Bear mar­ket eats into stock­bro­kers’ prof­its

Half year re­ports show that nearly half of the 21 mar­ket in­ter­me­di­aries have made losses

Business Daily (Kenya) - - FRONT PAGE - Pa­trick Alushula­tion­

Stock­bro­kers and in­vest­ment banks’ half-year pro ts dipped by 36.6 per cent, sad­dled by in­creas­ing ad­min­is­tra­tive costs and de­pressed ac­tiv­ity at the Nairobi Se­cu­ri­ties Ex­change (NSE), lat­est mar­ket data shows. Key play­ers such as Dyer & Blair In­vest­ment Bank, African Al­liance, Faida In­vest­ment Bank, King­dom Se­cu­ri­ties, Old Mu­tual Se­cu­ri­ties Limited, Apex Africa Cap­i­tal, ABC Cap­i­tal and NIC Cap­i­tal all re­ported losses, sig­nalling the tough times the sec­tor has been un­der­go­ing since the year be­gan. Fi­nan­cial re­ports show that nine of the 21 mar­ket in­ter­me­di­aries that have pub­lished their re­sults posted losses while two re­turned a fall in pro ts, pulling down the cu­mu­la­tive net profit by Sh37.14

mil­lion to Sh64.33 mil­lion. Re­nais­sance Cap­i­tal’s net earn­ings dipped 54.8 per cent to Sh77 mil­lion as those of Stan­dard In­vest­ment Bank fell 16.2 per cent to Sh5.1 mil­lion. Cap­i­tal Mar­kets Au­thor­ity (CMA) direc­tor of pol­icy and strat­egy Luke Om­bara told the Busi­ness Daily that the re­sults re­flected the heavy reliance by stock­bro­kers and in­vest­ment banks on buy­ing and sell­ing shares at a com­mis­sion, a po­si­tion that ex­poses them to see­saw­ing re­turns with the for­tunes of the NSE. "We are ask­ing them to do more than just agency. In­stead of re­ly­ing on com­mis­sions they should ex­plore other op­tions that the scope of their li­cences pro­vides," said Mr Om­bara. "The li­cences are sub-op­ti­mally used. If you look at the li­cens­ing reg­u­la­tions, they are do­ing like a fifth of the po­ten­tial." Mar­ket data shows that the stock­bro­kers’ per­for­mance was the vic­tim of de­pressed ac­tiv­ity at the Nairobi bourse, es­pe­cially in the se­cond quar­ter of the year. CMA data shows that eq­uity turnover, which de­ter­mines how much the mar­ket in­ter­me­di­aries can earn from com­mis­sions, dropped by 22.91 per cent to Sh47.14 bil­lion from Sh61.15 bil­lion booked in the pre­ced­ing quar­ter. Mar­ket cap­i­tal­i­sa­tion also fell by 8.6 per cent to Sh2.57 tril­lion, an out­come that has par­tially been at­trib­uted to profit tak­ing in well-per­form­ing blue-chip com­pa­nies. De­spite a 21.5 per cent rise in to­tal bro­ker­age com­mis­sions to Sh1.35 bil­lion from Sh1.11 bil­lion in June last year, ad­vi­sory fees dropped by 7.3 per cent to Sh98.3 mil­lion, low­er­ing the to­tal in­come. Mr Om­bara said stock­bro­kers are of­ten vul­ner­a­ble when the mar­ket is on the de­cline be­cause of the nar­row rev­enue stream. The bro­kers per­for­mance was also ad­versely af­fected by a Sh96.5 mil­lion or 27.3 per cent rise in op­er­a­tional and ad­min­is­tra­tive ex­penses to Sh450.17 mil­lion. To­tal ex­penses went up by 16 per cent to Sh1.64 bil­lion. Mr Om­bara said such high costs and low re­turns make it hard for mar­ket in­ter­me­di­aries to bring in the best ta­lent and be­come glob­ally com­pet­i­tive. Mean­while, em­ployee ex­penses were rel­a­tively flat at Sh617 mil­lion com­pared to the pre­vi­ous half year’s Sh615 mil­lion. Stock­bro­kers and in­vest­ment bank li­cences al­low them to spon­sor col­lec­tive in­vest­ment schemes and to trade in de­riv­a­tives. Be­sides, all li­censed in­ter­me­di­aries can lead cor­po­rate re­struc­tur­ings, in­clud­ing merg­ers and takeovers and Ini­tial Pub­lic Of­fer­ings (IPOS). Mr Om­bara, how­ever, said that low re­turns of lo­cal mar­ket in­ter­me­di­aries have pre­vented them from at­tract­ing in­ter­na­tional ex­perts to part­ner with in or­der to be­come in­ter­na­tion­ally com­pet­i­tive. "Noth­ing bars an in­vest­ment bank from do­ing an IPO within the East African Com­mu­nity as a trans­ac­tion ad­vi­sor or plac­ing bro­ker in the case of a bond trans­ac­tion. It is their ca­pac­ity that is lim­it­ing," he said. The NSE has not seen any new list­ing since the 2014 IPO that led to de­mu­tu­al­i­sa­tion and self-list­ing of the Nairobi bourse. The drought has meant that there are no list­ing fees from IPOS for in­vest­ment banks. The con­fi­dence in the bond mar­ket has also been on the de­cline fol­low­ing the place­ment of Im­pe­rial Bank and Chase Bank un­der re­ceiver­ship in 2016, which tied down bond hold­ers’ money. Such sit­u­a­tions have led to re­ports that some in­ter­me­di­aries may opt out. "No bro­ker or in­vest­ment bank has ex­pressed de­sire to exit. Those who are ex­it­ing are in­vest­ment ad­vi­sors but even so, new ones are com­ing in," said Mr Om­bara. More re­cently, the NSE has been sucked into the pres­sure of see­saw­ing reg­u­la­tions such as the Robin Hood tax, failed re­peal of in­ter­est rate cap and the dou­bling of ex­cise duty on money trans­fers, fur­ther putting pres­sure on stock­bro­kers’ mar­gins. "Bank­ing stocks in par­tic­u­lar, which had been bright eyed and bushy tailed ahead of the ex­pected rate cap amend­ment led the down­draft," said Aly-khan Satchu, an in­de­pen­dent an­a­lyst.


TRADE Stock­bro­kers on NSE trad­ing floor. -

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