Big banks, small dealers and the growing underwriting divide

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Bank-owned dealers appear to be pulling even further ahead of smaller brokers in the race for lucrative underwriting business. At least when viewed through a multiyear lens.

The Investment Industry Association of Canada (IIAC), an industry advocacy group for the independent dealers, noted the inexorable rise of the integrated (bank-owned) dealers, in a letter released Thursday. The share of new equity issuance in 2015 by bank-owned dealers was 73 per cent, according to IIAC. Five years ago, it was running at under 60 per cent. Independents saw their share fall to just under 27 per cent from 41 per cent in the same period.

A common refrain voiced by the independent broker-dealers in Canada is that it's getting harder to compete against the big bank-owned dealers, which have the ability to forge multitiered relationships with clients through their lending arms.

Some executives at boutique firms like to grumble about tied selling – in which bank-owned dealers gain underwriting business as a quid pro quo for cheap corporate loans. But when pressed for evidence that this is happening, they can't produce it.

There is plenty of evidence, however, of banks getting more powerful in equity underwriting over time at the expense of their boutique brethren for other reasons.

IIAC CEO Ian Russell put the multiyear shift down to the "greater incidence of large corporate financings" and "successful penetration by the integrated firms into the mid-cap underwriting market.

The trend of large corporate financings has become even more pronounced in 2016. Year-to-date, $31.4-billion in secondary financings have been announced in Canada, according to Bloomberg data. Five of those have been more than $1-billion. Eleven have been more half a billion. Independents are not seeing much of this action.

When Suncor Energy Inc. raised $2.9-billion in a new stock issue in June, more than $93-million in fees was divvied among Canadian bank-owned dealers, arms of global dealers and only one independent, AltaCorp Capital Inc., which is minority-owned by lender ATB Financial. Not one traditional national independent investment bank was in the syndicate, despite their slant towards commodities, historical expertise in the sector and a few of them actually being headquartered in Calgary. If large is the new normal in underwriting, that doesn't bode well for the independents.

Even more worrying perhaps is the integrated firms moving down the "corporate food chain" as IIAC put it. And it's not just in underwriting.

"In the past year or so, the integrated firms have also competed aggressively for corporate advisory work, particularly for mid-cap business in the energy sector," IIAC notes.

Advisory work can be even more lucrative than underwriting. A mergers and acquisitions (M&A) advisory fee is usually based on the percentage of the value of the business sold, and often times that's split with only one other bank, as opposed to with reams of banks in an equity-underwriting syndicate.

Encouragingly for the boutiques, IIAC points out that they are doing many things right – including aggressively cutting costs, slimming operations where appropriate and honing in on areas where they have a competitive edge, including "effective research on mid-cap companies" and "strong institutional and corporate relationships."