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Streetwise Steady as she goes most likely course for Scotiabank

As Rick Waugh steps to the podium Tuesday for what may well be his last annual general meeting as head of Bank of Nova Scotia, some in the company's securities business are getting ready for what they view as a more investment-banking friendly boss when Mr. Waugh's successor takes over.

Mr. Waugh has been a fine CEO. It's just that there's a perception that he was never all that interested in the securities business, especially the investment banking game of chasing deals. Some chalked it up to background. Mr. Waugh started as a teller and did not spend a big part of his career as a securities dealer.

In recent years, the percentage of the bank's revenue and earnings coming from the securities business has been shrinking, as the bank has grown by acquisition in other areas under Mr. Waugh. Roughly a quarter of profit now comes from the Global Banking and Markets business, down from closer to a third in the earlier years of Mr. Waugh's tenure.

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Brian Porter, who Scotiabank has signalled will succeed Mr. Waugh, came up through the securities business. Rightly or wrongly, the view from several senior staff in the bank's Global Banking and Markets business is that Mr. Porter may allow his investment bankers a freer hand to go after deals. (Of course, given they still work for Mr. Waugh, none of those bankers were keen to see their name in print.)

Yet looking at the numbers, it's hard to quibble with what Scotiabank has done in the securities business under Mr. Waugh. While it does not show particularly well in some investment banking rankings, it rakes in the money thanks to a good trading business and a low-cost investment banking model.

For example, the bank tends to lag in the so-called league tables, the closely watched rankings of which firms are busiest in key businesses such as underwriting stock and bond sales and advising on mergers. In 2012, Scotiabank finished fifth in Canadian equity underwriting, with less than half the issuance of the banks in the top two spots, according to Thomson Reuters. (That ranking excludes any deals led for securities dealers' own companies.) It ranked sixth in debt and merger advisory work.

That suggests that Scotiabank is bringing in far less in investment banking fees than many rivals such as RBC Dominion Securities and BMO Nesbitt Burns Inc., which rank further up the tables.

And yet, Scotiabank is consistently very profitable in the securities business, generating more income per dollar of revenue than rivals. Last year, the securities unit posted $1.5-billion in profit from revenue of $3.6-billion. That compares very favourably to rivals. RBC is much bigger by revenue, but its profit is about the same. RBC generated profit of $1.6-billion on revenue of $6.2-billion. BMO is about the same by revenue – at about $3.3-billion – but much smaller by profit at $949-million.

Scotiabank does it by concentrating on trading and lending, and running a very lean operation in investment banking. About 55 per cent of revenue comes from capital markets, with the remainder from corporate and investment banking. The vast majority of the corporate and investment banking revenue comes from loans.

But that helps Scotiabank be more efficient when it comes to generating deal income. The lending relationships help generate investment banking business, meaning Scotiabank's bankers have to spend less time pitching deals to new clients. That keeps costs down, and allows it to do business with fewer expensive investment bankers in almost every industry group.

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So why change? Look for Mr. Porter to tell the annual meeting that the plan is to keep each of the bank's four business lines contributing between 20 per cent and 30 per cent of earnings each, and to focus on consistency and predictability in results, said spokeswoman Ann DeRabbie. That suggests no big shifts.

One big alteration that is likely to come to pass sooner or later is a streamlining of leadership in the securities business. Right now, the firm is one of only two in Canada with two chief executive officers, an expensive proposition that is likely unnecessary. The only other two-CEO securities firm, RBC, is almost twice as big by revenue.

Michael Durland, who focuses on capital markets, made $8.25-million last year as co-CEO of Global Banking and Markets. Stephen McDonald, who oversees corporate and investment banking, made $5.4-million.

The dual-CEO setup began in 2005 when David Wilson stepped down as CEO of what was then known as Scotia Capital. There were three executives in line for a promotion – Mr. McDonald, Mr. Porter and John Schumacher – and not enough chairs to go around. Mr. Porter was named chief risk officer. Mr. McDonald and Mr. Schumacher became twin heads of the investment dealer.

Mr. Schumacher stepped down in early 2008, and Mr. Durland took over. When Mr. McDonald decides to go, it will likely be the end of the double team and Mr. Durland is likely to get the unified role, say people inside the bank.

Other than that, it is hard to argue against more of the same.

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(Boyd Erman is a Globe and Mail Reporter & Streetwise Columnist.)

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