Canadian Broker-Dealers Show Resolve

Terry Flanagan

Canada’s banking sector continues its strong run in global markets as cross-border rivals struggle amid macroeconomic uncertainty.

“We have very strong fundamentals in Canada,” said Kevin Sampson, vice-president of business development and strategy at TMX Group. “We have a very strong banking system, and have been very conservative as far as our balance sheets and debt.”

Royal Bank of Canada, Toronto-Dominion Bank and National Bank of Canada each performed better than expected, and above analyst estimates, when they revealed their fiscal first quarter earnings figures. The outlook at RBC and TD Bank were so strong that they announced dividend increases, despite both seeing slightly lower profits – down 6% and 5% respectively – from the same period last year. The banks’ lower earnings from their capital markets divisions were partially offset by strong consumer lending.

“It’s a tough time right now but that doesn’t mean you can’t invest,” a New York electronic trader told Markets Media. “Things will get better.”

Stateside broker-dealers have had a difficult time as market volatility declined and macroeconomic uncertainty continued through late 2011 and into this year. Bulge bracket bank JPMorgan Chase experienced a 23% drop in profit year-on-year due to lower profits at its investment banking division.

Equities trading volume in the U.S. has averaged about 6.9 billion shares per day thus far in 2012. This is down from the 7.9 billion seen during the same period last year, which was in turn down from the 9 billion in early 2010. This has inevitably put the squeeze on market participants, particularly exchanges and broker-dealers, which generate revenue based on trading activity.

Gordon Nixon, president and chief executive officer of RBC, Canada’s largest bank by assets, said: “Our outlook for RBC for the year ahead remains optimistic; we are confident that RBC has positioned itself to grow and prosper even through what is a challenging environment.” RBC suffered a 30% drop in earnings from its capital markets unit.

Ed Clark, TD Bank president and chief executive, said: “While we knew going into 2012 that our businesses would continue to grow in the face of a challenging environment, their performances have exceeded our expectations.” TD Bank is the second largest Canadian bank by assets.

Market volatility was up for much of 2011, as the Chicago Board Options Exchange Volatility Index indicated. Two and three per cent intraday swings became the norm. The surges came in the wake of a slew of macroeconomic events, including the European debt crisis and the U.S. debt downgrade. The VIX reached a high of 48 on August 8, 2011, as markets reacted to the lengthy U.S. debt ceiling negotiations and Standard & Poor’s downgrade of U.S. debt.

Since late 2011, however, volatility has settled down and remained in the high-teens. As of midday yesterday, the VIX was trading at about 21, spiking up 16% as traders reacted to uncertainty out of Europe.

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