The Canadian securities industry encountered serious challenges in 2001, but ended the year in comparatively good shape according to a report from the Investment Dealers Association.

The IDA’s annual Securities Industry Performance report reveals that profits in 2001 were lower year to year, but they nevertheless compared favourably with previous years and remained notably above trend.

Industry operating profits tumbled 22% to $2.8 billion in 2001 from $3.6 billion a year earlier. The decline was moderated by a surge in business activity late in the year that led to a quarter-to-quarter doubling in fourth quarter profits. Despite the downturn for all of 2001, industry profits compared favourably in a historical perspective representing the second highest result on record.

These overall results, however, masked significant differences in performance among various industry sectors. Integrated firms recorded comparatively small declines in revenue and profits, while smaller independent firms catering primarily to retail clients suffered relatively sharper decreases.

Many individual investors remained wary of taking new equity positions last year as the stock markets displayed weakness through most of the year. This was evidenced by the 20% increase in client cash held in brokerage accounts from 2000, and a 14% decrease in the TSE 300 composite index year to year. Retail firms saw a better result in the last quarter of 2001, but still saw their revenues decline 28% for the year.

Investment banking revenues increased by 60% in the last quarter of 2001, but were unchanged for all of last year from 2000 year to year. A late year spurt in corporate equity and debt financings totaling more than $17 billion in the final quarter 2001 resulted in a nearly 90% increase in activity quarter to quarter. Mergers and acquisitions played little role in this robust activity and were largely unchanged at about $29 billion for the fourth quarter of 2001.

Fixed income revenue fell slightly in the fourth quarter, but climbed substantially for the year, increasing 58% to an all-time high in excess of $1 billion. Equity trading revenue bounced back in the fourth quarter, up 490% from the third quarter, but was down 66% year-to-year.

Ancillary activity income rose 7% to $1.3 billion in 2001, a significant part of this increase coming from fee-based income. Interest income declined modestly from year to year in 2001, but remained the second highest result on record at slightly over $1 billion.

Client margin debt dropped to under $8 billion in the fourth quarter, down 8% from three months earlier and sinking to the second lowest level since monthly data began to be published in 2000.

Commission revenues totalled just over $4 billion for the year, 29% below last year’s level, but still the third highest on record.

Retail brokerage firms ended the year with a $97 million profit, down 82% from $527 million in 2000.

Equity trading revenue in the fourth quarter saw the best result since the fourth quarter of 2000 at $183 million, and $384 million total revenue for 2001.

Discount brokerage firms’ operating profits dropped 55% year to year, reflecting a 20% decrease in revenues.

Industry operating expenses were trimmed slightly by 1% and employment fell by 6%, to just over 37,000 workers. This was the first reduction following nine straight years of growth.