Securities industry aims for record year

The good times continue to roll in the securities industry despite a modest pullback in profits for the third quarter, according to the Investment Industry Association of Canada.

The industry as a whole earned an operating profit of $1.2 billion, down 5.8% from Q2 but up 8.5% from the same quarter last year. That’s still the fourth-highest quarterly profit in the sector’s history.

While operating revenue declined 6.9% to $3.5 billion, the industry mitigated the shortfall by containing costs, which dropped 3.8% from Q2, to $1.4 billion.

One major soft spot in Q3 was the commission stream, which suffered as a result of sluggish equity markets over the summer. The pain was spread across the industry, with commission revenue falling 12.3% among integrated firms, 10.3% for institutional firms and 16.6% for retail.

Not only did retail firms suffer the greatest decline, but this commission revenue stream accounts for about 50% of their overall income, compared to just a third for the integrated and institutional firms. As a group, the retail shops saw their operating profit tumble by 34.3% compared to Q2. Full service firms were the hardest hit within the group, with a 40.4% decline, compared to the 27.1% drop among retail introducers.

Integrated firms actually managed to boost operating profits by 2.7% on the quarter, while institutional firms saw a decline of 18.9%.

While trading commissions dropped off, investment banking services continued to account for the lion’s share of overall industry revenues. Investment banking brought in $877 million in Q3, off just 3.7% from Q2. So far this year, this segment has earned $2.9 billion, a 5.9% gain over 2005.

The investment bankers benefited from a strong M&A environment, collecting advisory fees on 420 transactions valued at $90.3 billion. Integrated firms saw the greatest benefit, as they tend to focus on the larger deals — mega-deals worth in excess of $1 billion accounted for more than half of the overall value of transactions.

Integrated advisory revenue soared to $195 million up 77.3% quarter over quarter and 130.8% year over year.

The institutional group, with its focus more on smaller transactions, saw advisory fees decline 26.7% quarter over quarter to $77 million, still 18.5% higher year over year.

On a year-to-date basis, operating profits have already hit $4.1 billion, up a substantial 31% from 2005, which was itself a record year. With such a head start, 2006 is poised to mark a fourth consecutive record for operating profits, requiring only $200 million in Q4 to match last year.

The final quarter of the year is already shaping up nicely, the IIAC report says, despite the federal government’s Halloween announcement that it would implement a tax on income trust distributions.

“While the trust clampdown is bad news to investors, it should not derail the industry from its record track this year, given the stellar performance in the first three quarters,” the report says.

Among all the financial records the industry is setting, it has also reached a new all-time high for employment, with 40,588 people working in the sector in Q3, up 4.5% from last year’s level.

“Putting it all together, the Canadian securities industry should end the year on a very jolly note,” the report says. “The record tunes cranked out by the industry this year will surely be a welcome gift for investors this festive holiday season.”

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

(12/15/06)

Steven Lamb