The Canadian and U.S. securities industries look a lot alike at first glance.
This is because “both are divided between large—often bank-owned—dealers with national scopes, and a large contingent of small, specialized institutional and retail boutiques,” says Ian Russell, president and CEO of IIAC in his most recent industry letter.
Also, “both have faced [seemingly] comparable challenges stemming from the 2008 financial meltdown, and have seen vigorous regulatory reform over the past few years.”
This is where the similarities end, however. Russell says the industries differ significantly when you analyze their performances, structures, operations and earnings over the past few years.
He adds, “The market collapse eviscerated the investment banking and retail businesses in the securities industries on both sides of the border, [but] earnings performance since then differs drastically.”
There are also varied “market conditions and structural differences, and even [the impact of] regulatory reform and tougher compliance standards” has been distinct when you compare both industries.
To start, earnings in the Canadian securities industry recovered quickly in 2009 and 2010. This rise from the ashes was “led by strengthening commodities markets and related financing and securities trading. Net profit for Canadian firms rebounded 53% in 2009, following a 32% profit setback in 2008,” says Russell.
Meanwhile, he adds, “The U.S. industry continued to slide into progressively weaker profitability. After collapsing by a dramatic 515% in 2008, net profits in the U.S. fell a further 50% in 2010 and 2011. In 2012, [the country’s] profit picture decisively reversed course, while in Canada profits moved lower in 2011 and 2012.”
The data suggests the two markets aren’t correlated, reflecting contrasting movements in the domestic equities of each country.
Canada’s stock markets are driven by heavy resource weighting, and resources “rebounded strongly in 2009 and 2010. They then tumbled in 2011 and 2012, taking down the performance of the industry,” says Russell.
He adds, “Operating profits at the retail boutiques disappeared last year, down from $600 million in 2007. Earnings of the institutional boutiques were sliced in half from 2010 levels, one third below profit in 2007. Integrated firms largely held their ground” over the past two years.
In contrast, “U.S. equity markets skidded sideways throughout 2009 and 2010, heavily influenced by the European crisis and political gridlock in dealing with the U.S. fiscal deficit.
“Earnings at the large dealers were hampered by the drag of non-performing assets, the legacy of pre-crash derivative asset holdings, and greater business presence and exposure to difficult European markets.”
By mid 2011, these conditions reversed. The S&P Composite Index moved up 13% last year, compared to a mere 4% increase in the S&P TSX Composite Index during the same period. The net profit for the U.S. securities industry rebounded in 2012 by 124%.
In his letter, Russell also highlights how regulatory reforms in the U.S. have been more reactive in an effort to help repair systemic weaknesses revealed during the recession—the Volcker Rule and Dodd-Frank have been a catalyst for industry-altering practice changes.
Though CRM and disclosure reforms will change the landscape for Canadian firms, Russell argues these rules were being developed and discussed prior to 2008.
For more on the differences between the industries and their earnings, read the full letter.
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