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February 2020 NEWS INVESTMENT EXECUTIVE Loan losses a challenge for banks
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The latest quarterly reports were a mixed bag: acquisitions; lower profits for some companies; and raised dividends
BY CATHERINE HARRIS
financial services com-
panies are feeling the drag of slower economic growth. A key indicator is bank loan-loss pro- visions, which shot up in the quarter ended Oct. 31, indicat- ing banks’ concerns that more borrowers won’t be able to make their loan payments.
Investment Executive’s profit survey covers financial results for quarters ended between Aug. 31 and Oct. 31, 2019. For most companies, that means quarters ended Sept. 30, but it’s Oct. 31 for most banks and Aug. 31 for AGF Management Ltd.
Of the 40 companies in the profit survey, 19 had lower net income than in the correspond- ing period in 2018 and four were in a loss position. For the others, Desjardins Group’s profits were unchanged, 15 companies had higher earnings and Element
Fleet Management Corp.
reported positive net income vs a loss a year earlier. (These fig- ures exclude Great-West Lifeco Inc. [GWL] and IGM Financial Inc., the results of which are con- solidated with Power Financial Corp.’s.)
Among the Big Five banks, Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC) and Royal Bank of Canada had lower net income, while gains at Bank of Nova Scotia and Toronto- Dominion Bank (TD) were less than 2%.
Nevertheless, nine companies raised their dividends, including four firms that reported lower earnings than a year earlier: BMO, Laurentian Bank of Canada, Sun Life Financial Inc. and Genworth MI Canada Inc. This indicates that these firms continue to be optimistic about their prospects.
BMO’s quarterly dividend increased to $1.06 from $1.03; Equitable Group Inc.’s to 35¢ from 33¢; Laurentian’s to 67¢ from 66¢; National Bank of Canada’s to 71¢ from 68¢; VersaBank’s to 2.5¢ from 2¢; Sun Life’s to 55¢ from 52.5¢; and TMX Group Ltd.’s to 66¢ from 62¢. Genworth raised its dividend to 54¢ from 51¢ and also paid a special dividend of $2.32 at the end of December. In addition, First National Financial Corp.
increased its monthly dividend to 16.25¢ from 15.83¢ as of December. The quarter was a busy one
on the acquisition front.
Brookfield Asset Manage- ment Inc. subsidiary Brookfield Business Partners LP acquired a controlling interest of 57% in Genworth on Dec. 12.
GMP Capital Inc.’s sharehold- ers approved the sale of “substan- tially all” of its capital markets business to U.S.-based Stifel Financial Corp., a deal that closed on Dec. 6. GMP plans to buy the two-thirds of Richardson GMP Ltd. that it doesn’t own.
In addition, struggling Callidus Capital Corp. went pri- vate, effective Nov. 5, 2019.
Here’s a look at the industries in more detail:
■■ banks. The industry has seen net interest margins shrink in the face of lower interest rates. Higher loan-loss provisions also pulled down earnings. But a recent report on the large Canadian banks from credit-rating agency DBRS Ltd. states that “overall asset quality remains sound.”
The largest earnings gain in the industry was Home Capital Group Inc.’s 19.7%. That’s encouraging for a company that has had to claw back up from its 2017 credit crisis. But both the stock price and net income are still well below previ- ous highs and the company hasn’t
yet resumed paying a dividend. The biggest drop in net income is HSBC Bank Canada’s 24.2%. The bank had a $17-million increase in loan-loss provisions in the quarter vs a drop of $7 million
a year earlier.
A couple of large items affected
results among the big banks. CIBC had an impairment charge of $135 million this quarter, related to the anticipated sale of its con- trolling interest in FirstCaribbean International Bank Ltd. Without that charge, net income would have been up by 3.3%.
BMO’s results were affected by a $203-million “benefit from the remeasurement of an employee- benefit liability” in the corres- ponding quarter. Without that benefit, net income this quarter would have been up by 3.1%.
■■ finance companies. Accord Financial Corp. and ECN Capital Corp. had lower earn- ings, but Element reported posi- tive net income of $98 million vs a big $312-million loss the year before. First National Financial Corp., MCAN Mortgage Corp. and Timbercreek Financial Corp. had
earnings gains.
ECN and Element were spin-
offs from Element Financial Corp. in 2016. Element Fleet has finished the transition, but ECN is still in the final stages of divesting legacy assets to focus on core businesses.
■■ life insurers. Revenue for these companies can swing sig- nificantly, depending on changes in the fair market value of assets supporting insurance and invest- ment contract liabilities. This quarter, revenue was up nota- bly, but that doesn’t show on the bottom line because of offsetting changes on the expense side.
Manulife Financial Corp.’s 67.7% drop was the result of negative impact from financial markets and regulatory chan- ges in rate assumptions. Sun Life also was affected by these, but to a much lesser extent. Both companies report core or under- lying earnings. For Manulife, this measure was little changed between Q3 2018 and Q3 2019. Sun Life reported an 11% gain.
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A recent report on the large Canadian banks from DBRS Ltd. says that “overall asset quality remains sound”
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