The conventional wisdom is that these are brutal times for investment banks. Generally speaking, that's true – especially for smaller independent dealers.
But the same can't be said for Canada's big banks. While revenues are much harder to come by than they were during the heyday of the income trust era and the global resource boom, the investment banking arms of the Big Six are outperforming their global peers.
Last year the world's 13 biggest investment banks – which do not include a Canadian dealer – averaged a return on equity of just 8 per cent, according to a global study by McKinsey & Co. The capital markets arms of Canadian banks, meanwhile, averaged an ROE of 17 per cent. (Some examples: RBC Dominion Securities' was 13.5 per cent, while BMO Nesbitt Burns' was 20.1 per cent.)
You may think it's unfair to compare Canadian banks to the world's biggest players, but Canadian players even outperformed the smaller U.S. investment banks that mostly focus on business within their own borders. The average ROE from these regional or national U.S. dealers was just 9 per cent.
All of this makes sense. Canadian dealers, for instance, generated more investment banking fees – $4.9-billion (U.S) – than those in any country, save for the United States, last year, according to Thomson Reuters.
The big question is whether this can continue, or did Canada simply stand out in a year when other markets suffered?
Judging by what McKinsey highlighted as the key threats to ROEs over the next few years, Canadian dealers are sitting pretty. Investment banking deal flows might seem to have picked up elsewhere, with the likes of Twitter Inc. and Royal Mail PLC going public, but underwriting is only one slice of the total capital markets pie.
Trading is a major source of revenue for many investment banks, and on this front Canadian dealers have much less to worry about than many of their global peers. New rules around derivatives clearing are expected to be a major headwind, because they will force investment banks to post collateral as their over-the-counter trades move to centralized clearinghouses. Only a few Canadian banks are sizable players in these markets.
A financial transaction tax is also under consideration in Europe. Depending on the final scope, the tax could significantly affect transaction volumes, with the European Commission's own impact study concluding that the tax could lead to a 10-per-cent drop in securities transactions. Again, the majority of Canadian banks are relatively immune from the direct effects – although any significant drop in volumes could affect global funding costs.
Major global banks are also grappling with new definitions of risk-weighted assets. McKinsey determined that the new calculations could boost the total value of risk-weighted assets by 70 per cent compared with the present Basel II requirements. For that reason major European banks, like Barclays PLC, have had to launch major rights issues this year.
Canadian banks haven't escaped unscathed. RBC, for one, has undertaken a big effort to scale back the total size of its risk-weighed assets. But the Big Six aren't in nearly as dire shape as their global peers – who are now worried about coming rules around leverage ratios – because Canadian regulators have long kept them in check.
Just one example: while new Basel requirements will force banks to hold capital that amounts to 3 per cent of their total assets, regardless of risk weightings, Canada's Office of the Superintendent of Financial Institutions has long enforced its own version of the rule.