Markets continue to weaken: IIAC

By Bryan Borzykowski | May 28, 2008 | Last updated on May 28, 2008
3 min read

The securities industry continued its downward spiral in the first quarter of this year, with total operating revenues falling 9% to $3.9 billion from Q4, and 14% year-over-year, says a new Investments Industry Association of Canada securities industry performance report.

Operating profits also dropped, declining 15% from the previous quarter and 37% from the same time last year.

Like most in the industry, Jack Rando, assistant director of Capital Markets for the IIAC, wasn’t surprised by the weak Q1 numbers. He says the quarter was particularity challenging, considering the massive SocGen scandal, the issues with Bear Stearns, and central bank rate cuts. “All these things made for an unprecedented first quarter,” he says. “We knew it would be rough, but the numbers are still pretty healthy.”

Healthy or not, most of the industry took big hits, including earnings that saw revenues decline 34% to $751 million — its worst performance since Q3 2004 — thanks to the flailing investment banking sector.

Because of the sector’s troubles, underwriting was hit hard, as total equity issuance fell 23% to $10.8 billion quarter-over-quarter and 35% from Q1 2007. The report says that “market conditions and lingering liquidity concerns dampened investor and issuer confidence in the new issues market.”

There were some signs in Q1 that industry was turning around in — equity trading increased 51% from Q4 2006, but the numbers were still down 80% and 81% from Q1 2007 and Q1 2006 levels, respectively. “Traders are adjusted to the market a bit better,” says Rando, explaining the quarter-over-quarter increase. “They’re making sense of things more they did in Q4, which was really weak on the equity trading front.”

Fixed income was another area that saw its numbers increase. This quarter, revenues hit $247 million; last quarter’s numbers were just $95 million. The IIAC says the increase was a result of the U.S. Federal Reserve and the Bank of Canada slashing their rates, and of bond traders “positioning themselves to benefit from the declining rates.”

One area that took a significant hit was wealth management. Fee-based account revenues dropped nearly $100 million, or 12% from Q4. People might argue that revenues usually fall between Q4 and Q1, since some fee-based accounts tack on charges at the end of the year, but, says the IIAC, “the decline this quarter was more pronounced, as asset levels in these programs, off which management fees are based, fell due to a decline in market valuation.”

Commission revenues, however, didn’t decline as drastically. While they fell slightly, they still brought in $1.5 billion as investors kept rebalanced portfolios.

One area of the industry that did break records was in TSX trading volumes, which hit 25.5 billion.

Overall, Rando thinks the industry is in “pretty good shape.” He says performance will improve as market conditions get better, but it’s still unclear when that will be. “There are a lot of uncertainties in terms of the economic and financial outlook,” he says. “Credit markets appear to be stabilizing a bit, but investor confidence isn’t where we want it to be yet.”

He’s still optimistic that we’ll see things bounce back later this year, but we’ll know more once Q2’s numbers get released. “This quarter will be important in determining the pace in the rest of year,” he says. “Are we out of the storm yet? Probably not, but hopefully we’ve seen the worst of it.”

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Bryan Borzykowski