Montreal-based national Bank Correspondent Network (NBCN) has announced its plan to acquire one of its major competitors,Toronto-based TD Waterhouse Institutional Services (TDWIS). The $250-million transaction, which would increase NBCN’s assets under administration (AUA) by almost 70%, would be one of the largest-ever consolidations in the Canadian back-office business.

“I think we were the natural fit as a buyer,” says Martin Gagnon, chairman of NBCN. “We have the same philosophy and approach that TDWIS has and we are both bank-owned, so our cultures mesh very well.”

(Executives with TDWIS declined to comment for this article.)

The acquisition will boost NBCN’s AUA to more than $84 billion from $50 billion.

Both NBCN and TDWIS have been major players in the clearing and back-office sector and, combined, were already serving a large portion of the market. Both firms offer back-office services to independent registered portfolio mangers and introducing brokers; these services include custody, trading, clearing, settlement and record-keeping.

NBCN’s retail client firms include 67 members of the Investment Industry Regulatory Organization of Canada (IIROC) – approximately one-third of the self-regulatory organization’s non-bank-owned membership – and 77 portfolio-management firms, for a total of 350,000 individual retail client accounts. Upon completion of the acquisition, NBCN could see those numbers rise to 88 IIROC-member dealers and 320 portfolio-management firms – for a total of 480,000 retail client accounts.

“Combining both teams is really going to bring an exceptional level of expertise together,” Gagnon says. “And while we do have to mesh two bank cultures together, a majority of these employees are committed to the industry that they work in.”

The acquisition fits NBCN’s strategy to expand outside of Quebec, Gagnon says. Already, the firm is looking to recruit relationship managers in Western Canada.

“We need to have a footprint in the West,” Gagnon says. “And this was something we were already thinking about prior to the acquisition. Now, we could have a very large presence in those [western] provinces.”

Both parent banks work on the same IBM Corp. platform, Gagnon says, which will facilitate a smooth transition. The client account conversion is expected to take eight months following the deal’s closing this year. Already, Gagnon has sent out offers to retain more than 60 member of TDWIS’s staff.

“We have a three-year growth strategy,” Gagnon says, “but we are only going to focus on executing a flawless transition for the clients coming on board. It is the biggest conversion [of its kind] in Canada that has ever happened, and it needs to happen seamlessly for the end-client.”

To help in client retention, Gagnon is relying on Patrick Primerano, who recently joined NBCN as executive vice president. Previously, Primerano was executive vice president at TDWIS, where he worked for 18 years.

“One of the important factors about the acquisition is that we knew we were getting into this with Patrick at the helm,” Gagnon says. “He knows the client base as well as the people at TDWIS, so we assume we will see very high retention of clients. Patrick brings a level of comfort to the table.”

As regulatory changes continue to increase compliance costs for dealer firms, those firms are looking to providers of clearing and custody services for increasingly cost-effective packages of services. NBCN has expanded its service offering to include an accounting service and a managed-account service team to help client firms assemble private investment-counselling offerings.

“We are competing with the Big Five [banks],” Gagnon says. “And this strategy of supporting independent portfolio managers and brokers gives us an advantage.”

TDWIS’s platform will add to NBCN’s service offering. For example, NBCN will retain TDWIS’s account-opening and fund-transfer processes. In addition, NBCN will add US$ RRSPs to its services shelf. 

“We analyzed the advantages of [TDWIS’s] platform and the advantages of ours and wanted to combine the best of both worlds,” Gagnon says. “I think this is an industry that is going to keep transforming itself, so you have to have deeper relationships with your clients and expand your offering to them. As well, our other IIROC platforms – full-service and direct-brokerage – will also benefit from these improvements as we implement across wealth management.”

With only a handful of players in the back-office market, a single consolidation can have significant impact. Independent provider Fidelity Clearing Canada ULC of Toronto, which entered the market in 2004, gained a significant portion of Dallas-based Penson Worldwide Inc.’s clients through a referral arrangement when the U.S.-based Penson shut down its operations in Canada last year.

“With any change in the marketplace,” says Todd Roadman, CEO of Fidelity Clearing Canada, “opportunities arise for firms [in the back-office business].”

Toronto-based Raymond James Ltd. entered the back-office and clearing business this summer. The firm has $2.5 billion in custodial AUA but has been busy ramping up its client roster after hiring industry veteran David Burnes as senior vice president of correspondent services this past May. Burnes formerly was executive vice president with NBCN.

“The elimination of a major participant creates room for others to expand their presence in the marketplace,” Burnes says. “The exit of Penson and TDWIS has narrowed the field considerably and created opportunities for the next wave of providers.”

© 2013 Investment Executive. All rights reserved.