Financial services profit survey: Mixed results in Q2

Three companies, in particular, stand out because of very large swings in their net income:

> Royal Bank of Canada reported a loss of $70 million vs $1.3 billion in earnings in Q2 2010. This was a result of a $1.3-billion writeoff of goodwill and intangible assets related to RBC’s U.S. regional retail banking operations that are being sold.

> Manulife Financial Corp. had net income of $495 million vs a loss of $2.4 billion in Q2 2010, when its insurance-contract liabilities, which have to be adjusted each quarter, rose sharply as a result of declines in equities markets and interest rates in the earlier quarter.

> Brookfield Asset Management Inc. had earnings of $1.4 billion vs $373 million the year prior, mainly as a result of a $1-billion increase in the fair value of its assets under management.

One Q2 2011 trend is that consolidation is continuing, with the following transactions being announced during the quarter:

> National Bank of Canada completed its acquisition of Wellington West Holdings Inc. on July 15.

> Desjardins Group‘s purchase of Western Financial Group Inc. was approved by shareholders on July 7; Desjardins is also buying MGI Financial Inc. from Jovian Capital Corp. (Jovian is also selling its stake in BetaPro Management Inc. to Mirae Asset Global Investments Co. Ltd.)

> On July 1, Guardian Capital Group Ltd. acquired a 67% stake in IDC Worldsource Insurance Network Inc., a life insurance managing general agency formed by the amalgamation of IDC Financial Inc. with Guardian’s Worldsource Insurance Agency Inc.

> Canaccord Capital Inc. is acquiring a 50% interest in BGF Capital Group Pty. Ltd., which operates in Australia and Hong Kong.

> Laurentian Bank of Canada‘s B2B Trust subsidiary is acquiring MRS Trust Co. and MRS Inc. from IGM subsidiary Mackenzie Financial Corp. In a related deal, Laurentian announced it will also distribute Mackenzie’s mutual funds in Quebec. (See page 1.)

> Bank of Montreal completed its purchase of Wisconsin-based Marshall & Ilsley Corp. on July 5.

> Bank of Nova Scotia is buying almost 20% of a China-based bank, and Power Financial is buying a 10% stake in China Asset Management Co. Ltd.

> Maple Group Acquisition Corp.’s offer to buy TMX Group Inc. has been extended to Sept. 30.

On another note, there were several quarterly dividend increases in Q2, including: Canadian Imperial Bank of Commerce, to 90¢ from 87¢; Home Capital Group Inc. , to 20¢ from 18¢; Toronto-Dominion Bank, to 68¢ from 66¢; and AGF Management Ltd. , to 27¢ from 26¢.

Gluskin Sheff + Associates Inc. will pay a special dividend of 80¢ in October and also announced an increase in its quarterly dividend to 16.25¢ from 13.75¢ following the quarter ended Sept. 30.

More details on the sectors:

> Banks. Eleven of the 16 deposit-taking institutions had earnings gains. RBC’s earnings would have been up without the writeoff of goodwill and intangible assets related to the U.S. regional banking operations it is selling; and Canadian Western Bank‘s earnings would have been up without the $7.5-million tax recovery in Q2 2010, which inflated its net income in that quarter.

Cash Store Financial Services Inc. ‘s big drop was due partly to a net $2.2 million in class-action settlement costs; but even without that, earnings would still have been down by 38.2% because of interest rate compression and the drag from the opening of new branches.

Xceed Mortgage Corp. ‘s loss was mainly the result of an estimated $1.7-million lawsuit settlement. However, it was also due in part to the company’s suspension of sales in the mortgage-broker channel this past January. It made only $9.8 million in loans this quarter vs $93.1 million a year earlier.

Pacific & Western Credit Corp. remains in a loss position as it continues to struggle to establish its businesses. However, there are signs of progress, as it is launching a credit card for Home Hardware Stores Ltd. on Jan. 2, 2012.@page_break@Earnings from Canadian banking operations were up for all of the Big Six banks. Most had increases in wealth-management, except for RBC. Scotiabank and TD had declines in wholesale banking or capital markets, while the others were up.

> Life Insurers. All four companies, including GWL, improved their financial results. Much like Manulife, Sun Life Financial Inc. was affected by unfavourable equities market conditions and the drop in interest rates in 2010; in Sun Life’s case, this was offset by the “favourable impact of investment activity on insurance contract liabilities.”

On the other hand, GWL’s 12.6% increase in net income was inflated by the release of $55 million that had been put aside for the settlement of a lawsuit involving its U.S. wealth-management arm, Putnam Investments Inc. Without this, GWL’s earnings would have been up by only 1.6%.(Putnam, which has been struggling since GWL acquired it in 2007, is finally reporting consistent net sales, with US$1.6 billion this quarter following US$1.8 billion in the Q1 2011.)

Manulife’s and Sun Life’s U.S. wealth-management operations continue to rack up net sales.

> property & casualty insurers. Results were mixed in this sector: Fairfax Financial Holdings Inc. ‘s earnings were up; Co-operators General Insurance Co. had a profit vs a loss a year earlier; EGI Financial Holdings Inc. and Intact Financial Corp. both had lower earnings; and Kingsway Financial Services Inc. remained in the red.

All but Intact had underwriting losses, as witnessed by their combined ratios of more than 100% — although Co-operators’ and Fairfax’s underwriting losses were relatively small. Intact has an enviable record of generating underwriting profits when markets are soft and/or bad weather pushes up losses at other insurers.

Devastating fires in Slave Lake, Alta., affected both Co-operators and Intact. Co-operators sees improvement in its Ontario automobile insurance business, for which reforms have been put in place to contain the size of claims; however, EGI is still finding claims to be high in Ontario.

Fairfax operates mainly in the U.S.; Kingsway, entirely. Fairfax noted losses related to tornados in the U.S., and its large profit gain of 265.1% is due mainly to net gains of US$120 million on investments in this quarter vs a loss of US$29 million the year prior.

Intact expects premium increases in the next 12 months to be in the mid-single digits for personal autos; upper single digits for personal property; and low single digits for commercial lines.

> Mutual Fund And Investment-Management Companies. Six of these firms had higher net income, and Integrated Asset Management Corp. reported a profit vs a loss a year earlier. Sprott Inc. had a decline in earnings, while Matrix Asset Management Inc. and Stone Investment Group Ltd. both had losses.

Sprott’s decline was small, and due to realized and unrealized losses on proprietary investments of $4 billion vs a gain of $949 million the year prior.

Matrix’s loss was exacerbated by $2.2 million in pretax merger, acquisition and other special-project costs, including the proposed merger of the VenGrowth funds into GrowthWorks Canadian Fund. (An after-tax figure was not provided.)

Stone has been in the red continuously since going public in 2006, with its AUM remaining below $1 billion.

Among the three big mutual fund companies, CI Financial Corp. had net sales of more than $300 million in Q2; net redemptions were $536 million at AGF, $145 million at IGM’s Investors Group Inc. subsidiary and $344 million at Mackenzie.

> Distributors And Suppliers. Only Anthony Clark Inter-national Insurance Brokers Ltd. and Equity Financial Holdings Inc. had earnings’ gains, both from very weak numbers a year earlier.

Three of the brokerages had declines, although Canaccord’s was small. GMP Capital Inc. cited “a notable decline in business activity driven by difficult underwriting conditions” in Canadian mid-market resource sectors, particularly mining. Oppenheimer Holdings Inc. ‘s report pointed to the negative impact of refinancing long-term debt as well as “significant continuing costs associated with auction-rate securities matters.”

Northern Financial Corp. remained in the red.

> Holding Companies. Only Power Financial had increased net income, reflecting earnings gains at both GWL and IGM.

Desjardins is making major investments “in the development of a service offer to members and clients, as well as technology infrastructure.” Dundee Corp. had declines in both its real estate investments and its asset-management operations. Jovian has been in the red for most of the past four years; it is evaluating how to use the proceeds of the BetaPro and MGI sales. IE