October 10, 1996
John Hunkin President, CIBC Wood Gundy
Robert Gemmell, President and CEO, Salomon Brothers Canada
WILL CANADIAN BANKS SURVIVE IN THE GLOBAL ARENA?
Chairman: Julie Hannaford, President, The Empire Club of Canada
Head Table Guests
Margaret Samuel, Manager, Capital Markets, National Trust and a Director, The Empire Club of Canada; The Rev. Kim Beard, Rector, Christ Church, Brampton; Brian Gray, Senior Vice-President, Canadian Federation of Independent Business; Dominic Barton, Principal, McKinsey & Company; Stanley Hartt, Chairman, Salomon Brothers and President, The Canadian Club of Toronto; Ross DeGeer, President, Government Policy Consultant; John Sadler, Senior Vice-President, Newcourt Credit Group and a Director, The Empire Club of Canada; Soma Das, OAC Student, Western Technical School; and Frank Potter, Partner, Emerging Markets Advisors Inc.
Introduction by Julie Hannaford
Since it was established in 1903, The Empire Club of Canada has been addressed by Prime Ministers Borden, King, Bennett, Meehan, St. Laurent, Diefenbaker, Pearson, Trudeau, Clark, Turner and Mulroney. Internationally, The Empire Club of Canada has been addressed by Neville Chamberlain, Winston S. Churchill, Indira Ghandi, Billy Graham, Dag Haamerskold, Edward Heath, Margaret Mead, Golda Meier, Richard M. Nixon, David Rockefeller, Margaret Thatcher, President Ronald Reagan and Bill Gates. 1 make reference to this distinguished list of speakers, not only because it tends to have a rather bracing effect upon those who are about to take the podium, but also because the list illustrates the way in which The Empire Club of Canada through its speakers provides a record of the political and industrial changes which define our history, which in turn defines us. In our history we have had, as the list I have provided indicates, world leaders address issues of international and national significance; we have had jurists address changes in the law that affects our governments; we have had presidents of banks address geo-political and constitutional issues from an economic perspective. Many of our speakers have at one time or another been investment bankers. However, my tour of the list of speakers who have addressed The Empire Club of Canada indicates that we have never had investment bankers address The Empire Club of Canada on investment banking. So, putting forward the prospect of having not one but two Empire Club of Canada meetings devoted to investment banking made for rather interesting debate amongst the directors of The Empire Club of Canada.
Once having convinced the directors that the topic of investment banking in Canada and internationally would be both important and interesting, questions arose as to the ability of the speakers to engage the audience. Primary amongst the questions asked was the following: "Yes, that's all very well, but can these people be amusing?" Throwing caution to the wind, I responded, "Of course they can. I am sure that within the research library 1 use, I'll find reams of amusing anecdotes told by or about bankers and investment bankers. Trust me."
Thus began the research. To my dismay, I found that there are few if any anecdotes or jokes told by or about bankers. This means one of two things. Either bankers and investment bankers are so universally loved that the prospect of humour is far from anyone's mind or the industry itself has not yet achieved sufficient prominence to warrant the development of industry-wide jokes.
It is my suspicion that this is about to change. Canada has developed a history of thriving on being self-effacing. In the investment industry, deregulation, the disappearance of those barriers to trade that kept us insulated and insular, the demands created by changes in technology, and shifts in demographics, mean that we shall not survive if we operate outside the global marketplace.
That means, in the investment banking industry, we have to compete. Fundamentally, the question that our speakers are here to address is whether we really can compete.
John Hunkin is the President of CIBC Wood Gundy. He has been with the CIBC since 1969. Mr. Hunkin moved to Wood Gundy as President and Chief Operating Officer in 1988. Mr. Hunkin has been a witness to changes in the industry, as well as a participant in creating those changes. He has very graciously agreed to address the Canadian perspective, and to do so first.
Rob Gemmell is the President and Chief Executive Officer of Salomon Brothers Canada. He brings a special perspective to the issue today. His academic training is both Canadian and American, and so is his business career. Before he was appointed President and Chief Executive Officer of Salomon Brothers Canada, he was Vice-Chairman of Merrill Lynch Canada, which position he arrived at after working with Morgan Stanley in New York. Mr. Gemmell has very kindly agreed to provide the responding and contrasting perspective to that which Mr. Hunkin will provide to us.
Please welcome our speakers today, Mr. John S. Hunkin and Mr. Rob Gemmell.
Good afternoon everyone! It's a pleasure to be here. In addition to thanking Julie Hannaford for her kind introduction, I want to express my gratitude for the speaker order. I think it was Mark Twain who said: "Adam had a good thing. When he said something, he said it first."
Today I've been asked to answer the question: Can Canadian banks survive in the global arena? The short answer is yes. But who cares? We bankers are so unpopular that jokes once saved for lawyers and accountants are now aimed at us.
I was asked last week what you have with a thousand bankers buried up to their necks in sand. A critical shortage of sand! So clearly bankers have arrived--but can we survive?
Why shouldn't we, or any Canadian institution, survive if not thrive in the global marketplace? The basic criteria are not that complicated. You need a good credit rating--double A or better. And you need size. Large Canadian banks have both.
You also need a strong customer franchise. And that's where the answer starts to get complicated. Satisfying a client base that operates in global markets requires an entirely new set of skills and a determination to be the best. So the better question might be: How many Canadian banks will equip themselves for the challenge of the global marketplace?
Not every bank sees that marketplace as part of its strategy. But if I can briefly wave the flag, I think it's important for Canada that some Canadian banks make the global choice. It creates opportunities for clients and provides export earnings, dividends and tax revenues for shareholders and governments. If you are in business to grow, you know that Canada is a small market. That makes it a secondary market for many companies and banks in the international financial markets. The Canadian banks that make the global choice will ensure that we can compete for our clients' international business.
But it means we have to match or beat the best in the world. Can we do it? My answer is "yes."
CIBC Wood Gundy made the global choice three years ago. And I don't think it's a secret that we have aimed at far more than just survival. We made the decision when we saw increasing numbers of our North American clients use the global markets to grow and satisfy shareholder expectations.
Furthermore, the new competitive environment was being driven by financial deregulation, the elimination of trade barriers, changing demographics, and technology that could transport information and capital around the world in seconds. So, when we stepped back and looked at that picture through a global lens, we came to a clear conclusion. If we didn't align ourselves quickly with these global forces, we were going to become irrelevant. That was the real survival issue. We weren't going to stand by and watch a sizable chunk of corporate Canada reach beyond our borders without us.
And if all this wasn't troubling enough, we were also experiencing a new wave of competition from international banks. They were already operating in markets that our clients wanted to reach. And those banks did what you would expect. They targeted our biggest and best clients. They promised new horizons, new possibilities for those customers--our clients.
Our challenge was clear. To remain relevant, we made the global choice. We chose an aggressive strategy focused on four key elements.
First, we targeted selected industries where we had a competitive advantage. We already had a strong franchise in energy, mining, forestry, real estate, technology and multimedia. And we added industry sectors like aerospace and defense. We built a U.S.$4 billion aviation finance empire in just seven months.
Second, we added new product capabilities. We needed the critical financial tools to make it easy for our clients to pursue their global goals and our growth. Those financial tools included derivatives, high yield, structured trade finance, and asset-based finance. We targeted the very best people in the world in these technically complex areas. And we now have one of the world's top-ranked derivatives teams. And our high-yield team continues to break into new financial territory. We're one of the major high-yield underwriters in the U.S. Our key competitive advantage was demonstrated in some recent billion-dollar deals. We can service a company's entire balance sheet from senior to subordinated debt and from private to public equity.
Third, we extended our industry and product strengths to our international network across Europe and Asia. And we strengthened our commitment to other key markets. New York was a clear priority. It's now our global centre for derivatives, high yield and structured finance. And we became a primary dealer in U.S. government securities to support that commitment.
Fourth, we integrated our corporate and investment banks to give our clients access to the full range of our capabilities. Our clients said they were tired of banks who just pitched products, but were not prepared to offer integrated solutions. They didn't want to fit the products together to create a solution. They wanted us to do it.
But we had to integrate two very different cultures with two different lifestyles. When I joined Wood Gundy from CIBC in 1988, I was told the reason bank presidents don't drive Porsches is they don't like to sit that close to their drivers. But I still don't have a Porsche or a driver!
Integration has given us powerful new tools. We can now design and deliver custom-tailored solutions with seamless service that only an integrated bank can provide.
It's clear that our strategy is working. "Euromoney Magazine" named us best Canadian securities firm two years running. They said: "CIBC Wood Gundy led the way in marrying commercial and investment banking." The Globe and Mail reporters here today may recall an article written in August which said: "Critics who once derided CIBC's ambitious expansion into derivatives and high-yield debt underwriting and its hell-bent integration of investment and corporate banking have grown quiet." The article goes on to say: "Profits have begun to flow and clients have shown a preference for one-stop shopping to meet their financing and risk-management needs."
I know it's not polite to brag, especially in front of a microphone. But I'm very proud of the progress we've made. Today, CIBC Wood Gundy is a Canadian bank that can compete and win against the strongest global competitor.
We're now ranked as the number-one arranger for U.S. project finance throughout the Americas. And we're number seven in the world. We've also jumped up the league tables in Project Finance advisory mandates. That's particularly impressive because we only started to focus on advisory services three years ago. We're also ranked number two for U.S. Exim Bank lending. "Global Investor" magazine put us on their superstars' list for derivatives. And "Risk Magazine" has just ranked us number two for credit derivatives. In these independent rankings, we are solidly in the top ten, often number one or two, or key global financial services.
And the very intense competition from firms such as Salomon Brothers make it critical for us to maintain our financial agility. Relentless competition has a way of raising the bar on excellence. Regardless of the industry, the market leaders are those who invest in being the best. And CIBC Wood Gundy has made that investment and is not only surviving but succeeding in the global market' place.
On that note, I turn the podium over to my worthy competitor from Salomon Brothers who was well-trained at Wood Gundy. Please join me in welcoming Robert Gemmell.
Good afternoon ladies and gentlemen. When I was excitedly telling my wife how I had been asked by Julie to come off the bench, so-to-speak, to replace your regularly scheduled speaker today and speak at the prestigious Empire Club, the only thing she said to me was: "Don't try to be funny; don't try to be intellectual; just be yourself." And what am I? John, your introduction describing me as a "worthy competitor from Salomon Brothers," which of course I can only aspire to be, is a nice segue into my topic today. I would suggest that five to 10 years ago, no major Canadian dealer--certainly not one as prestigious and dominant in Canada as Wood Gundy--would have paid much attention to the competitive threats from international investment dealers and certainly not described them as worthy competitors.
I am here to talk to you today about how, over the relatively short time-frame of just the last five years, fundamental changes have taken place in the Canadian marketplace. Combined with a dramatic refocusing of the strategic and capital market requirements and objectives of our Canadian client base, this has resulted in a relentless and unstoppable trend toward these clients adopting primarily a North American marketplace focus--a fundamental change from their traditional strict Canadian marketplace focus of five years ago.
However, and this is where I differ perhaps most dramatically from John in my beliefs, as the Canadian client base has evolved to a North American marketplace mentality fairly rapidly and efficiently, to take advantage of opportunities afforded by certain fundamental change that I will address shortly, in my opinion, the behaviour of the investment dealer community, primarily the Canadian investment dealers, but including some international dealers, has not evolved to the same extent. As a result, the investment-dealer community in Canada cannot and does not yet provide an optimal, unbiased level of service that the world-class Canadian client base deserves. We must understand and accept that the Canadian client base, if not truly global in their approach to all strategic and capital-market activities, is certainly now much more North American oriented than strictly Canadian oriented. We as investment dealers and advisors must do a better job of co-operating and co-ordinating with each other to provide the highest quality of service for our clients.
I would like to review with you several significant factors that will explain and illustrate this inexorable trend over the last five years to a North American strategic and capital markets focus among Canadian companies.
The first important factor and, in my opinion, the factor most responsible for this trend, was the introduction of the Multi-Jurisdictional Disclosure System in August 1991. For those of you who are not familiar with the MJDS it is, in essence, a system agreed to between the OSC and the SEC which, cutting through it all, allows a Canadian issuer to use its Canadian disclosure documents to access the U.S. capital markets. Even though all of the Canadian dealers fiercely opposed the introduction of the MJDS, the regulators had the courage and foresight to see it through. In my opinion, they have not been given enough credit for introducing a system that has provided ease of access to the world's largest capital market and investor base which is, obviously, extremely beneficial to a constituency that we all seek to serve to the best of our abilities. It is a beautiful system that has achieved tremendous benefits for the Canadian client.
The second key factor in Canadian firms moving toward a North American market focus from a strictly Canadian focus was the rebirth of a high-yield market in 1991 in the U.S. This $300 billion market (a comparable market does not exist in Canada) caters to those companies that are or would be considered less than investment grade or rated below BBB by the major U.S. rating agencies. Since 75 per cent or more of Canadian companies would fall into this category the U.S. high-yield market has become a very important source of capital for these firms. We have certainly observed the many Canadian firms that have moved away from commercial bank financing and into the U.S. high-yield market. The prime example of the migration to the U.S. market, of course, has been the Rogers group of companies. Since 1991 the Rogers group has completed relevant issues in the U.S. high-yield markets for proceeds in excess of $4 billion. Rogers has become the number-one issuer of high-yield debt in the U.S. capital markets. Having been personally involved in all of the Rogers financing in the U.S. markets, I can tell you that Rogers' reputation among U.S. investors is so good and so strong that the market will be a continuing attractive market for Ted and his group of companies. Many other world-class Canadian firms have followed Ted's lead away from Canadian bank financing and into this market. In fact, from the first deal completed by a Canadian company (Rogers Cantel) in this market in November 1991, in calendar year 1995 just under U.S. $4 billion was raised by Canadian companies in this market. Over the last five years debt financing for the majority of Canadian companies has most definitely gone south of the border. This John is an example where we perhaps disagree to some extent. I believe that the Canadian investment-dealer community did watch, and continues to watch, a sizable chunk of corporate Canada reach beyond our borders without them.
The third key factor in the trend toward a North American focus among Canadian firms can be demonstrated by a quick examination of cross-border strategic or M and A activity involving Canadian companies and nothing illustrates this better than the numbers. In 1990, total M and A activity involving Canadians was just under $10 billion with approximately 50 per cent being cross-border. In 1995 over $16 billion of strategic initiatives were completed by Canadian companies with almost $10 billion being done cross-border. From 1990 to 1995 strictly Canadian activity increased marginally while cross-border strategic activity increased 100 per cent. Powerful numbers.
The fourth and last key factor that I want to address (because I am running out of time!) is what I call "the next frontier" and that is the equity frontier. I call this the "next frontier" because we have barely scratched the surface in bringing Canadian companies to the U.S. equity markets. Unlike the U.S. high-yield market that does not have a comparable market in Canada, there is a very viable equity market in Canada. While new equity issues completed in the U.S. by Canadian companies have increased from $54 million total proceeds or one per cent of total new issuance in 1990 to $2 billion or 18 per cent of total new issuance in 1995, we are still at abnormally low levels, primarily because of the Canadian dealers' persistence and insistence on a concept that for the equity markets is, or should be, dead--that concept being the "bought deal."
The "bought deal" does not fundamentally satisfy any corporation needs. It is not fundamentally good for issuers, investors or investment dealers. Surely we would all agree, and in fact it can clearly be demonstrated that a marketed deal achieves the broadest form of distribution and, most importantly, allows retail investors to participate in a meaningful manner. It also allows the issuer to tell its story more adequately to investors and provides the most efficient pricing process.
The "bought equity deal" is the only way some firms can compete for the equity business in Canada (and I do not include Mr. Hunkin's firm in this category as CIBC, Wood Gundy and a couple of other major firms have historically been fundamental leaders and believers in Canadian marketed deals for Canadian companies), but those that persist I believe show a fundamental lack of respect for the issuing and investment process.
There are world-class Canadian companies in world-class industries such as oil and gas, telecom, mining or forest products to name a few, who have world-class market values of several hundred million to billions and who currently have a stock price that is controlled by a handful of Canadians. I believe that these companies will follow the leads of companies like Hollinger, AEC, Petro Canada, Magna and others who have had huge success accessing the U.S. equity market in the appropriate manner.
To sum up, certainly there has been an inexorable move toward world-class Canadian companies, of which there are dozens and dozens, moving, if not to the global markets, certainly toward the North American markets.
Again, cross-border debt issuance by Canadian has increased from $6 billion in 1990 to over $13 billion in 1995, including $4 billion from high yield from $0 in 1990.
Cross-border strategic activity by Canadians has increased from $5 billion in 1990 to $10 billion in 1995 and cross-border equity issuance (and next frontier) has increased from $54 million in 1990 to over $2 billion in 1995.
As I have demonstrated, in a relatively short period of time tremendous fundamental changes have taken place. The U.S. dealers are establishing major operations in Canada because of the U.S. market receptivity and potential for the Canadian client. In my opinion, Canadian dealers continue to be somewhat territorial and protective of their historical turf, most dramatically illustrated by the survival of the bought equity-deal concept. And in a world where strategic partnerships are being formed all over the world to meet changing client needs, whether it be Swiss Bank acquiring Warburg or Merrill acquiring Smith Newcourt or Deutsche Bank acquiring Morgan Grenfell, we are lagging somewhat in Canada relative to the changing needs of our client base.
Some progress has been made. We are partners in a major bridge fund with CIBC Wood Gundy in the U.S. and Goldman Sachs has convinced every Canadian dealer they have a special relationship but we have a way to go. John, while it is impolite to brag in front of a microphone, your awards for "best Canadian Securities Firm" by Euromoney two years running are richly deserved and a tribute to your leadership. But I believe that with proper co-operation and co-ordination "still to be defined" we, the Canadian and international dealer community can better and best serve from strategic and capital market perspectives the trend toward the "North Americanisation" of the Canadian client.
The appreciation of the meeting was expressed by John Sadler, Senior Vice-President, Newcourt Credit Group and a Director, The Empire Club of Canada.