Dealer profits suffer Q1 slowdown

(June 9, 2005) RRSP season usually means higher profits for Canada’s securities industry. And although operating profits at dealer firms reached a healthy $1.1 billion in the first quarter of 2005, that’s a 9% drop from last year and 1% lower than a record fourth quarter in 2004.

“A wobbly equity market, lacklustre trading and rising expenses played a major role in crimping operating profits in the quarter,” the IDA says in its quarterly securities industry performance report. “Mounting investor worries over rising oil prices, higher interest rates and a questionable corporate profit picture not only fueled market volatility, but limited the upside returns in the quarter.”

Equity trading suffered the most in Q1, falling 55% from Q4 last year and 60% year-over-year. Most of the action was in fixed income trading, the IDA says, which gained 57% from last year. Expenses rose 7% from last year to $2.3 billion.

But there were plenty of positives for brokerage firms in the quarter. The industry pulled in $1.4 billion in commissions, the second highest quarter on record. “Undoubtedly, retail commissions were buoyed by the mass market appeal of seasonal RRSPs and mutual funds,” says IDA senior vice-president Ian Russell.

In addition, new equity financings rose 4% in the quarter to more than $700 million.

Russell notes that 2004 was a banner year for the securities industry, and as such, a hard act to follow. “Despite the more modest pace, most revenue streams for the industry remained at or above historical trend. The step back to pre-record levels may be a bit bland and disappointing, but the industry is still standing tall.”

The success of the smaller independent firms was the big story in 2004, but that trend has faded somewhat this year. First-quarter profits at the boutiques were off 42% from last year, while the big bank firms posted a 6% profit increase.

Russell blames the drop in profits at the independent firms on the “brisk pace of expansion” over the past few years. “The strong growth has resulted in a jump in expenses, particularly in payroll.”

In addition, he says retail firms have been aggressive in recruiting staff with lucrative incentive packages, which are reflected in the group’s higher expense account. That trend could change, Russell suggests, as the number of staff willing to make the leap from a large institution to a small retail firm could taper off.

Going forward, Russell believes the industry may be on a slower expansion path in the coming months, due to uncertain markets and the usual summer slowdown.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com