Why Canadian banks are racking up trading wins

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The first-quarter reporting season for the Big Six banks hasn't concluded yet – five down, one to go – but an interesting trend has emerged. Banks are killing it on trading.

Royal Bank of Canada reported trading revenue of $855-million in the first quarter, a near-17 per cent leap over the first quarter of 2014. It's also up a whopping 118 per cent over the fourth quarter, but that was an unusual quarter because trading revenue was affected by changes associated with compliance to the U.S.' so-called 'Volcker rule' on proprietary trading.

For Canadian Imperial Bank of Commerce, the gain in first quarter revenue was more muted, at 12.4 per cent (and up 40 per cent over the fourth quarter) – but revenue of $299-million was the highest for any quarter over the past two years. For Bank of Montreal, trading revenue rose 10 per cent, beating some expectations.

Clearly, the trend is up – or is it? The problem with trading revenue is that it can be a notoriously volatile number from quarter to quarter because activity is at the whim of the market. When the stock or bond markets are hopping, trading activity tends to follow.

And markets have been hopping. By the end of December, the S&P 500 had recovered 12 per cent from an autumn near-correction. The daily moves were even more impressive. The benchmark index rose or fell by 1 per cent or more an astounding 13 times in December and January.

As for fixed income, the yield on the 10-year U.S. Treasury bond slid from 2.4 per cent in November to just 1.64 per cent at the end of January as the Federal Reserve wound down its bond-buying program and investors grew worried about the prospects for the U.S. economy. At the same time, currency markets have gone haywire.

But no one knows how markets are going to perform in the quarters ahead, which is why banks don't get much credit for the better-than-expected trading revenue.

Indeed, impressive numbers are often dismissed by analysts as "noise" that is hard to build into their forecasting models. Though trading revenue has stood out in the banks' quarterly reports, the numbers didn't attract much attention from analysts during earnings conference calls.

Robert Sedran, an analyst at CIBC World Markets, said in a note that RBC's trading revenue was encouraging but added that he was disinclined to follow the first quarter revenues higher – meaning that he was leaving his targets for trading revenue unchanged.