National Bank says no-commission trades years in the works to build up client base

A National Bank sign is seen May 30, 2016 in Montreal. Paul Chiasson/The Canadian Press

National Bank of Canada says no-commission trading at its direct brokerage was years in the works as part of an effort to increase its client base.

“This is not a brain cramp that happened this summer. We’ve been getting ready for this for many years,” said Martin Gagnon, executive vice-president of Wealth Management on the bank’s earning call Wednesday.

National Bank announced earlier this week that it had eliminated commissions on online trades for stocks, exchange-traded funds, and options at its direct brokerage division, the first big Canadian bank-backed operator to do so.

“The objective is very simple,” said Gagnon. “It’s to increase our client base. We know exactly how many clients we need to have to make up the loss in revenues.

“And we currently estimate that we will achieve this as revenue accretion in fiscal 2022.”

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Eliminating commissions puts “a relatively small” amount of revenue at risk for a chance to grow what is currently a relatively small market share, said Gagnon.

National Bank has slowly been cutting back its revenue from trades, Gagnon noted, being the first in Canada to cut commissions on ETFs in 2016 and offering $0.95 trades for active traders before the announcement. Standard commissions at the bank were $6.95 a trade before this week.

No-commission trading has become more common in the United States following the launch of the Robinhood trading app in 2013, while Charles Schwab and TD Ameritrade cut commissions in 2019. In Canada, the option has been largely limited to a trading option through WealthSimple Inc.

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Other big Canadian banks have so far made no commitments to eliminate commissions, but some have been increasing options.

BMO launched zero trading commissions on more than 80 ETFs in the last quarter.

Joanna Rotenberg, head of BMO Wealth Management, said on the bank’s earning call Tuesday that trading commission revenues are not material at about two per cent of revenues for the division, and less than one per cent for overall bank revenues, but they would continue to look at options.

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“We are, of course, always monitoring and changing our offering to make sure we deliver the best experience for our clients and value to them.”

Neil McLaughlin, head of personal & commercial banking at RBC, said on the bank’s earnings call Wednesday that their trading options, which cost $9.95 per trade or $6.95 for more active clients, represents good value.

“The announcement this week was from a player who has a very, very small market share,” said McLaughlin. “As we look at, again, the focus on value for money for our customers, we feel there is good value in the RBC direct investing platform in terms of the tool sets we have there, the top tier research, one of the few to provide free streaming quotes.”

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Gagnon said National Bank would continue to work to disrupt the industry if it improves customer service.

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“There’s no hidden agenda here. We’re really happy to provide the standard bank offering at fintech pricing plus all the added benefit of plus all the added benefit of real quotes, real-time quotes, all the registered accounts and everything.”

The Montreal-based bank topped expectations Wednesday as it reported a third-quarter profit of $839 million, or $2.36 per diluted share for the quarter ended July 31, up from $602 million or $1.66 per diluted share a year ago.

Revenue totalled $2.3 billion, up from $2.0 billion in the same quarter last year.

The quarter included a $43-million reversal of its provisions for credit losses compared with a charge of $143 million a year ago.

National Bank’s adjusted profit for the quarter was $2.36 per diluted share, up from $1.66 per diluted share in the same quarter last year.

READ MORE: National Bank’s direct brokerage division goes ahead with no-commission trading

Analysts on average had expected a profit of $2.13 per share, according to financial market data firm Refinitiv.

National Bank said personal and commercial earned $330 million in its third quarter, up from $223 million in the same quarter last year, helped by an increase in total revenues and lower provisions for credit losses.

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Wealth management earned $165 million in the quarter, up from $127 million a year ago, while National Bank’s financial markets business earned $227 million compared with $188 million in the same quarter last year.

The bank’s U.S. specialty finance and international operations earned $161 million in the quarter, up from $87 million a year ago.

Under the other heading, National Bank reported a loss of $44 million in the quarter compared with a loss of $23 million in the same quarter last year.

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