People walking south on Bay St. as the end of another working day draws near on March 30, 2015. Back in their boom times, independent investment banks were happy when banks focused on lending to established companies because that allowed them to service junior resource clients that the Big Six had never even heard of.Fred Lum/The Globe and Mail
The future for some of Canada's independent investment banks has been so grim for so long, they feel like everyone is out to get them.
Considering it's so ugly out there – GMP Capital Trust reported an $8.9-million quarterly loss last week, its second in a row – the depths of this frustration shouldn't surprise anyone. But before independents wallow in their self-pity for too long, they had better remember that much of this pain is self-inflicted. Their rivals are playing hardball, that's for sure – but they've also made missteps of their own.
Meanwhile, the Big Six banks are building ever stronger relationships with clients that once gave the independents a lot more work than they currently do. According to critics, the banks use their massive balance sheets to extend credit to companies, and in an era of rock-bottom interest rates, corporations are often happy to sign sizable lending agreements worth hundreds of millions, if not billions, of dollars. But these corporate loans aren't that attractive to the banks in themselves – they simply serve as a foot in the door. Once the agreements are signed, investment bankers at the Big Six lenders are expected to parlay the relationships into something much more profitable.
The better returns can come in many forms – maybe from underwriting a share offering, or advising on an acquisition. Whatever the form, investment bankers privately admit they would be out of a job if they couldn't deliver better returns on capital than those provided by the measly corporate loans. Low interest rates are great for borrowers, but bad for lenders.
This is where independents get restless, and the fruits of the banks' labour is being laid bare this year. Since January, Canada has seen some of its largest energy bought deals since the financial crisis, and yet the independents' share of their proceeds remains small.
One option for disgruntled observers of the Big Six's rise is to petition the Competition Bureau to intervene. But even if they spoke up and years down the road got a ruling against the banks, it wouldn't be a panacea for all the problems the financial services industry faces. Remedying those problems is what independents should be focusing on.
More than anything, their woes stem from the ugly state of resource prices, a slump that has completely rewritten their playbooks. Back in their boom times, independents were happy when banks focused on lending to established companies because that allowed them to service junior resource clients that the Big Six had never even heard of. Independents didn't complain when they were making money hand over fist before the financial crisis, or for that matter, in 2010.
Nor is it the banks' fault that high-frequency traders have disrupted the way shares trade hands, decimating independents geared toward trading commissions for junior resource stocks. Believe me, the banks wish they could rewind the clock to better days when they could make five cents a share for simply acting as a market maker.
Add to that the growing propensity of companies to borrow instead of issuing shares, as well as the emergence of venture capital firms that seed hot startups in sectors such as technology and health care, crowding out smaller investment banks, and the pool of clients available to independents dries up pretty quickly.
There's nobody who would love to see a competition case brought against the banks more than me. Not that I care who wins – I'm a journalist, and journalists love good copy. But rather than hope for governmental (or divine) intervention, independents are better off rethinking their business strategies. Times change. They should, too.
Tim Kiladze