Many firms in the Canadian investment industry have confronted the intense strains of the Covid-19 pandemic alongside their employees, clients and communities. Despite significant obstacles, Canada’s investment industry quickly transitioned many of its employees to work remotely and contributed to the solutions required to mitigate the financial challenges facing businesses, governments and individuals — helping to raise capital and working diligently to safeguard the portfolios of Canadians during uncertain and volatile times.
Canadian debt capital markets issuance in 2020 was the strongest on record as governments and businesses bulked up liquidity to weather the crisis. The rush for liquidity also played out in the equity capital markets, with preliminary data indicating a 20% increase in equity issuance year-over-year.
During these unprecedented times, the investment industry recorded one of its best years on record. With nine months of data in, we estimate 2020 securities industry operating profits to come in at $8.5 billion, a 12% increase from the previous record of $7.6 billion set in 2019. The more gratifying outcome is the solid profit rebound at independent dealers, matching the performance of the larger firms, signifying a broad dealer response to client demands for financial services.
The 38 domestic institutional firms saw operating profits more than double in the first three quarters of 2020 from 2019 to reach $258 million. Institutional independent dealers impressively cut operating expenses steadily over the past five years, benefiting significantly from operating efficiencies from increased digitization. As well, institutional firms benefitted from stepped up mid-cap financing, notably in the technology sector. Recent efforts to widen corporate client reach through increased research capability, wider distribution and greater business focus on small-cap private equity merchant banking also paid off.
The biggest challenge facing institutional firms is attracting enough regulatory capital to give greater maneuverability and range to compete for mid-cap equity offerings and gain syndicate positions in large corporate underwritings. This will become even more important as the demand for external capital from small- and mid-cap businesses escalates as the economic recovery gets underway.
Operating profits at the integrated firms jumped 9% in the first three quarters of 2020 compared to the same period the previous year, reflecting strong performance in the debt and equity underwriting business. There have been steady, widespread efforts among the integrated firms to aggressively strengthen efficiencies and adopt technology to capture clients.
The retail business turned in another strong performance in 2020. Operating revenue, based on nine months of data, rose 14% year-over-year and is on track to reach a record $4.8 billion in 2020. Operating profit at the retail firms, including both full-service and introducer firms, rose 48% in the first three quarters of 2020 compared to the same period in 2019 despite the earnings drag from lower net interest margins. The significant 10% gain in fee revenue gave a solid boost to overall retail revenues (accounting for nearly 40% of total retail revenue) and signals that smaller firms have adapted aggressively, with the help of technology, to the widening client shelf of products and services to support a holistic approach to life cycle financial planning.
The impressive performance of the investment dealer industry — both small and large dealers — in a year of unprecedented change leaves the industry well-positioned to serve clients in the coming year. Many firms have enhanced operating efficiencies and business scope through the adoption of a wide range of technologies and systems to leverage advisory and planning services and improve mid and back-office operations. Importantly, the independent dealers have managed to hold in place needed professional staff and have built more robust risk control policies for employee work-from-home arrangements, cybersecurity and vendor management. Further, continued efforts by securities regulators to reduce the regulatory burden should yield additional operating efficiencies and cost savings.
Dealers also learned important lessons during the Covid-19 crisis that position them well for the future: how to retain operational resilience when confronted with future pandemics and crises; how to adjust operating models quickly and effectively; how to take advantage of opportunities to deliver services solely through digital channels; and how to improve flexibility in work arrangements and respond to employees’ unique situations. These lessons should provide confidence the industry can successfully navigate future economic and market shocks.
Finally, investment dealers and their clients can look forward to increased business opportunities and continued momentum in equity markets as the economy rebounds — a real possibility with a steady and smooth rollout of Covid-19 vaccines, incredibly supportive fiscal and monetary policies, and significant pent-up demand.
Ian Russell is the president and CEO of the Investment Industry Association of Canada.