The risks of working with the fledgling cannabis industry still outweighs the potential benefits for the big Canadian banks, says Fitch Ratings in a new report.
The rating agency reported that Canadian household spending on cannabis was $1.4 billion in the first quarter, up by 14% year over year, according to Statistics Canada. It also noted that analysts are forecasting that the industry will have a retail value of $6.8 billion by 2020, which would be almost as big as the wine industry.
Yet, the big banks have largely stayed on the sidelines as the Canadian cannabis industry has flourished, the report noted.
“To date, banks have mainly provided investment banking services such as advisory and capital raising, not directly putting themselves at compliance risk,” it said.
Instead, primarily smaller banks and credit unions have been providing traditional banking services to the industry, Fitch said.
The rating agency said it expects the big banks will remain cautious about getting more deeply involved with the sector “until the legal and regulatory standards are more established for cannabis on both sides of the border.”
The heightened risks of dealing with the cannabis industry were highlighted by the discovery of alleged unlicensed growing by CannTrust, Fitch noted.
Additionally, it said that the sector faces a series of “outsize compliance issues” including marketing restrictions on cannabis firms, “consumer-safety concerns, exposure to legal liability, and history of cash-based transacting, coupled with high tax burdens.”
Cross-border anti-money laundering (AML) concerns are also curbing the Canadian banks’ willingness to provide banking services to cannabis businesses, Fitch said.
“Canadian banks with a significant U.S. presence such as BMO and TD have indicated they will avoid the cannabis industry in the U.S. until federal laws are changed, notwithstanding legalization by various states,” it said.
Fitch said that it views this cautious approach as a credit positive.
“Substantial risks in the cannabis industry, including increased compliance considerations and cross-border money laundering (AML) concerns, will continue to outweigh lending and advisory opportunities for banks in Canada and in the U.S. over the medium term,” it said.