Investors are nervous about the possibility of a recession as central banks hike interest rates. Geopolitical tensions are high amid the Russia-Ukraine war and the specter of famine in parts of Africa and the Middle East.
Only 14 companies reported higher year-over-year earnings, while 22 reported declines and five reported losses in the quarters ended May 31 through July 31. These numbers exclude the results of Sagen MI Canada Inc. and Empire Life Insurance Co., which are consolidated into those of Brookfield Asset Management Inc. (BAM) and EL Financial Corp., respectively.
Bear markets hurt brokers: Oppenheimer Holdings Inc. reported a loss, while Canaccord Genuity Corp. posted net income. went back. Most mutual fund and investment management firms also reported lower net income or a loss, while most insurers’ results worsened.
However, banks’ net earnings only fell by an average of 4.8%. The impact on capital markets divisions was offset by retail and corporate banking revenues as their net interest margins – the difference between what they charge on loans and what they pay on deposits – rose along with interest rates. This happened even as banks increased their loan loss provisions (LLPs) in anticipation of a possible recession.
The only sectors with higher median earnings were Financials, up 9.3% combined, and TMX Group Ltd., the only public company, up 33.9%.
Amidst all this uncertainty, only EQB Inc. (formerly Equitable Group Inc.) increased its quarterly dividend to 31 cents from 29 cents.
Here’s a closer look at the sectors:
Only three banks had higher profits this quarter — and the increases weren’t large. Bank of Nova Scotia’s earnings rose 2% year over year, Toronto-Dominion Bank’s rose 5.4% and VersaBank’s rose 5.2%.
Scotia reported higher Canadian and international banking revenues that offset declines in global wealth management and global banking and markets. At TD, the retail divisions in Canada and the US delivered higher profits, which offset a decline in the wholesale business.
Bank of Montreal’s profits increased only in its retail and commercial banking businesses. CIBC and National Bank of Canada both reported a 1.5% drop in net income. CIBC saw gains in Canadian Commercial Banking and Wealth Management and slight declines in other businesses. The National Bank fell in US specialty lending and international finance and rose elsewhere.
The Royal Bank of Canada saw a large decline in its capital markets division and smaller declines in Canadian banking and insurance. RBC’s wealth management division and its investor and treasury services were up.
The 12 banks collectively increased their LLPs to $1.7 billion, up from $242 million in the previous quarter and down $455 million year-on-year. This quarter’s LLPs are still at the low end of what is expected if the economy grows at a healthy growth rate.
Five companies reported higher earnings and three reported declines.
Element Fleet Management Corp. and First National Financial Corp. are the largest companies in the group (by assets), reporting revenues of $288.1 million and $251.9 million, respectively. Both had net income increases. That performance offset the sharp declines in Accord Financial Corp.’s net income. (92.6%), MCAN Mortgage Group (78.5%) and ECN Capital Corp. (46.9%) more than balanced.
One of the peculiarities of life insurance accounting is that changes in the fair value of the assets required to support long-term liabilities are included in revenue, which can even result in negative revenue. This was at Empire Life and Manulife Financial Corp this quarter. the case. For the other three companies, the fair value changes led to massive sales declines.
This accounting rule does not have the same impact on net income because life insurers’ expenses include changes in insurance contract liabilities, which can offset much of the change in fair value. For example, Manulife had a $17.8 billion loss in fair value but only a $13.8 billion reduction in insurance liabilities.
Still, four of the five companies reported lower net income and Great-West Lifeco Inc.’s net income increased just 1.5%. Manulife and Sun Life Financial Inc. posted large profit declines of 62.8% and 23.2%, respectively.
Manulife attributed its decline to the “direct impact of stock markets and interest rates and variable annuity guarantee liabilities.” The company excludes these areas from “core” earnings, which are down just 7.1%. In the case of Sun Life, excluding the market impact would have led to a tiny 0.2% gain.
Property, casualty and mortgage insurers
Two factors in particular impacted the result of this sector. Intact Financial Corp. acquired the Canadian, UK and International units of UK-based RSA Insurance Group Ltd., significantly increasing Intact’s revenue and hence net income.
Fairfax Financial Holdings Ltd. uses sophisticated techniques, including derivatives, to attempt to increase returns on the assets that underpin its insurance liabilities. This can result in dramatic fluctuations in the fair value of its investments. In the quarter, fair value fell $1.5 billion compared to a profit of $1.3 billion in the same quarter last year. As Fairfax’s deterioration outweighed Intact’s gain, the group of six companies saw net income fall 75.3%.
mutual fund and investment management companies
Three companies reported higher earnings and three lower earnings, while Dundee Corp. and Guardian Capital Group Ltd. reported losses.
RF Capital Group Inc. saw a huge 32,140% increase in net income as it reported just $5,000 in net income for the second quarter of 2021. The company is turning the corner towards sustainable profitability.
AGF Management Ltd. Profits up 100.7% primarily due to a $4.7 million gain on “fair value adjustment and distributions related to long-term investments,” compared to a loss of $482,000 a year earlier.
Among the big three independent mutual fund companies, AGF reported net sales of $132 million, while net redemptions at CI Financial Corp. and IGM Financial Inc. were $3.9 billion and $527 million, respectively.
Guardian’s loss was driven by fair value losses in its large corporate portfolio of $90.1 million, compared to a $56.5 million profit in the second quarter of 2021.
Sprott Inc.’s net income fell 93.2%. The company reported a decrease in the fair value of its assets by $7.9 billion compared to a profit of $2.5 billion in the second quarter of 2021.
Investment banking revenue plummeted to $18.7 million from $195.6 million for Canaccord and to $16.7 million from $104.7 million for Oppenheimer.
TMX Group posted a 33.9% increase in earnings, in part because it includes BOX Holdings Group LLC in its Jan. 3 results.
BAM’s profits were weighed down by a nearly $397 million fair value loss compared to a profit of $377 million in the second quarter of 2021. Desjardins Group reported a sharp decline in property-casualty insurance profits of 68%, 5% EL Financial reported a $697 million decrease in its large business investments compared to a $264 million profit in the second quarter of 2021.
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