Canadian corporations continued to report record earnings in the first quarter of 2005. Operating profits advanced 3.4% to $51.5 billion, following a similar increase in the fourth quarter of 2004. These profits have risen in all but two of the past thirteen quarters, following a downturn in 2001.

Chart 1
Operating profits continue to rise

The non-financial industries saw operating profits improve by 2.7% to $38.7 billion, led by gains in oil and gas, telecommunications and retail.

The financial industries earned $12.8 billion in first quarter operating profits, a 5.9% increase from the fourth quarter of 2004. Chartered banks were the big winners in the first quarter, while property and casualty insurers lost ground.

Chart 2
Profit growth sustained

Oil and gas profits propelled by record high prices

Oil and gas extraction companies reaped the benefits of strong prices in the first quarter, as operating profits advanced 5.8% to $6.3 billion. Average domestic crude oil prices were up 6.4% from the fourth quarter of 2004, and 35.5% from the first quarter of 2004. However, after-tax profits fell 30.7% due to recent changes in accounting regulations that resulted in some oil and gas companies reporting substantial first quarter losses on hedging contracts.

Mining companies gained ground in the quarter, as they benefited from hefty metal demand from markets in North America and China. Prices for some metals were the highest in over a decade, boosting operating profits by 8.2% to $1.4 billion.

Profitable quarter for telecommunications

Operating profits of the information and cultural sector reached $2.5 billion in the first quarter, a 14.2% improvement from the previous quarter. The telecommunications companies were the primary reason, as their profit jumped 15.4%. This sector has seen much volatility over the past few years, due in part to restructuring activities.

Retail gains widespread

Retailers reported first quarter gains in revenue and operating profits. Overall retail profits advanced 6.4% to an all-time high of $3.3 billion. Consumer spending has been generally upbeat over the last several years, with low interest rates and rising employment levels. Households continued to buy consumer goods, including furniture, home furnishings and appliances, where profits climbed 21.5% in the first quarter. Motor vehicles and parts dealers reported a 14.7% increase in profits, while clothing and department store profits rose 13.7%.

Mixed results for manufacturing

Manufacturing profits improved marginally in the first quarter, following declines in the preceding two quarters. First quarter profits of $11.0 billion were 1.2% above fourth quarter levels, but remained below the recent high of $12.5 billion earned in the second quarter of 2004. The Monthly Survey of Manufacturing reported an increase in manufacturers' shipments for the first quarter, but declines were observed in the latter two months of the quarter. Exports were down from the previous quarter, partly in response to the continued strength of the Canadian dollar. Nonetheless, the latest Business Conditions Survey reported that manufacturers anticipate maintaining the same level of production in the second quarter of 2005.

Petroleum and coal producers earned $2.3 billion in the first quarter, up 4.6% from the fourth quarter. Profits have been at historically high levels for the past year, and refined petroleum prices in March hovered over 25% above year-earlier levels.

Chemical manufacturers' profits were much improved in the first quarter, rising 10.0% to an all-time high of $2.1 billion. Companies indicated that strong demand and rising prices were the underlying factors in the profit growth.

Motor vehicles and parts manufacturers did not fare as well in the first quarter, as their profits were almost halved to $0.3 billion. Operating revenue declined 4.1%, possibly due to consumer reaction to higher fuel costs. Exports of passenger automobiles and trucks declined in the quarter.

Gains were also reported by manufacturers of fabricated metal (+16.9%), primary metals (+7.5%) and wood and paper (+3.2%).

Robust bank profits bolstered financial sector

The financial industries earned 5.9% more in operating profits in the first quarter, almost entirely due to an upsurge in chartered bank profits. The depository credit intermediaries (mainly chartered banks) earned $5.9 billion in operating profits in the first quarter, 19.8% above the fourth quarter and a $0.3 billion improvement from the previous high reported in the first quarter of 2004. In the most recent quarter, substantial trading gains due to stronger equity markets and higher net interest income lifted profits.

Insurance company profits fell back 6.1% in the first quarter. Life insurers earned $1.0 billion in operating profits, a 4.2% improvement from the fourth quarter. However, these gains were overshadowed by the property and casualty insurers, whose profits fell 12.4% to $1.6 billion from record high earnings in the fourth quarter of 2004. Despite the current quarter slide, profits of property and casualty insurers were still 8.4% above year-earlier levels.

Profitability ratios

The operating profit margin strengthened to a highest-ever level of 8.0% in the first quarter, from 7.8% in the previous quarter. The average quarterly profit margin steadily improved over the past three years from 6.2% in 2001.

The return on shareholders' equity, based on after-tax profits, lost a full percentage point to 9.9% in the first quarter of 2005. This profitability measure averaged 9.4% in 2003 and 10.6% in 2004. In the most recent quarter, non-operating items, including foreign currency gains/losses, interest and dividend revenue and write-offs and valuation adjustments, all contributed to a 7.9% decline in after-tax profits.

Text table 1
Financial statistics for enterprises