Capital Markets

Bear market eats Kenya’s stockbrokers’ 2015 profits

brokers

Brokers on the trading floor of the Nairobi Securities Exchange. PHOTO | FILE

A tough operating environment saddled by high interest rates and a surge in inflation saw 16 out of Kenya’s 21 stockbrokers’ 2015 profits drop, according to financial reports published by close of last week.

The industry reported a cumulative net profit decline of 35 per cent to Sh823.5 million from Sh1.26 billion in 2014, as revenues shrank with a steady rise in expenses and the fall in brokerage commissions with reduced trading volumes.

Industry insiders mainly blamed the steep rise in interest rates from the drop in trading volumes and the subsequent withering of brokerage commissions.

“The cost of doing business continued to rise, including marketing, research, compliance as well as IT… overall we did not see any major changes in the market other than rising interest rates hurting trading volumes,” said Kestrel Capital chief executive officer Andre DeSimone.

Stellar performers in 2014 such as Dyer & Blair Investment Bank, Suntra Investment Bank, Apex Africa Capital and Old Mutual
Securities saw their net profits fall by between 92 and 151 per cent.

Former market leader Dyer & Blair fared badly after losing control of the bond market with the exit of its bond trading gurus Norris Kibe and Gibson Gichaga who moved to rival Faida Investment Bank.

Dyer & Blair reported a net profit of Sh1.8 million compared to Sh178 million in 2014 – a more than 95 per cent drop in earnings showing the extent of its battering in the marketplace.

READ: Jimnah Mbaru back at Dyer helm after CEO quits

Apex Africa’s net earnings fell from Sh166.1 million in 2014 to Sh11.7 million last year, Suntra’s reported Sh10.8 million from Sh122.9 million the previous year while Old Mutual Securities returned a net loss of Sh38 million last year from 2014’s Sh74.5 million.

The five largest stockbrokers, Kestrel Capital, SBG Securities, Equity Investment Bank (EIB), Renaissance Capital (Rencap) and African Alliance, however, leaned heavily on foreign trading desks to mitigate some of the difficulties on the local front.

Smaller brokers, who largely rely on local retail business bore the brunt of the market downturn, having lost more than half their impressive 2014 profit numbers as local investors kept off the cooling market.

Interest rates rose steeply, especially in the second half of 2015, while inflationary pressure kept up as food and transport costs rose during the El Nino rains that persisted into December.

Overall, brokerage commissions for the industry fell by 16 per cent to Sh3.1 billion in line with the fall in traded volumes on the back of the capital gains disruptions and falling market valuations.

In 2014, the commissions rose 23 per cent, setting up the stockbrokers for a bumper earnings year.

The NSE’s bond market turnover also fell last year to Sh305 billion compared to Sh506 billion 2014, eating further into the brokerage commissions that form the backbone of the brokers’ earnings.

READ: Stockbrokers rattled as banks take over bond market billions

The decline in commissions offset a gain in advisory fees that grew by a fifth to Sh609 million. Stockbrokers’ costs rose by six per cent last year to Sh4.2 billion, mainly because most had to upgrade their operating systems to handle the upcoming derivatives trading, and train staff on the same.

Besides, employee, administration and operation costs rose for the second straight year.

SBG Securities, Equity Investment Bank (EIB), Renaissance Capital (Rencap), African Alliance and Kestrel Capital took up the lion’s share of industry profits and outperformed the market on average growth.

This was no coincidence considering they accounted for 68 per cent of total trades in the equities market.

“Performance was satisfactory all things considered, with valuations coming down, the market contracting, and we managed to contain our costs near where they were in 2014,” said SBG Securities chief executive officer Nkoregamba Mwebesa.

SBG Securities was the most profitable stockbroker in 2015 having clocked net earnings of Sh216.6 million, which was however a drop of 8.9 per cent from 2014’s Sh237.8 million.

Rencap combined healthy brokerage commissions with aggressive cost cuts to grow its net earnings from Sh15.6 million to Sh187.6 million, while African Alliance was able to turn around 2014’s net loss of Sh8.8 million to a net profit of Sh104.9 million last year.

EIB rode on its partnership with UK based investment bank Exotix Partners to grow its net earnings six-fold from Sh14 million to Sh92.8 million, while CBA capital, also in its first full year of trading, grew its net earnings eight fold from Sh6.2 million to 51.3 million.

“The partnership with Exotix gave us foreign investors…without the foreign investor business you don’t have much of a share in the market,” EIB head of brokerage Muathi Kilonzo said in an earlier interview.

Kestrel’s net profit declined by 2.9 per cent to Sh80.1 million, with high costs of Sh508 million eating into the form’s total income of Sh631.7 million.