Capital Markets

NSE stockbrokers defy bear run to earn Sh2.6bn in six months

BROKERS

FROM LEFT: Nkoregamba Mwebesa, SBG Securities CEO; Andre Desimone, Kestrel Capital CEO; Jimnah Mbaru, Dyer & Blair CEO. PHOTOS | FILE

Stockbrokers and investment banks collectively earned Sh2.6 billion in income for the first six months of the year, even as many of their top clients shed billions in wealth due to a bearish market.

Investors at the Nairobi Securities Exchange (NSE) have not had as much to smile about, with share valuations dropping Sh294 billion to push their paper wealth (market capitalisation) down to Sh2 trillion since the beginning of the year.

The NSE 20-Share index is down 18 per cent this year to 4,176 points, with the NSE All Share index 12.3 per cent in the red at 142 points.

But the stockbrokers have seen their income rise by 15 per cent — or Sh338 million — to Sh2.58 billion, helping increase their net profits by 22 per cent to Sh563 million for the period.

Kestrel Capital recorded the highest income at Sh382.3 million, up 54 per cent from Sh247.5 million over the same period last year, followed by SBG Securities at Sh315 million. This, though was down 8.1 per cent on last year.

Kestrel enjoyed an extraordinary gain from the sale of its stake in the NSE, but management says other performance was also strong.

“Considering the confusion caused by the attempt to introduce CGT (capital gains tax), the market performed well,” said Kestrel Capital chief executive officer Andre DeSimone.

Equity Investment Bank (EIB) made the biggest gain in total income at the market, however, going from Sh36.3 million in June 2014 to Sh282.1 million this year, making them third in the earnings ranking behind Kestrel and SBG.

The subsidiary of Equity Holdings has attributed the jump to its tie-up with UK investment bank Exotix, which has allowed it to claim a larger slice of the profitable foreign investors’ trading pie.

EIB’s commissions rose eightfold to Sh160.5 million, hugely backed by the large deal the investment bank handled when UK private equity firm Helios sold a 4.21 per cent stake in Equity Bank to London-based Genesis Investment. Its net profit also rose significantly from Sh11 million to Sh108.6 million.

“The Exotix relationship has been great for EIB both in getting international clients and on the research side,” said EIB managing director Irungu Nyakera. “It has helped us build capacity and get more corporate clients.”

Genghis Capital also recorded a significant rise in income — by 82.3 per cent to Sh124.5 million — on the back of higher brokerage commissions and advisory fees.

READ: Stockbrokers rattled as banks take over bond market billions

For the industry as a whole though, brokerage commissions dropped from Sh1.8 billion to Sh1.7 billion half-year on half-year.

The market intermediaries were, however, able to bank on an increase in their take from advisory and consultancy fees, which rose 71 per cent to Sh250 million, and protect their profit margins.

Stockbrokers earn commissions of up to 1.78 per cent on equity trades, which are, however, negotiable downwards, and 0.03 per cent on bonds trades.

This means that stockbrokers’ income from commissions was relatively low compared to the Sh106.6 billion NSE equities turnover and Sh189.3 billion in bonds turnover recorded for the half-year period.

“The reason why we were able to come in just under last year is from the income line known as other revenues, which offset the decline in brokerage commissions,” said SBG Securities chief executive officer Nkoregamba Mwebesa during the announcement of the firm’s results.

In terms of profitability, Renaissance Capital (Rencap) led the market with a net profit of Sh145 million, followed by SBG at Sh132 million, EIB at Sh108 million and Kestrel at Sh74 million.

These stockbrokers have strong foreign trading desks, allowing them to take advantage of heightened foreign investor activity, which was one of the features of the market in the first half of the year.

This has seen stockbrokers who are predominantly dependent on local investor trading record lower business.

“Turnover has shifted to 70 per cent to 30 per cent in favour of foreign investors from a 50-50 split (with locals) at the beginning of the year. The current situation has tended to favour those with strong foreign desks,” said AIB Capital chief executive officer Paul Mwai.

The increase in earnings has also been accompanied by an equivalent rise in expenses, with stockbrokers spending more on employee pay and administrative expenses. In the six months to June, total expenses for the industry rose 16 per cent to Sh1.86 billion.

Mr DeSimone said the rise in costs had been seen on all fronts, including employee pay, marketing, compliance and IT. 

Competition for top talent has also been a factor in raising employee costs. Faida Investment Bank (FIB) recently poached bond traders from Dyer & Blair to boost its fixed income desk, mirroring a similar move last year by Kestrel Capital on African Alliance.

For the second half of the year, the stockbrokers have not sounded an optimistic note on the market’s prospects, although they would still stand to earn revenue in the event of selloffs during a bear run.

“The second half of 2015 is now clouded by rising interest rates and global financial instability. It will certainly be more challenging as these will hurt both equity and bond markets,” said Mr DeSimone.

For investors, however, there is no safety net given that they depend on either dividend earnings or capital gains to get a return on their investments.

Six listed companies have issued profit warnings this year, lowering prospects of higher dividend earnings and deepening the likelihood that their share prices will not recover sufficiently to give a capital gain.