December 6, 2023

Investment Banking

Let Your Investment Banking Do The Walking

Bay Street’s big chill sets in as share sales crater, sapping fees from investment banks

Stock markets seemed to stabilize in April after a brutal start to the year.Nathan Denette/The Canadian Press

One of Bay Street’s best-known revenue sources is quickly evaporating, with the total value of share sales plummeting 57 per cent so far in 2022 amid a global market sell-off and fears of economic stagnation.

Share sales, or equity financings, are typically one of the most reliable ways for Canadian investment banks to make money. The standard 4-per-cent fee that underwriters earn on each sale has barely budged in decades, and the deals are usually spread across multiple sectors – which means there is often a floor for how far total revenues can fall because industry-specific cycles tend to offset each other.

This year, that floor is getting tested. From January through the end of May, the total amount of money raised in Canadian share sales has dropped to $10.5-billion, down 57 per cent relative to the same period last year, according to new data from TMX Group Ltd. X-T

Initial public offerings have suffered the most, with the amount of money raised by new companies listing on TMX exchanges dropping 73 per cent from the year prior.

The slowdown has played out over several months, and until recently there wasn’t much concern from bankers because they accepted that business activity was bound to cool. The 18-month window between July, 2020, and December, 2021, was one of the most frenzied in Canadian deal history – particularly for IPOs, with 20 technology companies listing on the Toronto Stock Exchange over this time frame.

But the slowdown isn’t letting up – if anything, it’s intensifying, as seen in recent quarterly results from the largest investment banks. Summer is also just around the corner and it is typically a slower period for deal activity, which effectively limits the amount of time available for a rebound before year-end.

Last week, Canaccord Genuity Group Inc. CF-T, the country’s largest independent dealer, reported its fiscal fourth-quarter earnings, and investment banking revenues for its Canadian business plummeted 84 per cent from the same quarter the year prior.

Canada’s big banks also reported their most recent earnings at the end of May, and their underwriting and advisory fees took big hits. Royal Bank of Canada RY-T and Toronto-Dominion Bank TD-T both saw these investment banking fees drop roughly 30 per cent from the same quarter in 2021, while Bank of Montreal’s BMO-T dropped 24 per cent. (Because of the way the banks report, these revenues include deals generated from their investment banking groups outside of Canada.)

The slowdown isn’t as severe if the time frame is expanded by another three months. At RBC, underwriting and advisory fee revenue dropped 10 per cent over the first six months of the bank’s fiscal year, which started in November, while at BMO they are actually up 12 per cent over the same time frame.

But it is possible the real pain has only recently taken hold. After a brutal start to the year, stock markets seemed to stabilize in April, which allowed investment banks to test the water with some new financings, such as Dream Residential REIT’s DRR-U-T US$160-million IPO.

Ultimately the deal got done, but only after it was priced at the low-end of its marketing range, and the size was slashed to US$125-million. More importantly, the markets took another nosedive heading into May, and the REIT’s shares are now down 13 per cent since they started trading on May 6.

Such turbulent markets have also made it nearly impossible to raise money for growth stocks, which dominated financings in 2021. The odd deal can still get sold, but just like Dream Residential, trading performance afterward is unpredictable.

In late May, Aurora Cannabis Inc. ACB-T successfully sold US$125-million worth of new shares and warrants – and investor demand was heavy enough to increase the deal size to US$150-million. The very next day, however, the company’s shares plummeted 40 per cent and have yet to recover.

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