U.S. tax reform drives RBC capital-markets division to record profit

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Tax reform south of the border helped boost profits at Royal Bank of Canada's capital-markets division, which reported a 13-per-cent jump in first-quarter profit.

RBC reported on Friday a record $748-million of profit for its capital-markets division, up $86-million from the $662-million it had during the same quarter last year.

Doug McGregor, group head of capital markets at RBC, said U.S. tax reform is "quite significant" for the dealer because more than half of its earnings – and most of its growth opportunities – are south of the border. The reduction in the U.S. tax rate contributed $40-million straight to the bottom line, he added.

"That's huge in our business," Mr. McGregor said in an interview on Friday.

During a conference call to discuss RBC's results for the first quarter, which ended Jan. 31, Mr. McGregor noted that the dealer is focused on expanding significantly in the United States, as well as in Europe.

"We'd like to grow in Canada," Mr. McGregor told investors. "It's a little more difficult right now. But certainly there is significant opportunity in the U.S."

RBC began its push into the U.S. investment-banking business in 2000, with the acquisition of Dain Rauscher, an investment bank focused on the technology and health-care space.

"Things were challenging in terms of competing with the Americans and the Europeans," Mr. McGregor said.

But when the financial crisis hit, it provided a "massive opportunity" for RBC, which had a clean balance sheet and was able to provide loans and hire talent from firms such as Lehman Brothers and JPMorgan Chase.

Fast forward to 2018 and nearly half of the head count of RBC's capital markets division is in the United States, Mr. McGregor said.

Growing its business in Canada has been more of a challenge because the heavily-weighted commodities sector has been under pressure for more than five years, Mr. McGregor said.

"Canada is quite profitable for us and it's an important business, but the fee pool has not been growing."

In addition to benefiting from tax reform, the dealer also had higher earnings from corporate and investment banking, as well as from its global markets division.

Corporate and investment banking revenue grew 6 per cent, thanks in part to higher lending revenue and increased debt and equity origination in the United States. Meanwhile, global markets got a boost from higher equity trading revenue and an increase in debt origination activity across all regions.

Capital-markets revenue climbed 5 per cent to $2.18-billion, up from $2.07-billion a year ago.