Text Version (IBM-PLI Quality Score Ranking): IBM-PLI Quality Score Ranking
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Western Canada’s Capabilities in Trade-related Financial and Business Services: A Solid Niche Industry Base
Western Canada’s financial and business services cluster is growing rapidly as the region develops as a global commercial gateway and the volume of international transactions increases. Western Canada’s strength in the sector is its solid industry base of financial and business service firms providing a wide range of services. They include banks, insurance companies, credit unions, trust and loan companies, securities dealers, finance and accounting firms, mutual fund companies, brokers, currency trading and hedging companies, commodity traders, business process outsourcing providers, management service companies and administrative service providers. All of Western Canada’s major cities, such as Vancouver, Calgary, Winnipeg and Saskatoon, have large clusters of these firms. Vancouver, for instance, has 11,900 banking and insurance firms: a significantly higher number, compared to San Francisco, Houston or Boston120.
Western Canada’s trade-related Financial and Business Services sector enjoys several significant advantages relative to other competitor destinations. The increasing flow of goods through Vancouver into the North American heartland makes this city an ideal location to establish and grow trade-related financial and business services. Indeed, the history of the development of major financial centres such as New York, Hong Kong and Singapore shows that these cities were, at first, gateways that then developed capital and foreign exchange markets to support their gateway trade activities.
Employment Levels, Contribution to GDP and Key Foreign Investors
The Finance and Insurance sector employs a significant proportion of western Canadians. In 2008, approximately 323,900 people in Western Canada were employed in the finance, insurance, real estate and leasing industry121.
At the provincial level, British Columbia had 47% of western Canadian employment in the Finance, Insurance, Real Estate and Leasing sector, with 152,300 employees in this sector in November 2009122. Of course, these broad categories capture a wide variety of workers performing diverse tasks in the Financial and Business Services sector. For example, BC Stats reports that in 2008, there were 50,000 employees working in banking institutions; 30,400 employees in insurance carriers, funds and other financial vehicles; 15,300 employees in securities and commodity contracts; 12,400 employees in business services; and 7,500 workers in management of enterprises and other administrative services in 2008123. In terms of revenues, British Columbia recorded operating revenues of $1.59 billion in accounting and bookkeeping, $628 million in employment services, $2.97 billion in engineering services and $478 billion in advertising services in 2007124.
Leveraging its geographical advantage, Vancouver has become an international hub for financial services. There are at least 30 foreign banks and 15 international financial institutions in Vancouver125, and all of the major Canadian banks – the Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce – have a strong presence in the province. HSBC, the world's largest banking group, also has its Canadian headquarters in Vancouver. The credit union system is quite developed in British Columbia, and there are 48 credit unions and 51 trust companies authorized by the B.C. Financial Institutions Commission126. Leading insurance companies, such as Manulife Financial, also have large-scale operations in British Columbia, and the province attracts a large amount of venture capital investment. In 2008, B.C. attracted $259.8 million in venture capital funding, or 18.9% of total venture capital funding in Canada127.
As a result of both its status as a gateway and its connections with the Asia-Pacific region, Vancouver has attracted several global financial services firms. These include the Bank of China, the Bank of Tokyo-Mitsubishi UFJ, JP Morgan Asset Management, Merrill Lynch Inc., the Bank of America, Citibank and the Korea Exchange Bank of Canada.
Alberta had 106,000 employees in the finance and insurance category in November 2009128. Alberta’s Financial Services sector has approximately 5,100 firms, including 12 of the world’s top 20 investment banks and Alberta Investment Management Corporation, one of Canada’s largest institutional investment fund managers129. The business services industry in Alberta is also large, with over 800 business services companies in Calgary alone130. Calgary is known as one of the fastest-growing economic regions in North America, as well as a key hub in energy finance, and the city’s Financial Support Services sector employs about 22,700 people131. In 2007, Alberta had operating revenues of $1.68 billion in accounting and bookkeeping, $1.49 billion in employment services, $5.04 billion in engineering services and $390 million in advertising services132.
Manitoba had 36,700 employees providing services in the Finance and Insurance sector in November 2009133. Manitoba’s financial and business services companies are concentrated in Winnipeg, where approximately 25,000 workers are directly employed in the Finance, Insurance and Real Estate sector134, and more than 10,600 workers are employed in the Business Services sector135. Leading firms in the industry that have headquarters in Winnipeg include Great-West Lifeco Inc., IGM Financial Inc., Boyd Group Income Fund, The Wawanesa Mutual Insurance Company and Assiniboine Credit Union Ltd.
Manitoba’s Financial Services sector alone contributes close to $4 billion to the province’s GDP136. The 2007 operating revenues in some key categories include $326 million in accounting and bookkeeping, $61.1 million in employment services, $187 million in engineering services and $79.2 million in advertising services137.
Existing Government Programs
At the provincial level, there are a number of incentive programs available to financial services companies establishing operations in western Canadian provinces. The Government of British Columbia offers a 30% tax credit to investors who provide venture capital to eligible small firms engaged in R&D in the province. In addition, British Columbia’s International Financial Activities Act (IFAA) is of particular interest to financial services firms. The International Financial Activities program gives a refund of up to 100% of provincial corporate income taxes to eligible firms engaging in international financial activities from British Columbia138, and it has already contributed to the provincial economy significantly. MMK Consulting finds that, because of the IFAA, British Columbia’s GDP increased by $0.5-$0.75 billion (which makes up 0.26-0.39% of GDP) and 5,000 to 8,000 new jobs were created in 2007. In addition, the Government of British Columbia offers IFA specialists a refund of up to 75% of B.C. income tax paid on net employment income earned from eligible international financial activities139.
In Saskatchewan, investors in shares of a provincially registered Labour-Sponsored Venture Capital Corporation (LSVCC) are eligible for a provincial tax credit equal to 20% of the cost of their investment in addition to a 15% federal tax credit on the first $5,000 of investment per year. Manitoba also promotes innovation by providing a 20% R&D tax credit to qualifying scientific research and development expenditures140.
Business Case Analysis: Cultural Connections will be Important
Our analysis of IBM-PLI data shows that in terms of quality relevant to the Financial Services sector, western Canadian centres do not compare favourably with leading European and North American financial services centres. Vancouver ranked 12th on IBM-PLI’s quality score, significantly behind leading centres such as London, New York, Chicago, Toronto and Montreal. At the same time, however, we note that Vancouver does rank competitively with second-tier financial centres such as Raleigh-Durham, Jacksonville and Boston on the IBM-PLI quality score. Key weaknesses of western Canadian centres for the Financial Services sector were the relative lack of an industry cluster, a relative lack of potential to recruit skilled staff and real estate constraints. Key strengths were the availability of language skills and superior living environments in western Canadian centres.
On IBM-PLI’s Profitability Index, western Canadian centres (especially Winnipeg) provide a compelling value proposition. For example, Winnipeg has an 8.6% cost advantage over Jacksonville and a 13% cost advantage over Raleigh-Durham. However, we note that centres such as Vancouver and Calgary do not have a major cost advantage over U.S. centres such as Jacksonville and Raleigh-Durham, which have attracted recent back-office investments by U.S. financial institutions.
One key advantage in favour of Vancouver over other centres in North America is the large Asian population in the city. While this factor may not have a quantifiable impact on the decision to invest by foreign investors, we think that having a large population base that speaks the same language as do clients in the Asia-Pacific region cannot hurt the prospects for the development of this sector in Vancouver. In fact, it is probably the main reason why HSBC established its Canadian HQ in the city and undertakes significant international commercial and wealth management business from its base in Vancouver. Also, several Asia-Pacific banks have chosen to establish retail locations in Canada only in Vancouver, because of the large Asian immigrant populations in the city.
We think that as the Asia-Pacific region continues to grow, there will be increasing demand for transactions related to international trade. Key investors will include banks and financial institutions based in the Asia-Pacific region, and we already see the beginnings of these investments in Vancouver (on the retail side). Further, attendant business services such as legal services, accounting services, etc. will also see growth as Vancouver becomes a relatively important gateway city compared to competitors on the U.S. West Coast.
Industry Structure and Competitive Dynamics: Opportunities in Gateway-related Growth
Canada’s banking and financial services industry is regulated at the federal level. Part of the regulatory requirement is that Schedule II and III banks have certain operating and ownership restrictions that act as a deterrent to large-scale investments by foreign banks in mainline businesses such as retail banking. Under Bill C-8 (2001), institutions with over $5 billion in equity cannot have any person or entity owning more than 20% of the voting shares or 30% of the non-voting shares (effectively eliminating foreign bank entry into Canada on a large scale). Further, Bill C-8 stipulates that institutions with equity of $1 billion to $5 billion are subject to having a public float of 35% of voting shares (which precludes financial institutions that do not want to enter public markets in Canada). Only institutions with less than $1 billion in equity have no ownership restrictions.
These ownership restrictions and the dominant market share of Canada’s “Big 5” banks in retail and commercial banking markets will remain in effect for the foreseeable future. Consequently, most foreign banks in Canada have chosen to focus on specific niche segments of the Canadian market, in areas such as trade finance, credit card issuance, wealth management and institutional and commercial leasing and lending. Where there are retail operations, these are mainly focused in a handful of cities in Canada, where specific retail niches can be developed for immigrant communities.
We generally do not view these ownership restrictions as being too onerous as far as running sizable international banking operations is concerned. Additional investments by financial institutions based out of the Asia-Pacific region will likely begin to exploit specific niche segments, such as retail banking, mobile banking and/or wealth management for specific immigrant populations. Over time, these will mature to international commercial relationships. As such, existing ownership limitations of $1 billion in equity is high enough that niche operations continue to be established in Western Canada. Indeed, several Asian financial institutions have established retail operations in Western Canada.
Foreign Direct Investment Implications: Targeting Niche Trade-related Investments
Given this industry structure, we think that there is a real opportunity to attract foreign banks to undertake niche trade-related financial and business services activities in Western Canada. Leveraging the growth of representative offices by shipping lines, transportation and logistics companies, and 3PL and 4PL service providers, Vancouver provides the natural location for the processing of financial instruments such as pre-shipment financing, PO financing, Letters of Credit, Buyer Financing, Documentary Collections, Buyer/Supplier credit, post-shipment financing, inventory financing, invoice and A/R factoring, etc.
This is because, despite having a cost structure that is not more competitive than that of other Tier 2 centres (particularly Jacksonville or Raleigh-Durham), Vancouver does have a large Asian population that will increasingly be needed to process transactions with counterparts in the Asia-Pacific region. Also, Vancouver’s position on the west coast gives it a two- to three-hour window of opportunity to work with Asia-Pacific partners, which does not exist for Eastern or Mountain Time Zone competitors.
The experience of HSBC over the past two decades in Western Canada is telling. HSBC chose to establish operations in the region first, because it saw an international commercial opportunity there. However, the bank only began to grow its operations after it acquired the assets of a failed financial institution, the Bank of British Columbia, in 1986. The Bank of British Columbia had a strong retail presence in the B.C. market. By acquiring it, HSBC gained 41 branches in British Columbia and Alberta, and went from being Canada’s 20th-largest to its 9th-largest bank. HSBC then leveraged its strong retail presence in the Asia-Pacific region to service its retail clients in Western Canada. It then chose to grow its commercial and international operations in the region.
We think that the potential entry of other financial institutions will be based on a similar model. They will be compelled to invest in Western Canada first, because of its large immigrant population, and then to attract key international commercial accounts. As such, the key to investment attraction for western Canadian policymakers is to ensure that these institutions establish their Canadian or North American regional headquarters in Western Canada, and that the business case for establishing back-office operations in Western Canada is clearly articulated to investors.