Where have all the good times gone?
In just eight months, the business of investment banking has gone from high-flying to just plain trying for bankers who make their living helping companies raise money or buy competitors. Last year started busy, but by August, business had dried up, as the Greek crisis and the U.S. debt-ceiling debate spooked executives and investors.
Add to that increased regulation in the wake of the financial crisis, and the result has been a decline in profits. Headaches, on the other hand, have increased.
The big question for those in charge at investment banks is whether 2012 will look more like the first half of 2011, or the second. So far, the answer is not the one they wanted to hear. Worldwide investment banking fees to date are down about 30 per cent from the same period a year ago, Thomson Reuters estimates, as volumes for every kind of transaction have slumped dramatically.
Amid all this gloom, Canada is looking pretty bright. The country's financial hub hasn't been spared the slowdown, but Bay Street is doing better than Wall Street in everything from stock sales to loans to bond underwriting.
For example, the volume of new stock sold by U.S. companies so far in 2012 is down 48 per cent, taking underwriting fees with it. The decline is only 10 per cent in Canada.
Mergers are down sharply on both sides of the border. But Canada is doing better there than the United States, and signals indicate a resurgence in deals in this country. In a PricewaterhouseCoopers study released Friday, a quarter of Canadian CEOs polled were planning a merger or acquisition, more than double the global average of 12 per cent. Merger bankers and lawyers too say their desks are starting to fill up with deals that clients are working on.
In that environment, Canadian firms are trimming staff, but it's nothing like the wholesale job cuts affecting New York and London. Banks ranging from UBS AG to Goldman Sachs Group Inc. culled their ranks mercilessly to cope with the drop in business, while Canadian firms have kept the layoffs to a minimum.
What's so special about Canada that is keeping its deal-makers busier than their global peers?
The key is confidence in the country's financial system. Banks are still lending, investors are still willing to buy stock or bonds to back expansion, and chief executives know it. They are able to access the money they need to grow while rivals in other countries can't. Almost three-quarters of Canadian CEOs said in the PricewaterhouseCoopers survey that they are confident they can finance growth. If there's a deal, they can do it.
"This market is punching way above its weight," said Patrick Meneley, the head of investment banking at TD Securities. "It's a system that really works. You have strong banks, strong companies and strong capital markets.
"We have a group of people who are skilled and they are exporting that skill, to Colombia for oil and gas, to Germany for real estate, into the U.S. every day. It's an entire ecosystem that's functioning very well."
In fact, PwC estimated that one in 10 of all global mergers last year had a Canadian involved in some way, the highest level ever. That's helping Canadian firms make a bigger mark globally. Two – BMO Nesbitt Burns and RBC Dominion Securities – now rank in the top 20 worldwide for investment banking fees.
It's not just corporations that are using their strength outside Canada. Bay Street investment banks also have a chance to build outside the country's borders. But that involves weighing whether the rest of the world will eventually gets its momentum back – or whether the deal flow is going to remain permanently depressed.
"You're back to the kinds of decisions you had to make in 2008, which is, there are unquestionably opportunities, but you have to look at that against your view for what we thought was going to be a slower environment," said Doug Guzman, head of global investment banking at RBC Dominion Securities.
As always, in Canada, there's the enduring theme of resources. Oil, gas and mining still make up an outsized share of Canadian deals, and with crude fetching $100 (U.S.) a barrel and gold on the rise, commodities will remain busy – as long as the fast-growing Asian economies keep going, of course.
"The thing that people always have at the back of their mind is concern that the Chinese economy continues to hold up," said Geoff Belsher, head of investment banking at CIBC World Markets. "If that can continue that is a very positive indicator for commodity prices."
There's also a hunger for stocks and bonds that provide income, something Canadian markets are rich with. Real estate investment trusts, pipelines and dividend-paying financial services firms such as banks are able to raise money in an instant, and they are putting it to work making acquisitions.
Still, with Europe's mess still far from sorted out and business unquestionably softer, it's not likely to be a roaring year for profits, even if Canada does hold up better than elsewhere.
"If we don't see any external shocks this could be a reasonably decent year," Mr. Belsher said.