RBC Boosts Mideast Wealth Fund Assets by 20% on Risk Profile

A Royal Bank of Canada executive said the cash, stocks, bonds and other assets it holds on behalf of Middle East sovereign-wealth funds rose by 20 percent in 2012 as the investment pools diversify away from riskier lenders.

Cormac Sheedy, senior executive officer for the Middle East and Africa at the bank’s RBC Investor Services Trust unit, said the firm stepped up its efforts in 2012 to compete with London and New York-based banks such as HSBC Holdings Plc, State Street Corp., JPMorgan Chase & Co. and Bank of New York Mellon Corp. that traditionally dominated custodian services in the region.

“Since the financial crisis, a lot of institutions have been looking at risk,” Sheedy said in an interview in Dubai today. “We’ve seen, particularly in the past 12 to 18 months, a big move by sovereign-wealth funds, who are worried about all aspects of risk, to diversify the custodian aspect.”

Royal Bank, based in Toronto, is among Canadian lenders that have reached Basel III capital requirements six years before the deadline set by global regulators. Canadian banks have been ranked the world’s soundest for five straight years by the Geneva-based World Economic Forum, and held four of the top 10 spots in Bloomberg Markets magazine’s May 2012 ranking of the world’s strongest banks.

Basel III

Standard & Poor’s affirmed its AA- rating on Royal Bank on Dec. 14, the fourth-highest grade. HSBC, Europe’s biggest bank, was cut to AA- from AA by Fitch Ratings on Dec. 7 as the lender prepares for stiffer regulation and additional compliance costs.

Royal Bank has had sovereign-wealth fund clients in the Middle East for at least 10 years. The Canadian lender is the custodian for about C$2.8 trillion ($2.84 trillion) of assets globally, Sheedy said. He wouldn’t disclose the proportion of that figure that derives from the Middle East.

Canadian banks have to hold a higher level of capital than mandated by international standards, putting them in better shape than those in other nations that struggled to meet the Jan. 1 deadline for starting to apply the revised Basel rules. Basel III was drawn up by global regulators to prevent a repeat of the financial crisis that followed the collapse of Lehman Brothers Holdings Inc.

The Middle East is home to some of the world’s largest wealth funds, buoyed by proceeds from the region’s oil reserves. In the United Arab Emirates alone, the Abu Dhabi Investment Authority, the country’s largest wealth fund, had assets valued at $328 billion at the end of 2008, according to economists at the New York-based Council on Foreign Relations.

“There is a continual flight to quality in the sovereign-wealth fund space,” Sheedy said. “We are very fortunate at RBC that we are highly rated by the rating agencies and that Canadian banks are extremely conservative. The banks in Canada weren’t allowed to enter into the kind of transactions that some of the banks in Europe were. On the back of that, our custody business is growing very well in the region.”

Royal Bank fell 0.1 percent to C$60.88 at 4 p.m. in Toronto. The shares rose 15 percent last year.

(Updates with closing share price in last paragraph.)
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