Only Sri Lanka’s top five stockbrokers profitable

Out of the 29 stockbrokers operating at the Colombo Stock Exchange (CSE), only the top five are profitable, the next 10 may be breaking even while the rest are full of woes, market analyst say.

Some stockbrokers are closing their outstation branches in a move to cut costs and manage bottom-lines and some who boasted over 25 branches have cut this number by four fold to end up at just five, they say.

While the broking companies are faced with several serious issues with strapped cash flows, some firms are shedding staff. The Securities and Exchange Commission (SEC)’s new rules in capital adequacy which direct the implementation of a risk based Capital Adequacy Requirement (CAR) of 1.2 times the risk requirement of stock brokers subject to a minimum liquid capital requirement of Rs. 35 million is also curtailing their operation, they said.

Broking firms have cost cuts on many items since the crisis in the CSE nearly three years ago, but to no avail. It’s hard to rally in profits and some new firms are selling their licenses.

At least three firms are in the market for sale, according to analysts. Some others who are chugging along had hinted at reintroducing margin credit, but the SEC is firm on not doing so. Margin credit is to extend credit facilities to clients in broking firms through margin providers registered with the SEC.

“In the wrong hands margin credit will be disaster and it’ll be a repeat of the 2011-2013 era,” a SEC official said.

They said that some run their branches on CSE premises which are subsidised by the CSE. “Branches at Matara, Kandy, Kurunegala, Negombo and Jaffna are highly subsidised. They pay a minimal rent only and no utilities,” a CSE official said. But this isn’t enough, many in the industry say.

“There should be a stronger pull to attract retailers, otherwise many firms in the trade will sink,” a CEO at a broking firm added.

The CSE insists that the market continues to trade at a discount compared to regional peers and offers further opportunities for investors - with a market price to earnings (P/E) recorded at 10.99 as of the end of October. “The market has also continued to attract foreign investment throughout 2017 with Rs. 98 billion in foreign buying contributing to a net foreign inflow of Rs. 19.6 billion year-to-date, a figure that is substantial compared to foreign activity in 2015/ 16. 2017 also recorded an all-time high for foreign investor buying recorded in the first half of a calendar year," the CSE said in a statement earlier this month.

While acknowledging all this, brokers reiterate their issue lies with the retailers. To be fair by them, the CSE tries hard.

"The CSE through its market development activities has embarked on an awareness drive in 2017, reaching out to multiple investor segments around the country and in international markets. Such efforts have seen the CSE work with the SEC on ‘Invest Sri Lanka’ investor forums in the US, Australia and New Zealand in 2017 and an island- wide local retail investor focused Investor Forum campaign to create awareness on stock market investment. The CSE branch network has also conducted over 500 educational programmes so far in 2017. In addition, CSE and the Colombo Stock Brokers Association is also presently conducting a series of events presenting investment research on companies featured on the S& P SL 20 Index, to an exclusive audience of Local Institutional Investors," the CSE statement said.

It added that the Benchmark All Share Price Index ( ASPI) has made a 2.78 per cent gain in October alone and a 6.31 per cent gain year-to-date, while the S&P SL 20 index, which features the CSE’s 20 largest and most liquid stocks has also improved consistently, making a 5.74 per cent gain in October and a 11.50 per cent gain since the start of 2017. "The positive growth of the indices mark a reversal of the declining trend recorded in 2015 and 2016, during which the ASPI recorded a decline of 5.54 per cent and 9.66 per cent, respectively. The performance of the market has also resulted in an improved involvement among investors, where the Daily Average Turnover is recorded at Rs. 943 million year-to-date, which is a 28 per cent increase from Rs. 737 million in 2016."

In the wrong hands margin credit will be disaster and it’ll be a repeat of the 2011-2013 era