Canadian corporations earned record high operating profits of $231.7 billion in 2006, led by solid growth in the wholesale, retail and construction industries. Depository credit intermediaries (mainly chartered banks) also turned in a sizeable profit gain for the year, while manufacturing profits were little changed.

Overall, operating profits increased 7.3% in 2006, down from double-digit growth in the previous two years.

In the fourth quarter, profit growth continued with a 1.5% increase, following a 3.5% gain in the third quarter. Despite the more modest increase, fourth quarter operating profits of $59.7 billion were at record high levels. Profits had previously shown a slight decline over the first two quarters of 2006.

Fourth quarter oil and gas profits weakened, as crude oil prices fell back from their early summer peak. In the manufacturing sector, higher profits of motor vehicle and parts manufacturers were offset by price-led declines in the petroleum refining industry.

In the financial sector, the depository credit intermediaries were the biggest winners for the fourth quarter, while insurance companies reported little overall change in profits.

Profitable year for retailers and wholesalers

Strong consumer spending propelled operating profits in the retail sector to a record high $14.3 billion, up 20.2% over 2005. Sales jumped 4.5% for the year, as upbeat employment levels, historically low interest rates and high consumer confidence continued to stimulate activity in retail showrooms.

Clothing and general merchandise stores earned $3.9 billion in 2006, up from $2.5 billion in 2005. Furniture, home furnishings and appliance stores earned $1.3 billion, a 41.1% improvement over 2005 profits.

Wholesalers' profits of $16.6 billion were up 15.1% over 2005. The largest gains were seen in wholesalers of motor vehicles (+39.5%), building materials (+25.4%) and machinery and equipment (+22.9%).

Robust activity lifts construction profits in 2006

Operating profits in the construction industry jumped to $9.7 billion in 2006 from $6.9 billion the previous year. Thriving demand for residential and non-residential space in Western Canada lifted the value of building permits to new highs.

Housing starts, as measured by the Canada Mortgage and Housing Corporation, fluctuated throughout the year but showed an annual increase. Engineering and repair construction activity remained strong.

High commodity prices bolster oil and gas and metal mining profits

Oil and gas extraction companies' profits exceeded $31 billion for the first time ever in 2006, up 2.3% over 2005 levels. Crude oil prices peaked in the summer of 2006, but retreated in the latter portion of the year due to high inventories and softening demand. Nonetheless, average crude prices for 2006 were well ahead of 2005, spearheading the gain in annual profits. Natural gas prices were strong early in the year, but fell back considerably as the year wore on.

Mining companies also enjoyed a banner year in 2006, as operating profits jumped 12.0% to $4.7 billion. Strong demand from China and other export markets kept inventories low, propelling non-ferrous metal prices to record highs during the year.

Manufacturing profits little changed in 2006

Operating profits of manufacturers showed little growth in 2006, edging up to $42.3 billion from $42.0 billion in the previous year. Returns on export sales were hampered by the strong Canadian dollar, which peaked around 90 US cents in the spring of 2006, compared to an average of 82.5 US cents in 2005. However, 2006 results may point to a bottoming out of the manufacturing sector, following a 7.0% slide in 2005.

Demand for Canadian goods from the US market was sluggish. The survey of Canadian international merchandise trade recently reported that total exports to the United States registered their first annual decline in three years. However, exports to other countries rose considerably.

Overall manufacturing shipments for 2006 slipped 0.6%, as measured by the Monthly Survey of Manufacturing.

Manufacturers of computers and electronic products were a bright spot, as profits of $2.7 billion reflected a 64.1% increase over 2005 levels. Operating profits have steadily grown since losses were registered in 2002. This industry includes manufacturers of communications equipment and audio and video equipment, which have been in high demand over the past few years.

Primary metal manufacturers reaped the benefit of strong commodity prices and earned $4.3 billion in 2006, a 13.9% gain over 2005 profits.

On the down side, wood and paper companies lost ground in 2006, as profits were trimmed by lower prices, a softer US housing market, high fuel costs and the strong Canadian dollar. Operating profits declined 16.0% to $3.3 billion. Paper producers continued to struggle with shrinking North American newsprint markets.

During the final quarter of 2006, the Canadian and United States governments implemented a new agreement to govern the flow of Canadian softwood lumber to the United States. Under this agreement, Canadian lumber companies are receiving refunds of about 80% of the softwood lumber duties previously deposited. In the wood and paper industry, any refunds reported in the fourth quarter are excluded from the calculation of these operating profits, but are included in the sizeable increase seen in after-tax profits.

Motor vehicles and parts manufacturers saw profits slide 14.8% to $1.5 billion in 2006. Exports, which comprise the bulk of Canadian automotive production, were on a downward trend throughout the year, despite some strength in the latter months. Domestic unit sales of new motor vehicles were up 2.2% for the year. Profits were dampened by high marketing and restructuring costs and the effect of the strong Canadian dollar on export returns.

Financial industries

In the financial sector, the depository credit intermediaries led the way with profits rising 14.3% to $26.4 billion in 2006. Profits were boosted by higher net interest income stemming from growth in mortgage and non-mortgage loans such as credit cards and consumer and corporate loans. Profits also benefited from trading gains derived from equity markets, higher volumes in treasury and investment banking as well as wealth management.

Insurance carriers earned $13.9 billion of operating profits in 2006, up 8.2% over 2005 levels. Both life insurers (+5.9%) and property and casualty insurers (+11.3%) contributed to the profit gains.

Non-depository credit intermediaries' profits rose 9.5% to $7.5 billion.

Quarterly growth slows but profits still at record levels

In the fourth quarter, all-industry operating profits increased 1.5% to a record $59.7 billion, following a 3.5% increase in the third quarter. Profits have risen in all but 3 of the past 20 quarters, posting record highs along the way.

In the non-financial sector, gains in 14 of the 17 industries lifted profits by 1.3% to $43.3 billion. The financial sector profits increased 2.2% to $16.4 billion.

The biggest fourth quarter profit swing was in the oil and gas industry, as operating profits declined to $7.2 billion from $8.0 billion in the third quarter. Crude oil prices fell back from the lofty highs of the summer and export demand eased. Natural gas export prices bottomed in October at less than half of the record high prices reaped in the fourth quarter of 2005.

Manufacturing profits edged up 0.9% to $11.0 billion. A price-led decline in petroleum and coal profits was largely offset by higher profits by motor vehicles and parts producers. While domestic and export demand for motor vehicles showed resilience in the fourth quarter, most of the profit increase was due to unusually large restructuring and marketing charges booked in the third quarter.

Wholesalers earned $4.3 billion in fourth quarter profits, up 5.2% from the third quarter. Retailers kept pace as their profits advanced 5.7% to a record high $3.8 billion.

Profits in the transportation and warehousing industry grew by 5.8% to $2.9 billion in the fourth quarter, matching the record highs posted in the final quarter of 2005. Airlines benefited from strong passenger load factors, as travelers eagerly took to the skies. In addition, transportation carriers were helped by lower fuel costs in the fourth quarter.

In the financial sector, the depository credit intermediaries earned $7.2 billion, up from $6.9 billion in the third quarter. Higher revenues were driven by gains in personal and commercial banking as well as efficiencies from some broad restructuring.

Insurance carriers showed little overall change in operating profits for the quarter. Life insurers reported a 2.3% increase in fourth quarter profits to $1.3 billion. Property and casualty insurers' profits slipped 1.3% to $1.8 billion.

Profitability ratios

The operating profit margin increased for a fifth consecutive year in 2006, rising to 8.2% from 8.0% in 2005. However, a sizeable gain in total equity trimmed the 2006 return on average shareholders' equity to 11.2% from 11.5% in 2005. Nonetheless, it remained well above the recent low return of 5.7% earned in 2002.

In the fourth quarter, the operating profit margin edged up to 8.4% from 8.3% in the third quarter. The return on shareholders' equity fell to 10.8% in the fourth quarter from 11.0% in the previous quarter.