Investment Industry Profits Soar | Investment Director


According to the latest data from the Investment Industry Association of Canada (IIAC), client assets under management (AUM) have increased by 55% since the start of the pandemic in March 2020, reaching $3.8 trillion as of December 31, 2021. Financial fundamentals have also improved, with most revenue streams increasing and earnings increasing.

The pandemic has had a salutary effect on household savings. The latest data from Statistics Canada indicates that household net wealth hit record highs in 2021, ending the year at $15.9 trillion, up $3.6 trillion from the fourth quarter of 2019.

Much of this gain was due to the booming real estate market: real estate stocks accounted for more than half of that $3.6 trillion increase.

But real estate is not everything. The value of household financial assets (including stocks, life insurance and pension assets) has increased by more than $1.1 trillion from pre-pandemic levels, Statistics Canada reported. And household deposits are up more than $300 billion from pre-Covid totals.

The investment industry has benefited from these trends. Along with the 55% gain in client assets under management, investors’ cash positions surged, rising nearly 50% to $102.1 billion at the end of 2021 from $69.2 billion in February. 2020. Margin debt also increased to $39.3 billion from just under $26 billion. during the same period.

These trends have fueled strong results for companies in the sector. For example, industry royalty revenue has increased by more than 30% during the pandemic. In 2021, total annual fee revenue was $11.9 billion, up from $9.1 billion in 2019. As a result, the industry’s annual fee revenue exceeded spending for the first time. total operating. (See chart.)

Commission revenue grew even faster than fees. Annual fee income (excluding mutual fund fees) topped $4.4 billion in 2021, the IIAC reported, compared to just over $3 billion in 2019.

These robust increases were supported by soaring investment banking revenues, as equity underwriting and mergers and acquisitions activity intensified over the past year. The industry’s annual revenue from equity issuance jumped to nearly $2.4 billion in 2021, from just under $1.4 billion the previous year. Meanwhile, corporate advisory fee revenue (from M&A and other assignments) rose 65% to nearly $1.7 billion last year, from just over $1 billion in 2020.

There were weak spots, including industry net interest income, which fell alongside the central bank’s move to rock-bottom interest rates. In 2021, companies in the sector generated less than $1.5 billion in net interest income, compared to $2.4 billion in 2019.

Nonetheless, the industry’s total operating revenue still increased significantly over the past two years, from $23.6 billion in 2019 to $30.4 billion last year. more than $10.9 billion in 2021.

All major industry segments have seen gains over the past two years, but retail companies have made the biggest leaps. For them, operating profits have effectively doubled during the pandemic – rising to more than $1.2 billion at the end of last year, from $615 million in 2019. In 2021 alone, companies retail companies saw their annual operating profits increase by 30.8% while revenues increased by 26.5%, driven by strong increases in fee and commission income.

In the retail sector, large self-clearing companies led the industry’s gains in 2021, as they saw their revenues increase by 39.1% during the year. Profits increased by 31.9%.

In contrast, retail introducers saw their revenue increase by only 9.7% in 2021 compared to the previous year. However, profits still rose 28.1% year over year as companies cut operating expenses by 6.1%.

This reduction in operating costs goes against the general industry trend of ever-increasing expenses. In 2021, the industry’s total operating expenses nearly hit the $11 billion mark, up from $9.5 billion in 2019.

Still, if the pandemic years have been good for the investment industry, the future may be less rosy. The large pool of household savings can be called upon to cushion the effects of high inflation and rising debt servicing costs.

According to the Bank of Canada’s latest survey of consumer expectations, households expect to spend about one-third of their excess savings over the next two years.

In terms of household wealth, the resilience of stock market valuations and the strength of the real estate market pose additional risks. The prospect of corrections in high house and financial asset prices continues to loom.

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