Profit Survey: Strong growth persists in Q1

The average increase in earnings in the first quarter (Q1) for the 42 companies in Investment Executive‘s quarterly profit survey was 12.5%. In all, 25 firms reported higher net income in Q1 2014 than in Q1 2013. EGI Financial Holdings Inc. and Integrated Asset Management Inc. (IAM) both reported positive net income in Q1 2014 vs a loss in Q1 2013. Laurentian Bank of Canada’s net income was virtually unchanged, which left eight companies with lower earnings and six 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.)

Two companies’ results should be highlighted: Canadian Imperial Bank of Commerce (CIBC) and Fairfax Financial Holdings Ltd. CIBC had a 62.6% drop in net income in Q1 2014, mainly due to a non-cash impairment charge of $420 million and loan-loss provisions of $123 million related to its FirstCaribbean International Bank subsidiary. In contrast, Fairfax had an increase of 380.7% in earnings, mainly as a result of US$1 billion in net investment gains in Q1 2014 vs virtually zero in Q1 2013.

It’s also important to note that large increases in revenue may be the result of changes in the fair value of investments and don’t reflect strong sales. This is the case for Manulife Financial Corp. and Fairfax in this quarter.

Divestments and acquisitions also played a role in the quarter. The biggest did not occur in Q1 2014, but is still worth mentioning: Bank of Nova Scotia announced on May 14 that it will sell most or all of its 37% stake in CI Financial Corp. Scotiabank expects a pretax gain of $380 million-$440 million on the $2.3 billion-$2.6 billion asking sale price.

Other noteworthy developments include:

– Bank of Montreal (BMO) completed its acquisition of U.K.-based F&C Asset Management PLC on May 7.

– Intact Financial Corp. subsidiary Canada Brokerlink Inc. acquired Anthony Clark International Insurance Brokers Ltd. on May 1.

– Gluskin Sheff + Associates Inc. announced on June 2 that it’s purchasing fixed-income specialist Blair Franklin Asset Management Holdings Inc. in a deal expected to close sometime between July and September.

– Guardian Capital Group Ltd. completed its purchase of Zephyr Management U.K. Ltd. on April 14.

– Matrix Asset Management Inc. voluntarily delisted from the Toronto Stock Exchange on March 25. The firm only had $226 million in assets under management (AUM) as of March 31.

There also were a slew of quarterly dividend increases in Q1 2014. This included six banks: BMO, to 78¢ from 76¢; CIBC, to $1 from 98¢; Canadian Western Bank, to 20¢ from 19¢; Equitable Group Inc., to 17¢ from 16¢; Laurentian Bank, to 52¢ from 51¢; and National Bank of Canada, to 48¢ from 46¢.

Among the mutual fund and investment-management firms, Brookfield Asset Management Inc.‘s quarterly dividend increased to 16¢ from 15¢ and Guardian’s rose to 6.5¢ from 5.5¢. In addition, CI’s monthly dividend rose to 10¢ from 9.5¢.

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

– Banks. Nine of the 15 deposit-taking institutions had higher earnings in Q1 2014 vs Q1 2013. Laurentian’s net income was virtually unchanged, three had declines and Equity Financial Holdings Inc. and PWC Capital Inc. (the new name for Pacific & Western Credit Corp.) both were in a loss position.

Equity Financial is switching to an alternative residential mortgage provider after divesting itself of its transfer agent, corporate trust and foreign-exchange businesses in 2013. PWC continues to struggle to establish a sustainable business.

It’s noteworthy that even though CIBC, Laurentian Bank and National Bank had lower or unchanged earnings, all three feel confident enough about their future to raise their dividends. The only other bank with lower earnings was HSBC Bank Canada.

Wealth-management earnings increased for all the Big Six banks, and Canadian retail banking was up for all but CIBC. U.S. retail banking was up for BMO, Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD), which report this line of business separately.

Net income for wholesale banking/financial markets was higher at BMO, Scotiabank and CIBC, but lower at National Bank, RBC and TD. Scotiabank’s international division and RBC’s insurance business both had lower earnings.

– Life insurers. Only E-L Financial Corp. had a drop in net income, of 32.8%; the other four (including GWL) had increases.

E-L, after selling its property and casualty (P&C) insurance subsidiary Dominion of Canada General Insurance Co. on Nov. 1, 2013, now is solely in the life insurance business through its ownership of Empire Life Insurance Co. E-L’s earnings decline was mainly as the result of higher net claims and benefits.

Industrial Alliance Insurance and Financial Services Inc. (IA) and Sun Life Financial Inc. had net income increases of only 1.8% while GWL was up by 13.2% and Manulife had a big gain of 44.9%.

IA’s gain was muted by lower profitability for group insurance. Sun Life had mixed results, as its operations in the U.S. were up but those in Asia and Canada were down.

GWL’s U.S. asset-management business, Putnam Investments, remains in a loss position and continues to experience net redemptions. However, GWL’s other U.S. operations and its Canadian and European businesses had higher earnings.

Manulife’s Asian and Canadian operations were up while its U.S. business was down despite strong earnings in asset management.

– Property and casualty insurers. Results were mixed, with Fairfax reporting a big increase in earnings and EGI reporting positive net income vs a loss a year earlier. However, Co-operators General Insurance Co. and Intact both saw their net income decline and Kingsway Financial Services Inc. remained in a loss position, albeit a small one.

Co-operators had an underwriting loss, indicated by a combined ratio of more than 100. Intact’s underwriting profits were lower, but the other three firms all reported stronger underwriting results.

– Mutual fund and investment-management firms. The big three mutual fund companies had increased earnings, but AGF Management Ltd. continues to struggle. It remains in net redemptions and its AUM was down by 8.1% from a year earlier. The company has appointed Kevin McCreadie as president and chief investment officer as of June 17.

CI and IGM both saw their AUM rise on the back of net sales in of $1.7 billion for CI and $802 million for IGM.

Sprott Inc.’s big 389.9% earnings gain was the result of the increase in the value of its investments.

Guardian’s 97.3% increase in net income was mainly the result of gains on the sale of some of its BMO shares.

Brookfield’s increase reflects solid operating results, but the notable 50.3% jump in net income was mainly due to gains in the fair value of assets.

Fiera Capital Corp.’s earnings increased by only 1.3%, but that reflects the expenses involved in its continued very strong growth. Fiera’s AUM was up by 22.4% and revenue rose by 65.4%.

– Distributors and suppliers. Canaccord Genuity Group Inc. and GMP Capital Inc. had substantial increases in net income – but from weak results in Q1 2013. Oppenheimer Holdings Inc., which operates just in the U.S., saw its earnings decline, as did the earnings of Accord Financial Corp., which provides financing services to small and medium-sized North American companies.

– Exchanges. TMX Group Ltd. had higher net income, as revenue rose while expenses declined.

– Holding companies. Both Desjardins Group and Power Financial reported higher net income. The latter reflects the gains at GWL and IGM.

Desjardins’ earnings in its personal, business and institutional services, wealth-management, and life and health insurance divisions were all up, but these gains were partially offset by lower net income in P&C insurance.

Dundee Corp.‘s loss was mainly due to its investments in United Hydrocarbon International Corp. and Blue Goose Capital Corp.

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