Stockbrokers cut jobs to survive bear run at the NSE

Stockbrokers are cutting jobs and putting a freeze on employment to cut cost as trading income show few signs of recovering from the bearish run at the Nairobi Securities Exchange (NSE).

Kestrel capital, the largest brokerage by market share, has fired four employees joining firms such as Francis Drummond, Equatorial Investment Bank and Dyer and Blair Investment bank in reducing their work forces.

Others such as Sterling Investment Bank, Suntra Investment Bank and ABC Capital have put a freeze on hiring plans as some of these market intermediaries reduce their office space to preserve cash.

The cost cutting drives are linked to the reduced activity at the Nairobi bourse that has seen the monthly equities turnover in the second half of this year fall by more than half compared to last year—which has cut the brokers’ commissions by the same margin.

“We have reduced staff across the board because trading volumes are low,” said Andre DeSimone, chief executive officer, Kestrel Capital.

“A lot of brokers are struggling. We will not make money in the fourth quarter of this year and at best we will break even.”

Kestrel reported one of the largest increases in employee costs in the six months to June 2011.

The stockbroker saw its wage bill increase by 48 per cent to Sh24.4 million in the period on increased salaries and new hiring.

Kestrel has built its dominance in the local market by having a lean operating model, with a larger research team and a focus on bringing in business from foreign investors who buy in large volumes and trade in good and bad times.

It has the lowest ratio of employee cost to income. For every Sh100 earned in the six months to June 2011, it spent Sh12 on employee costs, which is lower than the industry average of about Sh30.

But Kestrel says its high-net worth clients are now staying out of the market and the decision to trim its payroll is a signal that the firm is forecasting a delayed recovery at the Nairobi bourse.

“I am not bullish about next year. Our clients are looking at the effects of the prevailing high interest rates on company earnings,” said Mr Desimone.

Reduced interest from foreign investors, high inflation and the currency woes has reduced investor participation at the NSE and analysts reckon it is unlikely to return to its peak next year.

"The depression in the market is likely to persist into next year. While inflation may ease and the shilling strengthen, the general election will have a negative impact on the market", said an analyst at African Alliance.

Share price erosion at NSE has seen investors lose Sh316.2 billion since the beginning of the year and the market index shed 30.6 per cent of its value to stand at 3,115.64 points in the period.

Equities turnover, the bread and butter for the stockbrokerage firms, in the month of October and November stood Sh4.2 billion and about Sh3.3 billion respectively. Last year the respective figures were Sh10.2 billion in October and Sh5.8 billion in November 2010.

Dyer & Blair Investment Bank, Kenya’s largest broker by capitalisation, retrenched five employees in in October this year while Francis Drummond has let go five employees and is cutting its office space by half.

Equatorial Bank has also wound up its investment banking on reduced business that has kept it in losses.

Now, brokers are turning to the fixed income market, especially sell-buy back transactions.

In this transaction, bond- holders sell their securities with an agreement of buying back them later at a higher price, and the intention of the seller is to avoid taking a loss from selling the bond at market rates.

The original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest and brokers earn commissions from such transactions.

“Sell-buy backs are a function of the stock exchange.

When the interest rates keep changing it allows the institution to reclassify their books. This is not unethical,” says Paul Orem, the CEO of Dyer and Blair.