Fi­nan­cial ser­vices firms be­gan the year on a pos­i­tive note.

Most of the banks per­formed well, in­clud­ing rais­ing their div­i­dends, although Home Cap­i­tal cast a shadow over the group

Investment Executive - - FRONT PAGE - BY CATH E RI N E HAR­RIS

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 end- ed 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 f ew 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 $313.6mil­lion 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 l ower 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 & ca­su­altyand 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 i n net i ncome, 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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