timing turned out to be really quite good," says Mark Standish, president and co-CEO. "When the chaos hit and the [trading] volumes started to sky-rocket, we were very well positioned. One of our biggest jumps has been in US dollar business; we are trading a ton of US dollar products globally."

Defensive posture

The exit from those businesses that were simply not working for RBC has meant that, while other firms were having to deal with troublesome structured credit portfolios, RBC was largely able to focus on day-to-day business free from such operational burdens. Moreover, it freed up both balance sheet and resources. While RBC has shrunk the balance sheet as a defensive posture - "it was the prudent thing to do over the past two years," says Mr Standish - it has been able to re-allocate balance sheet to businesses that are performing well and that have subsequently yielded strong client flows.

One business segment generating major flows is the US public finance and municipal business, where RBC continues its aggressive expansion. Already a significant player with top five rankings in several of the biggest issuer states, RBC has used the dynamics of the financial crisis to its advantage.

The ranks of ex-Bear Stearns bankers have again provided rich pickings. In June 2008, RBC hired a team of seven senior bankers from Bear - four of whom had worked in the municipal finance healthcare market together for more than 20 years. When UBS decided to exit the municipal bond underwriting business in June 2008, RBC swiftly snapped up six of its top-ranked single family housing team, enabling the bank to win 13 additional senior managed state housing engagements.

The bank is increasingly well positioned in a business that issued more than $390bn in 2008 alone. In April, RBC was named to the senior manager pool for the Dorm Authority of the State of New York, which in 2008 was the second largest issuer of municipal debt in the US.

RBC now has a total of 170 muni bankers and, in 2008, senior managed 431 transactions totalling $14.7bn and served as financial adviser for 203 issues totalling $14.8bn. For the year to date, it ranks first for K-12 school district bond underwriting, second for student loan issuance, seventh overall for senior managed negotiated issuance and ninth for hospital bond-related issuance.

The municipal franchise also plays well to RBC's growing infrastructure business. It was recently named as one of three senior managers for Las Vegas McCarran Airport, which over the past five years has been one of the largest issuers of airport debt in the US.

As a sign of the growing appeal of RBC's platform to bankers from bulge bracket firms, last October the bank hired Peter Walraven - a 20-year veteran from JPMorgan - to head its US debt capital markets efforts for infrastructure and project finance.

Mr Standish says all the bank's recent hires follow a simple rule: that they are selective and additive. "Because firms are letting people go or people are vulnerable, we have access to people with real accounts that we can just bolt on and they are immediately productive. While there is a degree of loyalty to people and banks, clients want to be aligned with institutions that are solid."

 Mark Standish, President and co-CEO, Royal Bank of Canada Capital Markets

Long-term strategy The hiring strategy is also careful to ensure that recruits will be able to operate - and be happy - on RBC's platform. This is especially important if bankers are coming from big universal banks with a much more powerful brand. "We are very mindful of whether they and their clients will be comfortable on our platform. We don't want to be a couple of years' sojourn until the next opportunity comes around," says Mr McGregor.

It may sound as if RBC is leading a charmed life but it has hit a few potholes during the crisis, the results of which are still evident. While first-quarter figures showed that capital markets sales and trading revenue increased by 37%, and corporate and investment banking revenue by 8% compared with the same quarter last year, these gains were more than offset by writedowns.

Losses on subprime, municipal and commercial mortgage loans in the US were C$430m ($348m) before tax, including C$288m in costs from credit default swaps with bond insurers and other US subprime investments, and C$142m on US asset-backed debt securities. As a result, investment banking profit fell by 23% and trading revenue fell by 29%.

"We have not been immune to the current crisis and our first-quarter results were impacted by losses related to the adverse market environment including unfavourable credit valuation adjustments," says Mr McGregor. "That said, compared to our competitors, we are weathering the storm better than most. Our solid financial profile should continue to provide confidence in the strength and stability of our organisation, and supports the continued growth of our businesses. We remain upbeat about where we are now and where we are heading."

Too early to call

The bank may also have moved a little early in some areas such as European leveraged finance, where it established a new team with four senior hires from Canadian rival CIBC World Markets in March 2008 and completed the team with 11 further hires from CIBC. With European leveraged finance still in the doldrums, it is difficult to see if the investment has so far paid off in terms of revenues. Mr McGregor, who declines to talk about specific teams, says the figures show that overall, RBC's expansion and hiring strategy is working. "If you look at where revenues are coming from, it is working well, even if it doesn't always work perfectly," he says.

One or two blips aside, RBC is likely to emerge strengthened from the crisis out of a mix of good management and good fortune, but the shape of the financial world into which it will emerge remains unknown. With independent investment banks largely out of the picture and bankers moving from erstwhile bulge bracket firms to less high-profile universal banks, it will be a different one. Does the notion of 'bulge bracket' even hold any currency?

"The idea of whether the 'bulge bracket' still exists will be debated," says Mr Standish, "but what is more important to us is that we focus on what we are and on doing what we do well. All in all, the business outlook is good. There are still things to be cautious about, but businesses where the risk return just wasn't there over the past few years are now returning to levels which makes them profitable."

Mr McGregor agrees: "The overall theme that is emerging is that the operating environment in the wholesale business is pretty good, and we are well positioned for that."

Career history

Doug McGregor

2008 - Appointed chairman and co-CEO of RBC Capital Markets.

2007 - Appointed co-president, RBC Capital Markets.

2003 - Appointed head of global investment banking, RBC Capital Markets.

1993 - Appointed president of DS Marcil Inc, later acquired by RBC.

1983 - Joined Marcil Trust as vice-president/director.

1979 - Joined Pitfield MacKay Ross as corporate finance associate.

Career history

Mark Standish

2008 - Appointed president and co-CEO of RBC Capital Markets.

1995 - Joined RBC Dominion Securities as head of proprietary and structured trading, global equity derivatives group.

1993 - Joined Kidder Peabody as managing director.

1989 - Joined Lehman Brothers, New York, responsible for equity derivatives, commodity derivatives and commodity financing.

1985 - Joined Bankers Trust as bank officer.

1977 - Began banking career at Natwest Bank, UK.

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