Bear market pushes NSE brokers into Sh378m loss

Sinking stock prices at the Nairobi Securities Exchange (NSE) #ticker:NSE and rising operating expenses eroded stockbrokers’ profits in 2018, pushing the industry into an overall loss position.

Half of the 23 stockbrokers and investment banks posted a combined loss of Sh378.4 million, mainly on the effects of unrealised losses on investment — taking after a bear run on the bourse that wiped out Sh419 billion in the year to December.

An unrealised loss occurs when a stock decreases after an investor buys it, but he or she has yet to sell it.

If a large loss remains unrealised, the investor is probably hoping the stock's fortunes will turn around and its worth will increase past the price at which it was purchased.

Financial reports for the year ended December 2018 show that 12 of the market intermediaries closed the year in losses while another three posted weakened profits. Many of them carried the loss position from half-year.

Although advisory and consultancy fees grew by 22.3 percent to Sh378 million from the previous year’s Sh309 million, these were not enough to save most of the intermediaries from losses.

In the red

Top players such as Dyer & Blair Investment Bank, African Alliance, Faida Investment Bank, Genghis Capital, NIC Capital, Kingdom Securities and Old Mutual Securities all closed the year in the red.

Others in loss position were NIC Capital, Apex Africa Capital, Suntra Investment Bank, ABC Capital, Equity Investment, EFG Hermes and new entrant EGM Securities.

Luke Ombara, director for policy and strategy at the Capital Markets Authority (CMA), said most of the stockbrokers and investment banks were sub-optimally using their licences.

“Instead of relying on commissions, they should explore other options that the scope of their licences provides. If you look at the licensing regulations, they are doing like a fifth of the potential," he said.

Most stockbrokers heavily rely on advisory fees and commissions from share transactions, a position that exposes them to fluctuating returns due to share swings on the NSE.

CMA statistics show that the NSE had a 2.36 percent increase in equity market turnover in 2018 with Sh175.66 billion worth of equity being traded, compared to Sh171.61 billion in the corresponding period in 2017.

However, there was a 10.33 percent decline in share volume with 6.34 billion shares traded last year compared to 7.1 billion in 2017.

While commissions for firms such as Kestrel, African Alliance, SBG Securities, Standard Investment Bank (SIB), Old Mutual and KCB grew, the general decline in share prices -measured by market capitalisation - ruined the performance.

“The market was down and we had many offshore investors selling. As brokers, we still made commissions from this activity. But overall, volumes remained flat and therefore limited our fees,” said SBG executive director Bethuel Karanja.

There was a 16.65 percent drop in market capitalisation, with Sh2.1 trillion recorded in 2018 compared to Sh2.52 trillion the previous year. This translated to unrealised loss of Sh419.75 billion to all investors who held onto their stocks for 12 months to end of last year.

Genghis Capital suffered a Sh110 million loss, the largest in the sector while its brokerage commission dropped by 18 percent to Sh123 million pulling down total income despite advisory fees tripling to Sh48.5 million.

Africa Alliance saw its loss quadruple to Sh64.7 million despite brokerage commissions growing by 23.4 percent to Sh126.9 million while advisory fees tumbled 82 percent.

Loss positions

Others in loss positions were Faida (Sh49.69 million), ABC and EFG with Sh37.6 million and Sh32.2 million respectively.

Directors’ emoluments for 19 out of 23 stockbroking firms rose by 4.65 percent to Sh145.2 million while operational and administrative expenses also rose, piling pressure on the brokers’ bottom-lines.

Despite the general poor run, three market intermediaries were able to move from loss positions to profits.

Sterling Capital posted Sh33.9 million profit from Sh1.9 million loss while Francis Drummond & Co and Barclays Financial Services moved from losses to Sh1.6 million and Sh0.97 million profit respectively.

During the year, Kestrel Capital, SBG Securities, Standard Investment Bank and NIC Securities also managed to strengthen their profit positions.

SBG posted a 139 percent growth in profit to Sh77 million as brokerage commissions grew by three percent while advisory fees more than tripped to Sh32.5 million.

“Trading activities remained fairly stable, but we had a good growth in total income mainly driven by advisory fees and efficient investment of the excess cash that we had in our books,” said Mr Karanja.