Financial services profit survey: Some good signs in Q2

Nine of the 15 banks, all four life insurers (including GWL), eight of the 11 mutual fund companies and investment-management firms (including IGM) and four of the seven suppliers/distributors had better earnings than a year earlier.

The only sector to encounter serious problems was property and casualty insurance, which resulted from the floods in Alberta in late June. This sector always has to cope with such events, and the severe storms in the Greater Toronto Area (GTA) in July will affect their third-quarter results.

In the other sectors, there are no major problems on the horizon, as the recent sharp rise in long-term interest rates generally is good for financial services firms.

Although higher mortgage rates will put a damper on bank loans, the Canadian housing market was already cooling. Still, the rise in long-term interest rates will allow banks to increase their net interest margins, which have sunk to very low levels.

The rise in long-term rates also will lower the amount of assets that life insurance companies (lifecos) have to hold to cover their long-term liabilities, given that Canadian accounting rules require lifecos to assume that rates will stay at current levels when calculating their liabilities.

The rise in long-term rates also should encourage retail investors to buy more equities as they see their current bond holdings lose value. Of course, this will benefit the mutual fund and investment-management firms.

As usual, there were various acquisitions and asset sales in Q2 2013 – or announced after the quarter ended. This includes Industrial Alliance Insurance and Financial Services Inc.‘s (IA) announcement on July 16 that it has entered into an agreement to purchase Jovian Capital Corp.

But the biggest news in the industry was the agreement announced on Aug. 12 that Toronto-Dominion Bank (TD) will replace Canadian Imperial Bank of Commerce (CIBC) as the primary credit card issuer for Aeroplan on Jan. 1, 2014. On Sept. 16, it was announced that TD expects to acquire half of CIBC’s Aeroplan cardholders while CIBC retains the other half of clients who have broader relationships with the bank.

Here’s a look at the sectors in more detail:

– Banks. Nine of the 15 deposit-taking institutions had increases in net income, four had declines and Cash Store Financial Services Inc. and Pacific & Western Credit Corp. (P&W) reported losses. Cash Store has been reorganizing its operations; P&W continues to try to establish viable operations.

Among the Big Six banks, only TD had lower earnings – and that was because of a $418-million charge related to losses in its insurance division due to increased claims resulting from severe weather in Alberta and the GTA early in the summer. Royal Bank of Canada (RBC) is the only other bank that broke out the results of its insurance operations, and they were down by only a little.

Results for Canadian banking, U.S. banking and wealth management were up at all Big Six banks. Capital markets were up at Bank of Montreal, CIBC and National Bank of Canada but down at Bank of Nova Scotia, RBC and TD .

Earnings were down for Canadian Western Bank, Firm Capital Mortgage Investment Corp. and HSBC Bank Canada, but increased for Equitable Group Inc., First National Financial Corp., Home Capital Group Inc. and Laurentian Bank of Canada.

Five banks raised their quarterly dividends: TD, to 85¢ from 81¢; RBC, to 67¢ from 63¢; Scotiabank, to 62¢ from 60¢; Home Capital, to 28¢ from 26¢; and Equitable Group to 15¢ from 14¢.

– Life insurers. The full benefit of higher long-term rates will take some time to be felt, particularly because the lifecos hedge their exposure to interest rates and equities markets. But there was some immediate impact, as revenue at all four firms plunged as the fair market value of the large number of bonds they hold to cover their long-term liabilities dropped.

However, this drop was offset by large declines in their liabilities and good sales figures. The lifecos have worked hard at adjusting their product mixes to lower their sensitivity to changes in interest rates and stock markets.

As a result, net income was up at GWL, IA and Sun Life Financial Inc. Manulife Financial Corp. reported a profit of $334 million vs a loss of $249 million in Q2 2012.

Most of the lifecos’ wealth-management divisions did well, but GWL’s U.S. operations – Putnam Investments LLC – still is in net redemptions.

– Property and casualty insurers. The sector isn’t in as bad a shape as the earnings suggest.

Co-operators General Insurance Co. was the only company put into a loss position resulting from the floods in Alberta. Fairfax Financial Holdings Ltd. ‘s loss resulted from a US$495-million decline in the fair market value of its bond holdings vs gains of US$282 million in Q2 2012. The losses at Kingsway Financial Services Inc. continue as the firm tries to create a viable business in the U.S., the only market in which it operates.

EGI Financial Holdings Inc., Fairfax and Intact Financial Corp. all made underwriting profits, as witnessed by their combined ratios – operating expenses and losses as a percentage of net earned premiums – of less than 100.

– Mutual fund and investment-management companies. Five firms had increases in net income and Guardian Capital Group Ltd. and Integrated Asset Management Corp. reported profits vs a loss the year prior. AGF Management Ltd., Matrix Asset Management Inc. and Sprott Inc. were in a loss position.

AGF’s loss underlines the problems the firm is having. Its assets under management (AUM) of $37.6 billion on May 31 were 28% below the $52.4 billion peak registered in the first quarter of 2011, just after AGF purchased Acuity Investment Management Inc. AGF continues to experience sizable net redemptions.

In July, Matrix announced the sale of its Seamark Asset Management Ltd. subsidiary to Robert McKim, Seamark’s chief investment officer and one of its principals before Seamark became part of Matrix. In August, the Toronto Stock Exchange announced it had given Matrix 120 days to meet continuing listing requirements.

Sprott’s loss is not surprising or alarming. The firm specializes in gold and, thus, the swings in the price of bullion heavily influence the firm’s results. Sprott’s funds were in net redemptions in Q2 2013.

IGM also was in net redemptions this quarter, but its AUM was up by 5.8%.

Fiera Capital Corp. increased its quarterly dividend to 10¢ from 9¢. And with Gluskin Sheff + Associates Inc.’s June 30 yearend, the firm is paying a special dividend of $1.40; the firm also has announced it’s raising its quarterly dividend, to 20¢ from 17.5¢, starting with the quarter ending Sept. 30.

– Distributors and suppliers. Among the brokerages, Canaccord Financial Inc., GMP Capital Inc. and Northern Financial Corp. all reported positive net income vs a loss the year prior.

Oppenheimer Holdings Inc. had a 9.2% decline in its earnings.

– Holding companies. Both Desjardins Group and Power Financial had big drops in revenue reflecting the decline in the fair market value of the bonds held by their life insurance subsidiaries, but both also had increased earnings, albeit small for Desjardins.

Dundee Corp.’s big loss was related to the drop in the value of its investment portfolio.

© 2013 Investment Executive. All rights reserved.