The U.S. brokerage industry continues to struggle for a respectable level of profits in a very weak environment for many business lines, says Standard & Poor’s, adding it doesn’t see much improvement anytime soon.

“Investment banking (underwriting and M&A), retail brokerage, and asset management businesses continue to suffer from a heightened level of investor risk aversion, particularly in equities,” S&P says in a new report. “Equity sales and trading continue to suffer from nonexistent IPOs and very low participation by retail investors. Convertible debt issuance and equity derivatives are the only bright spots in this business.”

However, S&P notes that fixed-income sales and trading were very strong during first-quarter 2003, “and indications are that strong performance is continuing into the second quarter. Credit spread tightening has led to increased new issuance and secondary market trading. Investment banks are also finding numerous opportunities to assist troubled corporate sectors with balance-sheet restructuring.”

Finally, it notes that firms that engage in consumer lending as well as traditional brokerage businesses have reported good results in those divisions.

S&P says there are some signs of improvement in equities markets, but “this may not carry over into higher volumes of retail trades or IPOs coming to market. The danger for earnings performance going forward is that the revenue activity needed to support capacity dedicated to equity businesses may not materialize, while fixed income-based revenues may decline. It is more likely than not that credit spread tightening as well as consumer mortgage refinance activity will cool off as the year progresses. The result may be another year of weak earnings.”

S&P also points out that the large retail brokers (Merrill Lynch & Co. Inc., Citigroup Global Markets Holdings Inc., Credit Suisse First Boston USA Inc., etc.) are besieged by private litigation alleging conflicts in equity research.

“A large number of arbitration claims have been filed, as well as suits that seek class-action status. Private litigants will have at their disposal the “evidence” turned up by the investigations of various state attorneys general. While Standard & Poor’s Ratings Services believes the costs of all of this litigation will ultimately be manageable, the attendant negative publicity will not help the Street regain credibility among retail investors,” it concludes.