RBC Targets Large-Company Deals to Dislodge Wall Street Rivals

RBC Capital Markets spent the last five years pushing to become a top 10 U.S. investment bank, mostly by focusing on mid-sized companies. Now it wants to go after bigger fish.

The Royal Bank of Canada unit is targeting more American firms with market values exceeding $5 billion as it seeks to win business and steal market share from larger Wall Street rivals. The bank is aiming for a 5 percent to 10 percent annual increase in clients and corporate loans.

“We’re not going to leave our mid-market roots, but we do think we can stretch up and service the large-cap clients very effectively,” Blair Fleming, head of RBC Capital Markets in the U.S., said in a July 21 interview in New York. “We’ll strive to continue to build our market share.”

RBC set a goal in 2010 of cracking the upper echelons of U.S. investment banking, hiring star bankers and expanding its ambitions in the aftermath of the financial crisis. The firm now gets twice as much capital-markets revenue from the U.S. as Canada versus almost equal five years ago. That’s helping lift profit at the Toronto-based firm when growth in Canadian consumer banking has slowed.

“Royal Bank’s approach in the U.S. capital markets has been highly successful,” John Aiken, a Barclays Plc analyst in Toronto, said in a phone interview. “They’ve been able to grow their business and penetration and do it fairly effectively by bringing on dislodged talent coming out of the financial crisis.”

Raytheon Deal

RBC has already landed some transactions with larger companies this year, including lead adviser to Raytheon Co. on a $1.9 billion deal to create a cybersecurity company. It also helped arrange a $10 billion bond sale for Kraft Heinz Co. and underwrite a stock sale for American Tower Corp.

Royal Bank has a long way to go before displacing firms such as Goldman Sachs Group and JPMorgan Chase & Co. RBC estimates it has a 2.2 percent market share for deals involving large-cap corporations, up from 1.6 percent in 2010.

“As Royal bumps up against the larger bulge-bracket firms it becomes more and more difficult,” Aiken said. “If they’re successful it’ll open up another avenue for growth.”

Shares of Royal Bank have fallen 5 percent this year, compared with the 5.8 percent decline of the eight-company Standard & Poor’s/TSX Commercial Banks index. The 24-company KBW Bank Index of U.S. lenders has risen 5.5 percent.

‘Mixed Blessing’

RBC averages about a 3 percent to 3.25 percent share across investment banking, Fleming said, which he hopes to increase by capturing bigger deals from larger clients.

“There’s nothing wrong with being a mid-market bank,” Chris Kotowski, an analyst at Oppenheimer & Co. in New York, said in a phone interview, adding that serving larger companies may be a more commoditized, lower-return business. “It’s a mixed blessing to be at the top of the league tables.”

RBC’s top 10 ambition was a tall order in 2010. The firm’s mergers-and-acquisitions advisory business had a 1.4 percent market share for the prior year, ranked 13th for arranging U.S. stock sales and held 0.6 percent of the market for managing corporate bond sales.

RBC has since cracked the upper ranks for arranging U.S. equity financings and corporate bond sales, with only the goal of reaching that level for advising on U.S. takeovers still eluding the firm.

Different Level

“Royal is not a brand name in U.S. M&A yet,” Barclays’s Aiken said. “Right now, they’re building the foundation. M&A is what you strive for, but you can’t just get M&A.”

RBC ranked 20th in the first half of this year for advising on announced acquisitions involving a U.S. company, with 2.5 percent share based on aggregate deal size, according data compiled by Bloomberg. Last year the firm was 14th with 4 percent of deals, an improvement from 2009 when it was 23rd, the data show.

“Versus five years ago, the transactions and clients that we have are at a different level and scope,” Vito Sperduto, who oversees U.S. mergers and acquisitions, said in an interview, noting he’s seeing more growth coming from larger firms now willing to hire the Canadian firm. “We’re getting many more at bats today than we were historically.”

RBC ranks 10th for arranging U.S. equity offerings with 2.9 percent market share in the first six months of this year, the data show. The firm cracked the top 10 for the first time last year with a 3.6 percent share, up from 0.9 percent in 2009.

On U.S. corporate bond issuance, RBC is 11th in the first half with 3.2 percent of the $948 trillion market, improving on its 2.8 percent market share for all of 2014. The firm, which ranked 16th in 2009, first joined the ranks of the 10 largest U.S. debt underwriters in 2013.

“Market share, revenue and, importantly, profitability are the primary drivers,” Fleming said. “If we move up by rankings as a part of that, so much the better.”

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