IDA firms recovering from weak summer months

(December 9, 2004) The Canadian securities industry struggled through the third quarter, marking the second consecutive three-month period of weakness, according to the IDA’s quarterly survey of its members.

While revenues were off about 8% quarter-over-quarter, operating profits climbed 2% to $635 million, thanks in a large part to a 13% decrease in operating expenses.

The IDA report points out that the third quarter is often weak, as market activity tapers off through the summer. But this year investors appeared more cautious that usual as surging oil prices, rising interest rates and questionable growth prospects put a damper on trading activity.

Retail firms were particularly weak in the third quarter, as profits dropped 30% from Q2 to $32 million, and were down 44% from a year ago. Integrated firms, on the other hand, did much better than in Q2, with profits jumping 25% to $468 million, but that is 29% below year-ago levels.

Commission revenues fell 11% from the previous quarter to $1.0 billion and mutual fund commissions fell 4% to $336 million. Firms dealing mainly with institutional clients saw adjusted operating profits drop 33% to $135 million, off 15% from a year ago.

While the summer downturn was particularly acute this year, activity did pick up in the September and remained strong into the first months of the fourth quarter.

“The improved market atmosphere has spurred momentum, which has heralded a strong market rally in October and November,” the report reads. “The S&P/TSX composite index in November has risen 5% from September and is up 10% year-to-date.”

On a year-to-date basis, the industry appears to be in pretty good shape, as total firm operating revenue jumped 17% and profits climbed 8% compared to the first nine months of 2003.

Corporate advisory fees plunged 58% quarter-over-quarter, thanks to a drop in M&A activity in the period. New debt issuance also declined 44% from the second quarter.

While equity trading revenues jumped 108% quarter-over-quarter to $108 million, fixed income trading revenues fell 43% to $116 million. Investment banking revenues fell 14% to $636 million, but on a year-to-date basis, revenues rose 19% compared to 2003.

“On balance, overall year-to-date activity is up from last year with investment banking, commissions and fees as the key revenue drivers for most firm groups,” the report says.

“The [Q3] weakness in investment banking was clearly reflective of the decline in M&A activity and fixed income market in the quarter,” the report explains. “The Canadian M&A market remains on solid ground, but activity was definitely down from the robust second quarter.”

There were 200 M&A transactions in the third quarter, 50 fewer than in the previous quarter. The total value of the deals dropped as well, to $31.8 billion compared to $34.8 billion. But activity is up about 40% in value on a year-to-date basis, even as the number of deals has risen just 6% from 2003.

The number of so-called “mega-deals” helped the sector in the first nine months, as transactions valued above $1 billion have increased 111% since 2003. Smaller deals, between $1 million and $100 million, have increased only 2%.

IDA member firms appear to accept the view that the industry is improving for the long-term, with hiring continuing to increase, with a year-over-year gain of 3%.

“Going forward, tighter credit conditions, firm commodity prices, and a strong Canadian dollar will certainly add to the challenges of the IDA securities industry environment,” the IDA predicts in its report. “Amid these conditions, industry strength will increasingly be selective. While oil prices have retreated from their record highs, energy prices are expected to remain at relatively lofty levels — a huge bonus for Canada’s resource-heavy index.

“On this note, trading and financing activities will continue to be driven by a narrow group that yields the highest returns. In other words, resource-related activity should continue to be an important source of income for the industry in the coming months.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(12/09/04)

Steven Lamb