The debt market has been one bright spot in otherwise tough financial markets over the past few years, but new data from the Investment Industry Association of Canada (IIAC) shows that the benefits have accrued mainly to the large, integrated dealers.
In his latest letter to the industry, IIAC president and CEO Ian Russell details the rise of the bond markets over the past few years, reporting that industry revenue for fixed income trading and underwriting more than doubled in 2008-2009 to $2.8 billion, although it subsequently pulled back a bit after that initial spike. In 2012, IIAC figures show, total industry revenues reached about $2 billion; with trading revenues down from 2009, but underwriting business up.
“The gains in revenue and profit from the fixed income business can be traced, first, to trading activity such as market-making activities and securities positioning on their balance sheet to benefit from rising bond prices and widening spreads between long and short-dated maturities (carry trade business) and, second, to debt financing and underwriting as governments and large corporations moved into debt markets to take advantage of attractive borrowing rates,” he says.
As a result, debt market revenues rose to represent a record 17% of total industry revenue in 2009, the IIAC says; and, it notes that they have averaged about 12% of industry revenue since then. At the eight large, integrated firms, this business was even more significant, accounting for 20% of revenues in 2008-2009; equaling the total revenue earned by the boutique firms in the same period. Now, it’s down to about 15% of their overall revenues.
At the time, the integrated firms generated about 75% of revenues in the debt markets, with the rest coming from Canadian affiliates of the large global investment banks, and some Quebec-based firms that were expanding this business before the crisis hit. Since then, the integrated dealers have boosted their share even further, so that they now account for 85% of the debt market business, with the retail share falling to just 5% from 11%, and the institutional boutiques’ share slipping a little to 10% from 12%.
Indeed, the IIAC reports that, in the past year, “there has been a surprising retrenchment in market share” by the Canadian operations of foreign dealers. “This reflects several factors: First, some of the foreign affiliate firms are not as well-capitalized as their Canadian counterparts and have pulled back their Canadian operations, reallocating scarce capital elsewhere within the global financial group; second, the improved market share of the Canadian dealers’ trading also reflects a concerted effort on the part of these firms to execute more secondary trading on electronic platforms, notably CanDeal, in response to growing institutional interest for cost-efficient electronic trading.”
Moreover, the bank-owned dealers are the only Canadian firms big enough to participate in the over-the-counter (OTC) interest rate and currency swap markets, which, it notes, have “grown dramatically in recent years to improve returns for lenders and lower financing costs for issuers.”
However, in the years ahead, the large, integrated dealers can expect competition in the space to heat up once again. The IIAC says that it expects the Canadian affiliates of the global investment banks to step their commitment to the Canadian debt markets once again “as regulatory capital is built up within these financial groups, and the demand for non-Canadian-dollar investments and financings remains strong in the Canadian markets.”