Letter from the President & CEO
Fiscal 2018 was a good year for Canaccord Genuity Group Inc. Total firm-wide revenue surpassed $1 billion for the first time in our Company’s history. Excluding significant items(1), we delivered earnings per share of $0.59, an improvement of 84% compared to a year ago.
Throughout the year, we made excellent progress against our objectives: we achieved significant growth in our global wealth management operations and improved market share across our capital markets operations. Because of these efforts, we delivered solid financial results and set new benchmarks for our businesses.
Total client assets grew to $61.3 billion, a year-over-year improvement of 59%. Excluding significant items, our global wealth management operations contributed 49% of the total pre-tax net income for our combined operating businesses for the fiscal year, in line with our stated goal. We have begun to break out our earnings per share(2) by business segment, and excluding significant items, we estimate that our global wealth management business contributed $0.36 in fiscal 2018, with the remaining $0.23 contributed by our global capital markets operation.
The most substantial contribution to this growth came from our expanded UK & Europe wealth management business, which contributed record revenue of $201.4 million for the year. With the closing of our acquisition of Hargreave Hale in September, we have been privileged to welcome over 200 new employees and more than 14,000 new clients, and we are making excellent progress with our integration efforts. Now a top 10 wealth manager in the UK with £24.8 billion in client assets, our teams are leveraging synergies across their expanded platform to deliver impressive asset and related revenue growth, while strengthening our national footprint across the UK.
We also achieved significant growth in our Canadian wealth management business. With a platform that welcomes and embraces established and entrepreneurial financial advisors, we have added Investment Advisory teams and new clients representing over $5.0 billion in assets since we began our recruiting efforts in 2016 and have meaningfully strengthened our competitive position as a leading independent wealth management business in Canada. Total assets under administration and management increased by 18% from a year ago, to $15.6 billion. Excluding significant items, this business contributed pre-tax net income of $20.2 million to our overall results.
Our global capital markets division was a major contributor to our firm-wide revenue growth in fiscal 2018 with a record revenue result of $637.5 million.
Despite the market being punctuated by periods of elevated volatility during fiscal 2018, our investment banking segment performed well. A healthy environment for capital raising activity in our core focus sectors – particularly during the second half of our fiscal year – led to a 39% year-over-year increase in revenues for this segment.
Our Canadian operation ended the fiscal year as the dominant independent investment bank in the country for both number of transactions and total amount raised. Revenue generated through investment banking activities in this business nearly doubled over the 12-month period to $125.1 million.
An environment of growing earnings and elevated equity valuations led to a general trend of larger deal size across our advisory business, and we serviced increasing demand for independent advice that is free from conflict. We also experienced strong flows across our institutional equities business. Despite a softer trading environment, our US equities business continued to gain market share and the International Equities Group delivered continued growth. We anticipate that the acquisition of Jitneytrade and its related technology business, Finlogik Inc., will further strengthen our market share as the leading independent trader in Canada and provide access to new areas of growth through the development of fintech solutions for our capital markets and wealth management divisions.
Our efforts to intensify our focus on our core capabilities in our US capital markets division led to improved profitability in fiscal 2018. Excluding significant items, pre-tax net income in this business grew to $5.4 million over the year, while the total revenue contribution was in line with prior periods. Our teams in the UK, Europe & Dubai have continued to be productive on several notable investment banking and advisory mandates, and, despite a slow start to the year, delivered positive results for the last three consecutive quarters.
And finally, our Australian capital markets business delivered another strong performance. Despite the brief loss of momentum for growth stocks early in the year, an improved market backdrop allowed this business to deliver a record revenue result in the second half of the fiscal year. I am also very pleased that our increased investment in this operation supports our objective of more closely aligning this business with our global platform and exploring opportunities to grow our wealth management business in the region. Since our initial investment in 2011, this operation has steadily increased its contributions to our overall group results, and we look forward to capturing a greater share of this growth for our shareholders. By increasing share ownership among our partners and employees in Australia, we more closely align their incentives with the performance of the organization.
Revenue per employee in our global capital markets business has improved by 38% since we began our realignment initiatives in fiscal 2016, a reflection of our efforts to capture greater efficiencies from our existing infrastructure while improving our execution capabilities. By strengthening collaboration across regions, we have been able to drive incremental revenue growth and harness opportunities to lead the market in emerging high growth sectors such as cannabis and blockchain.
We have continued to manage our fixed costs, leaving our business increasingly better positioned to generate meaningful profits. Despite higher costs related to the expansion of our UK & Europe wealth management business and the increased activity across our capital markets operations, excluding significant items, our firm-wide expense ratio decreased by 3.8 percentage points over the fiscal year.
We have also improved our technological and operational infrastructure with a focus on strengthening the security and stability of our platform and ensuring compliance with an increasingly complex regulatory environment. Our enhanced back-office support capabilities provide us with the flexibility to continue adding scale across our wealth management operations while positioning our capital markets business to move swiftly into new areas of growth.
In keeping with our stated intention to review every aspect of our business with a view to improving long term value for our shareholders, we took steps to better align our compensation strategy with the performance of the business, shifting performance goals from a revenue basis to a longer term profitability basis. A significant portion of certain senior officers’ compensation will be in the form of Performance Share Units (PSUs), whose future payout will be conditioned on achievement of predetermined multi-year, market-based and financial performance metrics.
With an effective date of March 31, 2018, we made certain non-substantive changes to the Company’s long-term incentive plan, which governs our share-based awards program. These changes had the effect of causing a change in the method of expensing these awards so that they are now expensed in the period they are deemed to be earned rather than over the vesting period. With this accounting change, the cost of share-based awards granted in respect of fiscal 2018, as well as the unamortized expense as at March 31, 2018 of outstanding awards granted prior to fiscal 2018, was expensed in the fourth quarter of fiscal 2018. This change did not affect awards made in connection with new hires or for retention purposes, and the cost of those awards will continue to be recognized over the vesting period. The cost of awards granted prior to fiscal 2018 that was expensed in the current year was $48.4 million. This amount has been treated as a significant item for purposes of determining our adjusted (i.e., excluding significant items) fourth quarter and fiscal 2018 results. Share-based awards are generally covered through shares held in employee benefit trusts, so this change in accounting treatment does not have an impact on cash, book value or capital.
Others within the industry treat their share-based awards on a similar basis, and we believe this treatment provides greater transparency of our financial results and more closely aligns our revenues and expenses in reporting periods. Going forward, the share-based award expense recognized in each period will reflect only the cost of awards earned in respect of that period as well as the amortized cost of new hire and retention-based awards applicable to that period.
Our results for this fiscal year are indicative of the continued momentum in our business as we solidify our position as the dominant mid-market investment bank and wealth management firm in the regions where we operate. I believe that a significant market share opportunity exists across our businesses, and I am confident that Canaccord Genuity is best positioned versus our peers to capture this share.
We will continue to focus on key sectors of the global growth economy, because it’s what we do best. At the same time, we continue to make disciplined investments in our business, broadening our technological capability and further developing our digital offerings.
Looking ahead, I believe that our business is appropriately scaled to take advantage of market opportunities while allowing us to exceed our clients’ expectations in a range of market environments. The volatility that shocked the market toward the end of our fiscal year served as an important reminder that the markets are not always going to be predictable, and reinforced the value of maintaining liquidity in our business and being prepared for developments outside of our control.
I would like to thank our Board of Directors for their guidance throughout this pivotal year for our organization. And to you, our valued shareholders, I thank you for your continued support and would like to remind you that the values that drive our decisions are shared by all our employees, partners and directors. Getting here required hard work, and we know that continuing to advance our business will require ongoing discipline and commitment across the organization. As we begin a new fiscal year, we remain committed to operating a highly focused business that is thoughtful in the way it deploys capital and one where all employees are aligned with shareholders in their incentives.
President & CEO
Canaccord Genuity Group Inc.
We know that many of our greatest opportunities arise when we bring together the diverse and differentiated perspectives from across our talent pool, and we strive to operate as an organization that celebrates partnership and is free from discrimination and bias.
With a firm belief that diverse teams create better business outcomes, representatives in all our businesses have been working together to advance diversity and parity across our organization. While the activities may vary across businesses and regions – from advancing our recruitment, retention and talent development practices to ensuring that our parental leave policies are competitive – the goal is shared. Our collective success depends on sharing this responsibility across our organization and harnessing opportunities to drive measurable improvement.
While we realize this will take some time for our business and our industry, we believe this coordinated global diversity effort is further positioning our business – and our people – for long term success.
To learn more about our Diversity Policy, visit the Corporate Governance section of our website at www.canaccordgenuitygroup.com.
(1) Figures excluding significant items are non-IFRS measures. See Non-IFRS Measures on page 14 of our MD&A.
(2) Based on management estimates including certain assumptions made in respect of allocations of taxes, non-direct costs and expenses.