In a special report on the U.S. brokerage industry, Standard & Poor’s observes that U.S. brokerage firms continued to experience weak revenues and earnings during fourth-quarter 2002, and there is little likelihood for improvement in the short term.

S&P notes that Goldman Sachs’ net revenue of US$2.9 billion marked the weakest quarter of the past three years. The same is true for Merrill Lynch, where net revenue in the quarter was 44% lower than the level of first-quarter 2000.

S&P notes that only through aggressive cost cutting have firms manged to post profits despite the declining revenues. The steepest cuts have been in compensation expense, it says.

S&P says the outlook for the industry remains cloudy, because the continuing downward trend in revenues presents a major challenge. “Further cost cuts may be difficult without compromising long-term competitiveness,” S&P says.

Heightened risk aversion is the key driver for revenues in this environment, says the rating agency. This translates into lower transaction volumes across all business lines. “For 2003, we expect a continuation of the downward trend in revenues for at least the first half, with a subsequent leveling off.”

S&P notes that litigation risk continues to haunt the brokerage industry. It says that numerous civil cases have been filed against the big firms, primarily relating to analyst independence and two class action lawsuits relating to Enron.

S&P says that it cannot reasonably estimate the costs of these various legal actions. “Such actions are just getting underway, and it may be years before any settlement or adjudication is determined. We do not foresee ratings actions based on this litigation at the current time, but will continue to monitor these developments.”