Profit survey: Impact of low oil prices muted

There also were some increases in quarterly dividends. Bank of Nova Scotia’s dividend increased to 70¢ from 68¢; Canadian Imperial Bank of Commerce’s, to $1.12 from $1.09; Royal Bank of Canada’s (RBC), to 79¢ from 77¢; Industrial Alliance Insurance & Financial Services Inc.’s, to 30¢ from 28¢; Fiera Capital Corp.’s, to 14¢ from 13¢; and Accord Financial Corp.’s, to 9¢ from 8.5¢.

Economic growth has resumed and should continue, albeit at a sluggish pace. (See story on page 1.) Consumer spending and housing are holding up in the non-oil-producing regions and exports to the U.S. are expected to pick up as that country’s economic growth becomes firmer. This positive outlook is reflected in banks’ loan-loss provisions, which for the group came in at $1.63 billion, up only slightly from $1.56 billion in the previous quarter.

It is noteworthy that Canadian Western Bank increased its loan-loss provisions to $8 million from $7.4 million. This is not surprising, given the bank’s large presence in Alberta.

Energy capital investment is the biggest weakness in Canada’s economy. This particularly affects Canaccord Genuity Group Inc. and GMP Capital Inc., both of which have significant exposure to the oil and gas sector as well as the mining sector, in which prices and investments are down.

Canaccord and GMP also are affected by the general financial market turmoil and volatility that is gripping the world economy. That turmoil also is being felt by most of the big banks, although good results in retail banking and wealth management are keeping their overall earnings up.

Here’s a look at the sectors in more detail:

– Banks. Nine of the deposit-taking institutions had higher earnings. PWC Capital Inc. had positive net income vs a loss the year before. Of the five remaining, three posted declines in net income, Firm Capital results were unchanged and Equity Financial Holdings Inc. reported a loss.

All the big banks had increases in net income. Personal and commercial banking divisions had higher earnings, and wealth-management operations were up or – in the case of RBC – unchanged. These improvements were sufficient to push up the sector’s overall net income, even though capital market activities were down for all the banks except National Bank of Canada and Toronto-Dominion Bank.

Among the smaller deposit- taking institutions, two stars – Canadian Western Bank (CWB) and Home Capital Group Inc. – saw earnings decline. CWB’s decline is not surprising, given the impact of the drop in the oil price on Alberta. Home Capital’s drop was the result of higher expenses incurred as the firm invested in information technology and business-process enhancements.

HSBC Bank Canada also reported lower net income. Its financial report cites “margin compression, lower gains on financial investments and higher costs.”

Equity Financial has narrowed its focus to providing alternative mortgages in Ontario, having sold its transfer agent and corporate trust services business in 2013 and subsequently making changes in senior management and the board of directors. This quarter saw the first increase in the firm’s mortgage-loan book since early 2014.

– Life insurers. All five firms had big drops in revenue. This was the result of either drops or little increase in the fair value of investments compared with large gains in Q2 2014. But earnings dropped only at E-L Financial Corp. and Manulife Financial Corp. GWL, Industrial Alliance and Sun Life Financial Inc. had earnings gains.

GWL’s earnings were up in Canada and Europe, but down slightly in the U.S. Sales at Industrial Alliance were up in all divisions, but most of the increase in earnings came from a tax gain related to certain investments and a hedging gain. Sun Life had increases of 8% in insurance sales and more than 25% in wealth-management sales.

In contrast, Manulife was hurt proportionately more by changes in interest rates.

– Property & casualty insurers. Results were generally poor in this sector. Only Echelon Financial Holdings Inc. (formerly EGI Financial Holdings Inc.) had a big rise in earnings, but that was from a very weak Q2 2014. Co-operators General Insurance Co.’s net income rose only marginally, Intact Financial Corp.’s was down and both Fairfax Financial Holdings Ltd. and Kingsway Financial Services Inc. were in a loss position.

This poor showing came from the investment side. Fairfax, Echelon and Intact had higher underwriting profits, as indicated by lower combined ratios; Co-operator’s ratio was virtually unchanged; and Kingsway had only a small underwriting loss.

All the companies had either much smaller gains or drops in their investments’ fair value. This was particularly the case for Fairfax, with a drop of US$661 million this quarter vs an increase of US$409 million in Q2 2014. Fairfax is primarily an investment company, focusing on investment returns to enhance its profitability.

– Mutual fund and investment-management companies. Only three of the nine firms reported higher earnings. CI Financial Corp. and Sprott are solid companies, but AGF Management Ltd. is a question mark with its continuing net redemptions due to weak investment performance.

The four companies with declines in net income are all solid. Both Brookfield Asset Management Inc.’s and Guardian Capital Group Ltd.’s declines were entirely due to a lower increase in the fair value of assets than in Q2 2014, and Fiera Capital Corp. is still digesting its many acquisitions. IGM is the only one with possible issues. Its subsidiary, Mackenzie Financial Corp., has been plagued by net redemptions and recently lost $10 billion in assets under management due to the lose of investment-management contracts with MD Management Ltd. The other two companies in the sector – Integrated Asset Management Corp. and Stone Investment Group Ltd. – continue to struggle to establish viable businesses.

– Distributors and suppliers. Accord Financial Corp. provides factor financing – transactions involving such activities as selling accounts receivable – and its earnings were up.

The other four, all brokerages or related firms, are struggling with market turmoil and volatility. Cost savings is an obvious strategy for these companies, but only Canaccord’s report specifically mentions this, stating that the firm continues to “focus on improving operating efficiencies and growing our recurring revenue streams across our global business.”

– Exchanges. TMX Group Ltd. had positive net income vs a loss in Q2 2014, but its earnings were higher in the intervening quarters. Revenue was down and expenses were up.

– Holding companies. Desjardins Group had a strong increase in net income in all divisions. Power Financial Corp. had a more modest increase in earnings, reflecting the results from subsidiaries GWL and IGM. However, Dundee Corp. had a large loss due to its extensive holdings of resources-based investments.

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