The global credit crunch and the economic slowdown are taking their toll on publicly traded financial services companies, according to Investment Executive’s latest quarterly profit survey.
The 47 companies surveyed saw an overall average decline in earnings of 26.6% in the third quarter. (These numbers exclude companies whose results are consolidated with others in the survey. Northbridge Financial Corp. ’s results are included in those of parent Fairfax Financial Holdings Ltd.; Great-West Lifeco Inc. ’s and IGM Financial Inc.’ s are included in majority owner Power Financial Corp. ’s; and DundeeWealth Inc. ’s are included in Dundee Corp. ’s.)
Only 14 companies reported higher net income in the quarter than in the same period a year earlier. And only two — National Bank of Canada and First National Financial Income Fund — reported a profit in the quarter vs a loss a year earlier.
Nor were there solid improvement at the companies on the plus side. Royal Bank of Canada, for example, reported a 6.2% increase in net income, but that was the result of a $252-million reduction in its provision for litigation involving Enron Corp. Without this, RBC would have reported a 17.7% decline in net income.
Similarly, Toronto-Dominion Bank reduced its reserves related to Enron litigation by $323 million. Without that, TD’s earnings would have been down by 25.3%.
Bank Of Montreal’s earnings gain, on the other hand, reflected a very weak quarter a year earlier, when it took a $211-million charge related to the deteriorating performance of its capital markets business. This quarter, it took only an $8-million charge.
Likewise, National Bank had a bad quarter a year ago, when it took a $381-million charge related to its asset-backed commercial paper holdings. This quarter, it took a lower, $78-million charge for its ABCP.
Fairfax and its subsidiary North-bridge both had earnings gains — but not from their core insurance operations, which had large underwriting losses. The gains came from credit-default swaps.
AGF Management Ltd. paid taxes of $10 million in the quarter ended Aug. 31, vs $17.7 million year earlier, the result of lower future federal tax rates combined with differences in the mix of domestic and international earnings. Without this, net income would have been down by 14.9%.
Most of TMX Group Inc.’ s earnings increase was because of the merger with Montreal Exchange Inc. Without that, TMX’s gain was 2.7%.
The only companies with solid earnings gains were Laurentian Bank of Canada, the four mortgage originators, Cash Store Financial Services Inc., two mutual fund companies/investment managers that managed to increase their assets under management, and two suppliers that aren’t particularly vulnerable to weak credit markets or a weak economy.
Here’s a look at the sectors:
> Banks. Canadian Imperial Bank of Commerce’s results were muted, thanks to tax benefits of $463 million from Enron-related settlements. Without this, CIBC would have posted a loss in the quarter, albeit a small one, in addition to the $2.5 billion in losses the bank had in the first half of fiscal 2008. CIBC did take a $439-million loss on structured credit activities, valuation adjustments and writedowns.
Bank of Nova Scotia reported an charge of $642 million related to the bankruptcy of Lehman Brothers Holdings Inc. Scotiabank’s 26.6% increase in net income excludes that extraordinary item. The core operations of three of the Big Six banks are solid, and their adjusted earnings attest to that. These adjustments exclude items that don’t reflect the underlying condition of their businesses. In the quarter, Scotiabank had a 7.6% increase in certain adjusted earnings; National Bank, 5.1%; and RBC, 29.1%.
BMO’s certain adjusted earnings show a 5.8% decline: Canadian banking operations increased by 19.8% and capital markets by 7.3%, U.S. banking and private client group declined, and head-office operations showed a loss.
Certain adjusted figures for CIBC show a 9.4% decline.
Certain adjusted earnings for TD show a 34.9% drop — particularly, TD had big losses in wholesale banking and corporate operations. Retail banking was up by 2.7% in Canada and by 68.8% in the U.S.; the latter came from the acquisition of Commerce Bank.
Rejean Robitaille, Laurentian Bank’s president and CEO, in commenting on the bank’s fiscal year, said: “Strong performance within our retail and commercial operations throughout Canada has contributed to our solid revenue growth and our improved efficiency.”
@page_break@Excluding unusual and non-recurring items, Laurentian Bank’s efficiency ratio (non-interest expenses as a percentage of total revenue) dropped to 68.9% from 73.2% the year before.
Laurentian Bank decreased its loan-loss provisions in the quarter to $10.5 million from $18.5 million for the previous three months. The only others to take lower loan-loss provisions were BMO ($465 million vs $484 million) and HSBC Bank Canada ($22 million vs $25 million). For the group as a whole, loan-loss provisions rose to $1.9 billion from $1.5 billion.
There are always winners in periods of turmoil in capital markets and, this time around, they were among the mortgage originators. Equitable Group Inc., Firm Capital Mortgage Investment Trust, First National Financial and Home Capital Group Inc. all did well in the quarter. None were exposed to U.S. subprime mortgages or to Canadian ABCP, and all are benefiting from the increased profitability of mortgages.
Equitable and Home Capital have also picked up books of business that other companies are selling because their balance sheets need shoring up. In addition, Home Capital has entered the insured mortgage market, adding another lucrative line of business to its core alternative mortgage operations and its home equity and alternative credit card activities.
Cash Store Financial is increasing both the number of branches and the array of products offered.
> Life Insurers. Great-West Life and Industrial Alliance Insurance and Financial Services Inc. had relatively small declines in net income, but Manulife Financial Corp. was down by 52.6% to $507 million, and Sun Life Financial Corp. reported a loss of $379 million vs a profit of $598 million a year earlier.
Manulife had $3.2 billion in realized and unrealized losses on assets supporting policy liabilities and consumer notes, vs revenue of $834 million from these assets a year earlier. This was partially offset by a $2.3-billion reduction in actuarial liabilities, which had increased by $565 million a year earlier.
Manulife’s U.S. wealth-management business was also way down, contributing only $13 million to total shareholders’ net income vs $281 million a year earlier. The U.S. division’s AUM was down by 9.5%, to $164.1 billion from $181.3 billion.
Sun Life had asset impairments and credit losses, including $636 million in writedowns of holdings in Lehman Brothers, Washington Mutual Inc. and American International Group Inc. MFS, Sun Life’s U.S. wealth-management division, did better than Manulife’s, contributing $49 million to Sun Life’s net income. But that was down from $65 million a year earlier; MFS’s AUM was down 20.6% to US$162 billion.
Great-West Life also has a big U.S. wealth-management division, the result of its acquisition of Putnam Investments LLC in August 2007. Putnam had a US$23-million loss in the quarter vs net income of US$15 million a year earlier. AUM was down 11% to US$166.4 billion from US$187 billion when it was acquired. Great-West Life also had in impairment charges of $179.9 million related to holdings in troubled financial services companies.
> Property & Casualty Insurers. EGI Financial Holdings Inc. and ING Canada Inc. were still making money on underwriting in the quarter. Indeed, ING’s combined ratio fell to 94 from 97.1% a year earlier, indicating an increase in underwriting profitability. However, this was offset by sizable losses on invested assets.
The other companies in the category all had underwriting losses, although Fairfax’s and Northbridge’s were offset by gains on credit-default swaps.
Kingsway Financial Services Inc. reported another loss, following others in the first quarter of this year and in the fourth quarter of 2007. Kingsway has had to increase reserves for its struggling U.S. subsidiary, Lincoln General Insurance Co. Kingsway sold money-losing Canadian subsidiary York Fire & Casualty Insurance Co. in the most recent quarter.
> Mutual Fund & Investment Management Companies. Brook-field Asset Management Inc., DundeeWealth, Integrated Asset Management Inc. and Sprott Inc. were the only companies to report increases in AUM.
DundeeWealth’s increase was partly the result of its acquisition of 60% of Toronto-based Aurion Capital Management Inc. and of 89% of U.S.-based BHR Fund Advisors LP in July, which together added $4.6 billion in AUM. But DundeeWealth also posted net mutual fund sales in each of the first nine months of 2008. The company’s big drop in net income was due to a $113.8-million pre-tax writedown of its ABCP.
Brookfield’s and Sprott’s growth in AUM was organic, reflected in higher earnings.
Among the big mutual fund companies, CI Financial Income Fund had net fund sales in the quarter but AGF and IGM were in net redemptions. CI’s large family of segregated funds helped to stem redemptions.
> Distributors And Suppliers. Lagging investment-banking operations are hurting the investment dealers. Accord Financial Corp. and Grey Horse Corp. were the only companies with earnings gains. Canaccord Capital Inc., Oppenheimer Holdings Inc. and Thomas Weisel Partners Group Inc. all posted losses. GMP Capital Trust’s earnings were down by 82.3%. The sale of Loring Ward Inter-national Ltd. to a private company collapsed because Loring Ward’s AUM was down by more than 20% on Oct. 31 from June 30 levels.
> Holding Companies. Desjardins Group took a $65-million charge related to its ABCP. Dundee had losses in resources investments as well as in DundeeWealth. Power Financial’s net income was down by 13.6% in the quarter. IE