Mid-sized deals continue to stumble as commodity prices decline
Canadian independent investment banks are driving on a rocky road, with their profits being pressured by a reduction in client activity.
A DBRS report cited the declining commodity prices as the culprit. After peaking in 2012, prices have become low and volatile, causing a considerable downtrend.
With this, investment banks were left in a weakened market position despite their efforts to restructure and diversify. DBRS said the ability of these banks to recover any lost market share is restricted by inconsistent profitability and weakening credit fundamentals.
In fact, figures paint a dismal market picture. For instance, volumes in Canadian equity capital markets are down 19% year-to-date, while volumes for deals ranging $10 million to $100 million dipped 7%.
It is important to note that the market momentum experienced in previous years was driven by larger deals typically underwritten by banking giants. It is a different scene altogether with independent investment banks, as the market remains soft and not very active.
In terms of mergers and acquisitions, mid-sized deal volumes decreased significantly, down 31%. Furthermore, while industry-specific M&A volumes have doubled YoY, industry-specific mid-sized volumes still slumped by 37%.
"This again highlights the volume of larger transactions that are being completed, which are typically assigned to larger banks, while small- and mid-cap transactions have been sidelined," DBRS said.
Looking ahead, independent investment banks will remain pressured given their lack of diversity compared to their large counterparts. More so, their revenue streams will continue to be impacted by the unpredictability in commodity prices.
"Furthermore, pressured cash flows and increasing leverage are becoming more of a concern, as the challenging market conditions that are driving these trends are not abating," DBRS said.
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A DBRS report cited the declining commodity prices as the culprit. After peaking in 2012, prices have become low and volatile, causing a considerable downtrend.
With this, investment banks were left in a weakened market position despite their efforts to restructure and diversify. DBRS said the ability of these banks to recover any lost market share is restricted by inconsistent profitability and weakening credit fundamentals.
In fact, figures paint a dismal market picture. For instance, volumes in Canadian equity capital markets are down 19% year-to-date, while volumes for deals ranging $10 million to $100 million dipped 7%.
It is important to note that the market momentum experienced in previous years was driven by larger deals typically underwritten by banking giants. It is a different scene altogether with independent investment banks, as the market remains soft and not very active.
In terms of mergers and acquisitions, mid-sized deal volumes decreased significantly, down 31%. Furthermore, while industry-specific M&A volumes have doubled YoY, industry-specific mid-sized volumes still slumped by 37%.
"This again highlights the volume of larger transactions that are being completed, which are typically assigned to larger banks, while small- and mid-cap transactions have been sidelined," DBRS said.
Looking ahead, independent investment banks will remain pressured given their lack of diversity compared to their large counterparts. More so, their revenue streams will continue to be impacted by the unpredictability in commodity prices.
"Furthermore, pressured cash flows and increasing leverage are becoming more of a concern, as the challenging market conditions that are driving these trends are not abating," DBRS said.
For more of Wealth Professional's latest industry news, click here.
Related stories:
Should investors be worried about another Black Monday?
Are your clients braced for a market downturn?
