Canadian Banks Post Trading Declines on Bond Rout, Adjustments

Four of Canada’s six biggest banks have posted quarterly declines in trading, dragged down by plunging bond markets in October and one-time changes to how lenders value uncollaterized derivatives.

Toronto-Dominion Bank’s trading revenue dropped 14 percent to C$296 million ($260 million) in the period ended Oct. 31 from a year earlier, led by declines in interest-rate and credit trading, the company said today. The lender recorded a C$65 million pretax charge in its wholesale bank tied to the valuation adjustment.

Royal Bank of Canada, Bank of Montreal and Canadian Imperial Bank of Commerce also saw profit at their capital markets business decline as interest-rate and credit-trading revenue fell. Bank of Nova Scotia and National Bank of Canada are scheduled to report fiscal fourth-quarter results tomorrow.

“All of the banks took a new reserve charge in the business this year, the implementation of funding valuation adjustments, and that affected some of the trading numbers,” Toronto-Dominion Chief Financial Officer Colleen Johnston said in a phone interview.

Stock and credit markets fell and interest rates dropped in the first two weeks of October amid concerns that global growth was slowing. Markets rebounded and volatility waned in the second half of the month.

‘Localized’ Event

“The market dropped, most of the market participants moved to the sidelines for a considerable period of time,” Bank of Montreal Chief Executive Officer William Downe said in a Dec. 2 interview. “I see that as an event that was localized around a market move from which the markets have recovered.”

Bank of Montreal trading revenue tumbled 21 percent to C$186 million as fixed-income trading plunged 79 percent from a year earlier, the bank said in a Dec. 2 statement. The valuation adjustment reduced revenue by C$39 million.

“There’s no question the volume in fixed-income trading across the world has come down and we, and everyone else, have rationalized our expense base on that business to match the business opportunity,” Downe said.

CIBC trading revenue fell 81 percent to C$27 million, with a C$98 million loss in interest-rates trading, the Toronto-based bank said today in a statement. The lender said it recorded an C$82 million after-tax charge tied to funding valuation adjustments.

Trimming Capital

Royal Bank’s total trading revenue slid 43 percent to C$371 million, fueled by a 70 percent drop in trading of interest-rate and credit securities, the Toronto-based bank said yesterday. Royal Bank had a C$51 million after-tax charge tied to the adjustments.

Royal Bank has been trimming the capital devoted to bond trading as global regulations meant to prevent another credit crisis make it one of the lender’s most costly businesses, CFO Janice Fukakusa said.

“It’s mostly taking risk out, which takes capital out,” Fukakusa said yesterday in an interview at Bloomberg LP’s Toronto office. “You can use that capital in another business more profitably.”

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