Firm’s results skewed in Q3

However, the only really solid sector is the banks – and analysts are warning that they will be affected as the economy slows and the housing market cools. (See story on page 1.) Nevertheless, four banks raised their quarterly dividend – Canadian Western Bank, to 17¢ from 16¢; Home Capital Group Ltd., to 26¢ from 22¢; Laurentian Bank of Canada, to 49¢ from 47¢; and National Bank of Canada, to 83¢ from 79¢.

The life insurers benefited from improved equities markets vs a year earlier, but Manulife Financial Corp. is still in a loss position and the sector as a whole is still struggling with low interest rates, which increase the liabilities on long-term products.

The fundamentals of property and casualty (P&C) insurance firms are improving, but it’s still hard slogging.

Mutual fund firms face continued investor hesitation about investing in equities. For the first time, a major mutual fund firm – AGF Management Ltd. (AGF) – posted a loss. Things are better among the investment-management firms; in fact, Gluskin Sheff + Associates Inc. raised its quarterly dividend to 17.5¢ from 16.25¢.

Brokerages generally did somewhat better in Q3 2012 than in Q3 2011, but their earnings were still way below the levels seen before the financial crisis hit.

A closer look at the sectors:

– banks. Eleven of the 13 deposit-taking institutions saw earnings increase. HSBC Bank Canada’s 10% decline was mainly due to pressure on its net interest margin.

Toronto-Dominion Bank’s (TD) earnings were down by 0.7% due to the increase in its loan-loss provisions to $565 million from $438 million – the biggest rise among the big banks; this was mostly related to TD’s U.S. business.

TD has two acquisitions in the works. On Oct. 23, it announced that it will acquire U.S.-based discount merchandiser Target Corp.’s existing Visa and private-label credit card portfolio of around $5.9 billion; TD now will be the exclusive issuer of Target-branded Visa and private-label cards for seven years. On Dec. 6, TD agreed to buy U.S.-based asset manager Epoch Investment Partners Inc., which manages US$24.2 billion.

The increase of 4¢ in National Bank’s quarterly dividend suggests much confidence among its management and board of directors in the bank’s prospects after the sale of its asset-management business, Natcan Investment Management Inc., to Fiera Capital Corp. on April 1.

The increase of 2¢ to Laurentian Bank’s quarterly dividend follows earnings growth this year that resulted from the acquisitions of AGF Trust from AGF on Aug. 1 and of the MRS firms from Mackenzie Financial Corp. on April 16.

As previously mentioned, both Canadian Western and Home Capital also raised their dividends. Both firms have long track records of strong earnings increases.

– life insurers. Although the four major lifecos aren’t out of the woods yet, they had much improved results vs a year earlier – mainly as a result of better equities markets.

GWL and Industrial Alliance Insurance and Financial Services Inc. had strong earnings gains; Sun Life Financial Inc. reported positive net income vs a loss; and Manulife’s loss was a lot smaller, at $300 million vs $1.5 billion in Q3 2011.

Changes and updates to actuarial methods and assumptions had a positive impact for GWL but were negative for Manulife – to the tune of $1 billion – and Sun Life. Manulife also had a $200-million goodwill impairment charge.

– property & casualty insurers. Realized and unrealized gains or losses on investments can be a major determinant of earnings in the P&C sector. This quarter, big gains on the investment side pushed earnings way up for Co-operators General Insurance Co. and produced a profit vs a loss the year prior for EGI Financial Holdings Inc. However, investment results caused Fairfax Financial Holdings Ltd.’s earnings to drop.

Most P&C companies are ordinary investors, but Fairfax is very sophisticated, utilizing swaps and hedges that can give the firm excellent results in poor markets but also can pull earnings down – Q3 2012 was a case in point, with Fairfax reporting US$24 million in net losses on investments vs a US$1.6-billion gain in Q3 2011.

On the underwriting side, all firms in this sector but Fairfax saw deterioration in their profitability. In the case of EGI and Intact Financial Corp., their combined ratios remained below 100, indicating that they were still making money. Co-operators’ combined ratio climbed above 100 because of “increased accident year claims from summer storms and less favourable claims development, specifically in Ontario autos.”

Kingsway Financial Services Inc. remains in a loss position as it continues to try to turn around following acquisitions in the U.S. that didn’t turn out so well.

– mutual fund and investment-management companies. Five of the nine firms had increased earnings, and both Guardian Capital Group Ltd. and Matrix Asset Management Inc. reported profits vs a loss a year earlier.

Although that may sound good, the three big independent mutual fund companies clearly are struggling, with CI Financial Corp.’s earnings up by only 0.6%, IGM’s 23.2% drop in earnings and AGF in the red. All three firms remain in net redemptions.

AGF has been struggling the most and the longest. Its assets under management (AUM) were down by 14.8% and revenue dropped by 20.9%, but expenses, excluding impairment charges, declined by only 6.4%.

In contrast, IGM’s AUM was down by only 2.1% and the firm still made $189 million, while CI’s AUM was up by 9.6% and net income was up slightly.

Matrix’s results are worrisome, with AUM down to $1.1 billion – only a third of what it was when the company was formed following the merger between GrowthWorks Ltd. and Seamark Asset Management Ltd. in 2010. In 2005, Seamark had more than $10 billion in AUM.

– distributors and suppliers. This sector had a whopping 15,228.4% increase in net income overall, but that was because the seven firms had combined net income of only $82,000 in Q3 2011.

None of the brokerages are making much money, and they are unlikely to return to previous earnings levels until confidence in global economic growth is sufficient to produce significant expansion and merger-and-acquisition activity.

Demand for the non-brokerages is not as depressed for the other firms in this sector, but they all still face a challenging environment.

– exchanges. TMX Group Ltd. is the former Maple Group Acquisition Corp., which consists of TMX Group Inc. (which Maple acquired Sept. 14), plus the Canadian Depository for Securities Ltd. and Alpha Trading Group, both purchased on Aug. 1. The financial results for certain data in the table compare August and September 2012 with TMX Group Inc.’s results for July to September 2011.

– holding companies. This sector was a mixed bag. Jovian Capital Corp. was in a loss position – as it often is – as it tries to establish a sustainable business.

Dundee Corp. also reported a loss. Only its real estate and small agriculture segments generated operating profits; resources, asset management and capital markets operations were in the red.

Desjardins Group’s earnings were down marginally, while Power had a strong increase – partly reflecting GWL’s good results, but mainly because of strong earnings from Power’s European investments.

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