Thursday 28 Mar 2024
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This article first appeared in Corporate, The Edge Malaysia Weekly, on July 25 - 31, 2016.

 

THE impending closure of First Taz Tradition Sdn Bhd, one of seven licensed money-broking companies in Malaysia, has put a spotlight on the highly competitive and increasingly challenging — albeit low-profile — industry. It has also raised questions about the future of the remaining players.

Tightly regulated by Bank Negara Malaysia, the industry has seen a steady decline in profits over the last few years — some companies are loss-making — as a result of lower brokerage fees following the liberalisation of the industry five to six years ago and reduced volumes.

Sources say First Taz, loss-making in the last two financial years ended Jan 31, 2014 and 2015 — its FY2016 results are not yet publicly available — has ceased operations after failing to find suitable buyers to take over the company. When contacted, an employee tells The Edge that First Taz will close by the end of the month.

Incorporated in 1984 as Pyemas Sdn Bhd with Tun Dr Ling Liong Sik as its biggest shareholder, First Taz is now 54%-owned by businessman Datuk Tunku Ahmad Zahir Tunku Ibrahim, a member of the Kedah royal family, via his company First Taz Capital Sdn Bhd. Attempts to reach him for comment were unsuccessful. First Taz has a foreign money-broking partner in Tradition Singapore Ptd Ltd, which holds a 40% stake.

In FY2014, First Taz incurred a net loss of RM357,866 on the back of RM6.55 million in revenue. It sank deeper in the red the following year, posting a loss of RM1.55 million on revenue of RM4.21 million.

Industry players say First Taz’s closure may, to a large extent, be due to the increasingly tough times money-broking companies are facing. The biggest player in the market by revenue and profit is Amanah Butler Malaysia Sdn Bhd, followed by Affin Moneybrokers Sdn Bhd, the only company owned by a banking group (Affin Holdings Bhd). First Taz is a mid-sized player.

Money-broking companies basically act as intermediaries or arrangers of deals between two financial institutions (a buyer and a seller) in the foreign exchange and domestic money markets. The companies are paid brokerage fees when deals are concluded.

“Our clients are all the financial institutions here, we don’t do individuals,” says Affin Moneybrokers CEO Chandra Nair, who has 30 years of experience in the industry. “All products that a bank’s treasury operation d0es — whether they are money market instruments, negotiable instruments of deposit, Islamic products, interest rate swaps, foreign exchange currencies or fixed income products — the money-brokers will deal in those products. We match trades [for them] and receive a fee in exchange”.

In an interview with The Edge on the growing challenges in the industry, Chandra says brokerage fees have come down “tremendously” since the industry was liberalised five or six years ago.

“For trades on certain products like forex (foreign exchange), for example, the fees have come off 75% from five to six years ago. And for other products, they have come down 30% to 40%, easily,” he adds.

“Volumes did increase initially (post-liberalisation), but of late, they have come down again. This has to do with the [softer] market conditions. Market volatility is so high and politically, a lot of things are happening — not just here but all over the world — so banks are pretty risk-adverse. So, naturally, you’re not trading as much.”

To its credit, Affin Moneybrokers has stayed profitable every year since it began operations in 1984. Over the last five years, its net profit peaked at RM2.4 million in 2011 but this has since come down to RM1.63 million in 2015.

Chandra says low brokerage fees are a major problem for the industry. “Our costs are going up every year because it is costing more to hire and retain good employees, but the brokerage fees never go up. That’s a big problem because we’re already at the bottom in terms of how low we can go with the brokerage fees. Any lower and the quality of service is going to deteriorate. I mean, it stands to reason that there is a price to pay for good service,” he explains.

He estimates that last year, the industry saw RM65 million to RM75 million worth of trades done. “We’d like to see bigger volumes. We are hopeful that it will eventually pick up when the market sentiment improves, but if it doesn’t, then it’s going to affect us.”

The way the industry operates is also likely to change soon. From being primarily “voice brokers” now — where business is conducted over the telephone — the players plan to migrate to an electronic platform for forex trades, he says. This is to stay competitive, with at least one of the newer players in the market — Reuters Transaction Services Sdn Bhd — already an electronic broker.

“We, as in all the five voice brokers, have been talking to Bloomberg to go on an electronic trading system for [US] dollar-ringgit [trades]. It doesn’t make sense for us to do so on an individual basis. We’re already in the process, so probably in a couple of months’ time, hopefully, before the year-end, we will be on an electronic system, where we key in live prices so that all the banks can see and trade on those prices. Bank Negara encourages this because it creates transparency,” says Chandra.

“We have to go electronic to remain competitive because Reuters Transaction is, of course, a competitor and it has an electronic platform.”

He adds that most of the bigger banks in Malaysia are already doing forex trades via the electronic platform.

Chandra insists, however, that these money-broking companies are not becoming irrelevant. “Money-brokers, at the moment, are still relevant because we do provide transparency to the market. What that means is, as far as pricing is concerned, banks know more prices than there are out there, so they can get a feel of the market because of the brokers. You know, five brokers may not be quoting the same price, so there is price discovery. Going electronic is advantageous, but it also has one big disadvantage in that it can crash.”

Is it on the path to becoming a sunset industry? “Well, not in the near term — at least three to five years — I think,” Chandra says. 

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