Royal Bank of Canada’s president and chief executive said the bank is taking a “slow, cautious approach” when it comes to working with cannabis companies as the bank remains on the sidelines amid a boom in investor interest in the sector.
In an interview with BNN Bloomberg Wednesday, Dave McKay said there remains a significant amount of uncertainty in the cannabis space, including the size of the recreational market in Canada and the regulations marijuana companies have to abide by that are making the Canadian bank more of an observer of the industry, rather than a participant.
“We’re taking a slow, cautious approach because it’s an evolving industry,” McKay said. “The first thing you look at at an industry, and you look at the credit risk of the people you’re dealing with, the business plans they have, how sustainable the business is. It’s all new. We still don’t understand the size of the market that these companies are selling into. What is the total addressable market for recreational cannabis in Canada? That’s an open question.”
While RBC is still taking a wait-and-see approach to cannabis, other major Canadian banks are starting to engage with marijuana companies amid a flurry of M&A deals and IPOs in the space. Bank of Montreal has a small team dedicated to the cannabis industry and has participated in advisory and investment deals with several companies including Cronos Group Inc. and Aurora Cannabis Inc. Canadian Imperial Bank of Commerce’s investment banking arm helped underwrite a $60-million private placement for Canopy Rivers Corp., a partly-owned subsidiary of Canopy Growth Corp.
Meanwhile, the reluctance for bigger Canadian banks to get involved with cannabis has allowed smaller investment banks such as GMP Securities L.P. and Canaccord Genuity Corp. take the lion’s share of marijuana-related investment banking business.
Still, McKay said there’s enough economic and regulatory uncertainty, notably with how cannabis remains illegal under U.S. federal law, that is keeping RBC from working with the sector for the time being.
“As a North American bank, as a global bank, we have different regulations and we have to be careful about how we transact and how we do business. Even on the advisory side, between the U.S. federal regulation to Canadian regulation, we have to be careful,” he said.
“We’re trying to make sure that our potential customers can comply with Canadian regulations from the manufacturing to the distribution side,” McKay added. “We have to be very careful what counterparties we deal with, particularly, U.S. counterparties showing an interest in Canada. [For example] a CPG company in the U.S. showing an interest in cannabis.”
Advertisement