Earnings for financial services firms were mixed in the first quarter (Q1) of 2013, with 11 of 16 banks and deposit-taking institutions in Investment Executive‘s quarterly profit survey reporting increases in net income from a year earlier, which puts them solidly in positive territory.
The 7.3% overall increase in the banking sector’s net income is better than expected, but most analysts warn that earnings are likely to be weaker in the next few years because of lower loan volumes. However, the banks are confident enough in their prospects to continue raising their dividends.
Canadian Imperial Bank of Commerce, Canadian Western Bank, Equitable Group Inc. and Laurentian Bank of Canada all raised their dividends in Q1. This follows increases for Bank of Montreal (BMO), Bank of Nova Scotia, First National Financial Corp., Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD) in the previous quarter, and increases for Canadian Western Bank, Home Capital Group Inc., Laurentian Bank and National Bank of Canada in the third calendar quarter of 2012.
CI Financial Corp. was the only other company in the survey that raised its dividends in Q1, which reflects the weaker results in the other sectors.
In most other sectors, at least half – and generally more than half – of the companies had declines in net income or were in a loss position. In fact, two of the four life insurers; four of the five personal and casualty insurers; eight of the 11 mutual fund and investment management firms; two of the five distributors and suppliers; and two of the three holding companies had either lower net income than a year earlier or were in a loss position.
A more detailed look by sector:
– Banks. Of the 16 deposit-taking institutions, only five had weaker earnings or were in a loss. BMO’s decline wasn’t big, at just 3%, whereas First National’s drop and Xceed Mortgage Corp.’s loss reflect shifts in business mix to more insured mortgages. Cash Store Financial Services Inc.’s loss was due mainly to the cost of settling with pre-existing third-party lenders. Pacific & Western Credit Corp. is still struggling to establish sustainable businesses.
The other 11 firms had earnings increases. TD’s and HSBC Bank Canada’s were small – at 1.4% and 3.3%, respectively – but TD’s would have been bigger had the corresponding quarter a year earlier not included a $59-million reversal of a litigation reserve.
Both TD and HSBC increased their loan-loss provisions, by $32 million and $23 million, respectively. They weren’t, of course, alone in doing that. Only BMO, Cash Store, RBC and Xceed had lower provisions than in the previous quarter. But increases were generally small; total provisions for the group, at $1.6 billion, were up only slightly.
Most of the Big Six’s business divisions had higher earnings than in Q1 2012. The exceptions were BMO’s private client, Scotiabank’s global banking and markets, and TD’s wealth and insurance (although TD’s decline was very small).
– Life insurers. Earnings in Q1 2013 for Great-West Lifeco Inc. (GWL), Industrial Alliance Insurance and Financial Services Inc. and Sun Life Financial Inc. were all around previous highs. The reason for Sun Life’s decline was a particularly strong quarter a year earlier, when it had $263 million in pretax equity gains.
Manulife Financial Corp. continues to struggle, with its $555 million in earnings well short of the average $1 billion in earnings it generated between the fourth quarter of 2005 and the second quarter (Q2) of 2008. However, the firm believes it’s making progress toward its goal of $4 billion in annual core earnings by 2016.
GWL announced the acquisition of Irish Life Group Ltd. for $1.75 billion in a deal expected to close in July.
– Property and casualty insurers. Within this sector, only Fairfax Financial Holdings Ltd. had improved financial results, posting net income of US$163.3 million vs a loss of US$1.3 billion in Q1 2012. This was due mainly to better underwriting results, as indicated by the drop in Fairfax’s combined ratio – operating expenses and losses as a percentage of net earned premiums – to 94% from 98.8%.
The other four companies in this sector saw their underwriting results deteriorate, although Co-operators General Insurance Co. and Intact Financial Corp. were still making underwriting profits.
Kingsway Financial Services Inc. has been struggling for a long time as a result of U.S. acquisitions that never have been profitable. EGI Financial Holdings Inc.’s troubles – claims in its non-standard Ontario auto insurance business rose because of the long winter – should be temporary.
– Mutual fund and investment-management firms. Within this sector, only CI, Gluskin Sheff + Associates Inc. and Fiera Capital Corp. had higher earnings – and Fiera’s large increase was mainly because of its acquisition of Natcan Investment Management Inc. on April 2, 2012.
There were some dramatic drops in net income, but Sprott Inc.’s 87.7% plunge isn’t surprising for a company that focuses on precious metals investments.
AGF Management Ltd.’s 40.5% earnings drop is worrisome, as it reflects a big drop in assets under management (AUM) – to $39.3 billion from $52.4 billion just two years ago – and the bleeding is continuing. AGF had $722 million in net redemptions in Q1 2013, and AUM in its institutional and subadvisory business was down by 22.1% from a year earlier.
In contrast, net sales in Q1 were $1.1 billion at CI and $554 million at IGM Financial Inc.
Matrix Asset Management Inc.’s results also are worrisome, given the firm’s seeming inability to attract new business.
Both Integrated Asset Management Corp. and Stone Investment Group Ltd. also were in the red as they struggle to establish viable businesses.
– Distributors and suppliers. Canaccord Financial Corp. is doing the best among the brokerages, while net income at GMP Capital Inc. and Oppenheimer Holdings Inc. was still very low by historical standards.
– Stock exchanges. TMX Group Ltd. doesn’t have comparative numbers from a year ago, having been acquired by Maple Group Acquisition Corp. last summer.
– Holding companies. Desjardins Group’s personal services and business and institutional services divisions and the property and casualty insurance operations generated lower net income than a year earlier, while the firm’s wealth-management and life and health insurance divisions saw increased earnings.
Dundee Corp.’s loss was due to losses in its investments. Power Financial Corp.’s increased earnings reflect GWL’s gain, which was much larger than IGM’s net income decline.
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