Snow covers the Scotiabank logo at the Bank of Nova Scotia headquarters in Toronto December 16, 2013.Chris Helgren/Reuters
Canada's brokerage business has been extraordinarily resilient through very tough times, and it is beginning to pay off for those who have persevered.
After two years of relentlessly slow markets, business is rebounding in a significant way for firms that focus on trading and underwriting stock.
Last week was the busiest week for stock underwriting since 2009, with 14 transactions valued at $4.4-billion, according to figures from Canadian Imperial Bank of Commerce. That total includes the $2.3-billion sale of CI Financial stock by Bank of Nova Scotia.
That is not a blip so much as an exclamation point on what had already been quietly building.
The dollar value of financings on the TSX has risen already by almost 60 per cent, climbing to $16.97-billion in the first four months of the year from $10.76-billion in the same period last year. Add May, with the CI sale and the initial public offering of PrairieSky Royalty Ltd., one of the biggest in Canadian history, and the jump will be more pronounced.
Smaller capitalization stocks are also busy. TSX Venture financings are up 34 per cent from the first four months of last year.
Energy stocks, financials and technology are all active sectors, providing some breadth.
Trading is also more busy. In the first four months of the year, 70.1 billion shares traded on all Canadian markets, up 9.8 per cent from 63.8-billion in the same period last year, figures from the Investment Industry Regulatory Organization of Canada show.
For those who had been predicting that Canada would lose a lot of brokerage firms – me among them – it appears we may be wrong. Certainly, the slow markets claimed victims. For all the talk of firms in trouble, the number has been small considering the depth of the slowdown.
Fraser Mackenzie, Stifel Nicolaus and Byron Capital Markets were among those that gave up on the business.
But new firms launched, and others took the opportunity in down markets to try to expand when they could hire without having to pay as much.
The net result is not a big change in either the number of brokerages operating in Canada or employment. The brokerage industry has seen a net 12 firms disappear since 2010, some to closings and some to acquisition, leaving the total at 189 as of last quarter (before Byron's shutdown). Given the awful returns for most in that time, that is really a very small decline of 6 per cent. There could yet be a few more to go, if the wounds are too deep at some firms, but the last few months should stop most of the bleeding.
Employment in the industry has bounced around the 40,000 level. It is down from its peak, but not markedly.
What accounts for this resiliency, for people sticking to a business that was break-even at best for the past couple of years?
Memories are long and those who were involved in the good years when commodities were booming remember how lucrative it can be. Firms such as Jenni
In many cases, so much money was made in that run that firms can afford a few years of scuffling while waiting for a turnaround. When regulators demand more capital be put into a firm, there is the wherewithal to do it. It can not last indefinitely, but it has so far.
Certainly, it has always been a business suited to optimists, who believe a rebound is always going to come – it's just a matter of when.
And now that it appears to be here in some fashion, those firms that remain will start to feel a lot better quickly. Revenue per employee has been jumping in recent quarters, signalling that firms are leaner. That will translate to more profit.
To be sure, some things won't be the same even in better times. Volumes are returning, but trading is never likely to pay the way it once did. Per-share commissions have declined too much, and clients won't let them go the other way.
It looks as if I and other pessimists may be proved wrong by the fortitude of Canada's brokerage community. For the sakes of the tens of thousands of people the industry employs, I'm happy to be wrong. Just this once.