EUR 850.00 For Business Accounts Only

Morningstar | Power Financial Sees Modest Earnings Growth in 2Q

Nothing in either Great-West's or IGM Financial's results alters our long-term view of no-moat Power Financial. For the quarter, Power Financial reported adjusted net earnings of CAD 658 million, compared with CAD 622 million last year. We will maintain our CAD 35 fair value estimate.

Great-West’s second quarter largely saw the company holding steady, with overall adjusted annualized return on equity of 14% essentially flat with last year, and each region generating returns roughly in line both sequentially and year over year. We think the company's ability to consistently churn out modest excess returns is an outcome of its Exemplary stewardship. Canada remains the company's most profitable region, with a 21% adjusted annualized ROE for the quarter. Management continues to make progress with its cost-control initiative, and noted that it has achieved $170 million of its planned $200 million in annual expense reductions. We appreciate management’s diligence in this respect and believe the company’s relative lean cost structure is a key driver behind its ability to outperform peers in terms of profitability.

There was little in narrow-moat IGM Financial's second-quarter results that would alter our long-term view of the firm. IGM Financial closed out the June quarter with CAD 159.1 billion in managed assets, reflective of a 2.2% sequential increase in total assets under management. Year over year, the firm's managed assets were up 7.1%.

Investors Group, which accounts for around 55% of the firm's AUM, reported a 1.9% sequential and 5.3% year-over-year increase in its managed assets, despite posting its first outflows since the third quarter of 2016. Mackenzie Investments, which accounts for around 40% of AUM, recorded a 1.2% sequential and 11.0% year-over-year increase in its managed assets, with the firm generating positive flows from both its mutual fund and ETF operations, which helped offset institutional outflows. Investment Planning Counsel, which is IGM Financial's smallest segment, reported a 0.9% sequential and 10.1% year-over-year increase in its managed assets, despite posting its first outflows in five years. While average AUM was up 5.2% year over year during the second quarter, management fee income increased just 2.9% compared with the prior year's period, due primarily to ongoing fee compression. Total revenue was up 2.2% during the period, as lower distribution fee revenue and investment income affected results. Year-to-date top-line growth of 2.0% was at the lower end of our forecast for low- to mid-single-digit revenue growth for 2018.

As for profitability, IGM Financial has had a slightly more difficult time keeping expenses from growing faster than revenue. Even so, adjusted pretax operating margins were flat year over year at 31.0% during the first half of the year. Our long-term forecast continues to call for pretax margins to be pressured by increased competition from the Canadian banks, as well as the changing regulatory landscape.