Profit survey: Solid growth persists in Q4

In total, 25 of the 40 publicly traded companies in Investment Executive’s quarterly profit survey saw their earnings rise in the fourth quarter (Q4) of 2013 vs Q4 2012, and two others – Northern Financial Corp. and Oppenheimer Holdings Inc. – reported positive net income vs a loss in the corresponding quarter a year earlier. Only eight firms had declines and just five were in a loss position. (These figures exclude Great-West Lifeco Inc. [GWL] and IGM Financial Inc., whose results are consolidated with those of Power Financial Corp.) In fact, all four life insurers (including GWL), 11 of the 14 banks and six of the remaining eight mutual fund and investment-management firms had higher earnings.

Ten companies increased their dividends after the end of Q4. Six of these firms were banks. Bank of Nova Scotia’s dividend increased to 64¢ from 62¢; Canadian Imperial Bank of Commerce’s (CIBC), to 98¢ from 96¢, Home Capital Group Inc.’s, to 32¢ from 28¢; Royal Bank of Canada’s (RBC), to 71¢ from 67¢; and Toronto-Dominion Bank’s (TD), to 47¢ from 43¢.

All are quarterly dividends except in the cases of First National Financial Corp. and CI Financial Corp., both of which pay dividends on a monthly basis. First National’s monthly dividend rose to 12.5¢ from 11.66¢; CI’s monthly dividend increased to 9.5¢ from 9¢.

It’s also worth noting that Home Capital also declared a stock dividend of one common share per common share issued and out-standing. This is effectively a 2-for-1 stock split. National Bank of Canada and TD did the same thing in the previous quarter.

Meanwhile, Industrial Alliance and Financial Services Inc. (IA) is the first life insurer to raise its dividend, to 26¢ from 24.5¢, since the global financial crisis. Of the two remaining firms with dividend increases, Fiera Capital Corp.‘s quarterly dividend rose to 11¢ from 10¢ and Intact Financial Corp.‘s rose to 48¢ from 44¢.

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

– Banks. Bank of Montreal (BMO) was the only one among the Big Six banks with lower earnings than in Q4 2012 – and the 2.9% decline was not large. The main reason for this decline was a drop in net income for BMO’s Canadian capital-markets division.

Among the rest of the Big Six, all of CIBC’s, TD’s and National Bank’s divisions had higher net income; Scotiabank had declines in its international banking and capital-markets divisions; and RBC had drops in personal and commercial banking and in insurance.

All the smaller banks had higher earnings except for Cash Store Financial Services Inc. and Pacific & Western Credit Corp., both of which are struggling and had losses.

– Life insurers. The rise in long-term interest rates over the past year was positive for this sector. Canadian life insurers (a.k.a. lifecos) are required to calculate their insurance liabilities, which are mostly long-term, by assuming that interest rates remain at current levels. Thus, a rise in long-term interest rates decreases their liabilities. This was partially offset by losses in the bonds that lifecos hold to cover those liabilities, but the net effect of rising rates usually is a significant addition to earnings.

All the lifecos had increased earnings in their Canadian businesses. Manulife Financial Corp. and Sun Life Financial Inc. had higher net income in their U.S. businesses, but GWL had lower net income. GWL’s U.S. asset-management business – Putnam Investments – still is in a loss position, although it did have positive net sales in both Q3 and Q4 of 2013.

Overseas, Manulife’s profitability rose in its Asian operations, but Sun Life’s was down. GWL had higher earnings in Europe.

IA’s results for Q4 2013 include those of Jovian Capital Corp., which it acquired on Oct. 1.

Next: Personal and Casualty insurers
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– Personal and casualty (p&c) insurers. This sector continues to struggle, with three of the four firms experiencing earnings declines and Fairfax Financial Holdings Ltd. reporting a loss.

P&C financial results are affected by gains or losses from investments as well as by underwriting results. In Q4 2013, all the firms saw losses in the value of their bond portfolios as a result of the rise in long-term interest rates.

Those losses were particularly large in the case of Fairfax – US$329.1 million vs gains of US$635.6 million in Q4 2012 – and these included losses on equity hedges as well as bonds.

On the underwriting side, only EGI Financial Holdings Inc. had a loss – and that was due to measures to shore up its struggling niche business.

Intact was affected significantly by the ice storm in Ontario and Quebec in late December, which pushed up its combined ratio to 96.3% from 92.1%.

Co-operators General Insurance Co.‘s combined ratio was up only marginally.

Fairfax, for its part, operates primarily in the U.S. – and the huge improvement in its combined ratio was because it was so negatively affected in 2012 by hurricane Sandy.

– Mutual fund and investment-management firms. Six firms had increased earnings, two had declines (including IGM) and Integrated Asset Management Corp. (IAM) had a loss.

AGF Management Ltd. still is in net redemptions, to the tune of $601 million in Q4 2013. Although that figure is substantial, it’s a good deal less than the $1.1 billion in net redemptions it had in Q4 2012.

IGM had net redemptions of $955 million for its three subsidiaries – Investors Group Inc., Mackenzie Financial Corp. and Investment Planning Counsel.

In contrast, CI had net sales of $707 billion in Q4 2013.

Gluskin Sheff + Associates Inc.’s significant increases in revenue and net income are a result of much higher performances fees in 2013 vs 2012.

IAM sold its retail subsidiary, BluMont Capital Corp., to private company Arrow Capital Management Inc. in December. IAM is going to focus on expanding its real estate and private-debt operations, as well as seek accretive acquisitions.

– Distributors and suppliers. Three of the four brokerages had better performance, with Canaccord Genuity Group Inc. increasing earnings and Northern Financial and Oppenheimer reporting profits vs losses a year earlier. But GMP Capital Inc. had lower net income.

– Exchanges. TMX Group Ltd.‘s earnings declined amid subdued markets.

– Holding companies. Both Desjardins Group and Power Financial had increased earnings but those of Dundee Corp. were down.

At Desjardins, net income was up for its wealth-management and life, health and P&C insurance businesses, but was down for personal services and business and institutional services.

Dundee’s decline was because its Q4 2012 figures included earnings from Dundee Realty Corp., which was spun off in May 2013.

Power Financial’s results reflect the earnings at GWL and IGM.

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