"The continued downturn in the market, a sluggish economy, and the weak equity-underwriting pace reduced securities firms' domestic revenues through most of the year," said Frank Fernandez, a Securities Industry Association senior vice president, chief economist and director, research. "There was no opportunity to offset the U.S. declines with growth in foreign markets because these markets, too, performed poorly. But by using cost controls aggressively, firms remained profitable. While certain sectors, especially discounters and equity underwriters, felt the impact more than the others did, no segment of the industry has been left untouched by the bear market."
If SIA's projections are on target, U.S. broker-dealers' domestic pre-tax profits will be down 24.6 percent from 2001's $10.41 billion and 62.6 percent below 2000's record $20.98 billion. Gross domestic revenues are estimated to be $151.2 billion for 2002, down 22.4 percent from 2001's $194.8 billion and down 38.3 percent from the record $245.2 billion in 2000. Expenses are projected at $143.3 billion, down 22.3 percent from $184.4 billion in 2001 and down 36.1 percent from the record $224.2 billion in 2000.
For 2002, SIA estimates worldwide holding company pre-tax profits of U.S. securities firms will fall to $20.7 billion, down 26.6 percent from last year's result of $28.2 billion and down 64.3 percent from the 2000 record of $58.0 billion. Revenues this year are expected to slide to $284.4 billion, down 25.7 percent from 2001 ($382.7 billion), and 43.0 percent below the record revenues ($499.3 billion) earned in 2000.
"Profits earned by U.S.-based firms abroad have been equally hurt by the worldwide slowdown in business cycles and the slump in securities markets in all major countries, which were in synchrony with the United States," said Fernandez.
SIA projections for domestic full-year 2002 are based on results from NYSE member-firms and other sources; global figures are projections based on a number of sources.
Fourth-Quarter Results Suggest Revenue Slide Is Ending
Fourth-quarter industry gross revenues from domestic operations will increase to about $38 billion or 6.7 percent when compared to third-quarter 2002 results of $35.5 billion. While this level is still 10 percent below fourth-quarter 2001 results ($42.3 billion) and revenues will be down for the year as a whole ($151.2 billion), falling $43.5 billion or 22 percent from 2001 levels, the expected reversal in the fourth quarter "raises hopes that the long slide in industry revenue may be over," Fernandez said. However, Fernandez cautioned that the growth would likely be "narrow and gradual, impacting only a few of the various revenue lines."
In just 30 months -- from the record levels set in first quarter 2000 to what appears to be the trough in third quarter 2002 -- quarterly gross domestic revenues fell 44.4 percent to a five-year low of $35.62 billion.
Total underwriting revenue is expected to fall 13.3 percent to $13.5 billion in 2002, as higher revenues generated by the record level of bond underwriting of $2.42 trillion is more than offset by weakness in equity underwriting deals (All underwriting estimates are based on annualizing 11 months of data.) The value of all equity underwriting deals in 2002 is expected to reach $158.9 billion, 6.4 percent below last year's total and 22.3 percent below 2000's record of $204.5 billion. True initial public offerings, which account for a disproportionate share of total underwriting revenues and profits, were off more than 25 percent from last year, raising only $26.7 billion. This was almost two-thirds below the record activity set in 2000 of $75.8 billion.
Corporate debt underwriting reached $2.42 trillion, 2.3 percent above the annual record set last year. The total value of all corporate underwritings (debt and equity) this year is projected to be $2.58 trillion, 1.7 percent above last year's result, which would set a new record.
Commission Revenue Remains Weak
Commission revenue, another major contributor to firms' income, is projected to be $27.8 billion in 2002, up $1.0 billion or 3.7 percent from last year. This is down $15.9 billion, or 17.5 percent, from 2000's record $33.1 billion. This year's gain is largely the result of record trading volume in U.S. equity markets. Annual share volume climbed 8.6 percent to 910.2 billion shares (annualized based on 11 months of aggregate total shares traded on the NYSE, NASDAQ, AMEX and regional exchanges).
Another bright spot was that the decades long slide in the average commission revenue on each "ticket" appears to have come to an end as the industry absorbed the impact of decimalization and a shift in pricing that this change entailed for NASDAQ market-makers. While the increase estimated in the average commission earned per trade in 4Q 2002 is small, the change in direction is one indicator that the two-and-a-half year slide in industry earnings may have bottomed during third quarter 2002.
Expenses Staunched As Compensation Cuts Continue
Firms continued their aggressive expense-slashing efforts to remain profitable. Compensation remains the largest expense for firms, despite falling from last year's levels. Total compensation is expected to be $54.8 billion, 9.5 percent lower than 2001, and 20.5 percent below 2000 levels. These savings come from both reduced bonus payments (down an estimated 35 percent this year after a 12-percent decline in 2001) and other forms of variable compensation, as well as reductions in headcount.
Total U.S. securities industry employment, as compiled by the Bureau of Labor Statistics, has already declined 3.4 percent -- from 733,100 at the year's beginning to 708,300 based on preliminary figures for November -- and is off 9.9 percent from peak employment levels reached in April 2001. "Firms that had managed headcount through attrition finally had to lay off employees in areas that were hard hit by the business downturn," said Fernandez. "And, in some cases, firms had to have subsequent rounds of layoffs when the first proved insufficient to control costs."
Drop In Interest Rates Shaves Expenses
At its early November meeting, the Federal Open Market Committee cut benchmark interest rates 50 basis points or 1/2 of one percentage point. Although this was the FOMC's first action since December 2001, it was the twelfth consecutive rate reduction since May 2000, totaling 525 basis points. These reduced rates, the lowest in 40 years, were the principal factor in reducing another major expense for firms - servicing their debt. Interest expense had been the single largest expense item in the years immediately prior to 2002, accounting for as much as 51.5 percent of total expenses as recently as 1998. Total interest expenses declined to an estimated $49.8 billion in 2002, accounting for 34.7 percent of total expenses. This compares with total interest expense of $81.6 billion in 2001 (44.3 percent of total expenses) and $110.5 billion in 2000 (49.2 percent of the total).
Total Capital Raised At Near-Record Level
The U.S. securities industry is projected to raise $3.1 trillion, just down from 2001's record $3.4 trillion; this is the second straight year this has surpassed the $3 trillion mark. This number represents the total amount raised for American businesses through the sale of newly issued stock and bonds through underwritings, private placements, and medium-term notes.
Foreign Acquisitions Of U.S. Securities At Near-Record Levels
Based on nine-month figures, foreign investors are projected to have purchased $477 billion in U.S. securities in 2002, just below 2001's record $521.9 billion. While foreign acquisitions of U.S. stocks are down ($36.9 billion in the first nine months of 2002, as compared with $84.3 billion during the same period in 2001), foreign investors' purchases of U.S. corporate, government bonds, and agencies exceed last year's pace ($315.7 billion in the first nine months of 2002, as compared with $271.8 billion in the first nine months of 2001).
