Canadian Banks Report Variable Q2 In Foreign Exchange Trading Gains

Canadian banks are reporting mixed results from their foreign exchange operations for fiscal 1995's first half compared with the same period of last year. In their second-quarter earnings releases the banks overall are showing slightly improved foreign exchange revenues over the first quarter of the year but their performance is generally weaker when compared with 1994's strong second-quarter results.

A weakening Canadian and U.S. dollar, as well as the indirect effect the Mexican financial crisis has had on its northern neighbours' currency markets, appears to have affected the major Canadian banks' forex operations differently and in varying degrees.

The Royal Bank of Canada reports second-quarter foreign exchange revenues of C$82 million, up from C$66 million in the year-ago second quarter and C$71 million in the first quarter. Forex revenues of C$153 million for this year's first half are C$12 million above its year-ago level. Higher trading volume in the bank's North American treasury operations was cited as a factor in the positive results by bank management.

RBC has recently expanded the range of treasury products it offers clients through its Singapore dealing centre to include interest-rate risk management instruments, forex options and other Canadian dollar derivatives (FXW, May 8).

Bank officials say the bank expects its Singapore-based treasury business to outgrow its corporate banking business there, activities which now account for about 40 per cent of RBC's revenues from the city state. RBC's Singapore branch employs a 35-strong trading team and 100 employees overall.

The Bank of Montreal (BMo) reports C$42 million in second-quarter foreign exchange gains, up from the C$40 million it earned last quarter and C$39 million a year ago. For 1995's first half, BMo's C$82 million in forex revenues is C$6 million above its 1994 first-half results. The bank's forward forex business was a particularly strong contributor to the positive results, according to bank officials, as was its Canadian currency market business. Phil Wilson, a senior vice president in the bank's treasury division, says that the bank has made across-the-board progress in foreign exchange recently, signs that the organisational changes it has made and its investments in personnel and infrastructure are paying off.

The bank recently merged the BMo and Harris Bank trading operations in Chicago and moved into a new dealing floor there (FXW, March 27). It is moving along a similar path in Toronto, where a new trading floor is being built that by year-end will house both BMo's trading staff as well as its investment dealer subsidiary Nesbitt Burns.

Wilson says BMo's Asian operations are reaching critical mass under the stewardship of Marc Vandal, who was transferred from Toronto, where he was managing director of Canadian and international foreign exchange, to Singapore to build up its staff and capabilities in the region (FXW, February 20). In February, the bank rehired Richard Koh as its chief dealer there, after he had moved to the Royal Bank of Canada last June.

The bank is also building up its forex options capabilities, an area in which "we were a little light on staff," according to Wilson. Dave Faller heads up BMo's forex options desk. "I'm satisfied that David will provide the leadership necessary to build that business for us," he says.

Canadian Imperial Bank of Commerce's (CIBC) foreign exchange and capital markets revenues totalled C$47 million for the second quarter, down C$7 million from the year-ago second quarter and C$20 million below its first quarter figure. For the first half, CIBC's forex and capital markets revenues of C$114 million is down C$17 from its first half 1994 level.

Toronto Dominion (TD) reports second-quarter forex revenues of C$13 million, C$2 million above its first-quarter results, but C$11 million below those from the second quarter of 1994. For the first half, TD's forex revenues total C$24 million, nearly 50 per cent down from the C$45 million it generated through the first half of 1994.

Robert Burgess has once again taken up a position as a manager of TD's global forex business after taking charge of its regional Canadian treasury operations and the commercial distribution of treasury products in Canada and Latin America earlier this year (FXW, May 1). The move was prompted by the departure of TD's head of global trading, John Schumacher (FXW, March 13). Schumacher's responsibilities have now been divided between Burgess and Donald Wright, who was hired in March to head money markets, fixed-income and repo trading at the bank and its securities arm.

National Bank of Canada (NBC) reports C$11.3 million in second-quarter foreign exchange revenues and C$22 million for the first half. This compares with C$11.7 million and C$21.1 million for the corresponding 1994 periods.

Martin Ouellet, vice president of treasury operations at NBC, says that the bank has seen good business flow from both its wholesale and retail forex business lines. Canadian exporters have been active in hedging their currency exposures recently and that has contributed to the bank's deal flow as well offering some support to a weakening Canadian dollar, he says.

In addition to its Canadian/U.S. dollar book, NBC runs books in dollar/mark and European crosses against the CAD. Forex forwards trading is also a strong contributor to the bank's bottom line, Ouellet adds, although the forwards market isn't quite as liquid as it once was.

The bank has implemented a Dollar-at-Risk (DaR) decision support system from New York-based systems developer Sailfish Systems which is proving useful in evaluating the risk/reward potential of its forex trading activities, particularly in the options area. "Our activity there is slowly increasing," he says. "We want this to be based primarily on customer business, although we do engage in some proprietary options trading as well."

As the DaR methodology takes into account correlations between currencies as well as prospective changes in volatility of particular currencies, using the system will help the bank manage its options-related risks in a better and more consistent fashion than has been possible in the past, Ouellet says.

The Bank of Nova Scotia (BNS) has posted a C$7 million loss on its foreign exchange and precious metals trading account for the second quarter. This compares with C$65 million for the year-ago quarter and C$46 million for 1995's first quarter. In the first half BNS generated only C$39 million, about one-third of the C$105 million in forex and precious metals revenue last year.

"We obviously had a poor second quarter," says John Nicholson, vice president and acting global head of foreign exchange. "We had a bullish view on the U.S. dollar, in particular against the yen, and obviously that moved against us and to a greater degree than we anticipated." He adds that BNS has taken its dollar/yen exposure down to zero and he anticipates the bank's third-quarter results will rebound strongly to their normal C$30-to-C$40 million dollar range. BNS has discussed moving its Asian trading hub from Tokyo to Singapore or Hong Kong, but no decision has been made as yet, according to Nicholson.