Brian Steck once was a vocal foe of financial services convergence, viewing it as unwise for banks and securities firms to affiliate.

Then came the Canadian Bank Act of 1987, clearing the way for such deals.

"I made the first phone call to the Bank of Montreal," recalls Mr. Steck, then chief executive officer of Nesbitt Thomson, a large Canadian investment bank. "I thought it would be foolhardy to go it alone."

And so it was that Canada's banks began snapping up the country's securities firms. Bank of Montreal bought 75% of Mr. Steck's firm, and three other banks from the top five proceeded with similar deals. Another top bank, Toronto-Dominion, began building its own securities unit.

Twelve years later, the experiences up North stand as guideposts to bankers in the United States. Many U.S. banks have been pushing into investment banking as a way to bolster ties with corporate clients. And the trend could well accelerate if Congress passes financial reform legislation.

In this story and one Friday, American Banker explores how Canadian banks handled two of the trickiest strategic issues: whether to buy investment banks or build them, and how to integrate investment banking with traditional corporate banking.

Though buying is not cheap in any economic cycle, the Canadians were doing so shortly after the global slump of 1987-and so benefited from the sustained market boom of the 1990s. And if a bank is serious about getting into this business, buying is the quickest and surest way to do it.

"There are days when I wish we had bought," says Donald A. Wright, chairman and chief executive of TD Securities Inc., the home-grown subsidiary of Toronto-Dominion Bank. "It's difficult to build."

Judged by market share alone, the Toronto-Dominion's strategy has been less than a smashing success. The bank lags its competitors in both domestic debt and equity underwriting tables, ranking No. 6 overall last year, according to Canada's Financial Post.

But Mr. Wright, who came to TD five years ago after running Merrill Lynch & Co.'s Canadian unit, says that league tables tell only part of the story.

"When you are building, you can make decisions as you go along," he says. And TD has been firmly profitable, thanks in part to a thriving retail brokerage it formed alongside the investment banking business.

Certainly, those banks that bought their way into the business faced some tough times initially. They were widely criticized during the recession of the early '90s for taking longer than expected to see a return on their investment, says Gordon Roberts, a finance professor with Toronto's York University.

Four of the top five Canadian banks spent an average of $200 million to $300 million apiece on these firms in 1987 and 1988. And in most of those cases the partners retained a minority interest that later had to be wound up.

But market perception has swung with the economic cycle, Mr. Roberts says, because the banks with the biggest securities units made more money in the capital markets during the sustained 1990s boom.

Last year was a notable exception. With the five big banks closing their fiscal year on Oct. 31, capital-markets results were hurt by the global economic woes of the summer and fall.

Even so, the $1.5 billion of revenues at the Royal Bank of Canada's securities unit accounted for 16% of the holding company's revenues. And the $187 million net income at the securities unit last year represented 9% of the holding company's bottom line, more than at most U.S. banks that have gotten into this business more recently.

Royal Bank, Canada's largest in terms of assets, paid $312 million for its majority stake in Dominion Securities Inc. in 1988. Both the bank and the firm were well known for their voracious appetite for acquisitions.

Dominion was already an amalgamation of five mergers. And since becoming part of the bank, it has made eight acquisitions outside Canada, from the United Kingdom to Australia.

The Royal Bank unit has also purchased four domestic firms since 1988, ranging from a commercial real estate shop to another full-service investment bank, for which it paid $325 million.

This large outlay of appears to have paid off in market share. RBC Dominion Securities Inc., Royal Bank's securities unit, was the largest underwriter of debt and equity financings for Canadian governments and corporations last year, according to the Financial Post.

Gordon Nixon, a Dominion Securities veteran who was put in charge of both corporate and investment banking in November, says the banking unit has been successful because it has learned to adapt.

"We have developed more of an investment banking culture, trying to maximize revenues per client," he says.

Canadian Imperial Bank of Commerce, Canada's second-biggest bank, has also purchased a number of securities firms over the years. But after 1988 all of its acquisitions were outside of Canada.

The bank made its last securities acquisition in 1997, paying $350 million in cash for New York-based Oppenheimer & Co. As part of that deal, the bank also created a three-year $175 million retention pool for Oppenheimer employees.

Oppenheimer's top line was $1.1 billion last year-below the bank's initial projections-but the real disappointment was Oppenheimer's bottom line, according to Hugh Brown, a bank analyst with Toronto-based Nesbitt Burns Inc. He had projected operating income of around $50 million for the first year of bank ownership. Instead, Oppenheimer ended the year with roughly a $56 million operating loss.

But within Canada, Canadian Imperial is the only one that can give Royal Bank a run for its money in the capital markets. From year to year the two banks usually alternate in holding the title of Canada's top underwriter.

Two other large Canadian banks bought securities firms in the late '80s, and their market shares fall between the those of top two banks and Toronto-Dominion in most segments of the capital markets. Last year Bank of Montreal ranked No. 3 in overall Canadian financings and Bank of Nova Scotia ranked No. 5, behind Merrill Lynch & Co.

But these two banks have been relatively restrained in their securities acquisitions since making their initial investment in capital markets.

Though Bank of Montreal started the buying trend with its Nesbitt Thomson deal, it waited seven years to pull off its next and last securities acquisition. In 1994 the bank paid $295 million for a competitor, Burns Fry, and rolled it into Nesbitt, which it now fully owns.

Likewise Bank of Nova Scotia, after buying McLeod, Young, Weir & Co. in 1988, made just one more securities acquisition, paying $19 million for a metals trading and finance group.

Toronto-Dominion, for its part, has something to show for sitting out the buying spree. Last year it was the only one of Canada's so-called Big Five banks that did not see the bottom line drop at its securities unit. Rather, the unit's net income edged up 2%.

Unlike its rivals, the Toronto-Dominion unit gets about half of its revenues from global retail brokerage, the result of rapid growth in that field. In 1996, for instance, the bank bought U.S.-based Waterhouse Investor Service for $524 million.

Had Toronto-Dominion opted to buy an investment banking firm 10 years ago, it might not have pursued the retail brokerage business as aggressively, says Michael Goldberg, a financial services analyst with HSBC Securities Inc. in Toronto.

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