Profit survey: Not as good as it looks

(These figures exclude Great-West Lifeco Inc. [GWL] and IGM Financial Inc., both of whose results are consolidated with those of Power Financial Corp. Also excluded is Western Financial Group Inc., which is wholly owned by Desjardins Group.)

A big part of the overall improvement to earnings in the survey was due to gains in the insurance sector. Three of the major life insurers – GWL, Manulife Financial Corp. and Sun Life Financial Inc. – four of the property and casualty insurers (including Fairfax), and life and property insurer E-L Financial Corp. had higher net income vs Q1 2011.

The banks also did well, with an average increase of 13.5% in net income for the sector. The three holding companies had an average gain in earnings of 11.2%.

At the other end of the spectrum, mutual fund and investment-management firms, as well as the brokerages and TMX Group Inc., were hurt by investors who retreated from equities. In the first group, only Brookfield Asset Management Inc. and Sprott Inc. had earnings gains, although neither firm is typical of the sector. Brookfield invests in real assets, such as real estate, renewable resources and infrastructure, and private equity. Sprott’s lineup includes hedge and gold funds.

The biggest news in the quarter was the announced acquisition of Natcan Investment Management Inc. by Fiera Sceptre Inc. from National Bank of Canada. The merged company, now called Fiera Capital Corp., has $54 billion in assets under management (AUM); the deal closed April 2.

There were other significant acquisitions and sales in the quarter. Canaccord Capital Inc. completed its acquisition of Collins Stewart Hawkpoint PLC of Britain. Royal Bank of Canada (RBC) also announced that it will acquire the 50% interest in RBC Dexia Investor Services Ltd., a Europe-based global custodial business, that it did not already own. AGF Management Ltd. announced it is selling AGF Trust to Laurentian Bank of Canada‘s subsidiary, B2B Trust; that deal is expected to close in August. AGF plans to use the proceeds of $415.5 million to build its global business and strengthen its domestic operations.

Most companies maintained quarterly dividends at current levels. Four deposit-taking institutions raised their dividends: Canadian Western Bank, to 16¢ from 15¢; Home Capital Group Ltd., to 22¢ from 20¢; Laurentian Bank to 47¢ from 45¢; and National Bank, to 79¢ from 75¢.

There was only one dividend cut: Cash Store Financial Services Inc. halved its dividend to 6¢ from 12¢ because of restructuring costs and capital expansion needs.

A closer look at the sectors:

– banks. Thirteen of the 16 deposit-taking institutions saw net incomes rise. Among the others, Xceed Mortgage Corp. and Cash Store reported a loss vs a profit in the same period a year before. Pacific & Western Credit Corp. remained in a loss position.

Cash Store’s $10.4-million loss included $3.2 million less in revenue as a result of moving to a direct-lending model, in which fees are recognized when they are received. Under the firm’s previous broker model, fees were recognized when third parties financed loans. Cash Store’s results also reflect a $3-million impairment due to property and equipment and loan loss provisions, which jumped to $7.5 million from $654,000.

Xceed’s loss is due to its transition from in-house mortgages to a model that uses the broker channel to originate mortgages.

Pacific & Western Credit has struggled to establish a sustainable business. It believes recent initiatives will lead to improvements.

The Big Six banks all saw their Canadian banking operations perform well. But results for their wealth-management and capital-markets businesses were mixed. Wealth-management performance was up at Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC) and Toronto-Dominion Bank (TD); however, it was down at Bank of Nova Scotia, National Bank and RBC.

Capital-markets operations were up at Scotiabank, RBC and TD but down at BMO, CIBC and National Bank.

The U.S. banking operations of BMO and TD were up, and Scotiabank’s international banking operations were also up. RBC’s international banking operations were down, although its insurance division was up.

Loan loss provisions for the banks as a whole increased to $1.6 billion in the quarter from $1.5 billion a year earlier. BMO, National Bank and RBC increased their loan loss provisions. There were also large increases in loan loss provisions at alternative mortgage providers Equitable Group Inc. and Home Capital, as well as at Cash Store.

– life insurers. The earnings gains at Manulife and Sun Life were due to higher equities markets and increased interest rates. Due to these factors, Manulife’s gains were $541 million and Sun Life’s were $348 million, both after taxes.

Without these gains, both companies would have recorded declines in earnings – 30.3% for Manulife and 19% for Sun Life. Manulife has warned that changes in Canadian accounting standards as of Oct. 15, 2012, could lead to a charge of $250 million to $300 million.

GWL’s earnings increase reflected a weak quarter a year earlier – $75 million in provisions were taken at that time as the result of earthquakes in Japan and New Zealand. Otherwise, the company’s net income this year would have been down by 7.4%. GWL notes that most business lines were down, except for Canadian group insurance.Putnam Investments, GWL’s U.S.-based wealth-management arm, was in net redemptions.

Manulife’s mutual fund sales were down. But Sun Life’s U.S.-based wealth-management arm, MFS Investments, had net sales of US$5.9 billion.

Industrial Alliance Insurance and Financial Services Inc. had a small earnings decline but says all its businesses had growth in sales or assets.

– property & casualty insurers. Most companies in this sector saw improvement. Only Kingsway Financial Services Inc. continues to struggle; it has been in a loss position in almost every quarter since Q4 2007.

Co-operators General Insurance Co., Fairfax and Intact Financial Corp. all had underwriting profits, with combined ratios of less than 100. EGI Financial Holdings Inc.’s combined ratio crept up to 102.3% from 100.3%, while Kingsway’s remains very high.

The mild winter helped Co-operators and Intact. Co-operators also cites improvements in its auto business in Ontario, following the Sept. 2010 reforms. Intact is optimistic about the future positive impact of these reforms. However, EGI is less certain, saying that the long-term impact remains unknown.

– mutual fund and investment-management firms. Brookfield and Sprott, the only companies in this sector with earnings gains, were also two of the three firms that didn’t see AUM decline. (The other was Guardian Capital Group Ltd.)

Among the three big independent mutual funds firms, CI Financial Corp. had the smallest decline in AUM, reporting net sales for the quarter. AGF and IGM are both in net redemptions, but IGM’s drop in earnings was only slightly greater than CI’s.

For the other firms in this sector, drops in net income ranged from 5.5% for Guardian to 53.3% for Fiera. Guardian has the advantage of owning a large chunk of BMO common shares, which provide it with a steady flow of dividend income.

Fiera lost two investment mandates worth $1.7 billion in the quarter, although that is dwarfed by its acquisition of Natcan. Fiera also had only $43,000 in performance fees, compared with $1 million a year earlier.

Integrated Asset Management Corp., Matrix Asset Management Inc. and Stone Investment Group Ltd. all had losses. All three are struggling to establish sustainable businesses.

– distributors and suppliers. It wasn’t a good quarter for brokerages, with uncertainty about the global outlook putting a damper on investment banking and trading activities. Canaccord and GMP Capital Inc. saw earnings plunge, while Oppenheimer Holdings Inc. reported a loss compared with a profit the year before.

Equity Financial Holding Inc.’s big drop in earnings was partly due to particularly strong earnings a year earlier as a result of some very large foreign-exchange transactions. But it was also the result of a reduced contribution from its transfer agent business.

Accord Financial Corp. reports that it lost clients as a result of unusually aggressive competition from Canadian credit insurers and U.S. banks.

– exchanges. TMX’s earnings decline was due to lower revenue from issuer services and cash trading. The company is still negotiating with Maple Group Acquisition Corp. concerning Maple Group’s proposed takeover bid.

– holding companies. Dundee Corp. reported $35.5 million in net income vs a $2.3-million loss the year before. Desjardins had a 17.9% earnings increase and Power Financial was up by 1.1%.

Dundee’s earnings came mainly from its asset-management business, which had $33.7 million in pretax earnings vs a loss of $1.5 million the year before.

At Desjardins, its caisse network credit card services and P&C insurance businesses continued to build volumes. Power Financial’s results reflect those of GWL and IGM.

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