The S&P/TSX composite index has climbed 15 per cent in the past year.FRANK GUNN/The Canadian Press
Wondering why Royal Bank of Canada would downplay its ability to mint money in the securities business? A quick look at the early analyst reaction to RBC's earnings hints at the answer.
The market is still dubious about the sustainability of such earnings. For some investors and analysts, a dollar of trading or investment banking earnings is lower "quality" than a dollar from lending or some other vanilla banking business. Their take on the issue is based on the perceived repeatability of earnings.
In other words, these aren't the kinds of earnings the market is excited about. RBC is moving its securities and wholesale banking business away from trading and more into lending, and fee-paying businesses, such as merger advice. It's working, but so far the market is not visibly changing its stance on the sustainability of such earnings.
So even with the big beat and the bigger than expected dividend increase by RBC, the betting by some analysts (who have so far been correct) is that the market would be unimpressed.
Here are three analysts' first notes:
Robert Sedran, CIBC
"Overall, we had expected strength in capital markets related revenues, but these numbers were significantly stronger than forecast. The magnitude of any street estimate revisions will depend, therefore, on how comfortable the market has become with these revenues."
Sumit Malhotra, Bank of Nova Scotia
"This is an impressive capital markets results from RY, and underscores the success of the repositioning of the franchise to focus on origination and distribution as compared to the trading related volatility that impacted the business in 2010-11. While we expect the capital markets environment to remain conducive to earnings power in the near-term, we would be more excited by the result if it was accompanied by stronger trends in Canadian P&C [personal and commercial], or more so in current conditions, wealth management. Though we continue to rate RY shares as a Sector Outperform, we expect a relatively muted near-term reaction to the results considering (1) the composition of earnings in Q3; (2) the step back in the capital ratio; and (3) the run the stock has already enjoyed."
John Aiken, Barclays
"While we are decidedly positive on the results, naysayers will question the sustainability of the trading revenues and insurance earnings. That said, we feel this is the type of performance that investors should be looking for from Royal. ... While we do not believe that the market will assume that these levels will be fully sustainable, they should improve Royal's ongoing earnings outlook as it continues to outperform versus its global peers as well as against expectations."