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

DBRS Limited (DBRS) confirmed the Issuer Rating and Unsecured Debentures rating of IGM Financial Inc. (IGM or the Company) at A (high) and the 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 collective group of businesses including Investors Group Inc. (IG), Mackenzie Financial Corporation (Mackenzie) and Investment Planning Counsel Inc.

In confirming the ratings, DBRS took into consideration IGM’s standing as a consistently profitable financial services company in Canada. The Company has a leading market position in the mutual fund manufacturing and distribution market through the operations of both IG and Mackenzie, with total assets under management (AUM) of more than $150 billion and a market share of approximately 10%. IGM generates consistently positive operating cash flow and strong profitability metrics, including a 9M 2017 return on equity of 15.8%. IGM’s strong earnings can be attributed to a diversified and expanding product suite, an increasing focus on strengthening distribution channels, an overall redemption rate lower than the industry and improving net sales. IGM also has strong liquidity and a conservative financial profile. The Company’s financial leverage of 30% as at September 30, 2017, is elevated from historical levels to fund the acquisition of a 13.9% interest in China Asset Management Co., Ltd. (China AMC), a leading Chinese asset management company with $160 billion of AUM as at June 30, 2017. DBRS expects the financial leverage ratio to decline to historical levels near 24% as the Company pays down its debt obligations over time. The acquisition of China AMC presents an opportunity to cross-sell investment products through a different distribution channel, but DBRS notes that there are minimal operational benefits presented by this transaction. However, the acquisition does serve as an opportunity to both understand China’s rapidly growing mutual fund market and participate in its expanding retirement savings market.

IGM benefits from being part of the Power Financial Corporation group of companies (Power) through the associated strong governance and risk management model that is reflective of Power subsidiaries, its strategic importance to Power and its ability 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. The Company believes that its advice-centered business model, combined with the breadth of its product suite, makes it well-positioned to deal with the highly competitive investment product market. Efforts to expand IG’s product suite to include high-net-worth and managed solutions, combined with strengthening IG’s distribution and improving fund performance at Mackenzie has resulted in good net sales in 2017.

As the industry faces the ongoing movement of assets from active to passive investment options and increasing regulatory requirements, the execution of advisor training and client communication processes will become imperative to IGM’s profitability and sustainability of its business model. In the current challenging environment for traditional asset managers, IGM, like many of its peers, faces the possibility of decreasing net asset flows, especially if fund performance declines or lags. To continue attracting clients and retain assets, the Company will have to emphasize its value proposition to both clients and advisors.

In order to remain competitive, the Company is expanding its product shelf, introducing high-net-worth products and capabilities as well as exchange-traded fund options through Mackenzie. IGM appears to be successfully executing its strategy of attracting retirees and high-net-worth individuals, both segments that would benefit from the financial planning services offered by IG, which has a strong consultant network and varied product offerings, including both insurance and investment products. As a result of its scale, the Company is well-positioned to handle an increasing regulatory burden relative to smaller asset managers although it will still need to manage its expense levels prudently, considering the increasing proportion of assets flowing into high-net-worth funds that generally command lower management fees. In an effort to increase efficiencies across the organization, the Company is restructuring its organization to realize cost savings.

The Stable trends reflect IGM’s consistent profitability as well as its strong franchise in the Canadian asset management space. Negative ratings pressure could arise from a degradation of financial metrics, the sale of the Company by Power or if the Company sustains substantial negative net flows, materially affecting its profitability and financial strength through lower AUM. Conversely, positive ratings pressure could arise from substantial positive net flows driving AUM growth or from an improvement in financial metrics.

RATING DRIVERS
Negative ratings pressure could result if the Company no longer benefits from its current relationship with the Power group of companies. Ratings may also be negatively impacted if sustained negative net flows begin to materially impact AUM, affecting the profitability and financial strength of IGM, resulting in a degradation of debt coverage metrics. Conversely, positive ratings pressure may result from improved financial metrics and sustained substantial positive net flows driving AUM growth.

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.

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

Lead Analyst: Stewart McIlwraith, Senior Vice President, Head of Insurance – Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings

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.