Top Canadian Banks Not Ready for US Cannabis Business - Yet

Despite investor excitement about the US cannabis market, two large Canadian banks have confirmed no involvement in the sector will happen until sweeping policy changes take place.

According to a report from Bloomberg on Sunday (April 7), the heads of the Bank of Montreal (BMO) (NYSE:BMO,TSX:BMO) and Toronto-Dominion Bank (TD) (NYSE:TD,TSX:TD) expressed hesitation about financing deals or other business activities with US-based marijuana companies.

Investment in the US cannabis market, particularly in companies dubbed as multi-state operators (MSOs), has become one of the most dominant trends this year.

The executives for each bank expressed trepidation over conducting any business with US marijuana firms until legalization policies for the drug are in place.

“We’ll look at it then, but we have nothing in our business plans today that is dependent on pushing our cannabis business into the United States,” Darryl White, CEO of BMO, said following the bank’s annual meeting.

In a similar fashion, Bharat Masrani, CEO of TD, said the bank has no plans to perform any business in the US until legislation deems cannabis legal.

Marijuana remains an illegal substance at a federal level in the US despite legalization efforts from several states, including for recreational use in states like California and Nevada, where the adult-use market is legal.

“Depending on what comes out [from policy changes in the US], we’d look at it and make sure it is appropriate for TD in terms of our risk appetite and whether it’s right for our customers,” Masrani said following his bank’s annual meeting.

In terms of public capital, Canada remains the leader for investor enthusiasm for the emergent growth market.

Canadian investors have backed the operations of several Canadian firms directly involved in or with ancillary operations to the larger marijuana space.

“Canadians are leading the capitals market race,” Kevin Murphy, CEO of Acreage Holdings (CSE:ACRG.U,OTCQX:ACRGF), said during a panel talk at the MJBiz convention in Las Vegas last November.

However, the savviness of Canadian cannabis investors has sent them looking for growth in the US.

As such, MSOs have gained the attention of the market, as well as the financial institutions that are at its forefront.

“I think that the US companies have the confidence of investors, and they’re going to be able to raise more capital,” Alan Brochstein, cannabis analyst with 420 Investor, previously told the Investing News Network (INN).

Additionally, Nawan Butt, portfolio manager with Canadian asset management firm Purpose Investments, told INN his firm has started opting for US cannabis names compared to their Canadian counterparts.

Purpose Investments offers investors an actively managed marijuana fund called the Purpose Marijuana Opportunity Fund (NEO:MJJ). Companies such as Green Thumb Industries (CSE:GTII,OTCQX:GTBIF) and Curaleaf Holdings (CSE:CURA,OTCQX:CURLF) are included as some of the top holdings.

These firms predominantly list on the Canadian Securities Exchange, which elected to not block the business of these companies despite the federal roadblock. The NEO Exchange in Toronto has also shown an acceptance for marijuana listings with operations or assets in the US.

The upcoming Evolve Funds Group exchange-traded fund, which is focused on the burgeoning US marijuana market, will make its debut later this year on the NEO Exchange, according to a report from The Globe and Mail. The exchange already lists two marijuana funds with exposure to the US market.

Meanwhile, TMX Group (TSX:X), another Canadian exchange operator, has not budged in requests from the market to open the trading to US firms.

US cannabis market faces challenge from illegal status of the drug at a federal level

One of the major roadblocks for the US cannabis market remains the federal illegality of the drug despite its legality in several states.

Players in the US market have received encouragement in the form of two bills aimed at offering protections for the legal industry.

In March, the Secure and Fair Enforcement Banking Act of 2019, otherwise known as the SAFE Banking Act, was approved by the House Financial Services Committee and continues on its road to potentially becoming official policy.

The bill is designed to make it so marijuana businesses can perform banking activities and would no longer operate as cash only.

While experts agree the bill could help smaller dispensaries and other operations in the space, the movement of this bill also sends a signal of support for the overall cannabis market.

“I think that the passing of the SAFE Banking Act could help to signal a larger shift in public opinion that may ultimately help legislation like the STATES Act to gain traction,” Marc Adesso, veteran cannabis attorney with law firm Waller Lansden Dortch & Davis, previously told INN.

The second act is the STATES ACT, which is designed to grant legality to companies that operate in legalized marijuana states. This, however, wouldn’t represent a sweeping legalization of the drug in the country.

Murphy has projected the bill could be approved by the end of 2019 or early in 2020.

Investor takeaway

The US legal market has the potential to offer gains that no other space can match, which has led to investors looking for plays in this space.

As such, MSOs have expanded their business operations and ambition in terms of market dominance, thanks to the backing of investors.

Banks also play a critical role in the development of these firms; while established banks will wait for the market, several other financial institutions have jumped in.

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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: Acreage Holdings is a client of the Investing News Network. This article is not paid-for content.

The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.