Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now


You can switch off notifications anytime using browser settings.
12,053.95-32.75
Stock Analysis, IPO, Mutual Funds, Bonds & More

Brokerages shutting down retail business, while banks reap profits

“Retail brokerages may not be able to survive until they do upwards of Rs 100 cr backed by efficient technology and training,” says Rasesh Shah, Edelweiss group.

Updated: Nov 20, 2013, 08.11 AM IST
0Comments
“Retail brokerages may not be able to survive until they do upwards of Rs 100 cr backed by efficient technology and training,” says Rasesh Shah, Edelweiss group.
“Retail brokerages may not be able to survive until they do upwards of Rs 100 cr backed by efficient technology and training,” says Rasesh Shah, Edelweiss group.
A few years ago, Hong Kong and Shanghai Banking Corp, Bank Muscat, and India Infoline were excited about Indian retail broking. But, now, they have turned their backs on the industry that has felled many a Goliaths.

“This investment is of strategic importance to HSBC as it gives us a foothold in one of the largest retail broking markets in the world,” Sandy Flockhart, group managing director and chief executive officer of HSBC Asia Pacific, had said in 2009 of its $296-million investment to buy brokerage IL&FS Investsmart. “With over 20-million retail investors, India has the world’s third-largest investor base and its National and Bombay stock exchanges are respectively the third and fifth largest stock exchanges globally by transaction volume,” he had said.

So, what changed between 2009 and 2013 that HSBC was forced to wind up its retail broking division? The Lehman Brothers’ collapse cannot be blamed for the industry’s misfortunes; its fading fortunes are more due to the drive of the banking industry, especially the domestic private sector ones, to access cheap funds and their ability to exploit technology.

Dalal Street’s ubiquitous family-run brokerages are being consigned to history books. This is for the second time in the last two decades that they are facing a tough test. The advent of electronic trading in the mid-90s washed away many a Luddite; now, the internet and mobile applications are posing tough challenges to broking houses.

Many a nimble professional-promoted brokerage such as Motilal Oswal, Anand Rathi and Edelweiss have survived and even thrived after electronic broking became the norm, but they are now operating on wafer-thin margins due to surge in costs on human resources, raising doubts about their model’s longevity.

“Retail brokerages may not be able to survive until they do upwards of Rs 100 crore backed by efficient technology and training,” says Rasesh Shah, chairman, Edelweiss group. “Retail brokerage is a product and not a business anymore.”
Brokerages shutting down retail business, while banks reap profits

The retail segment equity brokerage revenue pool has declined 10-12% from Rs 8,000-Rs 8,500 crore in the fiscal ended March 2012 to Rs 7,100-Rs 7,600 crore in fiscal 2013, data from rating agency ICRA shows. The overall daily cash market average volume of retail investors has fallen to Rs 4,615 crore in 2013, the lowest in a decade, after touchingRs 14,000 crore in 2009. Retail investors’ contribution to daily turnover has plunged to 34% in 2013, the lowest, from 89% in 2001.

HSBC is not alone. Local investment bank Avendus Capital sold its broking business to IL&FS Securities, a subsidiary of infrastructure lender IL&FS. Fortune Financials and Antique Stock Broking sold their business to Sudhir Valia, brother-in-law of Sun Pharmaceuticals founder-billionaire Dilip Shanghvi. India Infoline, which created a stir in the retail business in 2002 by offering customers accounts at 5 paisa per trade, is exiting the retail business. Nearly 600 brokers and over 26,500 sub-brokers have shut shops since April 1, 2011.

 

“There are many brokers, who in their desperate attempt to survive, are offering very low brokerage and options trading to small customers,” says Nirmal Jain, chairman of India Infoline. “We believe one cannot build a sustainable business model with a product where the odds are against the customer.”

Furthermore, the loss of market value in a matter of months after the 2008 credit crisis has driven a generation of investors away from the equity markets. Although the overall trading volumes are many times more than what they used to be in the 1990s, they are in the poor-margins business of derivatives.

More than 90% of the total volume is contributed by day traders who are happy making a living with futures and options, rather than trading in the cash market. “Most of the volumes have shifted to low brokerage-bearing options segment due to which the commission pool in the overall brokerage industry has actually shrunk from the peak by approx 40-45%,” says Motilal Oswal, chairman & managing director of Motilal Oswal Financial Services.

While stand-alone family-run broking may be a vanishing tribe, banks like ICICI Bank, Axis Bank, which bought Enam Securities, and HDFC Bank are thriving in the business. These banks offer investment and trading account to all their savings bank account holders, who were once the hunting ground for retail brokerages. With these lenders offering the facility to trade and invest in stocks, bonds, fixed deposits, mutual funds and gold at the click of the mouse, many customers do not feel the need to be in touch with a retail brokerage.

Banks are also armed with research — fundamental as well as technical — and throw many ideas than what a retail brokerage can do. More than anything else, the trust factor, because of the fact that none lost money with a bank, also helps.

“Earlier, it was more about personal interactions, now it is about smart, non-invasive, always-available-at-anytime technology,” says Aseem Dhru, CEO & managing director of HDFC Securities. “Today, customers have shifted preference to the internet, and mobile trading applications are gaining rapid market share in line with the penetration and use of mobile phones in India.”

HDFC Bank’s income from brokerage business has grown at a compounded annual rate of 15% to Rs 5,443 crore in the last five years, while Axis Bank’s has risen 19% annually in the past five years to Rs 5,266 crore. ICICI Securities’ client base has grown from 2.2 million in 2008 to 2.7 million in 2013. “Banks with brokerage business have natural advantages, like access to retail branch network, to support client acquisition,” said Modan Saha, CEO & Joint MD, retail broking of Axis Securities. “In the current market scenario, independent client acquisition has become extremely costly.”

Online investment facility is also one of the reasons these banks have such a high current account and savings account deposits, which are essential for higher profitability. HDFC Bank’s CASA is at 45% of total deposits, and Axis’ is at 39%, compared with state-run Punjab National Bank’s 41% and Corporation Bank’s 18.8%, since they are slow in this business, which needs customers with a sizeable wallet.

“The large branch network and existing clients provide a good captive client base for banks,” points out Romesh Sobti, MD & CEO, IndusInd Bank. “For banks, this business is fee-generating as they get access to float funds.”

Comments
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links


Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service