Second quarter results paint a picture of a securities industry in the midst of a bear market and facing serious challenges for the rest of the year according to the latest Securities Industry Performance report from the Investment Dealers Association.

According to the IDA, retail investors, a major source of revenues, kept mainly to the sidelines in the first half of the year as equities markets headed lower. Securities industry revenues fell 21% year-to-year to $5.3 billion in the first half of this year, with the worst decline hitting retail brokerage firms.

Online or discount brokers saw their profits fall by more than half to $113 million compared to the same period last year.

Revenues from fee-based business increased 10% to $684 million in the first half this year and are helping to provide a buffer against weaker retail involvement in the market.

The IDA notes income from the spread on clients’ free cash outstanding is also helping industry revenues, remaining stable year-to-year in the first half this year.

Clients’ free cash was 10% higher at the end of the second quarter compared with a year earlier, indicating that clients are keeping ample funds with dealers as they await opportunities to resume investing. The foregoing reflects the marked increase in securities firms’ client assets under management, which climbed from $455 billion four years ago to $755 billion last year. The IDA says the large volume of assets under management should help retail brokerage firms’ revenues rise fairly quickly when client transaction flows begin to increase.

The IDA notes that investment banking revenues have been hit by weaker new issue and merger and acquisition activity. It reports that he underwriting of initial public offerings virtually ground to a halt this year, with less than $0.5 billion in the first six months, down from $3.5 billion last year.

On a brighter note, revenues from fixed income trading appear set to easily better last year’s result and register one of the strongest annual outcomes in recent years.

Industry operating profits rose modestly in the second quarter but the improvement was inadequate to change prospects for a weaker outcome for the year as a whole.

Firms operating primarily in the retail sector were hardest hit by declining profits, falling to a mere $15 million for the first half of the year from $309 million a year ago. Integrated firms proved best able to cope with deteriorating market conditions, suffering a relatively moderate setback in profits to $1.2 billion.

The IDA notes that this year’s results are being set against exceptional outcomes in 2000. If last year’s results are excluded, the results to date indicate profits as well as return on capital for the entire year will compare favourably with recent years. The average ROE for the first half of the year was 14%, compared to 26% last year

The association reaffirms that the securities industry’s performance this year remains basically sound.