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A TMX sign stands outside the stock-exchange operator's office in Toronto on March 24, 2020.

GEOFF ROBINS/AFP/Getty Images

TMX Group Ltd. reported strong earnings growth in the first three months of 2020, with frenzied trading of stocks and derivatives more than offsetting a drop in listing fees as COVID-19 shook financial markets in late February and March.

With panic taking hold and investors adjusting their exposure to stocks, bonds and derivatives, TMX saw trading activity explode across its various exchanges. Trading volumes on equity marketplaces, including the Toronto Stock Exchange and the TSX Venture Exchange, increased 24 per cent compared with the same quarter last year.

Derivatives trading on the Montreal Exchange was up 27 per cent year-over-year, driven largely by interest rate uncertainty in March.

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This translated into significant top-line growth for TMX, which earns money on trades. The company reported $220.3-million in revenue, up 12 per cent year-over-year. That helped boost net income by 15 per cent to $70.1-million, or $1.25 a share.

While market volatility helped trading results, it put pressure on capital formation fees, as public companies took stock of their bruised share prices and decided against issuing equity. Capital formation revenue, which is earned when companies list on an exchange or raise additional money, dropped 4 per cent.

TMX charges companies “additional listing fees” when they do transactions, such as financings or acquisitions, that lead to more shares being listed. The number of large transactions on the TSX, for which companies paid the maximum fee of $250,000, dropped from 27 to 18, a decline of 33 per cent year-over-year.

“The decline was somewhat offset by an increase in additional listing revenue on TSX Venture, where there was an increase in both the total number of financings and total financings of dollars raised,” Paul Malcolmson, managing director of investor relations, said on a Tuesday morning analyst call.

The Venture Exchange is popular with mining companies, which have been able to raise equity more readily than companies in other sectors over the past two months.

Interim chief executive John McKenzie said that it’s unclear when financing activity will begin to normalize, although he is expecting a surge in equity deals over the coming quarters, based on his experience of previous downturns.

“I can’t give you guidance in terms of when that can happen ... but what I would guide you to is that some of the best capital-raising markets come after downturns,” Mr. McKenzie said on the analyst call.

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Many companies came into the crisis with high debt levels, and they have added more debt over the past two months, he said. “There will be a need across the board for equity refinancing on these companies."

While the TMX’s results came in ahead of market consensus, the company’s stock price fell $3.26, or 2.4 per cent, to close at $132.33 on Tuesday. Nonetheless, analysts responded positively to the quarter.

“The TMX’s shares have been one of the best performing stocks within our coverage year-to-date, which we think reflects the company’s defensive attributes and positive fundamentals,” Geoffrey Kwan, an analyst at RBC Dominion Securities, wrote in a note to clients.

Mr. Kwan raised his price target for TMX stock to $148, up from $133, although he added a word of caution. “The share price could be vulnerable if market volatility declines (likely resulting in lower trading/clearing revenues) and the macro environment remains weak (hurting capital formation revenues)," he wrote.

So far equity trading activity has remained strong after the quarter’s end, with volumes in April some 50 per cent higher than in April, 2019, Mr. Malcolmson said. Derivatives trading volumes, however, declined 4 per cent year-over-year in April owing to “current interest rates being so low, and less uncertainty around rates,” he said.

There were no updates on Tuesday about the search for a permanent CEO to replace Lou Eccleston, who stepped down in January.

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The process is well under way, Mr. McKenzie said, although he added that physical-distancing measures have slowed things down, “in terms of availability and access to people."

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