Securities industry tumbles in Q3: IIAC

Everyone knew it was coming, but now it’s official — earnings and revenue growth for the securities industry was down significantly in Q3.

The Investment Industry Association of Canada published its third quarter results on the securities industry’s performance and found that a number of revenue lines saw double-digit percentage losses. Overall, the industry was hit with a 14% loss in industry revenues and a 29% drop in operating profits.

“When compared to the previous quarter, the third quarter would appear to be one most dealers would rather forget,” says Jack Rando, the IIAC’s assistant director, capital markets, and author of the report.

The performance decline can be chalked up to all the turmoil the markets experienced during the summer — credit tightening, repricing of risk, volatility in the global markets — and a number of other things that sent stocks tumbling.

Trading was hit hard, with commission revenues down 11%, or $185 million, to $1.5 billion. Compared to this time last year, though, revenues are actually up 13%.

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Equity-traded revenues were also badly affected, falling $209 million, or 120%, over last quarter and 123% from Q3 2006. Equity trading resulted in a net loss of $35 million in the third quarter. “This represents the first time since the third quarter 2002, about the same time the TSX bottomed out from the tech market collapse, that the industry reported a net loss from their principal equity trading business,” says Rando.

Principal trading revenues from fixed income actually fared well, raking in $207 million, up 16% from last quarter. Rando says the industry’s financial troubles made government-backed instruments more attractive.

Another area hurt by the summer’s volatility was investment banking. The IIAC reports that revenues were down 24% this quarter but up 10% from last year at this time. Rando attributes the decline to reduced volumes of equity and debt financing. “With market conditions in a state of disarray and many investors choosing to ride out the storm on the sidelines, demand for new issues faded in the quarter,” he explains, adding that dropping share prices and widening credit spreads made issuance too expensive for some companies.

The slowdown in issuance even affected the hot maple bond market, which saw its numbers decline from 26 deals worth $10 million in Q2 to 10 deals worth $2.6 billion in Q3.

In the report, the IIAC points to wealth management as the industry’s “steady hand.” Fee revenue for the quarter totalled $627 million, a slight increase over Q2, but up 23% from Q3 2006. Year to date, the industry has brought in $1.8 billion, mostly from fee-based advisory services such as wrap programs, fee-based brokerage and managed accounts.

“The shift to fee-based business has helped advisors, and their firms, better manage the cyclical nature of their revenues,” says Rando.

The mutual fund industry also saw its revenues decline by $37 million from Q2, to $538 million. The IIAC attributes the small downswing to the huge drop the industry saw in August, when there were $1.5 billion in redemptions, including $900 million from money market funds because of concerns related to asset-backed commercial paper.

The industry fared much better in September — net mutual fund industry sales that month were nearly $1 billion. “Hopefully, that’s an indication of things to come as the industry approaches its busy RRSP season.”

Despite the poor performance this quarter, the industry is still on track to have a record-breaking year. Year-to-date operating revenues are at $12.8 billion, while profits stand at $4.9 billion. Luckily, these big numbers mean that Q4’s inevitably poor figures shouldn’t derail a generally successful year for the securities industry.

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(12/07/07)

Bryan Borzykowski