Poor results mire Q2

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The eight non-banks with improved results include three property and casualty insurers: Cooperators General Insurance Co., Fairfax Financial Holdings Ltd. and Intact Financial Corp. This sector has been through a tough period over the past few years but is finally seeing better results.

The other five firms with improved earnings were: Guardian Capital Group Ltd., Anthony Clark International Insurance Brokers Ltd., Oppenheimer Holdings Inc., Desjardins Group and E-L Financial Corp., the last of which had positive net income vs a loss the year prior.

The bleeding was extensive elsewhere. Excluding the banks, the average drop in earnings among the remaining 30 firms was 56.2%. With the banks included, there was still a drop of 4.7% on average.

Twelve companies were in a loss position, and double-digit declines in net income were common. Indeed, the average decline was 75% for the four life insurance companies (including GWL) and 63.7% for the 10 mutual fund and investment-management firms (including IGM). The seven distributors and suppliers were in a loss position as a group, with three of the individual companies in the black.

Not surprising, there were no dividend increases outside of those declared by the banks. Canaccord Financial Inc. and GMP Capital Inc. both halved their quarterly dividends to 5¢ from 10¢, while Matrix Asset Management Inc. maintained its 1.5¢ quarterly dividend but is now paying it in stock rather than cash. In contrast, the Big Five banks, plus Equitable Group Inc. and First National Financial Corp. (the latter of which pays a monthly dividend) all increased their dividends.

On the consolidation front, there were some notable announcements after the end of the quarter, including Bank of Nova Scotia’s agreement to purchase ING Bank of Canada from its Netherlands-based parent and Manulife Financial Corp.’s purchase of WellingtonWest Financial Services Inc. from National Bank of Canada. Both deals are expected to close in the fourth quarter.

A look at the results by sector:

BANKS. Although most of the banks saw earnings increases, First National Financial and HSBC Bank Canada had declines in net income, and Cash Store Financial Services Inc. slipped into the red. Pacific & Western Credit Corp. remained in a loss position, although its big increase in revenue suggests it may be turning the corner.

Cash Store’s problem was lower loan volumes and a loss in its British operations. First National’s decrease was due mainly to losses in the company’s hedging program. HSBC’s decline was because its net income a year earlier was inflated by $47 million due to the recovery of fees paid in prior years from an affiliate.

Royal Bank of Canada’s (RBC) big increase was due, in part, to a positive tax settlement this year, “exceptional growth” (according to its quarterly report) in its Canadian retail franchise and strong investment-banking results. But the increase also re?ects the sale of the bank’s U. S. regional banking operations, which had been losing money, on March 2.

The rest of the Big Five all reported strong Canadian retail banking results. Both Bank of Montreal’s (BMO) and Toronto-Dominion Bank’s U. S. retail banking operations were down.

The wealth-management business was up at all but RBC. Capital markets were up for most, except at BMO. Scotiabank’s extensive international banking operations were up, but RBC’s smaller operations were down.

Laurentian Bank of Canada reports that the integration of the MRS firms it acquired in 2011 from Mackenzie Financial Corp. is going well. Laurentian’s purchase of AGF Trust from AGF Management Ltd. closed on Aug. 1.

LIFE INSURERS. GWL and Industrial Alliance Insurance and Financial Services Inc. had only small declines in earnings, but Manulife and Sun Life Financial Inc. were whacked again by the impact of low interest rates and declines in equities combined with soft economic conditions.

Manulife continues to be the most vulnerable of the lifecos to losses, posting its fifth loss in the past nine quarters. Sun Life has had only two quarters with losses during that same period.

Manulife will be completing its annual review of actuarial methods and assumptions in the third quarter and its quarterly report warns that the negative impact on earnings could be around $1 billion. However, most of this comes from products and businesses that “are not a substantial part of our go-forward new business plans.”

PROPERTY AND CASUALTY INSURERS. Co-operators had its third quarter in a row of strong earnings after 16 quarters of struggles that featured five quarters with a loss.

Fairfax’s earnings jump around a lot because its main focus is on managing its investments.

In contrast, Intact focuses on underwriting and hasn’t posted a loss since the third quarter of 2009. Intact completed its purchase of motorcycle insurer Jevco Insurance Co. on Sept. 5.

EGI Financial Holdings Inc.’s core Canadian personal lines division continues to do well, with a combined ratio of 88.4% in the quarter, but its niche operations and U. S. startup have struggled.

Kingsway Financial Services Inc., once a major alternative auto insurer, had been hit with major losses in its U. S. operations in 2007 and has struggled to reinvent itself since.

MUTUAL FUND AND INVESTMENT-MANAGEMENT FIRMS. A huge $1-billion drop in Brookfield Asset Management Inc.’s net income was mainly responsible for the group’s 63.7% earnings drop, but both Sprott Inc. and Stone Investment Group Ltd. also saw net income plunge.

Brookfield’s drop was mainly due to a particularly strong quarter the year prior, when its earnings reflected big increases in the value of commercial office and property valuations, particularly in the U. S.

Sprott saw management fees drop by $8.1 billion in the quarter. The company had completed its purchase of Toscana Capital Corp., Toscana Energy Corp. and Flatiron Capital Management Partners after the end of the quarter.

Stone’s problems are mainly a result of its small size.

Only three companies had increases in assets under management (AUM): Brookfield, Fiera Capital Corp. and Guardian. (Fiera’s was mainly because of its April 1 acquisition of Natcan Investment Management Inc. from National Bank.)

The biggest AUM decline was at Matrix, which was down by 52.2%. The drop was primarily in institutional AUM, which fell to $400 million from $1.2 billion, but retail AUM also fell significantly, to $700 million from $1.1 billion.

Among the three big mutual fund companies, CI Financial Corp. had the smallest decline in AUM, at 3.6%. IGM’s AUM was down by 9.4% and AGF’s fell by 16.6%. But when it comes to earnings, IGM had the smallest drop, a still substantial 19.1%, while CI was down by 27.4% and AGF was down by 38.6%.

The recent departure of AGF’s star emerging-market fund manager Patricia Perez-Coutts and her team to join a U. S. firm setting up shop in Canada is a major blow.

DISTRIBUTORS AND SUPPLIERS. Oppenheimer was the only brokerage with an earnings increase _ and that was primarily due to particularly weak results the year prior.

The other three brokerages – Canaccord, GMP and Northern Financial Corp. _ all reported losses. Investment banking has been hit particularly hard by global uncertainty and the resulting volatile financial markets.

EXCHANGES. Maple Group Acquisition Corp. completed its takeover of TMX Group Inc. on Aug. 10 and has since been renamed TMX Group Ltd.

HOLDING COMPANIES. Dundee Corp. and Jovian Capital Corp. both reported losses. Jovian is normally in the red, as it still is struggling to establish a viable business model. Dundee’s loss was due to realized losses from investments in the quarter.

Strong results from the caisse network was a major contributor to Desjardins’ solid earnings gain. Power Financial’s decrease in net income reflects the results at GWL and IGM.

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