Even with the travails of Manulife, providers of financial services bounced back strongly in 2010. Banks (21.1%) and insurers (7.1%) combined to capture 28.2% of total profit. That compares with about 39% of a considerably smaller pie in 2009, a year filled with misery for some of them and many of their clients. The Big Five banks, the envy of oligopolists the world over, occupy half of the top 10 spots on our list, led by perennial front-runner Royal Bank of Canada. Toronto-Dominion Bank leapfrogged ahead of Bank of Nova Scotia to claim second spot, while Bank of Montreal moved up a notch to seventh place. Laggard CIBC joined the party in eighth, after clawing its way back from 21st a year earlier. Among other profit drivers, bank bottom lines have been fattened by the juicy fees emanating from the wave of merger activity in the resource world. It didn't hurt that the Canadian housing and mortgage market enjoyed good health, defying the naysayers who predicted its imminent implosion.
On the resource side, energy producers Suncor Energy (No. 4) and Imperial Oil (10) cracked the top 10, along with mining giant Barrick Gold, which jumped all the way to sixth place from dead last in 2009. It's remarkable what getting rid of a dreadful hedging program can accomplish. So far, though, Barrick's investors haven't had nearly as much joy from the paper turnaround. Its stock closed out the year at about $47, the same level it reached in pre-crisis 2007.
Behind the impressive gains lurks an unpleasant truth about the Canadian economy: its continuing transformation into a two-trick act, which does not bode well for our long-term prospects. The only corporations in the top 10 outside the financial services or commodities businesses are regulars Research In Motion (5) and BCE (9). The next 10 include five resource players and three financials, along with Canadian National Railway, which derives a big chunk of its revenue from carting resources, and Brookfield Office Properties, which houses many of the profit-churners.
"Banks and resources are the two plays we have here," says Phillip Colmar, a partner with MRB Partners, a Montreal-based investment research firm. Fortunately, this story likely still has several years to run. "Canada has benefited over the last year from the global recovery, the strength in China and a healthy financial system," Colmar says. "There's a great policy backdrop. Liquidity trends are great."
That policy backdrop has several key facets. Environment cleanup costs haven't yet become much of an issue for resource producers. Meanwhile, there is still no sign of any significant monetary tightening by the Bank of Canada or a higher tax take by government. "So it [the outlook]is pretty favourable and we have had a pretty good commodity tailwind so far," says Colmar.
But once the current resource boom ends-as all cycles eventually must-the profit picture is bound to become muddier. The overvalued loonie will almost certainly stumble, wages will fall and complacent policy makers will find out what happens when there isn't enough growth to compensate for a lack of effective fiscal or industrial policies. MRB issued just such a warning this spring, laying out the growing risks of a skewed economy. The firm is bullish "about the prospects for the economy and maintains a positive cyclical outlook on Canadian risk assets," the report says innocuously, before getting to the good stuff. "Nonetheless, the euphoria needs to be kept in check. Oil and rocks have masked substantial and rapidly growing imbalances that will prove devastating if not corrected before the next global economic recession."
The outcome could be a made-in-Canada version of dreaded Dutch disease, which Colmar, the report's author, believes is already infecting the corporate sector. The economy-crushing syndrome gets its name from what befell the Netherlands after a major gas find in the 1960s. The resulting resource boom overwhelmed the little economy. The guilder shot up too fast for industry to adjust. Manufacturers could no longer compete in export markets and the business sector shrivelled.