TORONTO (Reuters) - Wealth management profits at Canada’s big banks shrank or stagnated in the sector’s third quarter, as market malaise and skittish investors again neutralized a segment expected to emerge as a future money-maker for the nation’s big lenders.
With billions of dollars of assets under management in the mutual fund, investment advisory and brokerage services of Canada’s big five banks, wealth management can add big profits in bull markets — but languish in bearish ones.
“Higher volatility and lingering concern about Europe returned, and I’m not surprised to see assets under management and under administration flat to down over the quarter,” said Edward Jones analyst Tom Lewandowski.
“You need both of those things to go in the right direction for this business to work.”
Assets under management (AUM) were little changed for the big five Canadian banks that reported third-quarter earnings in recent days — Royal Bank of Canada (RY.TO), Bank of Nova Scotia (BNS.TO), Toronto-Dominion Bank (TD.TO), Bank of Montreal (BMO.TO) and Canadian Imperial Bank of Commerce (CM.TO) — as flat or falling markets hurt investments.
With both retail and institutional investors staying on the sidelines, the banks mostly stuck with existing product lines in a bid to keep costs contained until market confidence comes back and they can start selling advice and investments again.
“Investor activity levels were low, reflecting uncertainty and lack of new issuance. These two trends depressed top-line performance in many wealth management divisions,” Moody’s banking analyst David Beattie said in an email.
Canada’s biggest bank stumbled hardest, though the results included a C$29 million charge in the third quarter. Excluding that, profits were down 8 percent compared with a year earlier.
“(RBC had) fairly significant decline in wealth management earnings, with revenue decreases across all geographies,” Barclays Capital analyst John Aiken said in a research note.
Even so, RBC Chief Executive Gord Nixon said the segment’s big size advantage over rivals and capacity to grow bodes well for better performance once improving markets lure investors back to their portfolios.
“We have an ambitious growth objective for this segment, and while we are behind schedule as a result of the uncertain markets and low interest rates, we are well positioned and have good leverage to benefit from market stability,” Nixon told analysts on a conference call, noting that the market environment had already improved in the last month.
“We are confident that we’re investing in a foundation that will provide strong future growth, particularly as markets begin to stabilize and client activities increase,” he said.
Crosstown rival TD Bank, the nation’s second-largest lender, did better in the quarter, with profits essentially flat as lower trading volumes in the directing investing business were offset by higher fee-based revenue in the asset-management segment and higher net interest margins.
“Despite a deterioration in economic conditions, we anticipate good earnings growth year-over-year driven primarily by continued momentum in net new client assets in the advice-based and asset management businesses,” Chief Executive Ed Clark said during a conference call.
Scotiabank, BMO and CIBC all saw profits edge higher compared with the third quarter last year, but shrink from the previous quarter.
Despite the lackluster performance at all of the banks, wealth management remains a favored segment among the lenders, in part because it has low capital requirements in a regulatory environment demanding banks hold more capital in reserve.
Demographics and the fact that plain vanilla borrowing-and-lending segments of banking have little room to grow also means wealth management holds better promise for future profits.
“If you can move into this wealth space there are attractive returns and profitability potential,” said Lewandowski.
With the exception of TD Bank, which relies on its strong retail banking platform to power profits, all of the banks are working to expand their wealth management units, either through acquisition or organic growth.
In the meantime, the banks are waiting for the tide to turn in global financial markets, trusting that when investor confidence comes back, assets under management and profits will grow again.
Lewandowski said the first sign of a change in sentiment will come when fund flow activity switches from the current focus on fixed income and hybrid funds towards more risky assets, signaling investors are active again.
“When you see that start to change, that will be a positive for all of these banks in their wealth segments. It remains to be seen when it will happen, but it will happen eventually. We are long-term here at Jones — so I’m willing to wait.”
Editing by Frank McGurty