Financial services companies are feeling the pain of higher interest rates, volatile stock markets and the possibility of recession. On average, net income for the 42 companies in Investment Executive’s Profit Survey dropped by 19.6% in the quarters ended between Aug. 31 and Oct. 31, 2022, versus the comparable quarter in 2021.
Fourteen firms reported improved year-over-year earnings and two reported positive net income vs. a loss the year before. But 24 companies saw lower net income and two reported losses. (These figures exclude Sagen MI Canada, whose results are consolidated with those of Brookfield Asset Management Inc., and Empire Life Insurance Co., whose results are included in E-L Financial Corp.’s.)
Despite the poor economic conditions of the past year, there was optimism, with 10 companies raising their quarterly dividend.
Here’s a look at the sectors in more detail:
Banks
Most of the banks saw lower year-over-year net income due to higher loan-loss provisions (LLPs) in the face of slowing economic growth.
As a group, the banks upped LLPs by $2.4 billion in the quarter ended Oct. 31. That’s $2.7 billion higher than a year earlier, when they decreased LLPs by $261 million. The banks overshot their LLP increases after the pandemic hit, so a significant increase wasn’t required until now.
Higher interest rates can make banks vulnerable to loan losses but can also increase their interest margin — the difference between what banks charge on loans and what they pay on deposits.
EQB, HSBC Bank Canada, Toronto-Dominion Bank (TD) and VersaBank reported higher year-over-year earnings in the quarter, while Laurentian Bank of Canada reported $55 billion in net income versus a loss of $32 billion the year earlier.
Laurentian’s upswing was attributable to a $93.4-million impairment charge in its personal banking division in the quarter ended Oct. 31, 2021, which was not repeated in 2022. The 2021 annual report said the charge reflected “the recent decline in assets and deposit volumes, which, combined with the bank’s limited digital capabilities to support the ongoing changing needs of customers during the pandemic, made it challenging to retain existing customers and acquire net new ones.” Laurentian was the only bank with a drop in LLPs from a year earlier.
Eight banks increased their quarterly dividend even though only five improved their financial results. Bank of Montreal raised its quarterly dividend to $1.43 from $1.39, CIBC’s rose to 85¢ from 83¢, Canadian Western Bank (CWB)’s rose to 32¢ from 31¢, EQB Inc.’s rose to 33¢ from 31¢, Laurentian’s rose to 46¢ from 45¢, National Bank of Canada’s rose to 97¢ from 92¢, Royal Bank of Canada’s rose to $1.32 from $1.28, and TD’s rose to 96¢ from 89¢.
The banking landscape will be affected this year by mergers-and-acquisition activity. Home Capital Group Inc.’s board of directors is recommending a takeover of the company by Smith Financial Corp. The deal is expected to close in mid-2023 pending approval from shareholders and regulators.
In addition, RBC agreed to buy HSBC Bank Canada for $13.5 billion in a deal that isn’t expected to close until late 2023 given the need for regulatory approvals.
Finance companies
The two biggest earnings drops were ECN Capital Corp. by 66.7% and Accord Financial Corp. by 37.6%.
ECN has been changing its business model, making acquisitions and disposing of two subsidiaries. The latter two contributed $18.6 million to net income in the third quarter of 2021. The company’s net income before these discontinued businesses was $7.7 million in Q3 2022, up from $4.6 million a year earlier.
Accord’s decline was mainly because it increased its LLPs to $1.1 million versus $336,000 the year prior. The company’s financial report expressed concern that “persistent inflation and rising interest rates may weaken the payment performance of some of its existing clients.”
Two companies raised their quarterly dividends: Element Fleet Management Corp.’s rose to 10¢ from 7.75¢ and First National Financial Corp.’s rose to 20¢ from 19.58¢.
Life insurers
The biggest decrease in net income was Sun Life Financial Inc.’s 40.4% drop. The company’s financial report highlighted a $170-million impairment charge for its U.K. business, which is being sold, and a charge of $55 million for the “resolution of a matter relating to reinsurance pricing” in the U.S.
Sun Life stated that its underlying net income increased to $949 million from $902 million a year earlier.
Great-West Lifeco Inc. saw a 21.1% drop in net income. The insurer took a charge of $128 million for estimated claims from Hurricane Ian.
iA Financial Group Inc. and Manulife Financial Corp. had relatively small drops in net income and Empire Life Insurance Co. reported a 32.3% earnings increase.
Property & casualty and mortgage insurers
Results were mixed. Co-operators General Insurance Co. and Intact Financial Corp. both reported higher net income, but ICPEI Holdings Inc. and Sagen had lower earnings. Fairfax Financial Holdings Ltd. was in a loss position.
Fairfax is not only the biggest company in the sector but it’s also an aggressive investor, including utilizing derivatives. In this quarter, Fairfax reported a US$519.1-million loss in investments versus a gain of US$374.9 million the year prior.
Mutual fund and investment management firms
AGF Management Ltd., Fiera Capital Corp. and RF Capital Group Inc. had higher earnings, and Dundee Corp. reported positive net income compared to a loss the year before. But CI Financial Corp., IGM Financial Inc. and Sprott Inc. saw lower earnings, and Guardian Capital Group Ltd. reported a loss versus positive net income the year before. (In November, Guardian announced that Desjardins Group agreed to buy its Worldsource wealth and insurance businesses.)
RF’s huge earnings increase of 758.1% was the result of tiny net income of $93,000 the year before. The company is in the process of building up its brand. Dundee, which mainly invests in resource companies, had $19.4 million in investment income in the quarter versus a loss of $40.5 million the year before.
On the other hand, Guardian’s loss was mainly the result of a $23-million drop in the fair market value of its large corporate securities holdings compared to a lower decline of $8.1 million in Q3 2021. In CI’s case, large foreign exchange losses were the main reason its net income fell by 44.2%.
Among the big mutual fund companies, AGF and CI had small but positive net sales of $51 million and $100 million, respectively, while IGM had $1.1 billion in net redemptions.
Brokerages
Canaccord Genuity Group Inc. saw investment banking revenue drop to $43.8 million from $106.3 million a year earlier, while Oppenheimer Holdings Inc.’s fell to US$38.4 million from US$86.9 million.
Exchanges
TMX Group Ltd. reported a 29.1% increase in derivatives trading and clearing.
Holding companies
Brookfield Asset Management had a US$549-million loss in the fair market value of its assets compared with a US$700-million increase in Q3 2021.
Fair value losses also wreaked havoc at E-L, which reported a $94.8-million drop compared to a gain of $9.5 million the year before.
Desjardins Group had a big drop in its property and casualty insurance division, with net income falling to $83 million from $289 million the year before. Its personal and business services operations were also down, while the wealth management and life and health division had higher earnings.
