This is the quarter in which financial services companies have made a start at accounting for their indulgence in asset-backed commercial paper.

In the quarter ended Oct. 31, the ABCP mess cost the big banks $1.2 billion after taxes. TD Bank Financial Group was the only bank not involved. DundeeWealth Inc. , through Dundee Bank, was also hit hard; the bank had to write down $134 million in ABCP and other investments, resulting in a loss for DundeeWealth in the quarter ended Sept. 30. Dundee Bank has since been sold to Bank of Nova Scotia, but DundeeWealth still had $399.4 million of non-bank ABCP on its books as of Sept. 30.

DundeeWealth’s parent, Dundee Corp. , however, was in positive territory with a $74.1 million gain on shares issued to Scotiabank and earnings of $136 million from its real estate investments. Those more than offset its $59.7-million share of DundeeWealth’s loss.

Some companies did benefit from the credit crisis, but they were smaller. Home Capital Group Inc. and Equitable Group Inc. are picking up books of business, and Canadian Western Bank expects to do so, as well.

But the big winner is probably Fairfax Financial Holdings Ltd. , which has taken a huge position in credit-default swaps. It sold a small portion of the swaps for a gain of US$40.9 million in the quarter ended Sept. 30. The rest was valued at US$545.8 million as of Sept. 30, with a cost base of $343.9 million. There is no guarantee that Fairfax will realize further gains, but it may well do so — given the time it’s expected to take to resolve the crisis.

This added to Fairfax’s turnaround in the quarter, when it reported earnings of US$253.2 million, vs a loss of US$359.2 million in the same quarter a year earlier. The year-earlier loss was related to its decision to cancel a big chunk of reinsurance.

The US$612.4-million improvement in Fairfax’s net income offset to some extent the banks’ deterioration, resulting in only a 3.2% average decline for the 47 companies in Investment Executive’s quarterly profit survey. (That figure includes results of companies that are not consolidated with other companies in the survey. Those excluded are Great-West Lifeco Inc. and IGM Financial Inc., owned by Power Financial Corp.; Northbridge Financial Corp. and Cunningham Lindsey Group Inc., owned by Fairfax; and DundeeWealth.)

Of the 47 companies, 26 had increases in net income and 13 had declines. Fairfax and Northern Financial Corp. posted positive net income vs losses in the same period the year before. The other six were in a loss position.

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

> Banks. National Bank of Canada was hardest hit by the ABCP market collapse. In addition to the $156 million of ABCP it owned, the bank purchased $2.1 million of paper from its mutual funds and pools and from retail and other clients at a net cost of $365 million. The carrying value of National Bank’s ABCP was $1.7 billion as of Oct. 31.

CIBC took a $302-million charge related to the credit crunch. It has $741 million in unhedged exposure to collateralized debt obligations (CDOs) and residential mortgage-backed (RMBs) securities related to the U.S. housing market. This is offset by $283 million in subprime index hedge notional value with a fair market value of $119 million. In addition, the bank has $9.3 billion in notional exposure to the U.S. subprime residential market through derivatives, with a related on-balance sheet fair value of $4 billion.

Bank of Montreal took a $211-million charge as well as $16 million in commodity trading losses. The latter have been haunting BMO over the past year, with losses for the 12 months ended Oct. 31 of $440 million.

Royal Bank of Canada took a charge of $160 million. It has $388 million in U.S. subprime RMBs and $216 million in net exposure to U.S. subprime CDOs of asset-backed securities.

Scotiabank had a charge of $133 million. It has no direct exposure to U.S. subprime paper and only nominal holdings of Canadian non-bank ABCP.

Laurentian Bank of Canada was also affected, taking a $2-million charge. It has $20 million in ABCP on its books.

Four of the big five banks (excepting BMO) had substantial gains as a result of the global restructuring of VISA Inc. These amounted to a net $381 million for CIBC, $163 million for Scotiabank, $269 million for Royal Bank and $135 million for TD. These are excluded from net income in this survey as they are unusual and non-recurring.

@page_break@On the acquisition/divestment side, in addition to a stake in DundeeWealth, Scotiabank added another bank to its Chile operations in late November. CIBC is selling its U.S. investment banking, equities, leveraged finance and related debt capital market businesses to Oppenheimer Holdings Inc.

Among the smaller banks and lenders, Canadian Western, Equitable Group, Home Capital and Rentcash Inc. all reported strong earnings increases; HSBC Bank Canada was up 4.9%.

Pacific & Western Credit Corp. ’s earnings were significantly lower from a year ago but up from the previous quarter. It notes that the credit crisis has allowed it to book new loans and leases at attractive spreads.

> Life Insurers. Great-West was the only insurer with a drop in net income. The reason was a $97-million after-tax provision for certain Canadian retirement plans. The operations of Boston-based Putnam Investment Trust are included in Great-West numbers as of Aug. 3. The restructuring of Putnam is expected to be completed by the end of 2008.

Industrial Alliance Insurance & Financial Services Inc. took a $7.3-million charge related to the ABCP turmoil. It purchased $76.8 million in ABCP from its retail money market funds; its total ABCP exposure as of Sept. 30 was $104 million.

Both Manulife Financial Corp. and Sun Life Financial Inc. had mixed results, with earnings from some businesses up and some down. Both were negatively affected by the higher Canadian dollar as U.S. results were translated into C$.

Sun Life says that the positive impact of credit spread movements and equity markets helped increase earnings at several of its North American businesses.

> Property & Casualty Insurance. This is a mixed bag. Co-operators General Insurance Co. , Fairfax, Northbridge and Optimum General Inc. , the last of which went private Nov. 9, had improved earnings. EGI Financial Holdings Inc., ING Canada Inc. and Kingsway Financial Services Inc. saw earnings decline.

The P&C sector is at a turning point. In the past two years, the auto insurance market has been soft, with standard insurers responding to high profitability by lowering both premium rates and underwriting standards in order to increase volumes. This has hurt non-standard insurers EGI and Kingsway, some customers of which could not be insured through standard companies. But the soft market has also affected other publicly traded P&C companies that refused to lower underwriting standards or write unprofitable business.

The market is expected to harden in 2008, as standard insurers realize that earnings are being eroded and raise their premium rates and underwriting standards.

All the P&C companies except Kings-way had an underwriting profit, as indicated by a combined ratio (losses and operating expenses as a percentage of earned premiums) of less than 100, although Co-operators’ profit was very small. Unfavourable reserve development produced an underwriting loss at Kingsway’s U.S. subsidiary, Lincoln General Insurance Co. The company has taken “corrective actions” and expects result to improve in 2008.

On the divestment side, Fairfax reduced its interest in Cunningham Lindsey to 45% from 86%. It had sold its 26% interest in Hub International Ltd. earlier in 2007.

> Mutual Fund And Investment-Management Companies. Among the big mutual fund companies, AGF Management Ltd. ’s sizable gain is the result, in part, of its acquisition of 79.9% of Highstreet Partners Ltd. on Dec. 1, 2006. But Highstreet added only $4.8 billion in assets under management, and AGF’s AUM was up $14.8 billion in the quarter ended Aug. 31. Net mutual fund sales were $342 million in the quarter, $52.8 million in September, $68.6 million in October and $1.9 million in November.

CI Financial Income Fund had just a 3.9% increase in net income despite a 12.4% gain in AUM. It notes that the credit crunch has reduced market activity, resulting in lower administration fees and investment income revenue at subsidiaries Assante Wealth Management (Canada) Ltd. and Blackmont Capital Inc. CI’s net mutual fund sales were $149 million in the third quarter, $175 million in October and $45 million in November.

IGM continues to post good growth, even though subsidiary Mackenzie Financial Corp. had net redemptions of $472.7 million in the quarter, $96.9 million in October and $82 million in November. Another subsidiary, Investors Group Inc., had net fund sales of $370.8 million in the quarter, $135.8 million in October and $168.4 million in November.

Mavrix Fund Management Inc. ’s bottom line remains in the red. Mavrix admits mutual fund sales were disappointing in 2007. It continues to invest in its marketing infrastructure in the hope that will “catapult Mavrix to the next level, in terms of revenue.”

Sceptre Investment Counsel Ltd. picked up the private-client business of Legg Mason Canada at the end of 2006. Saxon Financial Inc. reported healthy earnings growth. But Guardian Capital Group Ltd. was down slightly and Seamark Asset Management Ltd. continues to struggle.

Alternative investments producer Integrated Asset Management Corp. is also struggling, but it has increased its dividend, indicating its confidence in the future.

Gluskin Sheff & Associates Inc. reports growing interest in its products from prospective clients.

> Distributors And Suppliers. Among the brokerages, GMP Capital Trust and Oppenheimer had very strong increases in net income. But Canaccord Capital Inc. was down 30.3%.

Canaccord says the rising C$, credit problems in the U.S. and Britain, and the weakness in the U.S. housing market have been generally unfavourable for its businesses.

GMP, on the other hand, believes its performance reflects “the growing diversity and the expansion of our businesses, the talent and commitment of our people, and our strong client focus and relationships.”

Oppenheimer, which is Toronto-based but operates entirely in the U.S., says its results reflect its increased investment in its corporate finance efforts, as well as an increased level of activity for small issuers.

Grey Horse Corp. was granted a registration as a limited market dealer in September.

Western Financial Group Inc. net income was up 57.7% and Loring Ward International Ltd. had a gain of 10%, but Accord Financial Corp. was down 20.3%. Accord explains that yields were lower on higher volumes and loans, reflecting its strategy to be more competitive and explore new markets.

Anthony Clark International Insurance Brokers Ltd. ’s revenue was way up as a result of a U.S. acquisition, but it remains in the red. Cunningham Lindsey, Jovian Capital Corp. and Loyalist Insurance Group Ltd. also reported losses.

Jovian was not directly involved in the ABCP crisis, but it has felt the impact of negative investor sentiment. The company is restructuring its investment-banking arm.

> Exchanges. Montreal Exchange Inc. and TSX Group Inc. are merging to form TMX Group Inc. in a deal expected to close in the first quarter of 2008. (See page 26.)

The MX is negotiating to increase its ownership in U.S.-based BOX Options Exchange Group LLC to 53.2% from 31.4%. It has also filed for regulatory approval to trade Canadian carbon dioxide futures.

> Holding Companies. Desjardins Group had a $107-million writedown of its ABCP holdings, but “sterling” performance in the caisse network and the insurance subsidiaries partially offset that. IE