Even after a multiyear stream of transactions, the financial services sector is poised to serve up yet more deals in 2014.
Since the financial crisis, Canada's banks have been busy buyers of other companies, scooping up personal and commercial banking assets at home and adding wealth managers abroad. More recently, insurers have picked up their pace of purchases, while equipment-financing companies such as Element Financial Corp. have also boosted deal volumes with acquisitions and share issuance.
Despite the heavy activity, the sector shows no signs of cooling. After years of concerns about their capital levels, banks and insurers are finally on solid footing, giving them the flexibility to contemplate additional acquisitions.
Wealth management remains a prime area for expansion. As memories of the financial crisis fade, people are once again eager to invest. And since revenue in this area comes largely from management fees, wealth management chews up far less of a company's capital than capital markets operations.
"Pound for pound, dollar for dollar, asset management is a significantly less capital-intensive business," said David Skurka, deputy head of investment banking at Scotia Capital, who also leads the bank's financial institutions group.
Just two months into 2014, Bank of Montreal struck a billion-dollar wealth management deal, buying London-based F&C Asset Management for $1.3-billion.
More acquisitions are expected – and not only from the banks.
Canada's big life insurers – Manulife Financial Corp., Sun Life Financial Inc. and Great-West Lifeco Inc. – all have sizable asset management arms, and have signalled an intent to expand their operations. While banks tend to buy whole asset managers, insurers are better known for "lift outs," according to Brad Hardie, who heads up BMO's financial institutions group. In these smaller deals, an insurance company buys a portfolio management team with a great track record and plugs them into the insurer's own distribution channels.
For both banks and insurers, any deals are likely to come from beyond Canada's borders. "We've got a very consolidated Canadian marketplace," Mr. Hardie said, "and we've also got the big banks at a point in the development cycle … where they are looking to really build out global scale."
Bank of Nova Scotia has laid out plans to expand its wealth management business in South America, where it already holds stakes in pension fund managers. The business of managing retirement assets is particularly lucrative in Latin America because few countries have government-run programs, such as the Canada Pension Plan. In several countries, a portion of each employee's paycheque must go into a defined contribution account, overseen by an asset manager such as Scotiabank.
Both Sun Life and Manulife, meanwhile, are aggressively pursuing growth in Asia.
Transactions outside of wealth management are likely to be reflect each company's specific agenda. In the property and casualty (P&C) insurance market, for instance, Travelers Co. Inc. recently bought Dominion of Canada General Insurance for $1.1-billion, and the U.S.-based property and casualty insurer may seek to consolidate the highly fragmented Canadian market. Travelers "adds another competitive dynamic to the P&C space," Mr. Skurka said.
Element Financing, which specializes in equipment financing, has a game plan of its own. Element raised more than $1-billion in equity in 2013, using the funds to expand its leasing operations, which are backed by assets such as helicopters and rail cars.
So far, investors have been more than happy to play along, sending Element's stock soaring 50 per cent in the past year. "The bloom came off the resource rose two years ago," said Neil Selfe, managing director at GMP Securities and an adviser to Element, causing Canadian investors to look elsewhere for growth. "If you're looking to play financial services and are looking for a growth story, Element is it."
To be sure, mergers and acquisitions aren't the only way to drum up the flow of deals. Canadian banks have already started issuing a new type of preferred share that is compliant with the latest international capital rules, and may need to issue $20-billion worth of these securities over the next few years.
But acquisitions are likely to be the biggest driver of activity. Banks are generating a large amount of capital, and they aren't deploying much of it to buy back shares, said financial service analyst Sumit Malhotra at Scotia Capital.
"Their mandate to grow earnings per share is driven more by boosting net income than shrinking the share count," he said. For that reason, when it comes to acquisitions, "each of the Big Six banks is open for business."