The securities industry continued to cope with a difficult operating environment in the first quarter this year, according to a report by the Investment Dealers Association of Canada released Wednesday.

In its quarterly publication Securities Industry Performance, the IDA notes the industry posted improved results in early 2002, although this reflected cost-cutting efforts as firms struggled with declining revenues. Overall operating profits in the first quarter rose 2% from a year earlier to $681 million. While modest, the gain was notable following the 22% plunge in profits in all of 2001. Fully integrated firms, with their broad business base, posted comparatively strong results in the first quarter that more than offset weakness in other sectors of the industry.

Operating revenues fell last year and the downturn has extended into the first quarter this year with a further 7% setback. Commission revenues, the mainstay of the industry, were notably lower in the first quarter, as many investors remained wary of taking new positions in the equity markets. Uncertain prospects for corporate profits coupled with a loss of confidence in the market adversely affected the performance of the stock markets.

Fixed-income trading revenues were substantially lower this year. This came in the wake of quarterly trading in fixed-income securities in the first quarter falling for the first time in over a year.

Interest income also fell, partly reflecting low short-term interest rates and a decline in client margin debt.

Revenues generated from equity trading bucked the general trend of declines, jumping markedly in the first quarter. Preliminary indications that the equity markets were headed up early in the year provided opportunities for traders to adjust positions with favourable outcomes.

New trust units provided important support for investment banking revenues, as equity and debt financings were lower year to year and mergers and acquisitions decreased substantially. Investment banking revenues in the three months to March managed to match the year-earlier total despite lower activity in some key business lines.

With revenues declining, firms looked to cutting costs to bolster bottom lines. Industry operating expenses were reduced 5% year to year, led by marked reductions by institutional firms and by discount firms that suffered from weak retail activity. However, while firms in these two segments of the industry reduced staff significantly, overall employment was a modest 1% lower in the first quarter from a year earlier.