June 1, 2012 / 9:19 PM / 6 years ago

Canadian banks' wealth business sags, but prospects solid

(Reuters) - Wealth management wasn’t a big money-maker for Canadian banks this quarter as slumping financial markets kept investors on the sidelines, the second straight gloomy performance by a segment most banks view as a future cash cow.

Assets under management inched higher in the quarter ended April 30 as the banks drew in a few more clients and sold a few more mutual funds, but profits were flat or slightly lower for the banks who did not make big acquisitions.

“It’s a market-related revenue line, and when markets are down, so are revenues,” said Peter Routledge, banking analyst at National Bank Financial.

The global market downturn and the long-term prospect of low interest rates have made it harder for Canada’s Big Six banks to make money on their mutual fund, advisory and investment services, which in previous years have helped drive earnings at the very profitable lenders.

But the Canadian banks continue to jockey for acquisitions and greater market share in the global wealth management sphere, seen as a relative growth opportunity compared to plain vanilla banking like checking and savings accounts and lending.

“This is a growth engine for a lot of these banks, Royal especially, so they are going to continue to make acquisitions where they make sense,” said Tom Lewandowski, Canadian banking analyst at Edward Jones in St. Louis.

Canada’s largest lender, Royal Bank of Canada (RY.TO), has repeatedly said it is interested in expanding its global wealth management unit, and rumor has it that RBC is among the bidders for Bank of America’s non-U.S. wealth business.

RBC notched C$212 million ($204 million)in wealth management profits in the second quarter, down from C$227 million a year ago, but an improvement over the C$188 million in income in the previous quarter. Assets under management inched up to C$325 billion.

Cross-town competitor Toronto-Dominion Bank (TD.TO) followed a similar pattern as second-quarter profits crept up to C$155 million and assets under management edged up to C$202 billion.

But smaller rivals Bank of Nova Scotia (BNS.TO) and National Bank of Canada (NA.TO) have made the most recent headlines in wealth management acquisitions, bolstering both assets under management and revenues as well as future prospects.

“The industry is consolidating, so a downturn isn’t going to eat up all its profits - it’s just going to be down the next couple of quarters,” Routledge said.

“There is not a disaster coming. If you take a look at what Scotia and National have done in the last several years with acquiring, all of them have pretty stable platforms now that will earn their way through a difficult period.”

National recorded a gain on the sale of Natcan’s operations and the acquisitions of both Wellington West Holdings Inc and the full-service investment advisory business of HSBC Securities Canada. That, along with Scotia’s purchase of the rest of DundeeWealth, muddied second-quarter comparisons with the same quarter a year earlier - but both bode well for future earnings.

Cost controls across the industry helped the bottom line, as the banks tried to offset lower deal revenues and trading volumes with belt-tightening in advertising, staffing or long-term projects like information technology.

With global market malaise expected to continue amid Europe’s evolving debt crisis, analysts said the trend of cost-cutting is expected to persist for several more quarters.

“While the wealth business may continue to face difficult and volatile economic conditions, we expect our strong franchise will continue to generate good client asset inflows. This, combined with prudent cost management, should deliver solid results,” TD said in its report to shareholders.

Lewandowski said cost controls will probably be felt across banking until clients start trading and buying products again - which won’t happen until global economic woes, particularly in Europe, ease back from the headlines.

“When does the Europe issue end and we have confidence return to the investor base? That’s the $64 million question. I think the focus is going to be on expenses probably for the next 12 to 18 months,” Lewandowski said.

($1 = 1.0410 Canadian dollars)

Reporting by Andrea Hopkins; Editing by Jan Paschal

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