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National Bank Financial shifts focus to smaller caps

It's a brutal business fighting for the investment banking dollars of Canada's largest companies, with a huge number of firms from this country and abroad scrapping for the business of advising on mergers and leading stock sales.

In that environment, National Bank of Canada , the smallest of Canada's biggest six banks, has decided that it's a better bet to look to smaller companies for business. As a result, National Bank Financial, the securities arm of National Bank, let go 35 people Tuesday as it refocuses from large-capitalization customers to smaller-cap firms, especially in mining.

The result is that some high-profile names are gone. Those include Tanya Jakusconek, a highly ranked gold analyst who covered senior producers like Barrick Gold Corp., and telecommunications analyst Greg Macdonald. The cuts also led to departures in senior sales and trading roles and investment banking. In total, the reductions equal 14 per cent of the total staff in equities and investment banking.

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The changes and downsizing come as the firm faces much tougher markets. Trading activity is less profitable, and aside from a few hot sectors like mining, some areas of investment banking are sluggish.

In that environment, the firm has decided to switch to a strategy that concentrates on so-called mid-cap companies and smaller, particularly in mining. Those companies generate an outsized share of the fees paid in Canadian investment banking, as they are constantly going to market for new equity and doing merger deals.

The change meant scaling back in other areas that aren't as profitable, or where competition is fierce. That's especially true for large-capitalization companies where Canada's big banks plus foreign banks are all fighting for the business. The exception will be in Quebec, where the bank will still keep a focus on larger companies as well as mid-cap firms.

"It was time to sit back and look at what's working and what's not," said Ricardo Pascoe, co-chief executive of National Bank Financial.

The goal is to funnel some of the savings into new hires in mining, from bankers to traders to analysts, to establish a bigger business helping medium-sized miners.

Even serving companies under $2-billion of market capitalization, the competition is still vicious. However, it's more from boutique firms, and NBF is hoping that its ability to offer services such as hedging, lending and debt underwriting that boutiques generally don't have will be an advantage. In the big-cap space, pretty much every bank has those services.

It's a strategy NBF says it has tried in the energy business and it has paid off with more advisory mandates on deals.

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However, the cuts aren't solely about freeing up money to reinvest. Mr. Pascoe also cited "pressure on margins in investment banking and equities" as a reason for the cutbacks.

It's also been a tough year in many parts of the market. Some sectors have been very quiet on the deal front, leaving investment bankers fighting for business. And trading has become a much tougher business as commissions have fallen and costs have risen. That means that research, which is traditionally paid for through trading commissions, is harder to justify, especially if it's research on companies that don't provide investment banking business.

"The costs of trading have gone up, while revenues have gone down," said Gerry Throop, the head of global institutional equities at NBF.

The restructuring sparked talk that National Bank would buy a brokerage to fill holes, but Mr. Pascoe said that is not going to be the case.

The departures include:

-- Paul Sarachman, head of equity sales

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-- Russ Marceniuk, trader

-- Peter Ogden, large-cap energy analyst

-- Jimmy Shan, real estate analyst

-- Hari Sambasivam, biotech analyst

-- Benoit Caron, special situations analyst

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