Business people are seen at the intersection of King and Bay Streets in Toronto on Oct. 15, 2014.Kevin Van Paassen/The Globe and Mail
A global rout in commodity prices is hurting Canada's largest independent investment banks. Again.
Since the end of August, the price of copper has fallen 5 per cent, gold has slumped 10 per cent and the benchmark North American energy price is down nearly 20 per cent.
Over the same period, shares of both GMP Capital Inc. and Canaccord Genuity Group Inc. have dropped roughly 25 per cent.
Such a sharp correction – which is eating into their 2014 recovery – has to be frustrating for investors and management, considering both firms reported respectable earnings this week.
So far, Canaccord's net income over the first six months of its fiscal year has more than quadrupled to $36.5-million, while GMP's profit in the first nine months of its own fiscal year has soared to $21-million, up from just $4-million during the previous equivalent period.
But investors are always forward looking, and some will say that better profits have stemmed from a handful of major deals – such as Scotiabank's $2.6-billion bought deal for its stake in CI Financial Corp. or Amaya Gaming Corp.'s $5-billion takeover – as proof that, just below the surface, business is still spotty.
And both firms reported earnings for quarters that ended September 30. It wasn't until October when market really went on the fritz.
To stabilize their earnings, GMP and Canaccord have spent considerable money diversifying their business, by geography and by business line. Both firms are hoping to build out their wealth management platforms; GMP is building an energy business in Houston; Canaccord has significant capital markets operations in London and New York.
On this front, Canaccord is a few steps ahead. Breaking down its investment banking revenues – where fees have more than doubled this fiscal year – roughly 60 per cent of them come from outside Canada's borders.
Canaccord also has better diversity of revenues, with more exposure to sectors such as technology. GMP, meanwhile, gets 20 per cent of its total revenues from energy investment banking.
On a conference call Friday, GMP head Harris Fricker did not shy away from the weakness in the energy market and its effect on the firm's profits. But he wasn't full of doom and gloom, either.
"We think as you get price stability, you will see a reboot on the [energy] underwriting side," he said. However, he added, "there's no question that in terms of the pipeline, it is certainly leaning more toward M&A."
While its profits are a fraction of Canaccord's, GMP has proven capable of hanging in even when the market is tough, in large part because it snags large chunks of big financings, such as the latest bought deal by Lundin Mining Corp.
Tim Kiladze