Banks drag down results in Q3

One factor for the banks was an increase in their loan-loss provisions to $1.7 billion from $1.4 billion in the previous quarter and from $1.5 billion in Q3 2013. This probably reflects concerns about high household debt levels, a concern flagged by Bank of Canada governor Steven Poloz.

However, the Canadian economy is expected to continue to grow at a healthy pace of around 2.5% this year. Indeed, six of the 13 banks in Investment Executive‘s quarterly profit survey are confident enough about the near-term outlook to raise their dividends, including Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC) and National Bank of Canada, all of which had lower net income.

BMO’s quarterly dividend increased to 80¢ from 78¢; CIBC’s, to $1.03 from $1; Canadian Western Bank’s, to 21¢ from 20¢; Equitable Group Inc.’s, to 18¢ from 17¢; Home Capital Group Inc.’s, to 20¢ from 18¢; and National Bank’s, to 50¢ from 48¢.

Most other industries in the financial services sector also had mixed results. In total, 16 of the 39 companies in the survey had higher net income and four reported earnings vs a loss a year earlier. That left 14 with lower net income and five in a loss position. (These figures exclude Great-West Lifeco Inc. [GWL] and IGM Financial Inc., whose results are consolidated with those of Power Financial Corp.)

Besides the banks that raised their quarterly dividends, three other firms did the same: Industrial Alliance Insurance and Financial Services Inc. (IA), to 28¢ from 26¢; EGI Financial Holdings Inc., to 11¢ from 10¢; and Gluskin Sheff + Associates Inc., to 22.5¢ from 20¢.

In addition, CI Financial Corp. raised its monthly dividend, to 10.5¢ from 10¢.

Consolidation continues in the financial services sector. One major move is Manulife Financial Corp.‘s announcement that it will acquire the Canadian-based operations of Standard Life PLC for around $4 billion in a deal expected to close in the first quarter of 2015.

Here’s a closer look at the results, by industry:

– Banks. Six of the 13 deposit-taking institutions had higher earnings; six had declines; and Equity Financial Holdings Inc. reported net income vs a loss in Q3 2013.

Royal Bank of Canada and Toronto-Dominion Bank were the only big banks with higher net income. The declines at BMO, Bank of Nova Scotia and CIBC were broadly based. Only BMO’s personal and commercial banking divisions were up, while only Scotiabank’s global wealth-management and insurance operations and CIBC’s wealth-management business had higher earnings. National Bank’s results, meanwhile, were pulled down by a writedown in intangible assets.

Most of the smaller banks had earnings gains. The laggards were First National Financial Corp. and HSBC Bank Canada, both with declines in net income. First National pointed to competitive pressures, while HSBC still is in the process of exiting its consumer finance business.

– Life insurers. Results were mixed in this industry, with the big three companies – GWL, Manulife and Sun Life Financial Inc. – reporting strong earnings gains, while the smaller firms, E-L Financial Corp. and IA, saw their net income drop.

Among the big three insurers, Sun Life’s 174% increase in net income was because its earnings in Q3 2013 included losses in the U.S. annuity business the firm sold Aug. 1, 2013. Manulife’s earnings gain was mainly due to the increase in the fair value of assets. And GWL’s earnings were enhanced by higher net income in the U.S. and Europe but a slight decline in Canada.

E-L’s earnings were pulled down by weaker results in its individual insurance business. IA had declines in earnings for both group and individual insurance.

– Property and casualty (P&C) insurers. Results were mixed in this industry as well, but for different reasons.

Fairfax Financial Holdings Ltd. and Intact Financial Corp. had strong results. Fairfax saw big increases in the fair market value of its investments. Intact had much improved underwriting results so its combined ratio fell to 93.2% from 102.8%.

EGI had positive net income after discontinuing its U.S. business, which had put the firm, as a whole, in a loss position in Q3 2013.

In contrast, Co-operators General Insurance Co. and Kingsway Financial Services Inc. had both underwriting and overall losses.

– Mutual fund and investment-management companies. Four of the firms, including the three big, independent mutual fund companies – AGF Management Ltd., CI and IGM – had higher net income. Four firms had declines and Matrix Asset Management Inc. remained in a loss position as it continues to try to establish a viable business.

Despite AGF’s earnings gain, that firm continues to struggle. Its assets under management (AUM) were barely higher than in Q3 2013 and its mutual funds remain in net redemptions – to the tune of $441 million in Q3 2014. In contrast, IGM’s net redemptions were just $70.7 million and CI had net sales of $702 million in Q3 2014.

Fiera Capital Corp. also reported higher earnings. This company has grown rapidly through acquisitions and continues to make purchases. In Q3 2014, Fiera acquired closed-end fund specialist Propel Capital Corp.

There’s nothing worrisome about the earnings’ declines for the other four companies in this group. Brookfield Asset Management Inc. is very strong; Gluskin Sheff is as solid as a rock; Guardian Capital Group Ltd.‘s AUM continues to rise, and it has the added advantage of holding 4.4 million BMO shares; and gold specialist Sprott Inc. is experiencing declines in net income that normally occur when gold bullion prices are weak.

– Distributors and suppliers. Accord Financial Corp. and Canaccord Genuity Inc. had strong earnings increases, and GMP Capital Inc. reported positive net income vs a loss in Q3 2013. However, Oppenheimer Holdings Inc. saw its earnings drop by 16% and Added Capital Inc. had a loss compared with positive net income in Q3 2013.

Canaccord’s quarterly report says the firm had “strong results” in its global advisory business and “steady recurring revenue growth” from its global wealth-management operations. GMP’s report points to higher merger-and-acquisition advisory fees and increased underwriting revenue.

Oppenheimer, which operates solely in the U.S., had only a 0.5% increase in revenue, vs increases of 28.9% for Canaccord and 58.5% for GMP.

– Exchanges. TMX Group Ltd.’s big earnings gain was because its net income in Q3 2013 was pulled down by credit-facility refinancing expenses.

– Holding companies. Results in this industry were mixed. Power Financial had a strong earnings gain, reflecting higher earnings at GWL, IGM and Power Financial’s European subsidiary, Parasega Holding SA.

Desjardins’ net income was down slightly, with an increase for its P&C operations but declines for personal services, business and institutional services, wealth management, and life and health insurance.

Dundee Corp. had a large loss of $81.6 million because of a decline in the price of the company’s 29% interest in Dream Unlimited Corp., a firm that holds shares in Dundee Realty Corp.

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