Market conditions eroded Canadian investment dealers’ revenue in the third quarter of 2008, pulling operating profits down to a three-year low at 18% less than the same period last year, the Investment Industry Association of Canada reported Monday.

Industry operating revenues fell to $3.57 billion in the third quarter, down 6.4% from $3.81 billion in the second quarter of 2008 and down 7.4% from $3.85 billion in the third quarter of 2007.

Operating profits fell to $1 billion, down 11% from the second quarter and 18% from $1.22 billion in the same period last year. Net profit was $580 million, up 23% from $471 in the third quarter of 2007, due to lower income tax provisions in the quarter.

For the first three quarters of 2008, industry operating profits are $1.5 billion lower than last year, down by a third.

On the retail side, reduced investor participation in equity markets also resulted in a 9.2% annual drop in industry commission revenues, which came in at $1.34 billion.

Mutual fund sales were also hard hit with mutual fund net redemptions of $4.5 billion in September, which pulled mutual fund revenues down 13.4% to $466 million year-over-year. It was the first time in two years that revenues fell below $500 million.

Fee-based revenues, derived primarily from account management fees fell to $614 million in the quarter, a 2.1% decline from last year, due to lower portfolio market values off which these fees are based.

During the quarter, in which the S&P/TSX composite index shed 2,700 points, or 19%, equity issuance in Canada fell to $6.5 billion, its lowest level in more than six years.

The slow down in issuance activity resulted in equity underwriting revenues plummeting 48% from the previous quarter and 42% on the year.

“Though most of the industry’s business lines are suffering at the hands of current market and economic conditions, underwriting is the hardest hit as a result of the slow down in financing activity,” commented Jack Rando, director of capital markets at IIAC.

“We are, however, encouraged by the recent completion of several large-scale offerings which will instill some confidence in the marketplace.”

A bright spot in the quarter was corporate advisory fees, which saw a 25% boost to $285 million from $228 million in Q2, thanks to greater M&A activity. However, the revenue was still 27.8% lower than last year.

Investment banking revenues came in at $626 million during the quarter — the lowest in more than five years — down 30.4% from the previous quarter, and 35.1% year-over-year.

A total of 510 jobs were eliminated from the industry during the third quarter, representing 1% of industry employment. If market turmoil continues, this number will likely grow, according to the IIAC.

IE