Securities industry posts record profits: IDA

The securities industry posted higher profits in 2005, setting a third consecutive record for earnings, according to the IDA’s annual Securities Industry Performance report.

Total adjusted operating profits for the securities industry shredded the previous record of $3.6 billion in 2004, reaching $4.3 billion last year. The industry got a $1.215 billion boost in the final quarter, just shy of the all time quarterly record of $1.231 billion set in the first quarter in 2004.

“The spectacular back-to-back-to-back years of record-breaking industry profits during 2003-2005 have made the ‘go-go 90s’ seem tame in comparison,” the report says. “Surging oil prices, low interest rates, a strong loonie, scorching M&A activity, rising corporate profits, exploding income trust market and a healthy economy helped keep the good times rolling for the industry.”

Revenues climbed to $13.2 billion for the year, up 12% from the already lofty level set in 2004. While revenues climbed, the IDA praised the industry for keeping costs under control, especially at integrated firms, which managed to cut costs by 2% during the year.

“While the integrated firms have traditionally been a leader in cost-cutting, last year’s drop in expenses was absolutely amazing,” the report says. “The decline not only set the group apart from the industry in terms of cost reduction, but was a marvel given that the integrated headcount increased by 4% in 2005.”

Overall, job creation in the industry more than doubled from 2004, with 1,101 new positions created, compared to 477 jobs added the year earlier.

Integrated firms mounted a comeback following a period of “rather lacklustre performance” in 2004, when profits fell. In 2005, they set a new record, earning $3.0 billion, an increase of 21%.

Increased consolidation activity helped boost profits at the investment banking arms of these firms. Massive deals in the resource sector, such as Inco’s $12.8 billion bid for Falconbridge and Barrick Gold’s $10.4 billion offer for Placer Dome were joined by other high profile takeovers, including the $1.2 billion deal for Fairmont Hotels and Resorts.

Investment banking accounted for 25% of integrated firms’ revenues, bringing in $2.4 billion in fees, an increase of 8%. Not to be outdone, the debt issuance teams increased their revenues by 13% and corporate advisory services fees rose 23% year over year.

Rising stock markets also helped out the integrated firms, as mutual fund sales hit a five year high and commissions climbed 11% to a record $3.6 billion.

“Meanwhile, the growing popularity of structured and fee-based (such as wrap accounts) continued to provide an important and steady stream of industry income,” the IDA report says. “Fee revenue for the integrated group climbed to a high of $1.2 billion in 2005, a solid 22% increase from 2004.”

Among the small independent retail firms, profits climbed 19% to $352 million on the year. The group saw a 6% increase in commissions and “brisk gains in fees, investment banking and trading income.” Fees received a boost from expansion into discretionary managed accounts, with overall fee revenues totaling $409 million.

“However, as the small retail firms continue to branch out, growth has come at a price,” the report says. “Last year, there were two important developments for the retail group: escalating costs and a crowding out of firms.”

Operating costs increased by a whopping 8% among the retail players as a group, with an 11% increase among the full-service firms. The IDA blames increased back-office expenses for the increased cost of doing business. Another cost driver was a 4% increase in payrolls, despite a 5% drop in the number of firms.

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