Headquartered in Toronto, Ontario, Canada, Royal Bank of Canada (RBC) is the largest bank in Canada, providing a full range of services from commercial banking and wealth management to insurance and capital markets services. Also known as RBC Financial Group, RBC has more than 1,000 locations in Canada and additional operations in 49 other countries. In the USA, RBC owns investment bank RBC Dominion Securities and RBC Wealth Management, but the company sold its RBC Bank in the Southeast USA to PNC Financial in 2012 for $3.62 billion. RBC’s bank’s asset management operations are among the largest in the world. RBC has about 75,000 employees who serve more than 15 million personal, business, public sector, and institutional clients.
Some RBC highlights for their fiscal year 2012 that ended October 31 were as follows:
· 1. Earnings increased by 9 percent with return on equity (ROE) of 31.5 percent
· 2. Net interest margin (NIM) of 2.86 percent
· 3. Volume growth (loans and deposits) in Canadian Banking of 8.4 percent from last year and well ahead of peer average
· 4. Efficiency ratio of 46.9 percent, improved from 47.3 percent last year in Canadian banking
· 5. Named “Best Retail Bank in North America” (2012 Retail Banker International Awards)
· 6. Highest cross-sell among Canadian peers (Ipsos-Reid)
· 7. Announced agreement to acquire Canadian auto finance and deposit business of Ally Financial, Inc.
For the bank’s third quarter that ended July 31, 2013, RBC reported record net income of $2,304 million, up $64 million or 3 percent from the prior year, and up $368 million or 19 percent from the prior quarter. Two of the bank’s segments, 1) Personal & Commercial Banking and 2) Wealth Management, did especially well for the period. Specifically, Personal & Commercial Banking’s net income was a record $1,180 million, up $78 million or 7 percent compared to last year, largely due to solid volume growth across all businesses in Canada as well as the company’s acquisition of Ally Canada. RBC’s Wealth Management segment reported record net income of $236 million, up $80 million or 51 percent compared to last year, mainly due to higher average fee-based client assets. However for the quarter, RBC’s Insurance segment reported net income of $160 million, down $19 million or 11 percent from a year ago, largely due to higher claims costs of $14 million related to severe weather in Alberta and Ontario.
Copyright by Fred David Books LLC. (Written by Forest R. David)
The Merchants’ Bank of Halifax was incorporated in 1869 when 134 Halifax businessmen became shareholders of a new progressive bank started to support their various businesses. The new bank was renamed The Royal Bank of Canada in 1901. The history of RBC closely parallels the growth of Canada. Between 1921 and 1940, RBC regularly traded top ranking with Bank of Montreal, until 1941 when it became Canada’s largest bank. Under the leadership of John E. Cleghorn (1995–2001), RBC completed its transformation from a traditional commercial bank to a broad-based financial services group. Today, many, if not most, Canadians own shares in RBC through pension funds and mutual fund holdings and close to 90 percent of RBC’s employees are shareholders in the bank.
On March 2, 2012, RBC sold its U.S. regional retail banking operations to PNC Financial Services Group, Inc. On May 31, 2012, RBC acquired the Latin American, Caribbean, and African private banking business of Coutts, the wealth division of The Royal Bank of Scotland Group PLC., with client assets of approximately U.S. $2 billion. That acquisition gave RBC many clients in Latin America, the Caribbean, and Africa, as well as key private banking staff based primarily in Geneva, Switzerland, along with a team in the Cayman Islands.
On July 27, 2012, RBC acquired the remaining 50 percent stake in the joint venture RBC Dexia from Banque Internationale à Luxembourg S.A. (formerly Dexia Banque Internationale à Luxembourg S.A.) for €837.5 million ($1 billion) in cash. RBC thus now owns 100 percent of RBC Dexia, which has been rebranded RBC Investor Services.
Vision and Mission
RBC’s vision statement is given on the firm’s website as: “Always earning the right to be our clients’ first choice.” There is no mention of a mission statement on the RBC website, but the company has an Aspiration Statement as follows: “To be a top performing diversified financial institution.” In what could be mission statements, RBC has several Strategy Statements, as follows: For Canada: “to be the undisputed leader in financial services.” For the bank’s Global Operations: “to be a leading provider of capital markets and wealth management solutions.” For what RBC calls its targeted markets: “to be a leading provider of select financial services complementary to our core strengths.”
RBC operates in five segments:
· 1. RBC Royal Bank provides a broad suite of products and financial services in Canada through the largest national distribution network.
· 2. RBC Wealth Management provides services to affluent, high and ultra-high net worth clients globally with a full range of investment, trust, credit, and insurance solutions; provides asset management solutions through RBC Global Asset Management. RBC is the largest asset manager in Canada and number one in retail mutual funds.
· 3. RBC Insurance provides a wide range of travel, life, health, home, auto, wealth, and reinsurance products and solutions, as well as creditor and business insurance services.
· 4. RBC International Banking provides banking offices in the Caribbean; includes U.S. cross-border banking operations and RBC Dexia Investor Services. Note: RBC does business in 20 Caribbean countries and territories, stretching from the Bahamas in the north to Suriname in the south, with 121 combined branches, and more than 6,400 employees serving more than one million clients. RBC’s Caribbean headquarters are based in Port-of-Spain, Trinidad.
· 5. RBC Capital Markets provides global investment bank services to institutions, corporations, governments, and high net worth clients around the world. Leading all firms in Canada in 2012, RBC advised on 102 announced merger and acquisition (M&A) deals worth $76 billion. The deals advised on in 2012 included Chinese state-owned company CNOOC Ltd’s $15.1 billion takeover of Canadian oil and gas producer Nexen Inc., and Glencore International PLC’s C$6 billion purchase of Canadian grain handler Viterra, Inc. In total, the number of M&A deals with Canadian advisors involved fell by 13.1 percent from 2011, but the value rose by 38.7 percent. In addition, RBC accounted for 34.9 percent share of the equity-advising market, finishing ahead of Goldman Sachs Group, Inc., which advised on 21 deals worth $49.2 billion, and BMO Capital Markets, which advised on 63 deals worth $47.5 billion. In equity issuance, RBC raised C$5.5 billion ($5.58 billion) in 68 transactions, taking the top spot from 2011 leader TD Securities, which finished third in 2012 with C$3.7 billion. BMO finished second with C$4.7 billion. Also in 2012, RBC led in debt issuance, raising C$39.9 billion in 131 issues, and in initial public offerings, advising on C$367.5 million worth of deals in a slow year for new issues.
Effective at the end of October 2012, RBC eliminated its international banking segment and created a new Investor & Treasury Services segment that includes RBC Investor Services, formerly a business under international banking. RBC moved correspondent banking and treasury services from capital markets into this new segment. In addition on that date, RBC created a Personal & Commercial Banking segment that includes the former Canadian banking segment and expanded it to include the company’s businesses in the Caribbean and the USA.
Exhibit 1 provides a summary of RBC’s segment performance in fiscal year 2012. Note that their Insurance segment had the highest ROE (46.8 percent) whereas their Investor & Treasury Services has the lowest (4.3 percent). Exhibit 2 provides information on RBC’s geographic operations. Note in Exhibit 2 that Canadian operations comprised 79.6 percent of the bank’s net income in 2012.
EXHIBIT 1 RBC’s 2012 Segment Results by Product (in millions of Canadian dollars)
|Personal and Commercial Banking||Wealth Management||Insurance||Investor and Treasury Services||Capital Markets|
|Net interest income||9,061||393||—||668||2,559|
|Non interest income||3,582||4,442||4,897||657||3,629|
|Non interest expense||5,932||3,796||515||1,134||3,746|
|Net income before taxes||5,544||1,040||761||191||2,307|
Source: Based on company information.
EXHIBIT 2 RBC’s 2012 Segment Results by Region (in millions of Canadian dollars)
|Net interest income||10,413||1,308||777||12,498|
|Non interest income||9,378||3,564||4,332||17,274|
|Net income before taxes||6,041||843||706||7,590|
Source: Based on company information.
RBC operates from a strategic business unit organizational structure, having three group head positions, with various product divisions reporting to those group heads. The company’s organizational structure is illustrated in Exhibit 3 . Note in Exhibit 3 that the only female in the corporate hierarchy serves both as the company’s Chief Financial Officer (CFO) and Chief Accounting Officer (CAO); basically she is the Chief Operations Officer (COO) for the firm. It is a bit unusual for the COO, or CAO in this case, to also be the CFO in a company.
For the first time ever in 2012, RBC provided their Annual Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) with corresponding comparative IFRS financial information presented for the prior year. All amounts for 2010 and before are based on Canadian generally accepted accounting principles (GAAP).
For fiscal year 2012, RBC reported record net income of $7.5 billion, up $1.1 billion or 17 percent from the prior year. The results reflected record earnings in Personal & Commercial Banking, Capital Markets, and Insurance. Note in Exhibit 4 that RBC’s revenue in 2012 jumped $2.1 billion to $29.7 billion. Note in Exhibit 5 that RBC’s total deposits increased $29 billion in 2012 to a total of $508 billion.
EXHIBIT 3 RBC’s Organizational Chart
Source: Based on company information.
EXHIBIT 4 RBC’s Income Statements (in millions of Canadian dollars)
|Interest Income, Bank||20,852.0||20,813.0||17,746.0|
|Total Interest Expense||8,354.0||9,456.0||7,408.0|
|Noninterest Income, Bank||17,274.0||16,281.0||15,744.0|
|Loan Loss Provision||1,301.0||1,133.0||1,240.0|
|Noninterest Expense, Bank||18,781.0||17,525.0||17,015.0|
|Income Before Tax||9,690.0||8,980.0||7,827.0|
|Income Tax, Total||2,100.0||2,010.0||1,996.0|
|Income After Tax||7,590.0||6,970.0||5,831.0|
|Equity in Affiliates||0.0||0.0||0.0|
|U.S. GAAP Adjustment||0.0||0.0||−59.0|
|Net Income Before Extraordinary Items||7,493.0||6,869.0||5,673.0|
|Total Extraordinary Items||−51.0||−526.0||−509.0|
GAAP, generally accepted accounting principles.
Source: Based on company documents.
EXHIBIT 5 RBC’s Balance Sheets (in millions of Canadian dollars)
|Cash and Due From Banks||12,617.0||12,428.0||8,440.0|
|Other Earning Assets, Total||295,511.0||267,939.0||278,288.0|
|Property, Plant, Equipment, Total (Net)||2,691.0||2,490.0||2,139.0|
|Other Long-Term Assets, Total||2,756.0||29,357.0||35,181.0|
|Other Assets, Total||122,985.0||124,222.0||120,611.0|
|Liabilities and Shareholders’ Equity|
|Other Bearing Liabilities, Total||9,385.0||7,689.0||7,371.0|
|Total Short-Term Borrowings||64,032.0||42,735.0||42,066.0|
|Notes Payable, Short-Term Debt||0.0||0.0||0.0|
|Current Portability of Long-Term Debt and Capital Leases||0.0||0.0||0.0|
|Other Current Liabilities, Total||2,244.0||2,172.0||929.0|
|Total Long-Term Debt||8,515.0||9,643.0||7,408.0|
|Deferred Income Tax||176.0||266.0||0.0|
|Other Liabilities, Total||174,379.0||200,524.0||203,608.0|
|Redeemable Preferred Stock||0.0||0.0||0.0|
|Preferred Stock, Nonredeemable, Net||4,814.0||4,813.0||4,811.0|
|Additional Paid-In Capital||0.0||0.0||236.0|
|Retained Earnings (Accumulated Deficit)||24,270.0||20,381.0||22,706.0|
|Treasury Stock, Common||30.0||8.0||−81.0|
|ESOP Debt Guarantee||0.0||0.0||0.0|
|Unrealized Gain (Loss) 0.0||0.0||0.0|
|Other Equity, Total||830.0||490.0||−2,099.0|
|Total Liabilities and Shareholders’ Equity||825,100.0||793,833.0||726,206.0|
ESOP, employee stock ownership plan.
Source: Based on company documents.
Canada’s banks weathered recent economic woes in the USA and around the world quite well, having no housing bubble issues in Canada. That is partly why all six of Canada’s biggest banks made the Global Finance list of the world’s 50 Safest Banks for 2012. RBC expects the Canadian economy to grow by 2.4 percent in 2013, mainly driven by consumer spending, business investment, and improved net exports. However, given the continued global uncertainty, RBC plans to maintain the overnight rate at 1.0 percent until global factors restraining the Canadian economy ease. Modest and gradual withdrawal of the Canadian stimulus measures is expected to begin in the second half of 2013.
RBC expects the U.S. economy to grow by 2.3 percent in 2013, mainly driven by slightly higher consumer spending, continued business investment, and improvement in the housing market. RBC expects U.S. growth in 2013 to be restrained by fiscal policy tightening, with the Federal Reserve holding interest rates at historically low levels through mid-2015.
RBC expects Eurozone economic growth to improve to 0.1 percent in 2013 as governments implement policy measures to address the Eurozone structural issues and restore confidence. Consumer and government spending are expected to further decrease in Europe, reflecting weak labor market conditions and fiscal austerity measures implemented to ensure sovereign debt sustainability. Although inflation remains elevated, RBC expects interest rates in Europe to be maintained at 0.75 percent in 2013 to provide continued stimulus to the economy.
The Basel Committee on Banking Supervision Global Standards for Capital and Liquidity Reform (Basel III) provides new standards for capital and liquidity, establishes minimum requirements for common equity, and increases capital requirements for counterparty credit exposures, a new global leverage ratio, and measures to promote the build up of capital that can be drawn down in periods of stress. Banks around the world are preparing to implement these new standards (commonly referred to as Basel III). In Canada, the Office of the Superintendent of Financial Institutions Canada (OSFI) expects deposit-taking institutions to meet the minimum 2019 Basel III capital requirements for Common Equity Tier 1 (CET 1) in the first quarter of 2013. RBC continues to be well capitalized by global standards, with excellent capital ratios.
Domestic-Systemically Important Banks (D-SIBs)
The Financial Stability Board and the Basel Committee on Banking Supervision have finalized a principles-based framework to guide national authorities in establishing principles for dealing with D-SIBs. OSFI has not communicated formally on a Canadian D-SIB regime, but RBC expects one to be put forward. The implementation of a D-SIB regime in Canada may result in RBC being subject to additional capital and disclosure requirements.
Over-the-Counter Derivatives Reform
Reforms in the over-the-counter (OTC) derivatives markets continue on a global basis, with the governments of the G20 nations proceeding with plans to transform the capital regimes, national regulatory frameworks, and infrastructures that RBC operates. Thus, RBC anticipates changes in their wholesale banking business, some of which will impact their client- and trading-related derivatives revenues in capital markets. In July 2012, the U.S. Commodity Futures Trading Commission (CFTC) released proposed cross-border guidance regarding the application of U.S. swaps rules to international banks, including requirements to register with the CFTC as a swap dealer.
The banking business is intensely competitive, with rival companies having branches within close proximity of each other, and online banking taking a greater and greater share of the market each day. Exhibit 6 shows that RBC’s major rival firms are Canadian Imperial Bank of Commerce (CIBC), the Toronto-Dominion Bank (TD), and the Bank of Nova Scotia (BNS). Note that RBC has the lowest profit margin, a respectable 27.87 percent, but is the leader in most categories.
Canadian Imperial Bank of Commerce (CIBC)
Headquartered in Toronto, Ontario, Canada, CIBC has more than 1,000 branches in Canada, offering a wide range of services, including deposits, loans, investments, and insurance. With a stock symbol of CM, CIBC operates in two main segments: (1) CIBC Retail Markets (consumer and small-business banking, credit cards, wealth management) and wholesale banking arm (2) CIBC World Markets (merchant and investment banking, capital markets services, and research for corporate, institutional, and government clients). Outside of Canada, CIBC owns a majority of First Caribbean International Bank.
EXHIBIT 6 A Financial Synopsis of RBC versus Rival Banks in Canada (as of 10-30-13)
|Stock Ticker Symbols||RY||CM||TD||BNS|
Note: B = billions of Canadian dollars RY = RBC; CM = Canadian Imperial Bank of Commerce; TD = Toronto-Dominion Bank; BNS = Bank of Nova Scotia.
Source: Based on company information.
The Toronto-Dominion Bank (TD)
Headquartered in Toronto, Ontario, Canada, TD is also known as TD Bank that owns 45 percent of U.S. discount brokerage TD Ameritrade. Sometimes called TD Financial, the company ranks among the world’s top online financial services firms and is one of the largest banks in Canada, where it operates more than 1,100 branches under the TD Trust banner. U.S. subsidiary TD Bank, N.A., has another 1,300 branches in about 15 eastern states. TD also offers commercial financial and advisory services. Other segments of TD include TD Insurance, TD Asset Management (mutual funds), TD Securities (investment banking, equities, and foreign exchange), and TD Waterhouse, the largest online brokerage in the United Kingdom and Canada.