First Major Canadian Bank Steps into Cannabis Industry

Bank of Montreal

For years, and in spite of the country’s progress down the path of cannabis legalization, Canada has kept its nose clean of the blooming cannabis industry. This year, however, Canada’s largest financial institution, the Bank of Montreal (BMO), commenced research coverage of cannabis, indicating the intention of the country’s banks to finally take a bold step into the industry.

“The bank’s entry into the medical cannabis sector is a sign of the industry’s natural evolution and the potential for access to additional financial products,” said Max Mausner, senior analyst at Toronto’s Vantage Asset Management, in an interview with Marijuana Business Daily.

“To date, virtually all the capital raised in the sector has been public equity or equity-linked securities like convertible notes. But these businesses will require mortgage financing, debt financing and other more sophisticated banking products.”

Products and services such as these, of course, are not currently available to cannabis operators.

According to the Bank of Montreal’s inaugural research report, which was distributed to the bank’s clients:

  • There are currently 104 licensed producers, with 500 more in the pipeline.
  • In the first year of legalization and regulation, the legal cannabis market should displace 40% of the black market.
  • In the second year, it should displace 60% of the black market.
  • In the first year of legalization, small and medium cannabis growers (i.e. not large producers like Canopy Growth, Aphria, and Aurora) will likely make minimal contributions, followed by “a modest amount” the next.

Following legalization, the BMO authors also anticipate supply to catch up with demand in the second year and possibly even surpass it by the third or fourth year. It was noted that the intitial demand for cannabis in the legalized market would likely be below the current industry estimates but will nevertheless “considerably exceed” supply.

When scrutinizing the reasons for this lower demand, it was thought that (1) there may not be enough cannabis dispensaries and stores in certain provinces, such as Ontario; (2) existing stores may be located inconveniently to service a larger client base (also Ontario); and (3) popular products on the black market aren’t yet available on the legal market, such as extracts, concentrates, and edibles.

Initial findings aside, it is clear that the Bank of Montreal is showing very real interest in the cannabis industry and the fact that the financial sector is finally taking a step towards it, at least in Canada.

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