Banks and insurers get high marks from S&P

(June 17, 2005) The future looks bright for life insurance companies in Canada, but several smaller players could be facing another wave of consolidation in the coming years, says Standard & Poor’s.

In a presentation to analysts and managers in Toronto on Thursday, S&P directors discussed their outlook for the Canadian life insurance and banking sectors, how companies stack up against their peers worldwide and the methodology S&P uses in their rating process.

Donald Chu, CFA and director of financial institutions ratings at S&P, compared the assets of different companies, their relative positions and the amount of global exposure each company provides.

Canadian life insurance companies, he says are high quality assets that face a number of challenges. “We’ve been through the perfect storm and they’ve weathered it,” Chu said, adding that competition will remain intense in Canada and consolidation of second and third tier companies will continue.

The big companies — Manulife, Sun Life and Great West — could participate in the consolidation for strategic and tactical reasons, but he says their sights will more likely be set on international markets.

In the banking sector meanwhile, the quality of Canadian companies right now is comparable to some of the larger banks in the United States, says S&P managing director, Tanya Azarchs. She says the Canadian banks are also very similar to Canadian insurance companies in the way they are swayed by forces in the economy.

More than 80% of banks in Canada have “stable” ratings from S&P. Azarchs says the high number is simply a function of the relatively small number of companies in the sector. Royal Bank and Laurentian Bank are the only two companies with negative outlook ratings from the firm. The two companies make up 20% of the sample.

Overall, Azarchs says banks have moved out of the U.S. lending market in the past year. “Although some investors are willing to hold this paper, it’s not the banks,” she says. This “de-risking” has improved the quality of earnings profiles in the sector. As well, the major banks have dominant domestic franchises, good diversification, have maintained strong personal and commercial loan portfolios through the last credit cycle and have strong credit risk management in place. As well, the banks are reinvesting gains made from cost cutting measures in technology and infrastructure.

Although banks appear stable, revenue growth is slowing in the sector and has been for some time. The ratings company is also concerned about the lack of lending opportunities available. “This is about the time when we get worried. There’s too much liquidity chasing too few business opportunities,” says Azarchs.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com