Canaccord Genuity Group Inc. increased profits in a volatile fiscal fourth quarter, as strong results from the investment bank’s U.S. capital markets division and its British and European wealth management business offset significant declines from Canadian operations.
Bolstered by a string of recent international acquisitions, the Toronto-based company managed to increase its revenue and earnings, year over year, despite major market disruptions in March. The quarter ended March 31.
The investment bank’s chief executive, however, cautioned that Canaccord, like other investment banks, could face several rough quarters ahead as the economic outlook remains hazy and mergers and acquisitions activity remains subdued.
"We've built a very healthy pipeline of investment banking, advisory and restructuring mandates heading into our first quarter [which began in April]. That said, we do expect significant near-term disruption across our industry, certainly at least for the next couple of months," Dan Daviau said on a Wednesday analyst call.
Canaccord’s stock price dropped sharply on Wednesday morning, but recovered throughout the trading day to finish down 0.75 per cent.
In the first three months of 2020, Canaccord reported income of $26.2-million, or 21 cents a share, up from $2.4-million in the same quarter last year. On an adjusted basis, profit was $21.4-million, or 17 cents a share, up 29 per cent year over year.
Earnings were driven largely by the company’s U.S. capital markets and its British and European wealth management businesses. U.S. capital markets results were particularly strong, with quarterly revenue rising to $105.6-million, up 43.8 per cent from a year ago, boosted by New York M&A advisory firm Petsky Prunier, which Canaccord acquired last year.
The international results were in contrast to Canadian operations. Canaccord’s Canadian capital markets division saw quarterly revenue drop 28 per cent, led by a sharp decline in investment banking activity resulting from fewer cannabis deals. All told, Canadian capital markets contributed only $687,000 to pretax profit in the quarter, down 89.7 per cent from the same period last year.
Canaccord’s Canadian wealth management business likewise had a hard quarter. Revenue was up slightly, but pretax income fell 48 per cent, partly as the result of losses on loans to customers using margin accounts. Margin accounts allow investors to trade with borrowed money, which can lead to losses for the lender in moments of market stress.
“The abrupt market downturn in March put downward pressure on the value of securities held as collateral in our margin loan book. Accordingly, the provisions recorded were higher in our fourth fiscal quarter," Mr. Daviau said on the earnings call.
Total assets under management across all wealth management divisions fell by 7.6 per cent in the quarter, to $60.7 billion, largely because of the decline in equity markets in March.
Things have improved since then. By the end of May, assets under management had risen to $66-billion as markets rebounded, Mr. Daviau said. Advisers are likewise seeing net inflows of money as investors look for help navigating unsettled markets.
In mid-May, U.S. banking giant Morgan Stanley picked Canaccord to help run its wealth management business in Canada.
The outlook for capital markets is less clear, particularly on the M&A advisory side of things.
“It’s not that M&A is not happening. It’s just that we book revenue when we close deals, and it’s hard to close deals in this environment right now,” Mr. Daviau said.
With so much uncertainty, Mr. Daviau said Canaccord will undertake a number of cost-cutting measures in the near-term, which could include layoffs.
“Right now, when I look at our business levels in the quarter ended March, and the quarter we’re going to end in June, they’re pretty good. But what’s the quarter ended in September going to look like? And what’s the quarter after that going to look like? That is hard to have visibility into at this stage, given the volatility. So I think we’re going to manage things dynamically for a little bit,” he said.
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