Yesterday was RBC's fourth quarter results day. There was a lot of good news, especially if you're working at a US or European bank and have been wondering how well the fourth quarter's going: net income in RBC's capital markets business rose 39% compared to the fourth quarter of 2011, driven mainly by fixed income sales and trading.
And yet buried in RBC's investor presentation is a worrying slide (18) in which the bank explains its capital markets strategy by region. In Canada, it says that it wants a 'full suite of [investment banking] products across all sectors'. In the US, it wants a, 'full service investment bank with equity and fixed income sales & trading.' In Asia, it will be primarily focused on distribution, 'with select M&A advisory and origination.' And in Europe, RBC says it's focused on: 'origination in key sectors with fixed income and FX sales & trading.'
What about European equities sales and trading? RBC invested heavily in building its European equities business in 2009 and 2010. Slide 18 suggests European equities are no longer on the radar for RBC. So what next? An RBS-style withdrawal?
No. RBC declined to comment, but we understand that there are absolutely no plans to close the European equities business and that the failure to mention equities on the strategy slide was merely an oversight.
Nevertheless, it's easy to see why a frisson of fear might be circumnavigating RBC's equity desks. Equities sales and trading revenues at the bank fell 11% this year. And despite RBC's investment in the business, its equities revenues have never exceeded their peak of 2009. The bank has a stable market share of just 1.7%, according to analysts at Bernstein - although insiders tell us it's 1.8% and growing. Along with HSBC and Jefferies, this places RBC in the group of equities bit-players which will struggle to survive in the new flow-monster dominated world foreseen by analysts at Morgan Stanley and Oliver Wyman.
Most worrying of all is the suggestion that RBC's equities sales and trading business isn't at all profitable. "They hired a lot of people at the peak of the market for equities in 2009 and 2010," says one equities headhunter. "Since then, the market's collapsed."
However, RBC isn't RBS. RBS closed its cash equities business with the loss of 1,200 jobs earlier this year. But RBS is government owned and the British government had no appetite for running a marginal loss-making equities unit. RBC has far deeper pockets and a far longer time horizon says the equities headhunter: "They're a hugely cash rich firm and can sit this out until the market picks up."
Accordingly, RBC has continued to hire in cash equities. In the last six months, its brought on Adam Gaby, as an MD in pan-European equity sales, Richard Rose as an MD in oil and gas equity sales and Andrew Ord as an MD in pan-European equities sales. That's not a lot of hiring. Nor is the action of a bank that's about to wind its cash equities business down for good.