Profit survey: Firms deliver mixed results

The big banks also have trading revenue, but it’s proportionally a much smaller part of their business. None of the capital-markets arms of the Big Five banks had losses; and results improved at both Canadian Imperial Bank of Commerce and Toronto-Dominion Bank.

Nevertheless, the banks are not optimistic about the coming year because slow growth will affect their loan volumes and could increase loan losses.

Mutual fund and investment-management companies also came through Q3 2011 fairly well despite the volatile equities markets, with five firms reporting higher earnings than a year earlier.

Twenty-one of 42 companies surveyed had increases in net income vs Q3 2010. Co-operators General Insurance Co. and Kingsway Financial Services Inc. reported profits vs a loss in Q3 2010. But that still left nine firms with lower earnings and 10 others in a loss position. (These figures exclude Great-West Lifeco Inc. and IGM Financial Inc., as their results are consolidated with those of Power Financial Corp.; Western Financial Group Inc.’s results also are excluded, as they are consolidated with those of its new owner, Desjardins Group.)

As a result of the murky economic outlook, there weren’t any major acquisitions or mergers announced in Q3 2011 — and only three companies increased their quarterly dividends: Canadian Western Bank, to 15¢ from 14¢; Equitable Group Inc., to 12¢ from 11¢; National Bank of Canada, to 75¢ from 71¢; and Gluskin Sheff & Associates Inc., to 16.25¢ from from 13.75¢.

Here’s a closer look at the sectors:

> Banks. Eleven of the 14 banks in IE’s survey had increases in net income. The Big Five banks all had good to very good earnings gains, but it should be noted that CIBC, Royal Bank of Canada and TD all had weak quarters in Q3 2010 — and Bank of Montreal’s Q3 2011 earnings were enhanced by the acquisition of Milwaukee-based Marshall & Ilsley Corp. on July 1.

The Big Five banks — except for the capital-markets divisions at BMO, Bank of Nova Scotia and RBC — saw improved results in their operations, including Canadian, U.S. and/or international personal and commercial banking; wealth management; and, in the case of RBC, insurance.

BMO, Scotiabank and CIBC saw some increases in provisions for loan losses from both Q2 2011 and Q3 2010. RBC’s and TD’s provisions for loan losses have been trending downward.

Results were more mixed among the smaller deposit-taking institutions. Only CWB, Equitable Group and HSBC Bank Canada had strong gains, although Home Capital Group Inc. had underlying strength — its net income, after being adjusted to exclude the gains associated with unmatched derivative volatility in Q3 2010, was up by 23.7%.

Cash Store Financial Services Inc. is still expanding by opening more branches, which initially will produce a drag on earnings. However, the company also had lower volumes and loan fees.

> Life Insurers. GWL’s 71.6% earnings gain was due to a weak Q3 2010, when net income was pulled down by a litigation provision. Removing this factor from the equation, GWL’s earnings would have been down by 4.1% in the current quarter.

Manulife’s $1.5-billion loss was still much smaller than its $2.2-billion loss in Q3 2010. Sun Life’s $595-million loss compares to earnings of $446 million in Q3 2010.

All of Industrial Alliance and Financial Services Inc.’s major divisions had lower earnings in Q3 2011 compared with Q3 2010. IA was, however, the only lifeco with an increase in assets under management.

> Property And Casualty Insurers. Fairfax Financial Holdings Ltd. had a huge 150.6% gain, but that was due to big net gains in investments. However, it had an underwriting loss — which also was the case with all the other P&C insurers, except for Intact Financial Corp. This is not surprising in a soft market in which it’s hard to raise premiums enough to offset increased losses and operating expenses.

The P&C companies also are waiting for a positive impact from Ontario’s auto insurance reforms, aimed at addressing fraud, which took effect on Sept. 1, 2010.

> Mutual Fund And Investment-Management Companies. Brookfield Asset Management Inc., by far the biggest company in this sector, did very well. As a manager of large-scale, global investments — including real estate, power generation and infrastructure — Brookfield is ideally positioned to attract capital in this economic environment, in which investors seek high, safe returns.

The three big independent mutual fund companies all had good earnings gains. AGF Management Ltd. had a big increase in AUM and CI Financial Corp. only a slight gain, while IGM’s AUM declined. All three firms were in net redemptions in Q3 2011, although CI’s were only about $100 million vs AGF’s $585 million and IGM’s $1.3 billion. AGF reported a $1.7-billion drop in AUM due to market appreciation, vs a drop of $6.1 billion at CI and $12.1 billion at IGM. AGF’s milder decline was due to a different end of quarter of Aug. 31, 2011 for the firm, vs Sept. 30 for CI and IGM.

Sprott Inc. had a big increase in AUM, but only a small gain in net income. Gluskin Sheff and Guardian Capital Group Ltd. had drops in both.

> Distributors And Suppliers. Oppenheimer Holdings Inc. saw its trading volumes plunge but managed to stay out of the red. The other brokerage, Northern Financial Corp., remained in a loss position.

Accord Financial Corp. reports seeing opportunities to lend to well-run businesses that become unattractive to banks in a slowing economy.

A new business plan is being developed at Western Financial, now that it’s owned by Desjardins.

> Exchanges. TMX Group Inc.’s earnings have held up as Maple Group Acquisition Corp. continues to pursue its acquisition of TMX.

> Holding Companies. Desjar-dins’ results were lacklustre. Dundee Corp.’s asset-management and capital-markets divisions were in the red. Jovian Capital Corp. continued to struggle. At Power Financial, lower earnings in Europe partially offset the good results at GWL and IGM.  IE