The majority of canada’s publicly traded financial services companies saw profits rise in the fourth quarter of 2004 from the same quarter a year earlier. Twenty-seven firms reported increases, while one experienced no change, six saw profits decline and six reported a loss.

That tally excludes five subsidiaries whose results are consolidated with those of the parent company, as well as Cervus Financial Group, which has been public less than a year.

Some increases were very large, resulting in an average increase of 25.4% for the gainers. Manulife Financial Corp. and Sun Life Financial Inc. boosted the average with gains of 94.2% and 118.8%, respectively. If the two are excluded, the average gain for the group drops to 13.7%.

Manulife’s gain was due to its merger with Boston-based John Hancock Financial Services Inc., whereas Sun Life’s was the result of a very weak quarter a year earlier. In the fourth quarter of 2003, its MFS Investment Management subsidiary had an after-tax charge of $211 million for its settlement with regulators concerning mutual fund abuses relating to market-timing and late trading. Excluding the settlement, Sun Life’s net income was up 7% year-over-year.

Settlements with regulators also affected Canada’s three big independent mutual fund companies. The after-tax settlements, which concerned frequent trading and market-timing, amounted to $19.8 million at AGF Management Ltd., $33.9 million at CI Fund Management Inc. and $19.2 million at IGM Financial Inc. The penalties pushed AGF into the red to the tune of $8.1 million, while CI’s earnings were down 10% and IGM’s down 1.1%.

AGF is also having major problems with net redemptions, totalling $840 million in the fourth quarter ended Nov. 30. Redemptions continued during the rest of the RRSP season, with the November-February period showing net redemptions of $1.9 billion, according to data from the Investment Funds Institute of Canada. The problem is not investment performance, which remains reasonable, but rather poor communications with advisors (see story, page 1).

CI had net sales of $258.8 million in the quarter ended Nov. 30, including $89 million for CI mutual and segregated funds, $83.4 million for Assante funds and $125.4 million for structured products. In the November-February period, its net sales were $527.1 million.

Within IGM, Investors Group Inc. had net redemptions of $45.7 million in the quarter, while Mackenzie Financial Corp. had net sales of $123.5 million. In November through February, net sales were $315.4 million for Investors Group and $153 million for Mackenzie.

The quarter also saw the privatization of Brascan Financial Corp., which was merged with Brascan Corp.’s wholly owned Trilon Holdings Inc. as of Dec. 31. And subsequent to the close of the quarter ended Jan. 31, 2005, TD Bank Financial Group’s acquisition of 51% of Maine-based Banknorth Group Inc. was approved by shareholders. There was also an announcement that Financial Models Co.
Inc. will be acquired by Connecticut-based SS&C Technologies Inc.

Results for the big banks were affected by a new accounting standard related to preferred shares and other innovative securities. Under the change, securities that on maturity pay cash or equivalent value in common shares are to be classified as liabilities rather than equity, with the associated dividends now part of interest expenses.

This affects net income, but not net income applicable to common shares or return on common shareholders’ equity. The standard applies to all companies for fiscal years ending in 2005. This is the first quarter of 2005 for the Big Five banks, whose yearends are Oct. 31.

Still, eight of the 10 banks had increases in net income in the quarter, while CIBC saw no change in the bottom line and TD a marginal decline of 0.6%.

CIBC’s reported earnings were inflated by gains on three asset sales — Delaware-based credit card company Juniper Financial Corp. (net gain of $64 million), Trinidad and Tobago-based Republic Bank Ltd. ($85 million) and ACE Aviation Holdings Inc. ($22 million).
Investment Executive considers these unusual non-recurring gains and excludes them from this survey. CIBC also sold Edulinx Canada Corp., a provider of student loans, but the gain was not significant.

TD’s acquisition of control of Banknorth caused rating agency Fitch Ratings Ltd. to upgrade TD Banknorth. Fitch says Banknorth has “established itself as a capable acquirer and integrator” and will benefit from TD’s support. Fitch expects TD to increase its stake over time.