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.

KEY RATING CONSIDERATIONS
The rating confirmations reflect IGM’s position as the second-largest Canadian wealth and asset management company, with over $265 billion in total assets under management and advisement (AUM&A) at July 31, 2021, providing 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), Investment Planning Counsel Inc., and Mackenzie Financial Corporation (Mackenzie) as well as its strategic investments in Wealthsimple, China Asset Management Co. Ltd., Northleaf Capital Partners Ltd., and Great-West Lifeco Inc. (rated A (high) by DBRS Morningstar).

While IGM’s strong EBITDA margins reflect solid fee-based revenue generation, revenue and cash flows are primarily based on AUM&A and are vulnerable to either higher levels of redemptions by investors or sustained declines in market values. Nevertheless, IGM’s profitability has remained resilient during the Coronavirus Disease (COVID-19) pandemic, with AUM&A increasing following key acquisitions, record net inflows, and the market rebound seen after the initial impact of the pandemic. Headwinds remain, however, as new variants challenge the effectiveness of the available vaccines, which could require the implementation of new social-distancing restrictions, negatively affecting the pace of the ongoing economic recovery.

The Company maintains a conservative financial profile, with substantial available liquid resources and limited credit exposure related to a high-quality residential mortgage portfolio. Following an equity fundraising completed by Wealthsimple in Q2 2021, the revaluation of IGM’s interest in this affiliate helped to improve the Company’s debt-to-total capitalization materially, which provides additional support to the ratings. The Stable trends reflect IGM’s consistent profitability as well as its strong franchise in the Canadian asset and wealth management space.

RATING DRIVERS
A material increase in scale as evidenced by higher AUM&A, while the Company maintains strong profitability and balance sheet metrics, 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 over 15% since 2018, are supportive of the ratings. The Company’s trend of strong earnings can be attributed to a growing AUM&A base, a diversified and expanding product suite, strengthened 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 has remained resilient amid the pandemic, while being able to attract record net inflows and increase AUM&A, thanks to its disciplined acquisition strategy, which further support the Company’s current ratings. After disposing of a portion of its investment in Wealthsimple for $294 million, IGM’s remaining 23% fully diluted equity interest was valued at $1.15 billion, strengthening its total capitalization and liquidity, which is supportive of the 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 Corporation of Canada’s (Power) group of companies through its associated business opportunities, as well as strong governance and risk management 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, particularly for high-net-worth individuals and families. The Company continues to make good progress in its client-centred business model while prudently managing its expenses. This, combined with the breadth of its product suite, positions it well to compete successfully in the highly contested asset and wealth management industry.

However, the current operating environment remains challenging for traditional asset managers, which can still face competition from passive investment strategies with lower fee-generation opportunities. In particular, despite Mackenzie’s sales remaining strong, it faces the possibility of sustained net fund outflows within its third-party distribution channels, especially if fund performance declines or lags. This is different from 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 in Canada.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for IGM are as follows: Franchise Strength–Very Strong/Strong; Earnings Power–Strong; Risk Profile–Strong/Good; Funding/Liquidity–Strong; Capitalization–Strong.

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

The principal methodology is the Global Methodology for Rating Investment Management Companies (December 7, 2020, https://www.dbrsmorningstar.com/research/370957). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).

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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