Canaccord’s investment banking fees surge, shares drop

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Despite a solid quarter, Canaccord Genuity Group Inc.'s stock plunged early Wednesday morning, creating all sorts of confusion. Blame it on overzealous investors.

Before the independent investment dealer reported its first quarter results, some investors had high hopes for either a special dividend or stellar earnings that would blow away expectations. Because markets have been hot and deal flow is much more robust, investors knew there would be more money in Canaccord's coffers and they hoped some of it would be shelled out to them.

But the investment bank didn't deliver on either front, so investors sent its stock into a tailspin this morning and the shares fell double digit percentage points in early morning trading.

The odd thing here is that Canaccord's overall earnings were actually pretty solid. And its investment banking fees, which dominate revenues, continue to surge.

To put the numbers in perspective, over the past two quarters, the dealer's Canadian investment banking fees amounted to $46.5-million. In the equivalent two quarters last year, the domestic investment banking business brought in just $21.9-million. The rebound boils down to surging markets. "Driven by robust performance on the TSX, we are experiencing a welcome recovery in financing and advisory activity in Canada," Canaccord said in a statement.

If anything, the investment bank's recent stock market success is coming back to haunt its shares. Before the sell off, Canaccord's stock had popped 95 per cent in the past year. Arguably, investors were starting to get ahead of themselves, such that even solid earnings would no longer look good enough.

Already, some investors have realized that the situation isn't as bad as originally feared. Canaccord's shares have gained back some of its losses already this morning. Maybe they understand that the special dividend could simply come next quarter instead of this one – something analyst Sumit Malhotra at Scotia Capital believes is the case.

Still, they have good reason to be cautious. Markets have cooled off in the past week, and a bout of global uncertainty could hurt deal flow. If so, Canaccord's other businesses, such as trading and wealth management, haven't proved capable of picking up any slack in the past few years.