Skip to main content

Canadian bank headquarters on Bay Street in Toronto.Brent Lewin/Bloomberg

Foreign competitors are losing ground in the highly lucrative fixed-income market in Canada, with the big domestic bank-owned dealers increasingly asserting their dominance.

Canadian banks already face little competition in the fixed-income market as the independent dealers are largely absent. Commissions for underwriting bond deals are much lower than equity deals, but volumes are exponentially greater. The trading side of the business, too, can be extremely valuable. In the recently released third-quarter results, fixed-income trading was a big reason for a sizable bump in profits across the capital markets arms of the Canadian banks.

"Non-Canadian banks have stepped back from the [fixed-income] market," Peter Kane, a consultant with U.S. research firm Greenwich Associates, wrote in a report released last week. "To some extent, this can be seen as just another cyclical pullback that seems to happen every five to 10 years."

Earlier this year, Greenwich talked to more than 100 institutional investors to find out which fixed-income dealers they ranked the highest. Greenwich asked the buy side to rate brokers in terms of their trading prowess, the value of their research, and the quality of their sales team.

RBC Dominion Securities Inc. came out on top but "fought off intense competition" from BMO Nesbitt Burns Inc. and TD Securities Inc., which were statistically deadlocked in second place. Scotia Capital Inc., National Bank Financial Inc., and Desjardins Securities jointly finished third.

One area of dominance for RBC was in the underwriting of new corporate bond issues. Year to date, RBC has almost 25-per-cent market share (excluding self-led deals), according to Bloomberg data. BMO is in second place, with a little under 21 per cent. Merrill Lynch, the highest-ranked non-Canadian dealer, had 4-per-cent share.

Global investment banks have always swum in a slightly different pool than Canadian dealers. The Big Six Canadian bank-owned dealers control much of the domestic bond market. Global firms, like Goldman Sachs by contrast, have an edge in dealing non-Canadian fixed-income products to a large institutional investor such as a Canadian pension fund, which has a mandate to invest globally.

In an interview, Mr. Kane said a major reason that foreign dealers like Barclays, Merrill Lynch and Credit Suisse are losing market share to domestic banks is owing to a "modest scaling back" in their operations in Canada, necessitated by the need to cut costs.

"Regulation and capital requirements mean that [non-Canadian dealers] need to pull back their expenses, and one of their expenses is having an office in Canada," he said.

Jim Byrd, head of fixed income and currencies for Canada with RBC, said in an interview that he wasn't surprised that foreign dealers have been paring back their ambitions in Canada.

"I don't think it's a Canadian phenomenon by any stretch in terms of foreign banks stepping back to their core markets and their core competencies. You see that in every market around the world and every product," he said.

"Banks are being forced, due to capital constraints or potentially regulatory constraints, to make tough decisions about what businesses they want to be involved in," he added.

New regulation brought in worldwide in the aftermath of the great financial crisis has also resulted in subtle changes in the functioning of the entire bond market. Banks are no longer allowed to have as much capital tied up in fixed-income inventory, a measure that was introduced to mitigate risk to the financial system.

In practical terms, that means banks hold fewer bonds on their balance sheets than before the crisis. But that also means liquidity has been reduced in certain segments, which can have the unintended effect of actually increasing risk.

"There definitely has been a change in the level of liquidity in the marketplace," Mr. Byrd said. "Especially when you talk about off-the-run securities and less-liquid issues."

Report an editorial error

Report a technical issue

Editorial code of conduct

Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:15pm EDT.

SymbolName% changeLast
BMO-T
Bank of Montreal
+1.13%132.25
BNS-T
Bank of Nova Scotia
+0.94%70.07
CM-T
Canadian Imperial Bank of Commerce
+1.13%68.67
GS-N
Goldman Sachs Group
+0.59%417.69
NA-T
National Bank of Canada
-0.45%114.06
RY-N
Royal Bank of Canada
+0.48%100.88
RY-T
Royal Bank of Canada
+0.29%136.62
TD-T
Toronto-Dominion Bank
-0.63%81.75

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe