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Toronto out to prove stodgy is the new sexy

Toronto’s financial services sector emerged from the global crisis with its reputation unscathed — stodginess was, after all, a good thing. The next challenge will be to grow its role in the global debt markets. Philip Moore reports.

Bay Street, which is Toronto’s version of Wall Street, used to be a dangerous place. So dangerous, in fact, before 1797 it was named Bear Street, not in homage to gloomy stock market speculators, but to bears of the clawed, grizzly and hungry kind that were occasionally spotted there.

Today, the bankers who populate the Bay Street area are in no danger of physical attack from bears of either variety, nor from anyone else. “We don’t hang bankers from lamp-posts,” says Janet Ecker, who served as Ontario’s finance minister between 2002-03, and is now president of the Toronto Financial Services Alliance (TFSA). This is a figurative reference to the fact that Toronto’s financial services sector emerged from the global crisis with its reputation more or less unscathed. 

That is more than can be said for a handful of other financial centres around the world. “The key difference is that Bay Street did not blow up Main Street, which we saw happen in some jurisdictions,” says Ecker. “We did not need to bail out our banks, and none of them were engaged in the sort of questionable conduct that some banks did elsewhere. So it’s a very different business environment and a very different culture.”

If that means being much less swashbuckling than banks in some other financial centres, so be it. “Canada’s banking industry used to be criticised for being too conservative,” says Ecker. “It used to be considered fair game to say that Canada’s bankers and its financial system were stodgy. But as our federal finance minister once quipped, stodgy is the new sexy.”

Ecker also says that if stodginess means being home to the soundest banking system in the world (according to the World Economic Forum), four of the world’s 10 strongest banks (according to Bloomberg) and the global bank of the year (according to The Banker), bring it on. 

Jealously guarding this reputation is important for the health of the Ontario economy, because as Ecker says, financial services contributes about 20% of Toronto’s GDP and accounts for more than 300,000 direct and indirect jobs in the greater Toronto region. 

This job creation, adds Ecker, is being driven not just by local banks. “There are 55 foreign banks in Canada, 45 of which have their head office in the Toronto region,” she says. “There is a growing presence of overseas financial institutions in the city, especially among Chinese banks.” Nor is job creation being driven just by banking. In the first quarter of 2013, employment in the financial services industry — defined as finance, insurance, real estate and leasing — rose by 3.8% year-on-year, compared with a rise in employment across the province of 1.3%. Employment growth in Ontario continues to be underpinned by the province’s services sector.

Local experts

One of the attractions for financial services companies in Toronto, says Ecker, is the diverse reservoir of well qualified people living in and around the city. “Eighty percent of the people in the financial sector have post-secondary qualifications of various kinds, which is one of the highest levels in the OECD,” she says.

The diversity of Toronto’s human resources provides important support for the Toronto Stock Exchange (TSX) in general, and for its leadership in the energy sector in particular. In 2012, the TSX attracted 372 new listings, compared with 115 for the LSE/AIM and 146 for NYSE Euronext. While the total capital raised, $56.3bn, was dwarfed by NYSE ($124.2bn) it comfortably outpaced the $35.7bn raised on LSE/AIM. 

In the energy sector, meanwhile, the TSX is home to 35% of the world’s public oil and gas companies. In 2012 alone, there were 22 new listings raising $9bn — equating to 15% of the equity capital raised worldwide.

“Our leadership in the energy space is not just driven by Canada’s natural resources,” says Ecker. “We have the lawyers, the analysts and the other experts required to bring a new mining company to the public market and help it grow.”

While Canada’s pedigree in the energy sector clearly makes an important contribution to the country’s financial services sector, it also creates an element of fragmentation within the industry, with Calgary rather than Toronto acting as the main hub for much of the financing of the energy industry. “Energy banking is very much based in Calgary, because so many of the energy companies are headquartered here,” says Derek Neldner, managing director and head of Canadian energy at RBC in Calgary. He says that 40 members of his team are based in Calgary with five in Toronto. 

Roadshow destination

While Toronto remains a focal point for many companies in the global equity market, it is also playing an increasingly important role in the debt market. Although Toronto has not always been the most obvious stopping-off point for issuers from Europe or Asia roadshowing in North America, this appears to be changing — and so it should, given the size of the institutional investor base in Canada. Toronto is, after all, home to a handful of the world’s largest, most sophisticated and most cosmopolitan pension funds.

“On the high yield side, we’re seeing more companies tack on a day in Toronto, because it’s easy to do,” says Sean Gilbert, managing director, debt capital markets at CIBC in Toronto. “Over a lunch and a couple of meetings issuers can get access to an investor base that is used to buying high yield bonds in the US dollar market in 144A format. So if you’re travelling from New York to Chicago, Toronto is an obvious place to stop for a day.

“On the investment grade side, we haven’t seen a similar development yet, probably because the Yankee market is so deep and liquid that few see the need to come to Toronto. But over time we may see that evolve.”

Lofty ambitions

While its sturdy reputation for probity will help to attract bright young graduates to Toronto’s financial services sector, the city’s cosmopolitan character and its quality of life should continue to attract more investment and personnel from overseas.

According to The Economist, if you’re planning to start a family in 2013, Canada is the ninth best country in the world to do so. More specifically, Toronto ranks fourth among the world’s cities in this year’s EIU Liveability index.

Canadian bragging rights go to Vancouver, which is third, behind Melbourne and Vienna, but Toronto is placed well ahead of financial centres such as London and New York, which languish unflatteringly at 55th and 56th in the index respectively.

Toronto certainly has lofty ambitions — very literally. There are reportedly twice as many high-rise buildings now under construction in Toronto than there are in New York. That means that within a couple of years the Canadian city will have 44 skyscrapers more than 150m high, compared with just 13 in 2005.

There are obvious downsides to the furious construction activity that is clearly visible to any visitor to Toronto today. Traffic congestion in the central business district is an increasing source of frustration to downtown employees, and real estate prices continue to climb in the commercial and residential sectors. The average cost of a detached home in the city of Toronto reached $784,000 in August.

Rising prices and an increasingly stretched infrastructure do not seem to deter individuals from choosing Toronto as a place to live and work.

Senior professionals from in the financial services industry in Toronto say that they have encountered no difficulty in recruiting the highest quality professionals — from overseas as well as locally. That has been especially important for the three largest Toronto-based public pension plans, for example, which between them manage assets of about $380bn.

“In the early years it was a challenge to find people locally,” says Don Raymond, senior vice president and chief investment strategist at the Canada Pension Plan Investment Board (CPPIB), which employs 823 people in Toronto. Raymond himself returned to Toronto 12 years ago from New York, where he was at Goldman Sachs, and he says he is by no means exceptional in having made the switch across the 49th Parallel. “As we’ve become more high profile we’ve been able to attract more senior people from places like the US with no prior connections to Canada at all,” he says. 

Toronto recognises that there can be no room for complacency in the management of its human resources. “At TFSA, we spend a lot of time visiting schools and educating young people about choosing financial services as a career,” says Ecker. “We also work closely with the immigration department to explore ways of bringing more global talent to Toronto.”