Profit survey: Skewed earnings in Q4

If these three firms are excluded from the industry total, the average increase for the other 41 companies in the survey is 7.6% – a decent, but not particularly strong, gain. Among those 41 firms, 22 had higher net income; four reported profits vs a loss the year prior; 10 had declines in earnings; and five were in a loss position. (These totals exclude Great-West Lifeco Inc. [GWL] and IGM Financial Inc., as their results are consolidated with those of Power Financial Corp.)

Click here to view the profit suvey table.

Within the individual sectors, 11 of the 16 banks had increased earnings as did the three other P&C insurers. The mutual fund and investment-management companies had mixed results, with five posting improved earnings and the other three had declines. Brokerages Canaccord Financial Inc. and GMP Capital Inc. had strong increases, but from very low bases, while Oppenheimer Holdings Inc. and Northern Financial Corp. both had losses. The four holding companies saw their results deteriorate.

With only moderate economic growth and a deteriorating housing market, analysts aren’t enthusiastic about prospects for financial services companies in general, and banks in particular. Nevertheless, five banks announced increased dividends with the release of their quarterly financial results.

Among the Big Six banks, quarterly dividends increased to 74¢ from 72¢ at Bank of Montreal (BMO); to 60¢ from 57¢ at Bank of Nova Scotia; to 63¢ from 60¢ at Royal Bank of Canada (RBC); and to 81¢ from 77¢ at Toronto-Dominion Bank (TD). In addition, First National Financial Corp. increased its monthly dividend to $3.89 from $3.61.

Other quarterly dividend increases include Brookfield Asset Management Inc., to 60¢ from 56¢; Guardian Capital Group Ltd., to 20¢ from 17¢; and Intact Financial Corp., to 44¢ from 40¢. Similarly, CI Financial Corp. raised its monthly dividend to 8.5¢ from 8¢.

(In addition, Gluskin Sheff + Associates Inc. paid a special dividend of 65¢ a share on March 15, 2013, which it had announced in Q4 2012. The firm also announced that it’s considering paying special dividends semi-annually based on performance fees.)

Here’s a look at the results by sector in greater detail:

– Banks. Among the Big Six banks, only BMO and Canadian Imperial Bank of Commerce (CIBC) saw earnings decline.

Although all of BMO’s major business divisions – Canadian personal and corporate banking, U.S. personal and corporate banking, private client and capital markets – had increases in their net income, there were losses in runoff structured credit activities that pulled down the bank’s overall profitability.

At CIBC, retail and business banking was up but wealth management and wholesale banking had drops in earnings.

As for the remaining four major banks, most divisions were up. The exceptions were National Bank of Canada’s capital-markets division; RBC’s insurance unit, as well as its investor and treasury services; and TD’s wholesale banking division.

Most of the smaller institutions had increased earnings, including stellar performers Canadian Western Bank and Home Capital Group Inc. However, three firms are struggling: Xceed Mortgage Corp. saw a decline in net income; Cash Store Financial Services Inc. had a loss vs a profit a year earlier; and Pacific & Western Credit Corp. (P&W) remained in the red.

Xceed is a victim of the collapse of the private securitized-mortgage market in 2007 and is struggling as it makes the transition to providing insured mortgages and winds down its legacy securitized-mortgage portfolio.

Cash Store has had to increase its loan-loss provisions dramatically, to $9.3 million from only $668,000 a year earlier, and the company suspended its dividend as of the previous quarter, ended Oct. 31. The Ontario government also has suspended Cash Store’s payday loan licence; the firm is adjusting to this by shifting to line-of-credit products, although Cash Store also has asked for a hearing on the licence suspension.

P&W is still trying to establish viable businesses. Although the firm says it’s making progress, it remains in a loss position.

– Life insurers. GWL was the only life insurance company with lower earnings, but it also was the only one that didn’t have a loss a year earlier. Indeed, GWL hasn’t had a loss since Q4 2008, while Manulife has had eight and Sun Life has had four quarters of losses. Industrial Alliance Insurance and Financial Services Inc.’s (IA) only loss was in Q4 2011.

Net income at GWL was up in its Canadian division but down for both its U.S. and European operations. Its U.S. wealth-management subsidiary, Putnam Investments LLC, had strong sales but mainly for institutional business, while the retail mutual funds division still had net redemptions.

Manulife’s $1.1 billion in net income is quite strong in historical terms and was accompanied by record sales in both insurance and wealth management. IA reports strong momentum across the organization. However, Sun Life’s $399 million in net income is relatively weak; the firm’s Canadian business’s earnings were down.

IA sold off its U.S. annuities business in the third quarter of 2012. Sun Life also announced an agreement to sell its U.S. annuities business in December; that deal is expected to close by the end of June.

– Property and casualty insurers. The key figure for most P&C companies is the combined ratio. If it’s below 100, the firm is making an underwriting profit – and that was the case for all but Fairfax in both Q4 2012 and Q4 2011.

However, Fairfax primarily relies on its investment expertise to generate most of its earnings, as was the case in Q4 2012, when it had US$635.6 million in investment gains vs US$914.9 million in losses in Q4 2011.

– Mutual fund and investment-management companies. Among the Big Three mutual fund companies, AGF Management Ltd. continues to struggle, but both CI and IGM saw net income increases.

AGF had a 15% decline in assets under management (AUM) despite a 14.4% increase in institutional and subadvisory AUM. Net mutual fund redemptions in 2012 hit $3.3 billion, up from $2.2 billion in 2011. A major problem is weak investment performance at the retail level, with less than 40% of long-term assets in funds that have ranked in the first or second quartiles for performance in the past five years.

IGM subsidiary Mackenzie Financial Corp. also has suffered from relatively large net redemptions for quite a few years – even though its performance has been much stronger than AGF’s. However, two other IGM subsidiaries, Investors Group Inc. and Investment Planning Counsel, have seen smaller net redemptions and the continuation of net sales, respectively. Overall, IGM had $834.6 million in net redemptions during 2012 vs $637.3 million in 2011.

CI had $1 billion in net sales in 2012 vs just $300 million in 2011.

– Distributors and suppliers. Although Canaccord’s and GMP’s earnings were higher than any quarter since the first quarter of 2011, both are still well below previous net income peaks.

Oppenheimer’s loss was a result of a $30-million award against one of its subsidiaries.

Northern Financial continues to struggle. The latest blow was having to cease offering retail and institutional financial services because it has not been able to replace its carrying broker, which has discontinued that business.

– Stock exchanges. TMX Group Ltd. is the new name for TMX Group Inc., which was acquired by the Maple Group Acquisition Corp. consortium. As TMX also acquired a couple of other small operations, there were not many comparable year-earlier financial figures from a year earlier.

– Holding companies. Desjardins Group’s personal services, business and institutional services, wealth management and life and health insurance businesses had lower earnings; however, its P&C division’s earnings were up.

The decline in Dundee Corp.’s earnings was a result of lower equities earnings, realized losses from investments and an impairment charge related to the current price of gas against one of its subsidiaries’ reserves.

Jovian Capital Corp. continues to struggle.

Power Financial’s lower results reflect those of GWL and IGM.

© 2013 Investment Executive. All rights reserved.