U.S. securities industry profits plunged in the second quarter, according to the latest data from the Securities Industry Association.

Profits for all National Association of Securities Delears and New York Stock Exchange-reporting firms were US$2.98 billion in the second quarter of 2004, 61.2% below second quarter 2003 (US$7.7 billion) and 60.7% below profits for the first quarter 2004 (US$7.6 billion).

Gross revenues were US$53.93 billion for the second quarter of 2004, down 5% from second quarter 2003 (US$44.8 billion) and down 8.1% from first quarter 2004 (US$58.7 billion), the SIA said.

SIA senior vice president and chief economist Frank Fernandez attributed much of the decline to “mean reversion,” with growth in revenue lines returning to more normal levels after a period of what in some areas was “extraordinary growth.” Trading gains, a major contributor to firms’ revenue increases in past quarters, for example, amounted to US$4.66 billion; this compares with an average quarterly total of US$7.38 billion from fourth quarter 2002 to first quarter 2004. Commission and fee income also lagged in the second quarter 2004, down 12.7% from first quarter 2004 to $11.48 billion as trading volume slowed in June. Mutual-fund sales were the bright spot in firms’ revenues, increasing over second-quarter 2003 pace by 15.7%.

The decline in profits was somewhat mitigated by firms’ control of expenses. Compensation remained level when seasonally adjusted for bonus payments and accruals, the SIA noted. Interest expenses also remained below the second-quarter 2003 level despite increases in the average cost of borrowing and in firms’ use of credit.

The SIA also reported that the amount of foreign net purchases of U.S. securities dropped from the first quarter’s US$268.4 billion to US$230 billion, (with the decline virtually all in U.S. bonds). At the same time, Americans continued to add a foreign flavor to their stock portfolios in the second quarter of 2004. The US$24.6 billion in acquisitions of foreign stocks, added to the first quarter’s $18.6 billion, put U.S. foreign equity holdings on track to surpass 2003’s total of US$71 billion.

SIA vice president David Strongin attributes the strong interest in foreign stocks primarily to a 32% gain in the Japanese stock market since the beginning of 2002.