Chuck Winograd, chief executive of RBC Capital Markets; Doug McGregor, RBC’s co-president and head of global investment banking; and Mark Standish, RBC’s co-president and head of global markets, talk to Geraldine Lambe about the company’s need to grow outside of Canada.

In a globalised world, domestic strength is no longer enough. In the case of RBC Capital Markets, the investment banking arm of Royal Bank of Canada, may have a dominant position in Canada (according to data provider, Thomson Financial, it is first in M&A, syndicated loans, debt capital markets and equity capital markets) but the Canadian market is small and offers only a limited opportunity for expansion. Further growth will have to be international.

“The arithmetic is simple; we have 15% to 20% market share in Canada – and we will work hard to grow that – but Canada represents less than 2% of global markets. Growth will have to come from outside Canada,” says Chuck Winograd, RBC Capital Markets CEO.

The bank has a clear vision of what it wants to be – and that is not all things to all people. Instead, the strategy is to build a global platform with a mid-market focus, and to exploit pockets of strength, such as mining and energy, infrastructure finance, and cross-border finance into Canada.

“The key is to be relevant to clients without attempting to be in every market for every client,” says Mr Winograd.

The business case for focusing on the mid-market sector – firms with a market capitalisation around the C$2bn mark – is compelling. The fee pool in the mid-market is as big as that for larger deals but there are gaps in the market because of earlier consolidation among mid-market providers.

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“Compared to other banks focused on the mid-market, we have the advantage of a bigger balance sheet,” says Doug McGregor, RBC Capital’s co-president and head of global investment banking.RBC is making headway. While it may still lag in terms of market share and revenue, it is steadily climbing the league tables. Research from Bank of America into the mid-market sector identifies RBC as one of the top four “market share gainers” in M&A, ECM and DCM globally.

 

A natural market for the bank to focus on is the US. In February this year it formed an industrial and diversified services group, a food and beverage industry sector within its consumer group, and expanded its healthcare group. “These industries are big growth areas, particularly in the middle market, where we are focused,” says Mr McGregor.

Where RBC is really scoring particularly well is in mid-market (deals of $50m or less) public finance and municipal business. Last year, RBC’s municipal finance business ranked first in Arizona and Pennsylvania, second in Colorado, fourth in Texas and fifth in New Jersey. All five states rank among the top 15 issuer states in the US.

The bank is continuing to build out the platform with strategic acquisitions. In April this year, it acquired Seasongood & Mayer, the biggest underwriter of municipal debt in Ohio.

Perfect fit

Analysts see the deal as a great fit for RBC’s US municipal investment banking franchise; it bolsters the bank’s overall presence in Ohio as well as in education finance nationally. Last year, RBC Capital Markets ranked eighth in the US in senior-managed negotiated municipal bond underwriting volume, but based on 2006 rankings, the combined entity will be the top ranked municipal bank nationally in both US middle-market issues and the school finance sector.

With the acquisition, RBC becomes the only top-10 firm in the US to have a physical presence in the state of Ohio, and it brings the number of people it has on the ground there to more than 100. Mr Winograd says that putting people on the ground is the differentiating feature of the bank’s strategy for growing the municipal business.

“We have a different model from Wall Street,” says Mr Winograd. “Where their model is centralised, ours is distributed. We have 28 regional offices and hundreds of municipal bankers in the field; this is crucial in building a public finance platform. It is very much a local business and our local origination and distribution network is a huge advantage.”

Seasongood & Mayer is one of seven US acquisitions in the past year; others include the purchase in January of Carlin Financial Group, a broker-dealer known for its proprietary trade execution platform, and Daniels & Associates, an M&A advisor to the cable, telecom, broadcast and internet services industries. Now called RBC Daniels, it was ranked first in the US for the first half of 2007, according to Thomson Financial.

The deals are symptomatic of RBC’s strategy: to make careful acquisitions that fit snugly into the RBC business fold. “Most broker-dealer acquisitions fail or destroy value,” says Mr Winograd. “We like to make small tuck-ins that suit our strategic purposes.”

Other key areas for RBC include mining – an obvious target for Canadian banks, since about 60% of global mining companies are listed on the Toronto Stock Exchange. The bank now has more than 60 professionals in investment banking, sales and trading, and 10 mining research analysts covering more than 100 mining companies around the globe.

“We have expanded our coverage universe of small and mid-cap companies operating in both developed countries and in emerging market countries,” says Mr McGregor. “That’s where the business is. Large-cap company balance sheets are in good shape and they are not raising equity, they are doing buybacks.”

The bank has expanded its presence in Australia, where it is now a full member of the Australian Stock Exchange, and in London, where it secured nomad (nominated advisor) status on the London Stock Exchange’s Alternative Investment Market (AIM) in late-2006. The bank is acting as a nomad to four mining companies, most recently to Mineral Securities Limited, admitted to AIM following its merger with Scarborough Minerals, and is a broker to three other mining companies. Nomad status has also enabled it to expand into oil and gas.

RBC has also added precious and base metals commodity trading teams in London, New York and Sydney to provide clients with a full suite of inter-bank market making services in metals trading. “RBC now has the biggest resource focused on mining and energy,” says Mr McGregor.

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The main exception to RBC’s mid-market and growth company strategy is in fixed income. But there, too, the bank takes a very targeted, disciplined approach. “In debt capital markets you have to be in some areas of the investment grade business in order to build a global business,” says Mark Standish, co-president and head of global markets, based in New York.

 

“Our strategy has been to build an alternative dollar platform [that is, focusing on currencies other than the dollar, such as sterling, where RBC is fifth or sixth in the league tables]. So we have built a global platform based on that niche strategy – we do not go head-to-head with the bulge bracket firms – and are building dollar and euro capability on top of that.”

The next stage is to add other products onto the platform, such as alternative asset products. “We are probably a bit more nimble than other players. Our niche focus enables us to move more quickly and to adapt to specific situations,” he adds.

In Asia, the fixed income strategy is focused on improving RBC’s distribution. “Asia was a weak link from a distribution standpoint,” says Mr Standish. “We have therefore been expanding our presence in Tokyo and Hong Kong, primarily focused on trading and distribution of US dollar products.”

In April, the firm hired five senior marketers with cross-product experience in Asian markets, bringing the regional sales force in Hong Kong to about 12, with plans to add eight or so more in the coming months, and about 60 professionals on the capital markets side.

The bank considers a recent deal, in which it acted as sole arranger for Kommuninvest of Sweden in its issuance of ZAR561m bond – the third largest ZAR-denominated bond ever registered for sale into Japanese retail – as an important sign of its growing fixed income strength in its target markets.

“We are building a team that really understands our target markets and the major institutional investors,” says Mr Standish.

In September, RBC cut 40 fixed income sales positions in the US and warned that it may also close an entire office in Fort Lauderdale, Florida, suggesting that Canada and Canadian banks have not been immune from the turmoil in credit markets.

Fixed income cuts

Mr Winograd argues that the fixed income “restructuring” had little to do with the crisis. He acknowledges that the bank has felt some pain, but says that it is more to do with responding to changing opportunities in the US fixed income market. “We, in miniature, have had some losses, but we continue to perform on a competitive basis.”

He argues that the bank’s strict adherence to risk/return ratios has largely protected it. “The ratios kept us out of a number of deals for which we are now very grateful.”

And the bank may even be able to take advantage of the current turmoil, he says. “The market dislocation could provide opportunities for hiring or acquisitions. The most important things in this business are people and the balance sheet, and we are in a good position; 2006 and 2007 have been about planting the seeds, 2008 will be about execution.”

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