DBRS Confirms Canaccord Genuity Preferred Shares at Pfd-3 (low), Trend Stable

DBRS Limited (DBRS) has today confirmed its rating of the Cumulative Preferred Shares of Canaccord Genuity Group Inc. (Canaccord Genuity or the Company) at Pfd-3 (low) with a Stable trend. The Company has successfully integrated recent acquisitions, improved geographic diversity, enhanced its wealth management business segment and demonstrated resilience through the extended weak market environment. Nevertheless, the Company continues to face significant challenges.

Weakness in the energy sector, which has had an impact on many of Canaccord Genuity’s traditional Capital Markets clients, resulted in a loss in the last quarter of 2014 that also reflected impairment of goodwill/intangibles. As a result, the Company implemented expense control initiatives and other actions. The Company announced a planned 4% reduction in its overall workforce, primarily affecting the U.K./Europe and U.S. operations. In addition, there were a number of changes to the executive structure, including the appointment of a CEO for the combined North American capital markets and changes to the investment banking executive team.

The current rating reflects the Company’s through-the-cycle resilience and ability to achieve acceptable positive results in most quarters despite the unusually long market trough. Canaccord Genuity’s variable expense structure is an important factor. More recently, the Company’s increasing geographic diversity has made a greater contribution, as international results have generally offset weaker results in its traditional Canadian market. Canaccord Genuity has also developed into a more diverse institution over the past few years by expanding Wealth Management to supplement its traditional capital markets advisory businesses. The Wealth Management business is bringing a more stable source of fee-based revenue with assets under administration and management (AUA) now above $31 billion, compared to $17 billion just four years ago. Any new acquisitions are most likely to be in Wealth Management, as the Company continues to invest in this area, including a newly implemented IT solution. A new investment banking and advisory office in Dubai represents a minimal investment in further expanding the Company’s footprint.

In the difficult market environment of the past several years, the Company has brought costs into alignment with revenues through restructuring and rationalization initiatives. DBRS anticipates that the expense rationalization over the past year or so and the favourable contribution of the more stable wealth management operations should have a positive financial impact going forward.

Canaccord Genuity reported net income of $15 million for 9M ending December 2014 (Canaccord Genuity has a March 31 year-end), or $4.9 million attributable to common shareholders. These results include a loss of $21.5 million in the quarter ended December 2014. DBRS continues to monitor Canaccord Genuity’s near-term results, as the absence of profitability for an extended period would be a rating concern, particularly if it indicated any significant weakening in the Company’s franchise strength or earnings power.

Risk management processes are generally good, with appropriate credit and counterparty exposure control processes. The Company conducts most of its trading activities as an agent, not a principal, which significantly reduces its market risk exposure. Canaccord Genuity is regularly exposed to underwriting commitments, but the risk is managed under established guidelines and approval procedures that limit the overall risk to the Company. Credit risk is primarily in secured margin lending.

Liquidity is good, given the nature of the business and a relatively liquid balance sheet that includes cash and other liquid assets. The ratio of debt plus preferred shares-to-capital is considered reasonable, given Canaccord Genuity’s business mix and risk profile. Capital available exceeds requirements at all of the regulated subsidiaries.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations, Preferred Share and Hybrid Criteria for Corporate Issuers, and Rating Holding Companies and Their Subsidiaries, which can be found on the DBRS website under Methodologies.