Financial services companies continued to do well in the fourth quarter of 2006 and most firms believe that their prospects remain bright, although perhaps a little less so than a year ago.

Bank of Nova Scotia, for example, says in its report for the quarter ended Jan. 31: “While economic conditions continue to provide a favourable operating environment, the low levels of provisions for credit losses and the high levels of securities gains are not expected to be sustained through the balance of the year.”

And while CIBC expects interest rates and unemployment to remain relatively steady, it cautions that “some softening in housing activity and only moderate growth in consumer spending is anticipated.” This will not be enough to make the credit cycle unfavourable in the near term, CIBC says, but the current level of corporate defaults is probably “not sustainable over the longer term.”

Conditions in the property and casualty sector are also less favourable than a year ago, although profitability generally remains above historical norms.

Investment dealer Canaccord Capital Inc. , on the other hand, is upbeat. It believes the slowdown in Canadian growth will not be prolonged, but growth in Britain — where it has a large subsidiary — and Europe is not expected to slow at all.

Prospects also appear good for mutual fund and investment management companies. After three sluggish years, mutual fund net sales in the recent November-February RRSP season were very strong (see page 22).

In the quarter, 33 of 48 companies surveyed saw their earnings increase from the same quarter a year earlier. (Investment Executive surveys 55 companies, but five — BluMont Capital Inc., Cunningham Lindsay Group Inc., Great-West Lifeco Inc. , IGM Financial Inc. and Northbridge Financial Corp. — are excluded because their results are consolidated with their parents.) In addition, Stone Investment Group Ltd., which went public in December, did not provide year-ago figures and GMP Capital Trust changed its yearend to Dec. 31 from Jan. 31, so it does not provide numbers for the three months ended Dec. 31, 2005.

Of the others, Fairfax Financial Holdings Ltd. , Gluskin Sheff & Associates Inc. and Loring Ward International Ltd. reported profits vs losses a year earlier; eight saw profits decline and four reported a loss.

The average gain among the 48 companies was 27.3%, but that was inflated by results from Fairfax, which posted earnings of US$117.3 million in the quarter ended Dec. 31, vs a loss of US$318.1 million in the same quarter a year earlier. Without Fairfax, the average increase in net income was a still very strong 20.1%.

Consolidation continued in the quarter. CI Financial Income Fund announced a takeover of Rockwater Capital Corp.; Sceptre Investment Counsel Ltd. is picking up Legg Mason Funds Management Inc.’s Canadian private-client division; and Brookfield Asset Management Inc. is taking B.C. Pacific Capital Corp. private by acquiring all the voting shares it doesn’t already own. As of Feb. 28 2007, Brookfield had 4.9 million of the 11.7 million subordinate Class A shares, which have one vote each, and 612,989 of the 1.9 million Class B common shares, with 10 votes each.

The biggest cross-border deal is Winnipeg-based Great-West Lifeco’s purchase of the wealth-management business of Boston-based Putnam Investments Trust from Marsh & McLennan Cos. Inc. of New York, with subsidiary Great-West Life Assurance Co. getting Putnam’s 25% interest in T.H. Lee Partners, also of New York. The price of the deal is US$3.9 billion.

In another deal, Hub Inter-national Ltd. , the parent company of Hub Financial Inc., a Canadian managing general agent, is being bought by Apax Partners Worldwide LLP of London, together with New York-based Morgan Stanley Principal Investments (see story on page 12).

And in February, Loring Ward received a takeover offer from Alan Werba Acquisition Corp. of California (see page 10).

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

> Banks. FMF Capital Group Ltd. is closing its doors — the U.S. non-prime mortgage market in which it operates is “eroding rapidly.”

Pacific & Western Credit Corp. reported a 34.2% drop in earnings, mainly because of an increased provision for loan losses. Nevertheless, it says, its targets for the quarter ended Jan. 31 were exceeded and it’s looking forward to “improving profitability in the months ahead.”

@page_break@Canadian Western Bank’s results “exceeded expectations,” it says, while Equitable Group Inc. says its quarterly growth in profits and assets “far surpassed our performance targets.”

Alternative mortgage and credit provider Home Capital Group Inc. is moving into high-quality commercial mortgage lending “in order to utilize its excess borrowing capacity in a low-risk manner.”

Laurentian Bank of Canada called the quarter “solid” but admits it needs to improve profitability and efficiency and develop human capital to assure long-term success.

TD Bank Financial Group’s privatization of U.S.-based TD Banknorth Inc. is expected to close by the end of April. Banknorth has been struggling in a very competitive marketplace. It contributed $64 million to TD’s earnings in the quarter, down from $69 million the year before. Banknorth is focused on organic growth opportunities in loans and deposits, combined with disciplined expense control. TD admits it will take “a lot of hard work and time” to enhance shareholder value from this acquisition.

> Life Insurers. Great-West Life-co’s acquisition of Putnam’s assets, expected to close in the second quarter, adds almost US$200 billion in assets under management in the U.S., Britain and Japan. Putnam will retain its name; its existing management, investments, distribution and service teams; and will have its own board of directors.

Indus-trial-Alliance Insurance & Financial Services Inc. is integrating Clarington Corp., acquired in December 2005, as well as converting the administration system of National Life, bought in 1988. Industrial-Alliance also picked up mutual fund dealer FundTrade Finance Corp. in 2006.

Lower earnings in Manulife Financial Corp. ’s U.S. insurance and its Asia and Japan divisions were more than offset by gains in Canadian and U.S. operations.

The most recent example of Sun Life Financial Inc. ’s strategy of “growth through disciplined and focused acquisitions” is the purchase of a high-quality group-benefits business in the U.S., announced in January. Sun Life expects this to increase operating earnings by 5¢ a share and return on equity by 10 basis points in 2008.

> Property & Casualty Insurers. Fairfax’s huge improvement was primarily by comparison: the fourth quarter of 2005 was disastrous, thanks to huge U.S. hurricane claims. But the company also had big increases in investment-related income in the recent quarter, plus a pretax gain of US$69.7 million from the sale of 10.2 million shares in subsidiary Odyssey Re Holding Corp. That reduces its ownership to 59.6% of the 71.2 million shares outstanding from 80.1%. Fairfax will also receive US$220 million from the sale of Hub, mainly through 59.2%-owned Northbridge and through Odyssey Re.

Co-operators General Insurance Co. and ING Canada Inc. reported drops in investment and underwriting income, although both remain profitable. Co-operators cites increased severity of claims for the deterioration on the underwriting side; ING was affected by weather-related catastrophes.

Earnings at Kingsway Financial Services Inc. dropped as a result of increases in U.S. unpaid claims estimates. But the acquisition of Minnesota-based Mendota Insurance Co., announced in January, and increasing yield on its investment portfolio “puts us in a position to achieve improved profitability in 2007,” it says.

> Mutual Fund And Investment Management Companies. All companies with year-earlier numbers had gains in net income except for Mavrix Fund Management Inc. and Seamark Asset Management Ltd. Mavrix was in net redemptions in the recent RRSP season (November though February, inclusive), while Seamark is regrouping following the loss of its mandate to manage the Clarington funds in February 2006, subsequent to Industrial-Alliance’s acquisition of Clarington. All the other publicly listed mutual fund companies had net sales during the recent RRSP season; AGF Management Ltd. led the independents with $1.3 billion of new money.

CI Financial bounced back with net sales of $857 million in the three months ended Feb. 28, after net redemptions of $231 million in November that followed the announcement in early October that money manager Kim Shannon would now be managing money for Brandes Investment Partners & Co.

> Distributors And Suppliers. Two companies in this sector reported increases in net income, two had profits vs losses a year earlier, three saw earnings declines and two were in a loss position.

Jovian Capital Corp. ’s huge rise in net income is the result of improvements at its investment dealer subsidiaries, MGI Securities Inc. and MGI Securities (USA) Inc., for which the value of broker warrants received as compensation for corporate finance activities increased as market conditions improved.

Northern Financial Corp. ’s loss was larger than a year ago due to reduced underwriting and advice revenue in its traditional brokerage business. It also experienced a $1.2-million loss in its investment banking operations.

> Stock Exchanges. Montreal Exchange Inc. has decided to go public, but it’s unlikely that TSX Group Inc. will attempt to buy it — given the hefty price-tag as well as the TSX’s recent deal with New York-based International Securities Exchange to set up a derivatives operation in Toronto in 2009, when the non-compete agreement between the ME and the TSX ends. IE