BLC's pruning an example of how to stay competitive

Growing competitive pressures on the Street have some investment dealers calling uncle, and walking away from unprofitable operations.

BLC Securities, the investment banking arm of Laurentian Bank, started building a full-service institutional brokerage operation in the past two years. Moving from a base in Montreal, the firm opened Toronto offices that featured a relatively deep commitment to equity sales, trading and research.

In recent months, BLC Securities has seen a new chief executive officer appointed, with Charles Murphy taking the top job after spending most of his career in fixed income. With new leadership came a new focus.

Mr. Murphy said BLC Securities has carved out a solid business as an underwriter and trader of small- to mid-cap stocks. "We've done well developing a niche in small to mid-caps, we've done deals in areas such as technology and biotech, and the profit numbers are certainly there for us."

But when it came to winning a share of large-cap stock action, Mr. Murphy said he couldn't see a role for his shop. And he said looking forward, all he could see was a future that featured intensifying competition with larger Canadian dealers, plus European and U.S. shops.

"Previously, we were trying to be a part of the big picture," he said. "But it's just not worth trying to get a piece of a deal for someone like BCE, or other big stocks. In fact, it's almost impossible."

At investment dealers, when there is a change in strategic direction, bodies go over the side. Last week, Mr. Murphy said goodbye to four professionals in BLC Securities' Toronto office -- two analysts, a senior member of the equity desk and a corporate financier. As part of the same shift, two other senior professionals left the dealer three months ago.

Coming out of these cuts, BLC Securities keeps a focused team in Toronto, with research coverage of resource stocks and special situations, backed by scaled-down sales and trading. The firm also has tech analysts in Montreal. The total head count at BLC Securities is 276, with roughly 130 of that number made up of retail stock brokers. At this size, the firm ranks among the smallest of Canada's bank-owned dealers.

The process that's just played out at BLC Securities is part of the gardening that should take place regularly in any well-run business: Executives look at the prospects for different divisions and prune where necessary.

But an eight-year bull market allows investment dealers a bit of strategic indulgence. There are business lines in many shops that aren't supported by their returns. The garden is overgrown.

Global competition is only going to get tougher, and the profits of Canadian equity and fixed-income operations remain below the record levels seen in recent years. Given this state of affairs, expect to see other dealers making cuts similar to what played out at BLC Securities last week. Rumour surfing Before jumping into the latest rumours of which Canadian bank is doing what with who, let's pause for a moment and consider where things stand.

First off, the banks are about to be reregulated by legislation that comes down in a few months time, barring an election. We know the Finance Minister takes a dim view of sweeping changes in advance of the new rules.

A bank CEO would take huge risks by changing his institution's capital structure in advance of Ottawa's blessing -- such moves may well take the bank out of an attractive merger play. And bank CEOs are not known as roll-the-dice guys.

What we do have in the market is folks trading stocks on momentum. If speculative stories can move banks stocks by a buck or two, these traders are glad to pass on whatever tales they can dream up.

Given this backdrop, don't put a lot of faith in this week's set of rumours, which include CIBC buying Lehman Brothers -- the U.S. firm is too big for CIBC -- or Royal Bank selling its wealth management division to Salomon Smith Barney, or Toronto-Dominion Bank moving TD Securities and/or TD Waterhouse to Morgan Stanley and/or Goldman Sachs. There's a new era coming in financial services, but the monster deals are still months away. Euromoney rankings Each year, Euromoney magazine hands out awards for what it preceives as excellence in the capital market. There's as much art as science in the selection process, and it's interesting to note what a British-based publication sees as the most important developments in our market.

Last year, Euromoney seemed to give a great deal of weight to advisory roles in London-based conglomerate British American Tobacco's dismantling of Imasco, plus the airline merger battle. RBC Dominion Securities and Goldman Sachs were central players in both dramas, and both fared well in the survey.

On the fixed income front, Merill Lynch got kudos for innovative work in mortgage-backed securities. Here are the full rankings:

Best domestic bank -- Toronto-Dominion Bank

Best domestic equities house -- RBC Dominion Securities

Best foreign equities house -- Goldman Sachs

Best domestic bond house -- CIBC World Markets

Best foreign bond house -- Merrill Lynch

Best domestic M&A shop -- RBC Dominion Securities

Best foreign M&A shop -- Goldman Sachs

Looking abroad, Euromoney voted TD Securities as the best foreign bond shop in the U.S. market. Globally, Deutsche Bank was honoured as best bank, while Morgan Stanley got the nod as the top investment dealer.

Those who want more information on the rankings can find the survey on http://www.euromoney.com .