At first glance, statistics released by the Investment Industry Association of Canada (IIAC) suggest the industry is doing well, but a closer look reveals the recovery is shaky at best.
“On the face of it, it looks like a welcome respite where you see a welcome turnaround in industry profitability for the quarter,” said Ian Russell, president and CEO, IIAC, in Toronto. “But when you dig into the numbers a bit you find that the actual performance, the numbers, really belie what’s going on in the industry. In other words, the industry is still struggling.”
For example, the Securities Industry Performance results, released on Thursday, show the industry’s operating profit increased to roughly $1.4 billion in the first quarter of 2013 from about $1.1 billion in the last quarter of 2012. As well, overall revenue commissions were on the rise in the first quarter totaling roughly $1.41 billion, an improvement from the previous quarter’s 1.3 billion.
As institutional firms continued to struggle with a difficult commodity market in the first part of 2013, according to Russell, the retail sector is responsible for this boost in profitability. For instance, integrated firms, which include retail services, saw an increase in operating profits to $1.1 billion in Q1 2013 from Q4 2012’s $920 million. Furthermore, firms that focus on retail investing saw their operating profits jump to $61 million in the first quarter of 2013 from $1 million the previous quarter.
This significant jump in the retail sector was primarily driven by the strength in the U.S. and global equity markets, said Russell, and as such the gains are likely to be wiped out when numbers are tallied for the second quarter. “Our assessment is that there has not been a second quarter follow through in the retail business,” he said, “which would have been particularly blow for the smaller boutique firms that depend a little more on the commission side of it than the fee side.”
As such, with the institutional side of the industry struggling and the retail sector likely to see a slump in second quarter profit numbers, IIAC expects the ongoing trend of consolidation and exiting of firms to continue. IIAC’s statistic reveal that the number of firms in operation dropped to 192 in the first quarter of 2013 down from 198 from the first quarter of 2012.
Despite the expected poor showing in the second quarter, IIAC does see some hope for improvement in the last half of the year. The markets have mostly priced in recent shocks, including the Federal Reserve’s possible bond tapering strategy, according to Russell, and the continued growing strength of U.S. economic fundamentals mean that there is likely to be some improvement in the American equity market in the coming months.
“Canadian investors will take advantage of those opportunities,” said Russell, “so I would think the retail sector would have a good chance of improving earnings in the second half of the year — we don’t know but that would be my guess.”
Continued improvements in the equity markets could also mean that fewer firms will consolidate or exit the business in the coming year, particularly smaller boutique firms, according to Russell.