The U.S. securities industry likely improved its profitability in 2003, thanks to continued expense control to offset sluggish revenues, the Securities Industry Association reports.

Pre-tax profits for New York Stock Exchange member-firms for 2003 are expected to be US$15 billion, a 116% increase over 2002’s US$6.9 billion.

Gross revenues for 2003 are estimated to be US$142 billion, 4.5% below 2002’s YS$148.7 billion and down for a third straight year. Net revenues (net of interest expense) meanwhile showed a 4.2% increase over 2002 levels.

“Some areas, such as fixed-income sales and issuance activity, along with trading gains, posted strong results early in the year, offsetting weakness in all but a handful of the industry’s product and service lines,” said SIA chief economist Frank Fernandez. “This, combined with the continuation of stringent cost controls at the firms, lower interest rates and strong productivity growth, resulted in increased profits in 2003.”

Fernandez cites the continuation of effective cost controls at the firms as the key factor in the increased profitability. Total expenses fell 10.4% from 2002 levels, largely due to lower interest expense as the Federal Reserve moved base interest rates to 45-year lows and held them there in the second half.

Compensation, the industry’s top expense, grew only 2.8% in 2003 after contracting in the two previous years. Employment stabilized in the second half of the year, and modest job growth is expected in 2004.

The U.S. securities industry raised US$2.89 trillion in 2003 through all forms of corporate underwriting activity, as issuance of all debt and equity offerings increased, with the exception of initial public offerings. This level of total underwriting represented a 12.1% increase over 2002 results and the third year in a row that capital raising has exceeded US$2 trillion.

Debt underwriting rose 12.6% to US$2.73 trillion, accounting for the lion’s share of the total, and was roughly equally divided between straight corporate debt issues and the placement of asset-backed securities. Most of the growth in debt underwriting occurred in the first six months, as the pace of offerings slowed in the second half of the year.

Equity issuance showed the opposite pattern, with the final quarter of 2003 nearly twice as strong as the year’s first quarter. For the year, the total value of equity underwriting rose 3.6% to US$159.5 billion, while “true” IPOs (excluding closed-end funds) reached only $17.5 billion, the lowest annual total in 12 years.

SIA reports that investors began putting their money back into the markets in the last half of the year. Equity mutual funds witnessed solid inflows throughout the period from April to October, in stark contrast to outflows during nine of the prior 10 months. Inflows into equity mutual funds in October (US$25.5 million) were the strongest all year, 47% above September’s US$17.2 million.

The return of investors has not yet been reflected in increased trading activity in the markets, which was down slightly from 2002 levels. Projected average daily volume of 1.41-billion shares on the NYSE would be down 2% from the record 1.44-billion share pace set in 2002. Nasdaq volume for full year 2003 is projected to be 1.7-billion shares, which would be a decrease of 3% from last year and nearly 11% below the record level of 1.9-billion shares set in 2001.

Stock prices climbed sharply after March 2003, ending a three-year slide. The Dow Jones industrial average, which started the year at 8,341, surpassed 10,000 for the first time in 18 months on December 11, and was at 10,324 on December 26 for an increase of 23.8%. The Nasdaq composite jumped from December 2002’s close of 1,335 to December 26’s 1,973.14, a 47.8% increase.

Industry employment nationwide had fallen 3.2% in 2001 and another 1.5% in 2002 to begin this year at 798,000. “The securities industry is just beginning to selectively hire, adding to its retail staff and certain other areas that have shown growth,” said Fernandez. Variable compensation, which includes bonuses, should be approximately 18% above 2002’s level.

The trends that emerged at year-end are expected to extend into the first half of the new year and set the stage for continued improvement in securities industry performance in 2004.

Total revenues, which fell an estimated 4.5% in 2003, appear poised to rise 7.4% next year. Areas that showed the greatest growth in revenues in 2003 — fixed-income underwriting and fixed-income trading — were already showing signs of slowing late this year and are expected to decelerate further in 2004. Revenue growth is expected to come from those areas that were the most depressed during the three-year long industry slump, namely equity issuance and mergers-and-acquisitions activity.