Financial services companies had a good start to the year. This is in line with Canada’s strong economic growth in the first quarter (Q1) of 2017, with real gross domestic product rising at a 3.7% annualized rate.
Among the 44 firms, 24 reported higher profits than in Q1 2016 and seven others reported positive net income vs a loss. That left 10 with lower earnings and three – Callidus Capital Corp., Stone Investment Group Ltd. and Oppenheimer Holdings Inc. – in a loss position. (These figures exclude Great-West Lifeco Inc. (GWL) and IGM Financial Inc. Their results are consolidated with those of Power Financial Corp.)
The banks did particularly well, with higher earnings for 11 of the 12 companies, although much of the gains were because of lower loan-loss provisions (LLPs) than in the corresponding quarter in 2016.
Home Capital Group Inc. was the only bank with a decline in net income, and even that was only 5.9%. That was before the company experienced a run on deposits in the wake of an announcement in April that it was being investigated by the Ontario Securities Commission (OSC). In mid-June, the company announced $29.5 million in settlements with the OSC and a class action by investors. The company also suspended its quarterly dividend during this difficult time.
However, three banks raised their quarterly dividends: Bank of Montreal (BMO), to 90¢ from 88¢; Laurentian Bank, to 62¢ from 61¢; and National Bank of Canada, to 58¢ from 56¢.
Canaccord Genuity Group Inc. reinstated its quarterly dividend at 10¢. MCAN Mortgage Corp. increased its quarterly dividend to 32¢ from 30¢; Sun Life Financial Inc.’s quarterly dividend rose to 43.5¢ from 42¢; and TMX Group Ltd.’s quarterly dividend jumped to 50¢ from 45¢.
Canadian Imperial Bank of Commerce announced the purchase of Chicago-based Private Bancorp Inc. for US$4.9 billion ($6.6 billion). This was approved by Private Bancorp’s shareholders on May 12, but regulatory approvals are yet to come.
Other deals announced in Q1 2017 include: Desjardins Financial Corp.’s sale of Western Financial Group and Western Life Assurance Co. to Trimont Financial Ltd.; ECN Capital Corp.’s sale of its U.S. commercial and vendor finance business to a U.S. firm; and GWL’s acquisition of Financial Horizons Group.
Results by industry follow:
– Banks. Almost all the deposit-taking institutions reported strong earnings gains vs the corresponding period a year earlier, with National Bank and some of the smaller banks reporting 50%-plus increases in net income. The main reason for this was high LLPs in the corresponding period earlier for energy-related loans.
LLPs for the 12 banks as a group dropped to $1.9 billion in the quarter ended either March 31 or April 30, 2017, from $2.8 billion in the corresponding quarter of 2016. (Most of the banks have an Oct. 31 yearend, but the fiscal yearend for Equitable Group Inc., Home Capital and HSBC Bank Canada is Dec. 31.)
National Bank’s LLPs dropped to $56 million in the quarter ended April 30, 2017, from $317 million in the corresponding quarter a year earlier. Canadian Western Bank‘s LLPs dropped to $13.2 billion from $39.7 billion.
A few banks reversed their LLPs this quarter due to overestimations in 2016. This included HSBC and VersaBank, which reported reversals of $49 million and $582,000, respectively.
The only companies with higher LLPs year-over-year were BMO, Equitable Group and Home Capital. The increase wasn’t significant at BMO or Equitable Group, but Home Capital’s rose to $5.9 billion from $1.4 billion. (That happened before the OSC investigation announcement and reflects an increasing amount of commercial mortgage business.)
– Finance companies. MCAN Mortgage Corp. and Timbercreek Financial Corp. reported increases in net income. Four of the other five reported lower earnings and Callidus reported a loss vs positive net income in Q1 2016.
Callidus’ loss was partly the result of a big increase in LLPs, to $19.4 million from $7.8 million in Q1 2016. The company announced in September 2016 that it is exploring privatization of the firm.
Accord Financial Corp., ECN, Element and First National Financial Corp. reported lower revenue than in Q1 2016 – and lower net income as a result.
Three firms have undergone major changes. Timbercreek Financial was created from the merger of Timbercreek Mortgage Investment Corp. and Timbercreek Senior Mortgage Investment Corp. as of June 30, 2016. ECN and Element Fleet Management Corp. were formed on Oct. 3, 2016, when Element Financial Corp. was split into two entities.
– Life insurers. E-L Financial Corp. Ltd. reported $300.2 million in net income vs a $87.8 million loss the year before. GWL reported a small decline and the other three reported earnings gains ranging from 12.7% to 38.6%.
E-L benefited from a $313.6- million increase in the fair market value of investments vs a loss of $97.6 million in Q1 2016. Changes in fair market value are included in revenue; hence, the company’s 150.5% increase in that item.
Manulife Financial Corp. reported a relatively small increase in fair market value this quarter: up by $590 million vs a huge $8.9-billion increase in Q1 2016. This was offset by a smaller increase in insurance contract liabilities of $1.5 billion vs $12.2 billion.
Sun Life reported both lower revenue and lower expenses, while GWL and Industrial Alliance Insurance and Financial Services Inc. both reported increases in expenses. (GWL will be making about $200 million in expense reductions in Q2 2017.)
– Property & casualty and mortgage insurers. There was a strong earnings increase for Genworth MI Canada Inc. , while Echelon Financial Holdings Inc. and Fairfax Financial Holdings Ltd. reported positive net income vs a loss in Q1 2016. Both Co-operators General Insurance Co. and Intact Financial Corp. reported lower earnings.
In terms of underwriting, Co-operators reported a loss and Intact’s profit shrank, and Echelon and Genworth reported higher earnings. Fairfax’s underwriting profit was a little lower, but the firm’s main business is investing the assets that back up its insurance operations.
– Mutual fund and investment-management companies. Five of the 10 companies in this industry (including IGM) reported higher earnings. Fiera Capital Corp. and Integrated Asset Management Corp. reported positive net income vs a loss in Q1 2016. That left AGF Management Ltd. and Brookfield Asset Management Inc., for which earnings were lower, and Stone, which remains in a loss position as it tries to build a viable business.
Both AGF and CI Financial Corp. continue to experience net redemptions. IGM reported net sales, with even subsidiary Mackenzie Financial Corp. experiencing net sales.
Brookfield’s decline is of no concern: its net income varies, depending on gains and losses in the fair market value of its assets.
Sprott Inc.‘s huge 574.4% earnings gain reflects very weak results in Q2 2016 rather than a surge in net income in Q1 2017.
– Brokerages. Canaccord’s earnings were solid and justify the reinstatement of its dividend. GMP Capital Inc.’s results weren’t as strong due to weak investment banking; its quarterly dividend remains suspended. Oppenheimer remained in a loss position.
– Exchanges. TMX Group Ltd. reported both higher revenue and lower expenses.
– Holding companies. Dundee Corp. and Power Financial reported strong increases in net income, while Desjardins reported a small 1.5% decline. Dundee also reported strong gains in the fair value of investments, while Power Financial’s results reflect a large impairment charge at Paragesa Holdings Inc. (in which Power has a 27.8% interest).
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