GMP Capital Inc. (GMP) Canada’s second- largest non-bank brokerage, is poised to announce more cost cuts as a 25 percent drop in trading on the country’s two main stock exchanges leads to a third-straight quarter of per-share losses.
GMP and larger competitor Canaccord Financial Inc. (CF), both based in Toronto, have been cutting costs as trading volume and fees from stock sales have shrunk. GMP Chief Executive Officer Harris Fricker said in August he’d update investors on how he’ll improve “efficiencies” when the firm reports third-quarter results on Nov. 9.
“They’re not making any money today,” CIBC analyst Paul Holden said in an interview. “This is an environment where the revenues from the industry are not robust enough for them to earn a profit, so they’ve really got to focus on containing expenses and managing capital.”
Equity trading on the Toronto Stock Exchange and TSX Venture Exchange dropped 25 percent in the third quarter from a year ago amid the debt crisis in Europe and after Canada’s economy contracted in August. World growth is estimated at 2.2 percent in 2012, the slowest advance since 2009, according to data compiled by Bloomberg.
GMP is expected to post a loss of 3 cents a share excluding some items, according to four analysts surveyed by Bloomberg News. Canaccord is also expected to extend its streak of losses to three quarters today by posting a 7 cents a share loss for its fiscal second quarter, according to estimates from six analysts.
Rocco Colella, a spokesman for GMP, and Scott Davidson, a Canaccord spokesman, declined to comment.
Canaccord has already cut at least 320 positions in Canada, the U.S. and U.K. since March and shut 16 Canadian branches in its wealth management unit.
GMP may also exit some businesses such as asset management, said Phil Hardie, an analyst at Scotia Capital.
“We believe there is an increasing chance that the firm will exit the investment management business over the next few quarters,” Hardie said in an Oct. 18 note.
It’s going to be another tough quarter for investment banks, said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc., whose Toronto-based firm oversees about C$4 billion ($4 billion). “It’s really time to batten down the hatches. They’re talented people but when there’s a lot of headwinds rather than tailwinds there’s not much else you can do,” he said by phone.
GMP rose 0.6 percent to C$5.06 at 4 p.m. trading in Toronto, while Canaccord fell 4.7 percent to C$4.71, its biggest decline since Sept. 24. GMP has declined 29 percent in the year while Canaccord has plunged 40 percent, compared with the 7.4 percent gain in the 44-member Standard & Poor’s/TSX Financials Index.
The value of equity financings on the TSX Venture Exchange, whose marketplace of smaller companies are the staple for Canaccord and GMP, dropped 48 percent in the first 10 months from a year ago, according to TMX Group Ltd. statistics. Trading on the Toronto Stock Exchange fell 21 percent at the end of October from the same period a year earlier, while TSX Venture Exchange trading plunged 35 percent.
GMP relies on investment-banking fees and trading commissions for more than 85 percent of its revenue, according to its financial statements. Canaccord gets more than 60 percent of its revenue from investment banking and trading from its Canaccord Genuity unit, the company said in filings.
“The continued sluggish performance of the TSX Venture Index (STFINL) speaks to what, in our view, remains a marketplace that remains risk-averse, thus limiting the level of both underwriting and trading in these commodity-oriented names,” Sumit Malhotra, a Toronto-based analyst at Macquarie Capital Markets, said in an Oct. 29 note.
“We think it is imperative that expense management begin to play a bigger role with the company,” Malhotra said. “Signs of increased emphasis on cost control will be the key focus with GMP in the upcoming results.”
GMP’s Fricker said three months ago that he’s been reviewing the firm’s businesses to contain costs and improve efficiencies amid “extremely challenging” markets.
“The current low level of activity is affording us the opportunity to fully assess our operations across the entire franchise to ensure we are delivering services in an efficient, technology-forward and cost-effective fashion,” Fricker said in an Aug. 3 conference call. “We expect this major initiative to yield improved operating efficiencies.”
Since then, GMP said Christine Drake, who received C$1.2 million in fiscal 2011 as chief financial officer, left the firm on Sept. 18.
Restoring profit by cutting expenses is less appealing to investors, Nakamoto said.
“You cannot cost-cut your way to success, you need the revenue gains,” Nakamoto said.
GMP and Canaccord’s balance sheets still “look healthy,” according to CIBC’s Holden.
“They should be able to endure a slump for a while longer, but you just need higher revenues for these firms to thrive,” Holden said. “They’re doing enough to keep the lights on, but not much more than that.”
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