DBRS Morningstar Confirms Ratings on IGM Financial Inc. at A (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Unsecured Debentures rating of IGM Financial Inc. (IGM or the Company) at A (high) with Stable trends.

DBRS Morningstar assessed these ratings under its “Global Methodology for Rating Investment Management Companies” (January 21, 2020), which replaced the prior “Rating Companies in the Asset Management Industry” methodology.

KEY RATING CONSIDERATIONS
The rating confirmations reflect IGM’s position as the second-largest Canadian wealth and asset management company with over $165 billion in total assets under management (AUM), which provide good economies of scale. The Company benefits from a strong diversification of distribution channels and revenue streams through its main operating subsidiaries: IG Wealth Management (IG), Mackenzie Financial Corporation (Mackenzie), and Investment Planning Counsel Inc. as well as its strategic investments in Wealthsimple, China Asset Management Co. Ltd. (China AMC), and Great-West Lifeco Inc. (rated A(high) by DBRS Morningstar).

While strong EBITDA margins reflect solid fee-based revenue generation, revenues and cash flows are primarily based on AUM and are vulnerable to either higher levels of redemption by investors or sustained declines in market values. To date, IGM’s AUM and profitability have remained resilient during the initial impact of the Coronavirus Disease (COVID-19) pandemic, benefitting from the market rebound seen in the second quarter.

The Company maintains a conservative financial profile with substantial available liquid resources and limited credit exposure related to a high quality residential mortgage portfolio. Although debt-to-total capitalization remains relatively high because of the acquisition of China AMC in 2017, DBRS Morningstar expects this metric to improve to levels supported by the ratings as the Company pays down its debt obligations. The Stable trends reflect IGM’s consistent profitability as well as its strong franchise in the Canadian asset management space.

RATING DRIVERS
An upgrade is unlikely in the near to intermediate term, given the pandemic and the structural challenges faced by the asset management industry. However, over the long term, higher net sales that improve cash flow generation while maintaining strong earnings would result in an upgrade.

Conversely, sustained net outflows affecting the Company’s profitability would result in a downgrade.

RATING RATIONALE
IGM’s consistent levels of operating cash flow and solid profitability metrics, including a strong return on common equity of approximately 15% during the first half of 2020, are supportive of the ratings. The Company’s trend of strong earnings can be attributed to a diversified and expanding product suite, an increasing focus on strengthening distribution channels with material improvements in the quality of its advisor force, an increasing focus on the high net worth segment, and an overall redemption rate that is lower than the industry average. DBRS Morningstar also notes that IGM's AUM, net sales, and profitability have remained resilient amid the initial impact of the pandemic, which further supports the Company's current ratings.

As one of the largest players in the industry, the Company is well placed to handle the increasing regulatory burden in Canada relative to smaller asset managers. IGM also benefits from its role as a strategic arm of the Power group of companies through the associated strong governance and risk management model that is reflective of the Power subsidiaries. IGM also has a good enterprise risk management framework and proven strategies for its business lines, including an increasing focus on wealth management advice. The Company has made good progress in its client-centered business model while prudently managing its expenses. This, combined with the breadth of its product suite, positions it to compete in the highly contested investment product market.

The current operating environment for traditional asset managers remains challenging. Although Mackenzie sales have been strong, it faces the possibility of sustained net fund outflows within its third-party distribution channels, especially if fund performance declines or lags, given its reduced focus on financial planning compared with IG, which relies more on wealth advisory services to foster long-term relationships with its clients and has demonstrated redemption rates well below the industry average.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is the Global Methodology for Rating Investment Management Companies (January 21, 2020). https://www.dbrsmorningstar.com/research/355764/global-methodology-for-rating-investment-management-companies

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.dbrsmorningstar.com.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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