Canada's two largest commercial banks could hardly have taken more different approaches to integrating investment banking and traditional businesses.
Canadian Imperial Bank of Commerce, which bought a majority stake in one of the country's top securities firms in 1988, began melding the unit with its banking operations almost immediately. For example, it put one of its own executives in charge of the business and encouraged many investment bankers to resign.
Royal Bank of Canada, the country's largest, also bought into the securities industry in the late 1980s-but held off on integration until last November. Until then, the bank maintained clearly distinct reporting lines for commercial bankers and capital markets specialists, with one group based in the bank and the other in a separate unit.
Despite the divergent strategies, Royal Bank and CIBC have come to firmly dominate Canada's underwriting market. The combined volume of lead- managed deals for these two banks was 30% more than the combined volume for the country's three other big banks last year.
And therein lies a tale.
As major U.S. banks struggle to absorb investment banking units acquired in the past few years, the story of Royal Bank and CIBC shows that there is no one-size-fits-all solution to this crucial strategic issue. Although all but one of the Big Five Canadian banks have now blended their commercial banking and investment banking businesses, they have done so in different ways and at greatly different speeds.
Some are clearly grateful for having moved slowly.
"It took time for people at the securities firm to feel comfortable with the bank," said Peter Curry, chief financial officer of Royal Bank of Canada. "They are quite different cultures."
Shared reporting lines can reduce conflict between investment bankers and their commercial bank counterparts, Mr. Curry said. But until November, separate reporting lines did not keep Royal Bank from knocking CIBC out of the No. 1 spot in overall Canadian financings, according to an annual ranking in the Financial Post.
RBC Dominion Securities Inc., the bank's capital markets unit, raised $8 billion in debt and equity offerings for 225 Canadian corporations and governments, lead-managing 74 of those deals, according to the Canadian newspaper.
CIBC Wood Gundy Securities Inc., the Canadian arm of CIBC World Markets, raised $7.2 billion for 262 Canadian corporations and governments, leading 69 of those offerings.
Royal Bank owed much of its position last year to its long-term dominance of the government debt market, while CIBC just edged past its rival in corporate debt underwriting.
These two banks also alternated in the top spot for most 1998 underwriting segments. The only surprise came when Toronto-Dominion Bank's securities unit-which ranks fifth or sixth in most categories-ranked No. 2 in lead-managed corporate debt offerings.
But in terms of penetrating the domestic market, no other Canadian bank comes close to the top two. CIBC participated in 19% more Canadian debt and equity offerings and led 33% more deals than the country's third-largest underwriter last year-Nesbitt Burns Inc., a Bank of Montreal unit.
While some CIBC bankers take credit for leading the way in integration, others in the market say CIBC essentially had no choice. They describe the $165 million the bank paid for a 62% share of Wood Gundy Corp. in 1988 as more of a rescue.
"The reality of the situation is that CIBC bought Wood Gundy and took control of it. Royal Bank bought Dominion, and Dominion took control of it," a Canadian market source said.
Dominion executives were highly regarded when the bank made its acquisition, Mr. Curry said. Since founding the firm 15 years earlier, they had built it up into one of the country's leading investment banks.
But Wood Gundy-a venerable Canadian firm with roots dating to 1905-had just suffered a big hit in the 1987 market crash, mostly due to a large deal for British Petroleum that had to be renegotiated.
"Wood Gundy sort of imploded," said Patricia Meredith, who had just joined the firm at the time and is now an executive vice president and strategist at CIBC World Markets.
"The biggest difficulty was the cultural issue," she said. "People in a brokerage really have a hunter mentality, chasing the next deal. So much of a banker's revenue comes from interest on existing loans."
After CIBC staked its claim in Wood Gundy, the bank took a strong hand in running the firm-encouraging many of the senior executives to resign and bringing John Hunken over from the bank to run it.
CIBC merged the trading rooms of the bank and the securities firm in 1989. Then, in 1994, CIBC integrated corporate lending and investment banking, putting one executive in charge of both.
"I think a lot of the other banks decided to imitate us once they saw how successful we were," said David J. Kassie, who heads CIBC's global originations for corporate and investment banking.
In November, Royal Bank created a position similar to Mr. Kassie's, appointing Gordon Nixon, who joined the bank from Dominion. Mr. Nixon and Mr. Kassie now battle each other from opposite ends of Bay Street, a northern version of Wall Street that cuts through the center of Toronto.
Mr. Nixon suggested that Royal Bank reaped clear advantages by moving slowly on integration.
"I think relative to the United States, Canadian bankers have a big advantage in that we have had 10 years to live together before actually integrating," he said. "Managing culture is a very big challenge. It's better to let it evolve."
Some corporate customers do not want their commercial and investment bankers to get too cozy, added Daniel F. Sullivan, deputy chairman of ScotiaMcLeod Inc., the Bank of Nova Scotia's securities unit.
"There are some things clients might tell their investment banker that they would not want shared with their lender," said Mr. Sullivan, who came from the firm McLeod, Young, Weir & Co., which the Bank of Nova Scotia acquired during the rush to purchase firms in 1988.
And, observers said, formal organizational links may not be needed for commercial and investment bankers to engage in healthy teamwork.
"If you've got a bank that is associated with a dealer, given the motivations of all the people involved, they are going to establish the networks they need," said Michael Goldberg, a Canadian financial industry analyst with HSBC Securities Inc. in Toronto.
Generally speaking, however, the big banks are each embracing some degree of formal integration.
Bank of Nova Scotia is the only one of the Big Five that has not yet formally melded its capital markets unit with the bank, but executives are drafting a plan to implement in November, according to Mr. Sullivan. He said he did not yet know if it will take the form adopted by CIBC and the Royal Bank.
Profitability has not always followed market share in Canada's tight- knit investment banking community. The country's two top underwriters watched the bottom line drop in their capital markets units during the last fiscal year, which ended Oct. 31.
Among the top underwriters, Royal Bank was the least scathed. The top line of its securities unit was down 4% for the year, to $1 billion, and the bottom line was down 8%, to $121 million.
The performance of CIBC's investment banking unit could hardly have been more mixed. It had almost double the revenues of the securities subsidiaries at Canada's other big banks-watching its top line soar 21% in 1998, to $2.3 billion. But its bottom line was nearly sliced in half from a year earlier.
The banking unit was solidly profitable in the first half of its fiscal year. But in the last quarter, it lost over $100 million in the global capital markets disruption of the late summer and early fall.
CIBC has pursued the most aggressive agenda abroad. All of the bank's securities acquisitions other than Wood Gundy have been in foreign markets, culminating in its $525 million acquisition of New York-based Oppenheimer & Co. in 1997.
Profits in the banking unit rebounded in the quarter ending Jan. 31-with net income rising 26% from a year earlier, to $71 million. The bank did not break out Oppenheimer for that period, but clearly it performed better, said Hugh Brown, a bank analyst with Nesbitt Burns.
Though integration can be disruptive, executives at Royal Bank and CIBC seem to agree that, ultimately, it is vital to maximizing profits at a securities unit.
And Royal Bank's Mr. Curry said he is already seeing other benefits from the integration plan his bank implemented last November. "We are whittling down the book, and it helps to take everything into account," he said.
This is one way that integration can benefit the bottom line of the bank holding company, he said, and not just its investment banking subsidiary.