DBRS Confirms Ratings on IGM Financial Inc. at A (high) and Pfd-2 (high), Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debentures rating of IGM Financial Inc. (IGM or the Company) at A (high) and its First Preferred Shares rating at Pfd-2 (high). All trends are Stable. The ratings are primarily based on the profitability, operating cash flow and business strengths of the Company’s Investors Group (IG) subsidiary, while recognizing the complementary positive contribution of the diverse products, brands and distribution channels offered through Mackenzie Financial Corporation (Mackenzie) and Investment Planning Counsel Inc. (IPC).

In confirming the ratings, DBRS took into consideration IGM’s standing as a consistently profitable financial services company in Canada. IGM has a leading market position in the mutual fund manufacturing and distribution market through the operations of both IG and Mackenzie. The Company has good operating cash flow and consistently strong profitability metrics, including a 6M 2016 return-on-equity (ROE) of 14.7%. IGM also has strong liquidity and a conservative financial profile. The Company’s ratio of debt plus preferred shares-to-total capitalization as at June 30, 2016, remains appropriate for the rating at 24%.

IGM benefits from being part of the Power Financial Corporation group of companies (Power, rated A (high), Stable) through the associated strong governance and risk management model that is reflective of Power subsidiaries, its strategic importance to Power, and also by being able to leverage revenue and expense synergies such as cross-selling opportunities. IGM also has a good enterprise risk management framework and well-articulated strategies for all of its business lines. As the industry faces the ongoing movement of assets flowing from active to passive investment options, as well as increasing regulatory expenses, the execution of these strategies and their ability to drive growth will become imperative to IGM’s profitability and sustainability of its business model. In the current challenging operating environment for traditional asset managers, IGM, like many of its peers, is facing decreasing net asset flows. To continue attracting clients, the Company will have to emphasize and justify its value proposition at a time when there are an abundance of cheaper investment options, for example, lower fee exchange traded funds (ETFs).

To counteract the slowdown in net flows, the Company is expanding its product shelf, introducing innovative products that utilize sophisticated investment strategies as well as ETF options through Mackenzie. IGM is also focusing its efforts on attracting retirees and high net worth individuals, both segments that would benefit from the financial planning services offered by IG, and where it has a strong consultant network and varied product offerings, including both insurance and investment products. The Company is well-positioned to handle an increasing regulatory burden, including the remaining Client Relationship Model – Phase 2 (CRM2) changes.

RATING DRIVERS
Negative ratings pressure could result if the Company is sold by Power Financial Corporation and no longer benefits from its current relationship. Ratings may also be negatively affected if continued negative net flows begin to have a material impact on the profitability and financial strength of the Company, resulting in a degradation of debt coverage metrics. Conversely, positive ratings pressure may result from increased diversification of revenues.

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 on the issuer page at www.dbrs.com.

The applicable methodologies are Rating Companies in the Asset Management Industry (December 2015), DBRS Criteria: Rating Holding Companies and Their Subsidiaries (January 2016) and DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (January 2016), which can be found on our website under Methodologies.

Lead Analyst: Stewart McIlwraith
Rating Committee Chair: Roger Lister

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com.