Q&A: RBC's Gordon Nixon

RBC's CEO on Canada's financial industry.

He has spent his entire career in banking. He started at Dominion Securities, then moved on to Royal Bank of Canada when it acquired DS in 1987. He became RBC’s CEO in August 2001, and is the current chair of the Canadian Council of Chief Executives. With nearly 30 years of experience, including six running Canada’s largest bank, the man knows the sector inside out. Nixon has plenty to say on the topics of the competitiveness of Canada’s financial services industry, where to find opportunities in the current market, and bank mergers and competition policy. He spoke about these issues, and others, with U.S.-based contributor Rachel Pulfer.

When I’m talking to Wall Street contacts, RBC often comes up as one of the most aggressive, innovative Canadian banks. How have you earned that reputation?

We are the largest bank in the country. Our capital markets business in New York is very strong. We have been a lead player on the financing side as well as the advisory side of a couple of big global infrastructure transactions. We’ve worked on large projects in British rail and the Airports Authority.

For a while, it seemed as though all the banks were waiting for direction on the merger issue.

You can’t sit back and run your business waiting for a potential policy shift. We made it very clear to the marketplace that we weren’t going to withhold investing for growth. All the banks have done that, but perhaps we have been slightly more aggressive than some — because of our size and scale, we’ve been more forward-looking.

Please flesh out what “forward-looking” means.

We’ve acquired Centura, and continued to make investments in smaller banks in the southeast part of the United States. On the capital markets side, RBC bought a small electronic trading company called Carlin and a specialty boutique called Daniels that focuses on the telecommunications space in the United States. On the global private banking side, we continue to make investments in the U.K., in particular in private banking trust services.

We really believe in the strength of the diversified model. There hasn’t been one large transaction of a significant amount of capital deployed.

How is RBC positioned in the U.S.?

We position ourselves as a leader in the mid-market — on the investment banking side. That’s where we have got the best competitive advantage.

You reported $1.4 billion in earnings in the most recent quarter, and analysts were not impressed with your capital markets investing strategy record. How would you respond to that criticism?

One has to be very careful not to react too strongly to quarterly earnings. You don’t run the bank for a quarterly earnings release. Our earnings were up 19%, and our shares have been very strong going into the announcement. If you look at today’s world, which is very different from where we were a month or two ago, the cap market business is going to be very closely scrutinized by the investment analysts. And it should be, because we are going through a tumultuous time.

Some markets are going to go very quiet over the next few months. There will be less leveraged buyout financing over the next six months. But the flip side is, as the system has been flushed, the return on credit is going to go up, and the return on assets for a business like ours — a strong, solid banking provider — should increase.

From this turmoil will come opportunity — and we will be well positioned to take advantage of those opportunities.

The most recent OECD report on Canada called for greater liberalization of financial services and more foreign players. What do you say to that?

We have a heavily regulated financial services sector, and there are controls around ownership, but there’s nothing that prevents a foreign bank coming in and competing directly head-to-head with our banks. You’ve seen it in some of the niche markets such as ING Direct coming in and providing the Internet capability — this is a fiercely competitive marketplace. But yes, it is difficult for new entrants to come up, given the efficiency of the Canadian banks.

You can’t look at the control of ownership issue without looking at the issue of mergers. Our view on mergers is that the government should allow the regulatory rules as opposed to letting the politics dictate consolidation. Most economists would argue that consolidation should be allowed to occur, but the flip side of that is also more openness with respect to the ability of foreign companies to play in this realm.