Strong markets boost IDA firms’ earnings

The third quarter of 2005 was particularly kind to the securities industry, with profits surging across most lines of business, according to the IDA’s quarterly Securities Industry Performance report.

Operating profits hit $1.1 billion for the industry as a whole, up 26% from the second quarter and a massive 74% increase from Q3 a year earlier. Strong equity markets fueled the gains, as commissions, trading and investment banking activity rose.

Traditionally, the summer season is slow for the markets, making this year’s performance something of a pleasant surprise, especially after an unusually weak second quarter. On a year-to-date basis, the industry has raked in profits of $3.1 billion, up 28% from the same period in 2004.

For the industry as a whole, commission revenue totaled $1.4 billion, up 16% over Q2, while investment banking revenue hit $889 million, up 3%.

Integrated firms earned $794 million in the third quarter, up 34% quarter-over-quarter and up 27% on a year to date basis, versus 2004. The group was a laggard last year, when profits faded by 3% compared to 2003, despite an overall industry gain of 7%.

“Not only did the integrated firms enjoy a fantastic quarter, but 2005 is shaping up to be the comeback year for the group,” the report says. “The sharp improvement this year is definitely a big positive and boost for the group after last year’s disappointing performance.”

Integrated firms managed to cut expenses by 2%, while at the same time realizing strong gains in their main revenue sources, with investment banking revenues rising 17%, commissions up 11% and fees up 21%. Equity trading pulled in $143 million, which is up 204%, but on a year to date basis the $253 million total is down 25% from 2004.

“While integrated equity trading will likely come in lower this year, activity will still be at historically high levels,” the report says.

Retail firms posted collective operating profits of $96 million, up 53% from the previous quarter. On a year-to-date basis, their operating profit was up 51% over the same period in 2004.

“For these firms, the wealth management business remains a key revenue pillar,” the report says. “Commissions and fees — accounting for over half of the group’s revenue — continue to spearhead earnings.”

Commissions were up 15% quarter-over-quarter and 7% year-to-date while fees climbed 8% in the third quarter and 29% year-to-date. But growth has not been homogeneous within this category. Full service retail shops have seen profits rise by only 7% year to date, while introducer firms have enjoyed 128% growth, with commission growth being the primary driver.

Institutional profits were down 3% for the latest quarter, to $217 million. Over the first nine months, profits were up 24% over the same period last year. These firms failed to capitalize on strong M&A activity in the quarter, as the lower end deals they tend to service declined 11% in value.

Mergers and acquisitions in the quarter tended to be at the higher end of the market, where the integrated firms dominate.

Strong earnings have translated into hiring in the industry, as employment increased 2% from the second quarter, with 38,840 employees. This comes at a time when the number of employers dropped 1%, from 203 to 201 firms.

With the year drawing to a close, the IDA has reviewed the available data for the fourth quarter and is predicting a strong finish to the year.

“Based on preliminary Q4 issuance data, firm commodity prices and robust trading, it looks like the industry is on track to enjoy another record-breaking year in profits in 2005,” the report says.

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

(12/15/05)

Steven Lamb