Charges related to the global credit crunch, combined with weak equity markets, have lowered the latest quarterly earnings at many Canadian financial services companies.

The most severe impact of the credit crunch has come in the form of writedowns of U.S. subprime mortgage and Canadian asset-backed commercial paper holdings. But lower interest rates, aimed at easing the credit situation and stimulating the sluggish North American economies, are squeezing margins at deposit-taking institutions, which are paying higher rates on guaranteed investment certificates and other interest-paying instruments issued when rates were higher.

Weak and volatile equity markets are taking their toll as well. Investors are shying away from equities in general and from financial services stocks in particular. Corporations are putting off raising capital, and lower stock prices are eating away at assets under management at money-management firms, further deflating the earnings of financial services companies.

Ten of the 51 publicly traded companies surveyed by Investment Executive reported a loss in the quarter, vs a profit a year earlier. Another three remained in a loss position and 17 saw earnings decline. (Those 51 companies exclude four whose results are consolidated with parent firms in the survey — DundeeWealth Inc.,majority-owned by Dundee Corp.; Great-West Lifeco Inc. and IGM Financial Inc., owned by Power Financial Corp.; and Northbridge Financial Corp., owned by Fairfax Financial Holdings Inc. )

Coventree Inc. and Xceed Mortgage Corp. were front and centre in the Canadian ABCP mess. Coventree, despite posting a profit in the quarter ended March 31, vs a loss a year earlier, is winding down its business. But Xceed, which posted a loss, plans to survive by changing its business model; it will originate mortgages that qualify for Canada Mortgage & Housing Corp. insurance rather than those that don’t.

Of the banks, only CIBC, National Bank of Canada and Royal Bank of Canada took additional ABCP-related charges in the quarter ended April 30, whereas in the previous quarter, the eight largest banks — except TD Bank Financial Group — all took charges. Bank of Montreal reversed some of its previous charges in this quarter.

Desjardins Group, Canaccord Capital Inc. and Dundee, reflecting charges at DundeeWealth, also took ABCP-related writedowns this quarter.

Property and casualty insurers are also experiencing soft markets; companies are lowering premium rates and underwriting standards to increase volumes. All six P&C insurers saw underwriting results deteriorate and their combined ratios rise. (Combined ratios are operating expenses and claims as a percentage of net premiums earned.)

Gains in the P&C sector came entirely from the investment side. And, in the case of Fairfax and its subsidiary Northbridge, those were spectacular. Both insurers are reaping profits from buying credit-default swaps.

Great-West also reported a substantial gain. It picked up $176 million on the termination of a long-standing reinsurance agreement; without that, its earnings would have declined by 6.8%. The acquisition of U.S. investment-management firm Putnam Investments in August 2007 accounted for the increase in Great-West’s revenue and AUM.

Great-West’s challenge is in turning Putnam around. Putnam has been struggling since it was caught in the market-timing scandals in 2003 and has continued to post substantial redemptions. Great-West recently appointed high-profile veteran Robert Reynolds, former vice chairman and COO of Fidelity Investments, as Putnam’s president and CEO.

Many of the other companies that posted strong gains in earnings were relatively small. Here’s a look at the sectors in more detail:

> Banks. In its fiscal first half, CIBC has taken $4 billion in ABCP-related charges — $1.7 billion this quarter and $2.3 billion in the previous quarter. The question is: is there more to come? As of April 30, CIBC had $3.4 billion in unhedged exposure to structured credits. In its efforts to reduce costs, the bank plans to eliminate 100 positions at CIBC World Markets Inc. and has already exited or sold off most of its U.S. operations.

CIBC’s retail markets, which includes Canadian and international personal and corporate banking and wealth-management operations, also reported lower earnings.

The other Big Five banks likewise had lower earnings in their capital-markets divisions. Royal Bank, National Bank and TD reported downturns in their wealth-management divisions.

But those banks did report increases in other areas. At both BMO and TD, earnings from personal and commercial banking in Canada and the U.S. were up. Bank of Nova Scotia also saw gains in its domestic and international banking businesses, while Royal Bank’s earnings from Canadian banking operations were up but those from U.S. and international banking were down. At National Bank, personal and commercial banking earnings were up slightly.

@page_break@On the acquisitions front, TD completed its acquisition of New Jersey-based Commerce Bancorp Inc. in the quarter. Scotiabank recently announced the acquisition of a bank in Guatemala and the business assets of banks in the Dominican Republic and Peru.

Small deposit-taking institutions that weren’t exposed to U.S. subprime mortgages or Canadian ABCP are finding opportunities to pick up assets that other banks are shedding. Canadian Western Bank, for example, says it is evaluating several potential acquisitions of quality asset portfolios.

Equitable Group believes fewer competitors in its core mortgage market will result in improved interest rate spreads. Pacific & Western Credit Corp. is increasing its capital to take advantage of less competition and improving interest spreads. And First National Financial Income Fund, which originates and services residential and commercial mortgages, reports increased market share in the single-family residential mortgage-broker channel.

Elsewhere, HSBC Bank Canada believes its brand-building activities are being successful, as loan volumes are increasing. Laurentian Bank of Canada is continuing to invest in infrastructure as well as in direct services to clients.

> Life Insurers. Manulife Financial Corp. was the only life insurer whose net income dropped in the quarter, as lower equity markets trimmed $275 million from earnings. Translating U.S.-dollar earnings into Canadian dollars also cost the insurer $70 million.

Like Great-West, Sun Life Financial Inc. also has a big U.S.-based investment-management firm, MFS Investments, that has been struggling with redemptions. Sun Life tried to sell MFS but couldn’t find a buyer. And, as with Manulife, the high C$ has hurt Sun Life’s earnings, reducing them by $43 million in the quarter.

Industrial Alliance Insurance and Financial Services Inc. has acquired a U.S.-based pre-funded funeral insurance company that will reopen for new business under the name IA American Life Insurance Co. Currently, Industrial Alliance does only a little life and annuity business in the western U.S.

> Property & Casualty Insurers. The P&C market isn’t expected to firm up until at least 2009. In addition, insurers operating in Alberta are being negatively affected by a court decision to disallow government-imposed caps on minor injury claims; the provincial government is appealing.

But most P&C carriers have remained profitable, with the exception of Kingsway Financial Services Inc. It has been struggling for some time to turn around a U.S.-based subsidiary, Lincoln General Insurance Co. This has necessitated increased reserves as well as restructuring.

> Mutual Fund And Investment-Management Companies. Among the big mutual fund companies, net income was way up at AGF Management Ltd.,up marginally at IGM and down slightly at CI Financial Income Fund.

All three firms had declines in AUM but AGF, which is the most diversified of the three, has other operations that are doing well. Its trust company reported earnings before interest, taxes, depreciation and amortization of $12.9 million in the quarter ended Feb. 29, vs $8.1 million in the same period a year earlier.

But the main reason for AGF’s gain was a significant drop in future income tax liabilities as a result of the scheduled decline in the federal corporate income tax rate. IGM, too, had lower income tax liabilities but the drop was less dramatic. CI, as an income trust, isn’t affected in the same way.

Both AGF and IGM had net redemptions for the five months ended May 31, but segregated fund sales and the popularity of CI’s newly launched Cambridge mutual funds have kept CI’s fund sales in positive territory; unitholders are less likely to redeem seg funds in weak markets. DundeeWealth, too, has had net fund sales.

Mavrix Fund Management Inc. and Stone Investment Group Ltd. both reported net losses. Stone is in the process of building its business, and its AUM is rising. Mavrix, however, has lost almost a quarter of its AUM in the past year.

Seamark Asset Management Ltd. is still struggling to regain momentum lost when Industrial Alliance bought the Clarington funds in February 2007.

Gluskin Sheff & Associates Inc. and Integrated Asset Management Corp. had strong increases in AUM, which improved their earnings. Both Gluskin Sheff and Sceptre Investment Counsel Ltd. had higher earnings in the quarter than a year earlier. IAM posted a profit in the quarter vs a loss a year earlier.

Both Guardian Capital Group Ltd. and Saxon Financial Inc. reported earnings lower by almost 20%.

> Distributors And Suppliers. The outlook for the investment banking and brokerage sector is unclear. GMP Capital Trust sees “little sign” of the challenging credit market conditions abating and says this could continue for the rest of 2008.

Canaccord Capital Inc. is more optimistic. “Equity markets should continue to show good gains,” its quarterly report says, “as liquidity moves from safe-haven assets to longer-dated assets — in particular, equities.”

Oppenheimer Holdings Inc. and Thomas Weisel Partners Group Inc. have both made recent acquisitions. Oppenheimer is “confident in the long-term success” of its purchase of most of CIBC World Markets’ U.S.-based capital-markets business. Weisel, a U.S.-based investment bank/brokerage that was listed on the Toronto Stock Exchange after buying Toronto-based Westwind Capital Corp. on Jan. 2, is in the process of integrating its operations.

The other investment dealer, Northern Financial Corp., remained in the red in the quarter.

Accord Financial Corp. increased its provisions for credit and loan losses. It is, however, finding new business, as banks, especially in the U.S., cut back on loans to small and medium-sized companies, Accord’s target market.

Grey Horse Capital Corp. has followed the industry trend and reported lower earnings in the quarter. Despite Loring Ward International Ltd. ’s loss, it has agreed to a takeover bid, which another potential purchaser is challenging. Western Financial Corp.’ s lower earnings were the result of additional network expenses, which will “normalize” during the year, according to its report.

> Exchanges. TSX Group Inc. took a $15.2-million charge related to its decision not to enter derivatives now that it has merged with Montreal Exchange Inc. , reducing TSX’s bottom line.

> Holding Companies. Desjardins took a $150-million ABCP-related writedown. Its insurance operations also had lower earnings. IE