Industry revenues sag in Q3

The third quarter of 2008 will not be remembered fondly by investors. The securities industry itself took a hit, with revenues falling 6% from the second quarter, or 7% from Q3 of 2007.

According to the quarterly report from the Investment Industry Association of Canada (IIAC), the operating profits for the three months ending September 30 were at a three-year low of $1 billion.

“Though most of the industry’s business lines are suffering at the hands of current market and economic conditions, underwriting is the hardest hit as a result of the slowdown in financing activity,” said Jack Rando, director, capital markets, IIAC. “We are, however, encouraged by the recent completion of several large-scale offerings, which will instill some confidence in the marketplace.”

A large part of the downturn in profits stemmed from retail investors selling their holdings and parking their assets in cash. This allocation swelled to $30 billion at the end of the quarter, a record high. While selling may have initially generated sales fees, client aversion to risk resulted in an overall decline of 10% in commission revenue.

Fee-based accounts also saw a decline in revenues, since fees are largely based on assets under management. Fee-based revenues fell to $614 million in Q3, off 6% from Q2.

Meanwhile, clients limited their leverage risk, with margin debt falling nearly 10% in the quarter.

Mutual funds saw net redemptions totalling $4.5 billion in September alone, and fund revenues in the securities industry declined 9%, falling below $500 million for the first time in two years.

Falling revenues and weaker profits led to the elimination of 510 jobs in Q3, more than half of which came from retail firms.

“Though this represents just 1% of total industry employment, if current market conditions persist, this figure may likely increase in the months ahead,” the report says.

Equity issuance in Canada stalled, falling to $6.5 billion, its lowest level in more than six years. That hit underwriters hard, slashing 48% from their revenues. Corporate advisory fees were a rare bright spot in the industry, spiking 25% on increased mergers and acquisition activity. Deal activity almost tripled to $54.7 billion, largely driven by strong deal-making in July, as August and September marked the weakest months since 2005.

(12/15/08)