Investment industry sees profits slip

(September 12, 2005) Despite lower second-quarter earnings, Canada’s investment industry remains on a solid footing, according to the latest quarterly report from the IDA.

Operating profits dropped 21% to $879 million across the industry, reflecting an 11% drop in operating revenues and an increase in expenses. But the bottom-line number was “not far off from the $930 million quarterly average posted during the record-high 2003-04 period,” the IDA report said.

“What’s the main culprit behind the quarter’s performance slowdown?” the report asked. “In a nutshell, double-digit declines in the industry’s principal revenue drivers — trading, commissions, and investment banking.”

Year-to-date earnings for the industry totaled $1.9 billion—7% higher than those of the first six months in 2004 —this at a time of expected interest rate hikes and uncertainty over the price of energy.

Integrated firms were hardest hit, with operating profits falling 27% to $593 million for the quarter, compared to the second quarter of 2004. Again, year-to-date earnings show improvement, with a gain of 11% to $1.4 billion.

While the Canadian mergers and acquisitions market remained active in the second quarter — transaction values were up 22% from Q1, totaling $29 billion — integrated firms failed to cash in. Advisory fees dropped 5% amongst the integrated firms, while the rest of the industry saw such fees rise 30%.

“The fact that there have been fewer mega deals or more deals under the $1 billion mark has been great news for Canada’s smaller retail firms, less so for the integrated group,” the report reads. “Given the increased number of lower-end deals, and oil and gas income and royalty trusts on the M&A scene, advisory needs have benefited the institutional and specialized, independent firms more than the large, integrated players in the second quarter.”

Retail firms saw operating profits fall 19% to $63 million, while year-to-date earnings increased 10% over the same period last year. Revenues from commissions totaled $1.1 billion in Q2, down 17% quarter-over-quarter and unchanged on a year-to-date basis compared to 2004.

Institutional profits were unchanged at $223 million for the quarter, but year-to-date earnings are off 2% from 2004. Investment banking earned $867 million in Q2, down 11% quarter-over-quarter, but up 18% on a year-to-date basis.

“Looking ahead, the third quarter could be off to a good start,” the report says. “Market activity appears to have heated up in the summer. As at the end of August, trading on the TSX/S&P 500 was up an impressive 11% while the index rose 3% from June.”

Still, concerns remain about both interest rates and the price of oil, which spiked following the destruction wrought by Hurricane Katrina along the U.S. Gulf Coast.

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