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The Canadian Investment Banking Market Debriefed

A look into the different players that dominate the investment banking landscape in Canada

14 Mar, 2012 7:49

Written by Magid Awad

2012 is going to be a busy year for Canadian firms. According to a survey conducted by PWC released in late February, CEOs have a bold agenda for this upcoming year, with 66% of them anticipating changes to their companies’ strategies. Plans include the use of traditional M&A, restructuring, joint ventures, and strategic alliances as tools to yield growth.  According to the report, 25% of Canadian companies plan to engage in M&A activity, compared to a global average of 12%.

The aforementioned statistics reflect Canada’s growing presence in the global M&A market. In fact, in 2011 Canada represented 10% of global M&A deals by value, up from the previous high of 7% back in 2007. With the makings of a transformative deal execution environment in Canada, it’s important to assess the domestic investment banks that stand to profit:

The Players:

RBC Capital Markets—the investment banking arm of the Royal Bank of Canada—is by far the largest player among the Canadian firms. RBC has total assets of $655 billion, and of its net revenues, their Capital Markets division represent 21.3%, or $5.9 billion. RBC ranks near the top in almost all areas as seen by the chart below:

It is clear that RBC has a firm footing in many of the different product areas accross the Canadian market; in Canadian Corporates Debt Underwriting, they have maintained the number 1 ranking for nearly 10 years. On a global level, RBC has done quite well this past year, ranking 11^thon Thomson Financial Investment Banking Fee League Table  in 2011.

BMO Capital Markets has had a great year in 2011. According to Thomson Reuters estimates, the firm had a 21% increase in fees in 2011, in great contrast to the average global 6% decrease. Additionally, BMO Capital Markets has been named the World’s Best Metals and Mining Investment Bank by Global Finance Magazine for a second year in a row. This reputation is reflected by their position as leading equity underwriter by market share in the North American Mining industry:

Notable activity in 2011 included BMO’s position as Lead Underwriter in Franco-Nevada Corp.’s $340 million equity issuance, done on a bought deal basis.

TD Securities, the investment banking division of TD Bank Group, is another dominant player in the Canadian market, and is the second largest domestic bank by assets, with $557.2 billion. Their Investment Banking and Capital Market operations represent 7.94% of their net revenue this past year, or $1.73 billion. Below is a quick overview of where TD Securities ranks in the major product segments:

As an equity underwriter, TD increased their standing in the Canadian market dramatically, as the total volume of arranged offerings increased from $3.2 billion in 2010 to almost $6 billion in 2011, propelling them to become the top Canadian equity underwriter this past year. This was the first time they topped industry-wide equity sales, dethroning RBC Capital Markets, which claimed the top spot in 4 of the past 5 years. Some of the deals that helped TD climb the rankings included their co-leading of Intact Financial Corp.’s $962 million offering, and their involvement in Lone Pine Resources Inc.’s $195 million IPO in late May 2011.

Desjardins Securities is a smaller player in terms of overall investment banking business, but it is growing, and has consistently been able to maintain a strong presence in the Quebec market. They participated in more than 150 new bond issuances in 2010, ranked as the 8^th largest underwriter of fixed income securities in Canada in 2011, and over the past 3 years have consistently been ranked among the top 3 debt underwriters in the Quebec market.

Notable deals this past year include their position as Co-leader in a syndicate of underwriters that entered in an agreement with Homburg Canada Real Estate Investment Trust to purchase 9.65 million “units” on a bought deal basis at a price of $11.40/unit.

As the Capital Markets division is in high growth phase, Desjardins has acquired a strong team of top talent individuals to spur growth in that business segment, which resulted in a relatively top-heavy employee structure when compared to other banks. Notable hires include Martin Labrecque, the current Managing Director of Fixed Income Sales, who joined Desjardins in 2006 after working for J.P. Morgan’s Fixed Income desk for several years. Additionally, Pierre Morin, Managing Director and Head of Fixed Income, joined Desjardins in 2006 after his time with Goldman Sachs in Toronto, and Antoine Avril joined in 2010 as the Managing Director of Corporate Banking with several years of experience in London working for Deutsche Bank.

For CIBC World Markets, the wholesale banking arm of CIBC, the big story in 2011 was the fact that it ousted Goldman Sachs & Co. to become this past year’s Canadian M&A leader. CIBC advised and worked on 38 lucrative deals, including advising Equinox Minerals Ltd. on its sale to Barrick Gold Corp. The top M&A dealers in the Canadian 2011 market are listed below:

Scotiabank’s Global Banking & Markets, the investment banking division of Bank of Nova Scotia, accounted for 16.5% of the banks net revenues this past fiscal year. It maintains a strong presence in the Canadian Corporate Bond market, ranking in 3^rd with a market share of 15.7% in 2011. In regards to equity underwriting, it lags the main five banks for 2011, but not by much, as the difference between 5^th and 3^rdplace for in 2011 is only 0.7%. Overall, Scotia maintains a solid position in the Canadian investment banking industry, consistently ranking in the top 5 across product categories.

Investment Banking Business Outlook:

Globally, there is cautious optimism for M&A activity this year. According to Bloomberg’s Global M&A Outlook poll, experts cite “weak economic growth and sovereign debt issues as significant potential obstacles to deal making in the coming year.” However, attractive stock valuations and huge cash stock piles present an opportunity; with inflation in Canada and the US hitting 2.3% and 2.9% respectively in January, much higher than the low returns offered in liquid low risk securities, North American companies definitely have an incentive to invest. In Canada, high commodity prices and record levels of liquidity on balance sheets could prove to be a catalyst for domestic firms to engage in M&A, especially out west, as large energy firms strive to improve their competitive advantage by acquiring smaller, more specialized companies.

It is also very important to consider the US market, as 45% of the Canadian CEO’s surveyed in PWC’s Annual Global CEO Survey said they are looking outside of Canada. According to the Bloomberg 2011 Annual Mergers & Acquisitions Legal Advisory Rankings, the “concern about sovereign debt was identified by about 25 percent of survey respondents as the biggest obstacle [to deal making].” However, recent developments in Europe, though not a silver bullet, have seemed to calm the highly volatile markets. Increasingly, it seems as though investors are less worried about the extent to which the US economy is exposed to Europe; according to economist Paul Krugman, total US exports of goods to Europe is just 2% of GDP, or 2.5% including services, so a sharp fall in exports to Europe would be only a small hit to demand. As for the other form of indirect exposure that is a concern, counterparty risk, the ECB’s vast liquidity injections via their longer-term refinancing operations, or LTRO, has allowed banks to plug their funding needs, and thus has greatly reduced—albeit not eliminated—the risk of a Lehman-style global liquidity crisis and credit crunch. The increasing divergence between the performance of the S&P 500 and the performance of the Bloomberg European 500 Index seems to reflect these statistics, and suggests that investors are beginning to recognize that the US economy is not as sensitive to Europe as thought before. With markets reflecting optimism over the main issue that was curbing M&A activity in 2011, 2012 offers an environment that fosters deal making in the US, and thus one that tailors well to Canadian firm’s international expansionary goals.

                         This graph reflects the de-coupling of the two indices over the course of the past year

With the aforementioned catalysts in Canada, and the market-reflected decreasing sensitivity to Europe, all signs point to a busy year for Canadian firms, and thus Canadian investment banks.