Capital Markets

Brokers’ foreign trading desks beat stock market barons

brokers

Relative newcomers continued to dominate trade at the Nairobi Securities Exchange in 2014, leaving erstwhile barons of the stock market with shrinking market shares. BD GRAPHIC |

Kestrel Capital retained the top position as the stockbroker with the highest trade volumes at the Nairobi Securities Exchange (NSE) in 2014, in a year when relative newcomers to the bourse continued to dominate erstwhile barons of the stock market such as Jimnah Mbaru’s Dyer and Blair.

Kestrel, headed by its shrewd chief executive Andre DeSimone, has in recent years capitalised on rising international interest in Kenya’s stock market to build a formidable foreign trading desk that has kept it ahead of old top dogs of the bourse whose mainstay was trade orders by wealthy Kenyan businessmen and local institutional investors.

The stockbroker transacted shares worth Sh76.8 billion last year, accounting for 17.8 per cent of volumes traded at the NSE, as per market share data figures seen by the Business Daily.

In yet another signal of its determination to remain ahead of the park, Kestrel announced just last week that it had poached back its former executive, Ewart Salins, who had left the brokerage for a stint at rival African Alliance Investment Bank.   

“We continued to add clients and we have greatly increased our staff strengths by hiring the equities and bonds sales and trading teams. We have also hired several new research staff,” said Mr DeSimone in an interview.

Mr Salins, who had taken the position of CEO at African Alliance, rejoined Kestrel as an executive director.

Just like in 2013, the top five stockbrokers accounted for 65 per cent of the turnover at the bourse in 2014.

READ: Kestrel raids rivals in fresh round of talent war among investment firms

Renaissance Capital (Rencap), which joined the NSE in 2007, took the second position with a 13.8 per cent market share (Sh59.5 billion), while SBG Securities, which took over CfC Financial services’ business and rebranded only about three years ago, came in third with a 13.2 per cent (Sh57.1 billion) share.

Kestrel’s traded turnover improved by 23 per cent from 2013’s Sh62.4 billion, which had accounted for 20 per cent of the market’s total. Rencap and SBG saw their traded volumes rise by 50 per cent each compared to the previous year.

SBG, headed by former NSE chief executive Nkoregamba Mwebesa, has made a remarkable rebound, having been on a decline only a few years ago. 

Market turnover stood at Sh215.72 billion for the year as reported by the NSE, which factors in one side of the corresponding buy-sale trades, to reflect the real money changing hands.

Stockbrokers earn commissions for both sales and purchases, meaning they booked an actual turnover of Sh431.45 billion.

Foreign investor trades constituted 51 per cent of the total market turnover last year.

With the top three unchanged, the biggest jump at the top came from Standard Investment Bank (SIB), which was fourth in volumes in 2014 at Sh53.7 billion (12.4 per cent of the market), up from sixth in 2013 when it had 9.8 per cent market share at Sh30.7 billion in trades.

Dyer & Blair, whose chairman and main shareholder is Mr Mbaru, a former NSE chairman, dropped to sixth with Sh27.8 billion in trades, representing a 6.5 per cent share of the market.

Dyer was fourth in 2013, having moved trades worth Sh31.7 billion (10.2 per cent of the market).

African Alliance remained fifth, holding a 10.5 per cent share of the market last year.

Dyer & Blair, however, led the market in bonds trading, with a 27.1 per cent share (Sh274 billion) of the total traded volumes which stood at Sh1.01 trillion.

Kestrel accounted for 20.2 per cent of bonds trade volumes (Sh204 billion) while SIB accounted for 9.7 per cent (Sh98.5 billion).

Equity Investment Bank (EIB), which received its trading licence in August 2013, saw its share of the total equity trade volumes rise to 4.5 per cent from 0.15 per cent in 2013.

The improved turnover now sets the stage for an intriguing contest to see who best converted their big traded volumes to high income and profits.

Profits will largely depend on which firm manages to keep a check on expenses, which have in the past eaten away at the brokerage commissions.

Income will also be determined by the earnings from advisory work in a year which saw an increase in the number of corporate deals and new issues in the market.

“Expenses cannot be generalised for this industry, given that each firm spends differently on factors such as employee costs, marketing and capital expenditure. However, just like in other industries, the prospect of higher revenue drives up costs as companies would then be more willing to risk more resources,” said SIB director Job Kihumba.

SBG Securities was topped earnings charts for the half year to June 2014 at a net profit of Sh138.66 million, and Sh342.7 million in total income.

RenCap followed with a net profit of Sh67.4 million, while Kestrel clocked Sh38.8 million. The brokers’ full-year earnings results are due to be released from next month.

In 2011, stockbrokers had gone on a cost-cutting drive —mainly on employee expenses — amid a tough business environment, but as their fortunes improved from 2012 the expenses started rising again as they hired more staff to handle increased business.

“Cost of operations and compliance continues to grow putting more pressure to increase trading volumes and public listings,” said Mr DeSimone.
In addition to trading turnover, 2014 also saw an increase in the number of corporate deals in the market, which gave stockbrokers additional income from advisory and arrangement fees.

There were four new listings in the NSE, while several banks and insurance companies issued corporate bonds.

Analysts expect the market to continue on the growth path it has enjoyed over the past three years.

The market has been largely boosted by foreign inflows in the period which has seen foreigners accounting for more than half of the equity turnover.

“I expect frontier equity to continue to suck in cash and this will spill over into Kenya, maintaining the elevated foreign investor tempo. This is more of a trading market now than it was in 2012, 2013 and 2014,” said Aly-Khan Satchu, the managing director of investment advisory and data vending firm Rich Management.

Concerns, however, remain over the capital gains tax on tradable securities and equities, with both Mr DeSimone and Mr Kihumba citing the confusion that has accompanied its implementation as a threat to trading activity, at least in the short term.

Mr DeSimone says the NSE, the Central Depository and Settlement Corporation (CDSC) and stockbrokers do not have the data, systems and software to determine and collect capital gains tax for each and every trade, making it a near-impossible administrative task.

The Kenya Revenue Authority has, however, maintained that the tax must be implemented, creating a standoff with the market intermediaries.