Cannabis might be legal in Canada now, but major Canadian banks — with the exception of the Bank of Montreal — appear to be exercising a significant degree of caution when it comes to providing their full suite of services to the cannabis sector.
It is unclear if this is due to lingering stigma about the drug itself on the part of the banks — historically conservative institutions — or a trepidation about the long-term viability of certain companies, or whether they are wary of finding themselves in trouble with U.S. regulators where they have sizeable operations.
But interviews with the heads of seven of the biggest licensed producers — with a cumulative market cap of over $20 billion — paint a picture of how cannabis companies are still struggling to garner full access to banking services provided by Toronto-Dominion Bank, Royal Bank of Canada, Bank of Nova Scotia and Canadian Imperial Bank of Commerce.
“You check every box, and they still don’t like you,” said Bruce Linton, CEO of Canopy Growth Corp. “They are opening up, but reluctantly. What I need is everything that they do.”
Just weeks before legalization, Linton says he was scheduled to meet with “very senior executives” at one of the Big Five banks. “I said okay, good, I’ll come, I’ll tell you what this whole thing is about. And then suddenly, they said, don’t come.”
Canopy has banked with the little-known Ottawa-based Alterna Savings & Credit Union Ltd. since 2015, after being shut down by all the five major banks, years ago. Alterna, for its part, has become a major financial player in the pot sector, which as of April 2018, was offering bank accounts to “at least two-thirds of almost 100 licensed producers in the business,” according to Bloomberg.
They are opening up, but reluctantly. What I need is everything that they doBruce Linton, Canopy Growth CEO
“The big banks here are still conservative. They want to be certain, that given their U.S. exposure, they won’t end up in difficulties with the American government,” said Cam Battley, chief corporate officer of Aurora. “I really don’t think it’s anything to do with cannabis itself, especially now that you see both Canopy and Aurora are on the New York Stock Exchange. The thing is, we’re interested in the full range of products and services from them, and to them, it’s a question of caution.”
In January, BMO became the first major Canadian bank to break the ice with the cannabis sector, leading a $200-million equity financing deal for Canopy Growth. In May, its capital markets division advised Aurora exclusively on its successful $3.2-billion bid for cannabis producer Medreleaf Corp. Those two transactions essentially paved the way for other cannabis companies to come knocking on BMO’s door, in search of the full array of financial services, which until then, had been largely provided by mid-sized investment firms such as Canaccord Genuity Group Inc., Eight Capital Corp. and GMP Securities LP.
Battley claims that Aurora does almost all their banking with BMO now, a trend that appears to be industry-wide. Canopy, along with other smaller producers like CannTrust Holdings, OrganiGram Holdings and Auxly Cannabis Group Inc., also have bank accounts with BMO.
Of the remaining four banks, it is RBC and Scotiabank that appear to be the most conservative when approaching the cannabis sector, according to multiple interviews with cannabis company executives.
“RBC and Scotiabank have always been the two most anti-cannabis. I have heard that RBC is starting to poke around and consider the sector but I would say that Scotiabank appears currently not to be looking at the industry at all,” said Chuck Rifici, one of the former founders of Tweed who currently heads licensed producer Auxly Cannabis.
His sentiment was echoed by Greg Engel, CEO of New Brunswick-based Organigram who believes that although RBC has not officially been involved in the cannabis space, they are looking to increase their involvement “in the not too distant future” by first issuing coverage on the sector.
“I just think all the banks have different cultures and move and different speeds. Desjardins and Laurentian are looking to work in the space, even though historically, there was a hesitancy there,” Engel told the Financial Post.
We're interested in the full range of products and services from them, and to them, it's a question of cautionCam Battley, Aurora chief corporate officer
Recently, Desjardins CEO Guy Cormier said his bank would begin “supporting the needs” of clients who participated in the cannabis industry with lines of credit, mortgages and long-term loans.
RBC was vague when contacted regarding its current and future involvement in the cannabis sector. “Thanks for your inquiry. We don’t currently cover this sector. If that changes down the road, we’ll be sure to let you know,” the bank’s spokesperson Tony Maraschiello said in an email.
When specifically asked if RBC provides bank accounts to any individual or business involved in the cannabis sector, Maraschiello declined to respond directly: “I’ll come back to you when we have more to say on the topic.”
Scotiabank, TD and CIBC did not respond to queries regarding their involvement in the cannabis space. Despite being actively involved in the pot space, BMO too did not respond to questions regarding its relationship with the cannabis sector.
“In fairness, one of the reasons Canadians banks have been so successful is their level of conservatism. It has served them well, and we certainly saw that in 2009,” said Jay Wilgar, CEO of Oakville-based cannabis company Newstrike Resources Ltd. “Look, the relationships they have in the U.S. are important to them, and so unfortunately that has been a difficult issue for all of us.”
Newstrike, whose claim to fame is a co-partnership with Canadian rock band The Tragically Hip, still has not been able to obtain lines of credit from any of the Big Five banks.
“We have had credit cards with Alterna Bank, and we have a very strong balance sheet. But just little things like credit cards, lines of credit against real assets — things that normal mainstream businesses can access — that’s the kind of stuff the industry wants.”
Part of the risk assessment of Canadian banks involves compliance to Canada’s anti-money laundering (AML) legislation. And that bar for compliance with certain record-keeping and reporting requirements is high, especially if your client is a cannabis business, selling a product that only recently achieved legal status.
“It would be prudent for cannabis-related businesses to become familiar with the requirements as they apply to them as customers of financial institutions,” said a recent briefing note by law firm Osler, Hoskin and Harcourt LLP.
As major banks stay on the sidelines, cannabis is morphing into an extremely lucrative business.
Little things like credit cards, lines of credit against real assets — things that normal mainstream businesses can access — that’s the kind of stuff the industry wantsJay Wilgar, Newstrike Resources CEO
Institutional money is pouring in, according to an analysis by Kingsdale Advisors, which estimates that the number of institutional shareholders of six of the largest cannabis companies by market cap increased an average of 549 per cent over the last year alone. A report released by debt-rating agency DBRS Ltd. just days after legalization predicted that there will be an increased need for financial services as the “distribution chain expands.”
Bloomberg data shows the cannabis sector alone has fuelled roughly $8 billion in deals since the beginning of 2018, surpassing activity for all of 2017. And with the exception of BMO’s capital markets division, the major winners in those deals weren’t big Canadian banks — they were Goldman Sachs and Greenhill & Co. for advising Constellation Brands’ on their investment in Canopy, Canaccord Genuity and GMP Capital.
“Did you know that Barclays (Capital) has a marijuana analyst? It’s funny, we started this business in Canada first, and now the international banks are moving at the same pace as the Canadians,” Linton quipped.
“I want to see the other four participate fully in the industry and validate the sector,” said Rifici. “I’m actually a little shocked that we haven’t seen a second bank truly in the industry. I’m surprised they haven’t come knocking.”
Published at Thu, 25 Oct 2018 11:57:07 +0000