Among three of the Big Six banks, Royal Bank of Canada (RBC) is most exposed to capital markets volatility, but it also has the least reliance on that business, notes Moody’s Investors Service.
The rating agency issued a new report Thursday comparing the capital markets businesses of three of the Big Six banks — Royal Bank of Canada, Bank of Montreal (BMO) and National Bank (NBC) — which finds that their “distinct strategies have led to important differences in the credit profiles of the [banks’] capital market operations.”
The report stresses that the capital market businesses of all three banks carry inherent earnings volatility, but that this is somewhat offset by their “strong, sustainable and more stable Canadian personal and commercial franchises”. Indeed, Moody’s says that it expects personal and commercial earnings to continue to be the primary pillar of support of the three banks’ strong credit quality.
Moody’s notes that the global reach of RBC’s capital markets operations “make it the most exposed to large and unpredictable losses that may arise in the future”, but it also finds that RBC is the bank with the strongest domestic personal and commercial franchise to help even out its performance.
“RBC leads the other two peer banks in terms of capital market revenue, income and trading inventory,” says David Beattie, vice president and senior credit officer at Moody’s. “The volatility of its capital market earnings is the highest of the three banks. However, an offsetting factor is that RBC is less reliant on capital market earnings than either BMO or NBC.”
As for BMO, Moody’s says that the bank’s goal of becoming the leading investment bank for North American mid-cap issuers in select industries “increases its potential for incremental risk-taking”. It says that BMO’s reliance on capital market earnings falls between RBC and NBC, but that it has also been trending down in recent years.
National Bank is the smallest of the three banks examined by Moody’s, which finds that it is “the most reliant on capital market earnings and has a less robust ability to absorb shocks from its capital market business than either RBC or BMO.” Its capital market operation is large relative to its stable Quebec-based personal and commercial franchise, says Moody’s.