Profits in the Canadian securities industry plummeted 50% year-over-year in the fourth quarter of 2008, the Investment Industry Association of Canada reported on Monday.

In the association’s Securities Industry Performance publication for the fourth quarter, it reveals that fourth quarter net profit was $281 million, down 50% from $564 million in the fourth quarter of 2007 and down 51.6% from $580 million in the third quarter of 2008.

The industry’s operating revenues for the quarter were $3.3 billion, down 22.5% from last year and down 7% from the third quarter.

For the year, net profit was $1.9 billion, down 32.3% from 2007. Operating revenues totaled $14.6 billion, down 14.8% from the previous year.

The hefty drop in profits and earnings came as the S&P/TSX composite index fell 24% during the fourth quarter and deteriorating economic conditions drove down investor confidence, IIAC noted.

“The industry downturn comes as little surprise given the sharp collapse in global equity markets, vulnerabilities in the global financial system and a weakened economic and financial outlook,” said Jack Rando, director of capital markets at IIAC. “Industry performance will strengthen as market and economic conditions recover and confidence in the global financial system is restored.”

The decline was broad-based with most major business lines suffering lower earnings than 2007, IIAC said.

Investment banking revenues increased 28% in Q4 as a result of large-scale equity offerings from several financial institutions. The fourth quarter involved the largest quarterly equity issuance for the year, with $12.7 billion in equity capital raised.

But for the year, investment banking revenues were one-third below 2007 levels, and the lowest since 2003, as debt and equity underwriting declined.

The principal trading business saw mixed results, with high revenues among fixed-income desks and record lows for their equity counterparts. Equity trading suffered trading losses of $11 million on the year, their worst performance since 1990.

High volumes of mutual fund redemptions drove down mutual fund revenues to $369 million in the fourth quarter, down 21% from the third quarter.

Industry commission revenues were down 3% in the fourth quarter and 11% for the year as market uncertainty drove investors to the sidelines

Margin borrowing hit a five-year low as client debt margin outstanding fell to $8.8 billion at the end of 2008, a 37% drop from the previous year. Meanwhile, client cash holdings in the securities industry hit a new record high of $33.7 billion, up 18.2% from 2007.

The IIAC noted that the wealth management business was somewhat insulated from the market cyclicality in 2008 thanks to the gradual transition to fee-based compensation. The report finds that industry fee-based revenues grew 8% in the fourth quarter and totalled $2.6 billion for the year, at par with 2007’s level. Fee-based revenue accounted for 18% of the industry’s total revenue for 2008, up from 11% five years ago.

Institutional firms experienced the biggest hit in operating revenues in 2008, with a 24% drop. Retail firms saw revenue fall 15.3% and integrated firms experienced a 12% drop.

In terms of profits, the retail sector was hit the hardest, incurring a loss of $8 million, down from profits of $104 million the previous year. Institutional firms’ net earnings fell 42.1% to $382 million and integrated firms’ profits fell 25.1% to $1.5 billion.

The industry’s performance was “respectable in relative terms,” the IIAC said, since 2008 results were buoyed by good first-half finances. If conditions that prevailed in the fourth quarter persist through this year, the association expects profit to be half the 2008 level and total revenue to fall 20% year-over-year.

IE