Investment Banking in Canada

Canadian Investment Banking Landscape

In Canada, capital markets are well-developed and public equity and debt investment is a key source of financing for the economy. Likewise, investment banking (by “investment dealers” – the historical Canadian term) has been a longstanding business in the country.

Investment bankers in Canada provide the same services as investment bankers anywhere else – raising capital, advising on mergers and acquisitions and providing general industry coverage.

Investment Banking in Canada versus the USA

However, there are some differences between Canadian investment banking and the US, UK or Hong Kong. Unlike the US, there are no full service independent investment banks such as Goldman Sachs or Morgan Stanley, or elite boutiques such as Evercore and Lazard.

The most successful investment dealers that existed in Canada have all been acquired by the incumbent commercial banks to offer a wider product suite and better service by being both commercial banking and investment banking client coverage.¹

However, Canadian companies are much smaller and less sophisticated than American or global corporates – a function of the advantages of scale and the USA and New York’s historical dominance as a global financial center, which means that investment banking relationship coverage is loosely bifurcated into domestic and global clients.

Most domestic clients are brought into investment banking relationships once they begin to require M&A advisory or capital markets activity of sufficient scale, having previously been serviced by the commercial bank and mid-market investment banking platforms of the relationship bank.

Once the companies are large enough and well into the multi-billion dollar range, they may want to look at global platforms for issuing equity or debt to realize better pricing, and may look at potential companies to acquire across the border. This is when global, bulge bracket investment banks are invited into the relationship bank group.

Investment Banking in Canada versus Australia

The Canadian investment banking industry’s closest comparable is Australia. Both are English-dominated commonwealth countries with a large focus on natural resources (and are favorites for resource companies operating in politically unstable jurisdictions to list on exchanges), have a similar population and demographic profile, and a concentrated commercial banking market dominated by domestic banks that cross-sell their capital markets platforms.

The largest miners (BHP Billiton, Rio Tinto) publicly list in Australia instead of Canada and the Australian market is decidedly more global and free-trade oriented, possibly as a function of being an island (Canada – especially major cities and provinces – are landlocked, with many provinces not having access to tidewater leading to natural resource egress issues).

Given the similarities, Big 6 Canadian banks have offices in Australia for mining (BMO and RBC having the largest ones) while Macquarie has a large presence in Canada for infrastructure, mining and oil & gas – although it operates on a boutique model as opposed to being fully integrated with their global franchise.

Major Investment Banks in Canada

Major Domestic Investment Banks in Canada

Big 6 banks – RBC Capital Markets, BMO Capital Markets, TD Securities, CIBC Capital Markets, Scotiabank Global Banking & Markets and National Bank Financial – dominate investment banking business for small and mid-cap companies. Most of the debt raising for governments will also be conducted through Canadian banks.

All of these Big 6 banks are also commercial banks, and capital markets plays a different role in their overall universal banking package. Capital markets as a % of the overall business is the largest at National Bank Financial and the smallest at TD. National Bank earnings are accordingly heavily dependent on capital markets activity.

For larger, more sophisticated companies, access to global markets is paramount and global (increasingly US) banks take a disproportionate amount of investment banking revenue. The Big 6 Canadian banks will have ECM and DCM platforms out in New York but may not have as much local expertise on the ground for cross-border transactions with the exception of RBC and BMO. Canadian banks will deal with domestic mandates and share cross-border mandates with US banks.

Bulge Bracket Banks, Global Capital Markets Providers and Elite Boutiques in Canada

Major capital markets and advisory firms operating in Canada include Evercore, Goldman Sachs, Rothschild, Lazard, JP Morgan, Bank of America-Merrill Lynch, Morgan Stanley, Barclays, Credit Suisse, Greenhill, Citi, Wells Fargo, UBS, HSBC, Bank of Tokyo-Mitsubishi UFJ, BNP Paribas and Deutsche Bank.

Other Global Banks Operating in Canada

For the following banks, they do not participate in M&A but have credit presence where ancillary business will come through the form of US$ debt issuance or other trading products. Some of these banks do not have a fleshed out capital markets platform anywhere in North America, and only provide credit. Alternatively, they may operate in Canada to support key domestic franchises in their home countries – especially as it pertains to natural resources or other industries of national interest.

This may still make business sense as their return hurdles may be much lower than Canadian banks (cheaper funding, influential shareholder who may have other interests i.e. state-owned banks). Certain financial institutions may hurdle on term loans alone.

These banks include: Mizuho,Sumitomo Mitsui Banking Corporation, Societe Generale, Bank of China (Canada), Industrial and Commercial Bank of China, China Construction Bank, Bank of Communications, ICICI Bank, United Overseas Bank, Fifth Third Bank, Rabobank, Royal Bank of Scotland, State Street, BNY Mellon, Credit Agricole, Standard Chartered, Various government export development agencies (Export Development Canada, Business Development Bank of Canada)

As capital continues to become more global and responsibility to shareholders becomes more prominent, global banks are increasingly being rewarded for good idea generation and an understanding of the need to meet credit hurdles has increased among clients.

List of Domestic Investment Banks in Canada

Canadian Banks	Strong Boutique Banks	Other
RBC Capital Markets BMO Capital Markets TD Securities CIBC Capital Markets Scotiabank Global Banking and Markets National Bank Financial	Canaccord Genuity Macquarie Capital GMP Securities (including FirstEnergy – Calgary) Desjardins Peters & Co (Calgary only) Maxit (Mining only) Altacorp (government affiliated)	Cormark Paradigm Eight Capital (formerly Dundee) Haywood Mackie

Boutique Investment Banks in Canada

Boutique banks in Canada do not play in the same niche as global Elite Boutiques such as Moelis, Lazard, Evercore and Centerview.

The boutiques banks in Canada are heavily focused on the resource sectors of mining and oil and gas – particularly small capitalization companies at $100 million or less. The lower down the size scale they operate in, the more they resemble historical brokerages than today’s investment bank. This means that the senior staff may work purely on commission and salary is extremely variable.

During the mining and oil and gas booms, employees were paid far better there than at the Big 5. A $100 million equity issuance could result in a managing director at a boutique personally pocketing a few million dollars. Brokerages can operate this way because of fewer fiduciary duties to shareholders, a leaner structure (bonus is directly linked to revenue generated for relationship managers) and an entrepreneurial culture.

Industry Groups in Canada

Coverage at investment banks is usually segmented into industry verticals. Due to fewer scale advantages in Canada, there cannot be as much specialisation from a coverage perspective (a TMT team in Canada may cover technology, media and telecommunications while the TMT team at a US Bulge Bracket may have over 10 times the staff with multiple senior bankers for each of technology, media and telecommunications).

When interviewing for specific roles, interviewers appreciate initiative and intellectual curiosity, so it behooves any aspiring professional to attain a cursory understanding of the industry in question. The site aims to provide comprehensive and concise walkthroughs for all major verticals in Canada. The usual alignment of verticals usually includes some mixture of the following with smaller coverage being shifted to a “Diversified Industries” pool.

Industry	Multiples	Public Companies
Energy	EV/Reserves EV/Production EV/Capacity EV/EBITDAX = Enterprise Value to Earnings before Interest, Tax, Depreciation, Amortization and Exploration Expenses EV/Proved Reserves	Suncor Energy Canadian Natural Resources Imperial Oil Husky Energy Cenovus Energy ARC Resources Crescent Point Enbridge Encana Inter Pipeline Pembina Pipeline TransCanada
Power & Utilities	EV/EBITDA EV/Capacity ($ per kwh produced) EV/Customers Price to Earnings (P/E) Price to Net Income (P/NI) Price to Book Value (P/BV)	Hydro One Canadian Utilities Emera ATCO Capital Power Fortis
Metals & Mining	EV/EBITDA Price to Net Asset Value (P/NAV) Price to Net Present Value (P/NPV) Price to Cash Flow (P/CF) EV/Resource ($ per weight)	Barrick Gold Franco-Nevada Cameco Goldcorp Agnico Eagle Mines Eldorado Gold First Quantum Minerals Kinross Gold Silver Wheaton Teck Resources Yamana Gold
Financial Institutions Group (FIG)	Price to Earnings (P/E) Price to Book Value (P/BV) Price to Tangible Book Value (P/TBV) Price to Net Asset Value (P/NAV)	Royal Bank of Canada Toronto-Dominion Bank Bank of Nova Scotia Bank of Montreal CIBC National Bank of Canada CI Financial Gluskin-Sheff Element Fleet Management ECN Capital Manulife Financial Fairfax Financial Intact Financial Great-West Lifeco Industrial Alliance Sun Life Financial
Financial Sponsors (Private Equity, Pension Funds)		Brookfield Asset Management ONEX Corp Power Financial
Technology, Media and Telecommunications (TMT)	EV/Subscribers EV/EBITDA	BCE Inc Thomson Reuters Rogers Communications TELUS Corp Shaw Communications Thomson Reuters Blackberry Open Text CGI Group CAE Constellation Software
Consumer Products & Retail	EV/Customers EV/EBITDA EV/EBITDAR = Enterprise Value to Earnings before Interest, Tax, Depreciation, Amortization and Rental/Lease Expenses	Spin Master Alimentation Couche-Tard Restaurant Brands International Loblaw Companies Canadian Tire Saputo Canada Goose Aritzia Jean Coutu George Weston Gildan Activewear Magna International Metro Inc
Basic Materials (excluding Metals & Mining)		Agrium Cameco Potash Corp Methanex
Industrials	EV/EBITDA	Canadian National Railway Canadian Pacific Railway WestJet Air Canada Finning International Toromont Industries Magna International SNC-Lavalin Stantec Bombardier
Real Estate	Price to Earnings (P/E) Price to Book Value (P/BV) Equity Value to Funds from Operations (Equity Value/FFO) Equity Value to Adjusted Funds from Operations (Equity Value/AFFO)	Riocan REIT Brookfield Property Partners H&R REIT First Capital Realty Canadian Apartment Properties REIT
Healthcare		Valeant Pharmaceuticals Concordia International

Mergers and Acquisitions in Canada

RBC Capital Markets has the largest M&A team in Canada, although the focus is shifting towards becoming a bulge bracket in the US. Mandates for RBC are increasingly executed through the New York office.

BMO has a strong mining focus so their position will move with mining activity (they basically have a whole floor focused on mining) – their strong US middle-market franchise does not necessarily flow into Canadian merger activity, but the US presence allows for participation in financing pieces due to a high-yield platform.

Scotia has a leaner presence as their focus, similar to TD, has been in their commercial banking franchise (although TD focuses on the US and Scotia focuses on emerging markets – Latin America in particular). Recently, they have both become more aggressive with their larger balance sheets in underwriting large loans to support winning M&A mandates.

Bulge Bracket M&A is done entirely through New York, and the Canadian offices focus on being local relationship coverage.

Debt Capital Markets in Canada

DCM is a sprint – the interview process involves a mix of market questions (macroeconomic) and bond math – knowing duration, tenor, and what drives pricing overall.

DCM is often on the trading floor (in line with markets), although it is considered part of investment banking. DCM juniors will have to keep up to date with daily market news. Hours are generally 7-9 but vary from bank to bank. The whole day, DCM bankers are fielding calls, answering questions from coverage investment banking on pricing and manipulating data on Excel. At a higher level, DCM may help create debt investor presentations and help draft term sheets.

Debt Investors and Issuers

Generally, debt raising is separated into corporates (as funding for capital structure), financials (predominantly banks – who use bonds as funding), and governments (to fund spending supported by taxation).

In Canada, bank issues and corporate issues are roughly equal (that’s how big the banks are). Foreign issuers who issue in Canada will issue maple bonds (a similar concept to Eurobonds, Dim Sum Bonds, Samurai Bonds, etc.). Public bonds issued in Canada are overwhelmingly investment grade (>95%) with the remainder being unrated or high yield – this is because the market is not as deep and sophisticated as the US and has much less liquidity and expertise.

Industries are roughly in line with the coverage universe in investment banking – with a noticeable absence and a noticeable addition. Mining companies can rarely raise debt unless they are extremely large or diversified, and only the cream of the crop will tap into DCM in Canada (Goldcorp, Barrick, Teck), although they usually still will have substantial cash positions and large liquidity lines (revolving bank credit). The timing of cash flows and depleting nature of assets is not conducive to bond investor confidence. Usually, miners are much bigger ECM participants.

One noticeable addition is captive finance companies, especially for foreign car manufacturers. Their finance arms help sell vehicles (Purchase a Hyundai at 0% down at 1.9% APR) and lend money like banks (but mostly for individual cars and dealer fleets). This issue volume is huge. These issuers, being financials, will also go for floating rate debt while corporates prefer fixed. Auto companies may be more opportunistic with swaps, as they will have access to sophisticated treasuries based out of New York with strong derivative capabilities to help achieve best pricing.

Currently, DCM has been an extremely hot market with large scale issuance as corporates try to lock in cheap financing (interest rates are very low) for long tenors. Investors are usually insurers and asset managers, both whom may have extremely varied mandates and objectives – usually they are forced to hold debt (as opposed to equity) as a percentage of the portfolio as they do not have the same appetite for loss.

Equity Capital Markets in Canada

While investment banking advisory for corporate finance and mergers & acquisitions usually means that one or two banks take the entire mandate and fee, ECM business is usually syndicated out – so business is a much more even split between the Big 5 (not to say that it is entirely even) – although the lumpy nature of these deals can mean that one or two large issues related to a large merger (TransCanada-Columbia, Fortis-ITC) can skew league tables heavily towards a lead bank.

ECM’s relevance to the investment bank is higher in Canada than the US (versus DCM and industry), due to factors including:

the concentration of resource stocks on the TSX and junior resource stocks on the TSX Venture who cannot access public debt (especially miners, where net debt to EV is relatively small);
the profitability of “bought deals” for incumbent Canadian banks; and
the proportion of the Canadian investor universe which is retail as opposed to institutional (with retail being less sophisticated and direct clients of the Big 6 Canadian banks where there can be synergy with the investment banking arms).

Bought Deals – Secondary Equity Offerings in Canada

In the US, equity underwriting tends to be on an agency or best efforts basis – banks will take a fee for issuance but should the deal not be successfully syndicated, the company may not issue or may not issue fully. In Canada, banks tend to purchase the entire issue at a steeper discount and sell it off.

Of course, with the greater risk, Canadian banks earn a greater return. Sometimes, global banks will balk at the opportunity because they are unfamiliar with the security and do not want to hold risk on their books. Generally, this is a huge moneymaker for the banks – however, the risk is very real with quite a few hung deals (share price falls below the bought deal price and banks eat the loss as they cannot clear out the inventory). This tends to happen with resource companies when an overly ambitious lead offers pricing that is unrealistic.

From a corporate finance perspective, this can be perceived as leaving money on the table as it hurts the economics of issuing equity, so more sophisticated Canadian corporates have tapped US banks for execution when forced to issue equity (example: recent EnCana issuance led by JP Morgan).

Share Repurchases – Normal Course Issuer Bids

The NCIB is the standard share repurchase mechanism for Canadian companies. An NCIB program will be filed and can be administered by an investment bank to repurchase shares opportunistically throughout a 12 month period. There are restrictions to how many shares can be repurchased in certain time periods.

In Canada, up to 2% of a class of shares (for example Teck Resources has Class A and Class B stocks – generally the dual class structure will have equal economic interests but Class A stocks will have superior voting rights allowing key shareholders to maintain control despite not having a majority economic interest) can be repurchased in a 30 day period up to the greater of 5% of outstanding shares or 10% of the public float.

Share Repurchases – Substantial Issuer Bids

The SIB allows for major repurchases for a set number of shares from all of a company’s shareholders at a predetermined date and price. Usually this will be at a major premium to the existing share price.

An issuer bid for all of the shares of a public company is a go-private transaction.

Retail Investors in Canada vs Institutional Money

There is some amount of home bias in Canada (Canadians invest heavily in Canadian securities despite the total Canadian float being less than 5% of global stocks), which is accentuated by tax incentives for admissible dividends in Canada.

The average Canadian retail investor is also much less sophisticated and more intellectually lazy than the average US retail investor (who will go on Seeking Alpha, Bloomberg and blast their thesis to start an argument). It is no coincidence that each Big 5 Canadian bank has bought a major brokerage at some point which sells down to financial advisors in the bank network or direct to retail investors.

Due to the integrated nature of the Canadian investment banks, this is a large opportunity for ECM – generally, the smaller or riskier the company, the more retail money flows into it. Looking at an equity’s institutional ownership speaks volumes about the perception of the stock. Due to this nuance, banks who may not extend as much credit but have prominent brokerages (CIBC Wood Gundy) may outperform in ECM.

Prominent investment dealers in the past include Wood Gundy, Dominion Securities, and Nesbitt Thompson, who have been acquired by CIBC, RBC and BMO to be folded into their capital markets platforms – the legacy brands have been changed to the marketing names for their retail brokerage platforms while the investment banks have all been rebranded as “Capital Markets”; this may be confusing to new capital markets employees as the old investment dealer names are still occasionally the legal entity that is brokering large capital transactions.