Wednesday, August 26, 2009

Brokerages focus on core business

Equity brokerage volume jumps 66% in April-June while non-broking income dips.
Broking firms have renewed their focus on the core business as non-broking income has shrunk and equity brokerage volume has moved closer to peak levels.
Aided by increasing stock prices and easing global concerns, domestic equity brokerage volume has grown 66 per cent in the first quarter of 2009-10 on a sequential quarter-on-quarter basis, second only to the highest-ever volume recorded in the third quarter of 2007-08, according to a recent report by ICRA. The turnover in the first quarter of 2009-10 alone equated to 36 per cent of the total turnover in 2008-09.
The growth was driven by the cash segment, which accounted for 27 per cent of the total turnover, which was same as that in the third quarter of 2007-08. In the fourth quarter of 2008-09, the cash segment had accounted for only 23 per cent of the total turnover, the report said.
On the other hand, non-broking continued to be under pressure as revenues from this business had been hit more than that from the broking business.
While merchant banking revenues declined with delay in the final closure of deals, the income from distribution income decreased with lesser number of mutual funds on offer and decrease in life insurance premium, the report noted.
In addition, recent regulations such as removal of entry load on mutual fund schemes and changes in the fee structure of unit-linked products in the insurance sector are likely to affect the non-broking business of broking houses.
In recent years, broking firms have been leveraging retail network beyond equity broking to distribution of third party products, IPOs, margin funding and merchant banking.
The distribution business generally accounts for 15-20 per cent of the total income of prominent broking firms.
“The new regulations will severely affect the distribution income and, hence, we have to devise new distribution models. However, this will take some time and we will be focusing more on broking business in the near future,” said R Venkataraman, director of India Infoline.
“Distribution income is likely to be hit due to the ban on entry load and also a possible shift of insurance products towards non-unit linked,” said Karthik Srinivasan, research analyst, ICRA.
In non-unit linked products, commissions are generally less than that in unit-linked ones. Recently, the Insurance Regulatory and Development Authority (Irda) had imposed a cap on unit-linked insurance plans (Ulips).
“The new regulations are definitely going to impact the way brokerage firms work, and we are creating a new model to offset the impact. We will have to find out how to manage assets so as to give the best returns to the clients while deriving our commissions. However, the shift to a new model will take some time,” said Angel Broking Executive Director (Equities Broking) Vinay Agrawal.
Although stock prices have shown a rising trend and many IPOs have been lined up this financial year, ICRA expects revenue contribution from merchant banking to remain low as compared to 2007-08.
But, equity brokerage yields continue to remain under pressure due to increasing competition and few firms offering a flat fee structure. The average broking yields declined from 7-8 basis points to 5-6 basis points in the last few years, the ICRA report said, adding that it might not fall below 4 basis points in the medium term.

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