NON-BANK-BACKED investment banks (IBs) and stockbroking firms have been struggling to find earnings growth in recent years, at a time when the bank-backed IBs expanded through mergers and acquisitions.
While the stockbroking firms are still profitable, with the exception of Jupiter Securities Sdn Bhd and PM Securities Sdn Bhd, it has not gone unnoticed that their earnings performance has been on a downward trend in the past three to four years.
For instance, the stockbroking segment of K&N Kenanga Holdings Bhd saw its earnings decline from RM17.52 million in FY2011 to RM4.71 million in FY2012 and RM2.5 million in FY2013, before it climbed back to RM12.41 million in the first nine months of FY2014.
It is worth noting that K&N Kenanga completed the acquisition of ECM Libra Investment Bank Bhd in 2012. Following that, revenue from K&N Kenanga’s equity broking business doubled to RM140.23 million, and its market share rose to 8.92% from 6.28%, according to the group’s 2013 annual report.
Meanwhile, TA Securities Holdings Bhd’s earnings fell to RM28 million in FY2014 from RM31 million in FY2013. Its earnings came in at RM47 million in FY2012 and RM54.44 million in FY2011.
Jupiter Securities, which is 71.76% owned by Olympia Industries Bhd, has been making losses for three consecutive years and has few options but to stringently control costs to improve operating margins.
Malayan United Industries Bhd’s PM Securities, the last universal broker in the country, posted a loss before tax of RM17.1 million in FY2013 due to further impairment of its intangible assets. A similar impairment of RM180.4 million was made in the previous year.
According to the Securities Commission Malaysia, in addition to the activities that a stockbroking company is allowed to conduct, a universal broker can undertake a full range of capital market services such as corporate finance, as well as deal in derivatives and debt securities.
The lower retail participation in Bursa Malaysia was the main factor that dragged down the earnings of these stockbroking firms, as most of them are focused on serving retail investors, save for KAF Investment Bank Bhd.
Furthermore, many remisiers have yet to evolve with the times in the fast-changing stockbroking landscape, especially with online trading making investing easier. An investor says remisiers should offer more personalised service to clients to stay competitive.
K&N Kenanga managing director Chay Wai Leong tells The Edge that remisiers will continue to play a key role in attracting retail interest as they are the catalysts to deliver good investment ideas and advice to customers.
“We believe that eventually the business will comprise ‘premium high-touch equity broking’ for investors requiring a high level of interaction for investment ideas and trade executions, as well as ‘self-help online broking’ for the younger generation — those adept to doing their own research and trade executions online,” he says.
He adds that the emergence of these two types of investors will result in pricing differential between the two models.
Hong Leong Investment Bank Bhd dealer representative Frank Lin opines that Bursa Malaysia and the stockbroking firms should first introduce the blue chips to young investors as these stocks are safe and offer good returns.
“As time goes by, they will learn the skills, and when disposable income permits, they will naturally venture into some short-term and more volatile counters. This will boost market volume and the stockbrokers’ revenue on a sustainable basis, whether they are stand-alone brokers or otherwise,” he says.
An experienced industry observer remains optimistic about the future of stand-alone stockbroking firms, provided that remisiers are willing to take more initiatives and learn how to sell other products such as unit trusts.
“The stand-alone broking house had ridden many storms in the past few decades — in 1987, 1997 and 2008 — and they will continue to sail through. There is still hope in the industry despite a bleak outlook.
“Yes, they are not making super profits now, but just like the stock market, you can’t expect prices to keep going up. There are good times and bad times, but they will survive,” he says.
According to a veteran remisier with a bank-backed broking firm, the market approaches of some stand-alone broking house are incorrect and not aggressive enough to stay competitive.
“There is a perception that it is always safer to trade with bank-backed firms due to their stronger brand name, but then again, the niche brokers also have their loyal clients and star remisiers. So, it’s how you approach the investor,” he says. — By Liew Jia Teng
This article first appeared in The Edge Malaysia Weekly, on February 2 - 8 , 2015.
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