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Bear market eats into stockbrokers’ profits

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Stockbrokers at Nairobi Securities Exchange. FILE PHOTO | NMG

Stockbrokers and investment banks’ half-year profits dipped by 36.6 per cent, saddled by increasing administrative costs and depressed activity at the Nairobi Securities Exchange (NSE), latest market data shows.

Key players such as Dyer & Blair Investment Bank, African Alliance, Faida Investment Bank, Kingdom Securities, Old Mutual Securities Limited, Apex Africa Capital, ABC Capital and NIC Capital all reported losses, signalling the tough times the sector has been undergoing since the year began.

Financial reports show that nine of the 21 market intermediaries that have published their results posted losses while two returned a fall in profits, pulling down the cumulative net profit by Sh37.14 million to Sh64.33 million.

Renaissance Capital’s net earnings dipped 54.8 per cent to Sh77 million as those of Standard Investment Bank fell 16.2 per cent to Sh5.1 million.

Capital Markets Authority (CMA) director of policy and strategy Luke Ombara told the Business Daily that the results reflected the heavy reliance by stockbrokers and investment banks on buying and selling shares at a commission, a position that exposes them to seesawing returns with the fortunes of the NSE.

"We are asking them to do more than just agency. Instead of relying on commissions they should explore other options that the scope of their licences provides," said Mr Ombara.

"The licences are sub-optimally used. If you look at the licensing regulations, they are doing like a fifth of the potential."

Market data shows that the stockbrokers’ performance was the victim of depressed activity at the Nairobi bourse, especially in the second quarter of the year.

CMA data shows that equity turnover, which determines how much the market intermediaries can earn from commissions, dropped by 22.91 per cent to Sh47.14 billion from Sh61.15 billion booked in the preceding quarter.

Market capitalisation also fell by 8.6 per cent to Sh2.57 trillion, an outcome that has partially been attributed to profit taking in well-performing blue-chip companies.

Despite a 21.5 per cent rise in total brokerage commissions to Sh1.35 billion from Sh1.11 billion in June last year, advisory fees dropped by 7.3 per cent to Sh98.3 million, lowering the total income.

Mr Ombara said stockbrokers are often vulnerable when the market is on the decline because of the narrow revenue stream.

The brokers performance was also adversely affected by a Sh96.5 million or 27.3 per cent rise in operational and administrative expenses to Sh450.17 million. Total expenses went up by 16 per cent to Sh1.64 billion.

Mr Ombara said such high costs and low returns make it hard for market intermediaries to bring in the best talent and become globally competitive.

Meanwhile, employee expenses were relatively flat at Sh617 million compared to the previous half year’s Sh615 million. Stockbrokers and investment bank licences allow them to sponsor collective investment schemes and to trade in derivatives.

Besides, all licensed intermediaries can lead corporate restructurings, including mergers and takeovers and Initial Public Offerings (IPOs). Mr Ombara, however, said that low returns of local market intermediaries have prevented them from attracting international experts to partner with in order to become internationally competitive.

"Nothing bars an investment bank from doing an IPO within the East African Community as a transaction advisor or placing broker in the case of a bond transaction. It is their capacity that is limiting," he said. The NSE has not seen any new listing since the 2014 IPO that led to demutualisation and self-listing of the Nairobi bourse.

The drought has meant that there are no listing fees from IPOs for investment banks.

The confidence in the bond market has also been on the decline following the placement of Imperial Bank and Chase Bank under receivership in 2016, which tied down bond holders’ money.

Such situations have led to reports that some intermediaries may opt out. "No broker or investment bank has expressed desire to exit. Those who are exiting are investment advisors but even so, new ones are coming in," said Mr Ombara.

More recently, the NSE has been sucked into the pressure of seesawing regulations such as the Robin Hood tax, failed repeal of interest rate cap and the doubling of excise duty on money transfers, further putting pressure on stockbrokers’ margins. "Banking stocks in particular, which had been bright eyed and bushy tailed ahead of the expected rate cap amendment led the downdraft," said Aly-Khan Satchu, an independent analyst.