“Out of the brokerage firms, the old and established ones are doing somewhat okay. But the new entrants are presently feeling the pinch financially due to the overall decline in the average daily turnover in the CSE in recent times and rising competition levels at broking houses,” a top market source said on the condition of anonymity.
Ownership of stockbroker Arrenga Capital changed hands in April 2012, with the Softlogic group acquiring the company, and analysts do not rule out further changes of ownership in the industry given difficult market conditions, despite the improvement in sentiment this week.
According to unaudited financials submitted to SEC, total turnover and net profit of the stock broking industry decelerated sharply by 13% and 34% respectively during the year 2011 compared to the year 2010. The industry’s net capital at the end of 2011 also fell by a quarter to Rs.3.35 billion compared to the net capital position recorded at the end of 2010.
“Given the fall in the average turnover levels year-to-date in 2012, where it had fallen to even lesser than Rs.200 million a day on some days, brokerage firms are definitely having a tougher time than last year,” the source said.
During the month of May, both the ASPI and MPI fell 11%, with the ASPI having now witnessed a 34.8% YoY decline while the MPI declined 37.0% YoY. Average daily market turnover during the month was recorded at Rs.398.7m.
“What worsens the broker’s scenario is the fact that salaries and other perks nowadays are comparatively much higher in the industry than what it used to be a few years ago. This is partly due to the rapid increase in the number of players which has created a heavy demand for personnel. This has led to many firms luring staff from other firms by offering better packages,” an analyst pointed out.
Meanwhile, despite the entry of new players to the industry, another market source questioned whether the new entrants have brought anything new to the market in terms of increasing the portfolio of investors or introducing new technology.
“I have already gone on record to say that for a small capital market like CSE, the number of stockbrokers we have at the moment is too high. But this is my personal opinion. It is now a battle for the survival of the fittest. As long as they are all conforming to the rules and regulations we have no problem,” the Chairman of the SEC, Thilak Karunaratne said when asked for his opinion.
During the year 2011, some of the key regulatory concerns the SEC encountered of stockbroking companies were the non compliance with the Minimum Net Capital Requirement, inadequacy of client funds to settle creditors and deficiencies identified in Management Information Reporting System (MIRS) and internal controls, the SEC had stated in its Annual Report.