Record profit for IDA firms

(March 22, 2005) Securities dealers earned a record $3.9 billion in 2004, the IDA says in its latest industry report, as small retail firms outperformed their larger integrated cousins.

The year was book-ended by two record quarters. Firms made $1.2 billion in Q1 and $1.1 billion in Q4. Revenues rose to $3.3 billion in Q4 and hit a record $12.4 billion for the year.

“Many of the concerns that had weighed investors down during the mid-year had been lifted — or at last alleviated — in the final quarter,” the IDA says, pointing to modest interest rate hikes, tepid inflation and healthy levels of corporate earnings and M&A activity.

“Amid this encouraging backdrop, investor confidence perked up and the market snapped back with a year-end rally.”

Both the wealth management and investment banking sectors posted double-digit gains in 2004. Of note was a “rare profit divergence” between the large, bank-owned integrated firms and the smaller specialized firms, particularly on the retail side, the IDA says.

While the integrated firms earned strong profits last year, they were lower than in 2003, the brokerage industry association adds, noting that bank-owned firms usually do better when the economy is booming.

“The integrated firms, notably the bank-owned dealers, ran into severe headwinds last year via a challenging trading environment, particularly in the fixed income market,” the report says. “The steep flattening of the yield curve caught many investors off-guard and knocked down trading revenues across the board.”

Net profits at institutional firms jumped 113% last year compared to 2003 and 78% on the retail side, the IDA notes, pointing to the success of specialized firms in fee-based products and other new lucrative business areas.

“For example, the advent into discretionary managed accounts by the small retail firms was a success in broadening the group’s product repertoire, income and client base.”

In addition, the entrepreneurial environment at the boutiques has been a magnet for industry professionals, reflected in an 8% rise in jobs in the sector, compared to flat growth in the integrated group.

“With a team of top experts on staff, the small retail group is well-equipped to compete with innovative and sophisticated products.”

Looking ahead, the IDA expects 2005 to be a year of moderate growth in the securities industry. “Economic conditions will not be as favourable. The repercussions from the high Canadian dollar should hit the domestic economy much harder this year than in 2004.”

Corporate Canada will be in consolidation mode in 2005 following a record year of financings, the IDA expects. Finally, activity in the oil and gas income trust sector — an integral driver of Canadian financing and advisory business in 2004 — will likely slow down due to “growing valuation concerns and relative yield pressure.”

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