Bank-owned brokerages to show up to 20% profit growth in FY22: Icra

Surge in trading volumes to drive better show; huge competition from discount brokerages a challenge; capital market linked loan book shows 100% CAGR

Bank-owned broking entities in India are expected to post about 17-20 per cent growth in profit in FY22 on a surge in trading volumes, retail participation and margin funding.

According to rating agency Icra, the net operating income (NOI) of bank brokerages under its coverage could grow by 20-25 per cent year-on-year (YoY) in FY22 supported by steady broking income and distribution businesses. The ramp-up of other capital markets related businesses could further support the earnings profile.

They posted an all-time high net profit of Rs 3,246 crore in FY21, up 79 per cent. Also, their capital market-related lending business took off following the amendment in the margin funding guidelines by Sebi. In line with market rally, their loan book scaled up to just over Rs 7,300 crore in March 2021 from about Rs. 227 crore as on March 2017, showing a CAGR of over 100 per cent. This led to an increase in the share of interest income for these entities.

Bank brokerages draw the advantage of strong retail franchises. However, the ramp-up of digital initiatives remains critical to sustain growth. They face intense competition from discount brokerages. The market share of bank brokerages in terms of transaction volumes declined in FY2021 and moderated further in Q1 FY2022 as they continue to lose share to discount brokers.

The cost structure and operational efficiency of the bank brokerage companies also improved over the past few years with focus on the rationalisation of branches. They have made cautious efforts towards the transition to a digital business model, thereby improving the operational efficiency across brokerages.

Bank-brokerages have been increasingly looking at other non-broking sources of income, namely capital market lending business, distribution income and investment banking revenue, Icra added.

Samriddhi Chowdhary, Vice President & Sector Head-Financial Sector Ratings, Icra said bank brokerages, under rating agency’s coverage, showed an estimated 28 per cent rise in average daily turnover (ADTO) at Rs 1.51 trillion in FY21 from Rs 1.18 trillion FY20.

Despite the changes in the margin requirements, the performance remained healthy in Q1 FY2022 with an estimated ADTO of Rs 1.64 trillion, driven by favourable retail investor sentiment.

The average daily turnover (ADTO) of the entire market increased to Rs 27.92 trillion in FY21 from Rs 14.39 trillion in FY2020, registering an annual growth of 94%. Transaction volumes remain strong in the current fiscal, with the markets clocking an ADTO of Rs. 56.36 lakh crore in H1 FY2022.