Capital Markets

Bear run hits NSE with Sh77m profit dip

nse

NSE chief executive Geoffrey Odundo. PHOTO | SALATON NJAU

Summary

  • NSE forecasts its earnings to fall by at least 25 per cent in the 2016 financial year compared to 2015, when it made a net profit of Sh305 million.
  • The exchange has been hit by lower equities trading turnover, hurting its trade commissions that contribute 53 per cent of revenue.

The self-listed Nairobi Securities Exchange Ltd (NSE) full-year profit for 2016 will drop by at least Sh76.3 million as it pays the price of a bear run at the market amid heavy capital outlay on platforms for futures trading.

The exchange issued a profit warning to its shareholders on Tuesday stating that it forecasts its earnings to fall by at least 25 per cent in the 2016 financial year compared to 2015, when it made a net profit of Sh305 million.

The trading commission-reliant exchange had already reported a 54 per cent drop in net profit to Sh81.9 million for the first half of the year, with the profit warning effectively indicating the performance in the second half has not improved sufficiently to significantly alter the trend.

NSE chief executive Geoffrey Odundo said the exchange has been hit by lower equities trading turnover, hurting its trade commissions that contribute 53 per cent of revenue.

“This year we had anticipated revenue growth, however, what happened earlier in the year with slowing commodities markets, the effects of Brexit and rate capping have impacted on trading volumes in terms of turnover, impacting on our income,” he said.

The stock exchange has been on a downward trend since March 2015, with the benchmark NSE 20 Share Index shedding 41 per cent of its value over the period.

Turnover has fallen due to lower share prices — only six out of the 61 actively  traded have increased their valuation in 2016 — in spite of the number of shares traded this year rising.

READ: NSE blames lower trading turnover for 5pc net profit

In the first 10 months of the year, the total traded equities turnover stood at Sh140 billion, compared to Sh181 billion at the same point in 2015.

Income from equity transactions levy declined by 31 per cent to Sh176.7 million in the first half of 2016 from Sh255.7 million in a similar period in 2015 owing to the reduced trading activity.

The NSE makes much less in commissions from bonds trading, meaning that the increase in bonds turnover to Sh376.2 billion in the first 10 months of this year, from Sh263.7 billion, is unlikely to counter the effect of the decline in equities commissions.

In the six months to June 2016, bond transactions levy income stood at Sh18.4 million, up from Sh13.2 million in half-one 2015.

The exchange had been banking on additional revenue streams this year from new products such as futures trading, but the launch of products such as exchange traded funds and index futures has been pushed to next year.

The NSE has had to invest heavily in upgrading its platform to enable the trading in these new products, which include the yet-to-be launched M-Akiba mobile-based bond.

“We have been putting together platforms that will deliver new products, and therefore have had to put in heavy capital and recurrent expenditure in our derivatives platform and human resource capacity including consultants. These investments are, however, a one off,” said Mr Odundo.

“The projections were that we would be able to bring online some of the products this year and we were fairly optimistic, but there were overruns as we sought to build capacity and public awareness.”