Institutional brokerages' revenues may shrink

Had hit a five year low in 2013

The total pie of money institutional broking players’ share could reduce for the third year due to regulatory moves and lack of room to cut costs and boost profits.

The total amount of brokerage revenue for the financial year ending this March was Rs 2,000-2,300 crore, according to various estimates. It is believed to have fallen Rs 280 crore in FY12, and further in FY13. One analyst estimated the pie had shrunk Rs 600 crore in FY13 and expected a 10 per cent decline in broking volumes this current financial year.

Domestic brokerages suggest a recent regulatory move to curb the amount of brokerage that mutual funds (MF) can pay has also affected revenues.

“When this set of service providers have been marginalised, a regulatory move to curb the amount of money that can be paid to them seems harsh. Nobody would like to invest in the business,” said an official with a domestic brokerage.

“Overall, it doesn’t look too good. I wouldn’t expect revenues to be higher this year, compared to the previous one,” said a senior official with another brokerage.

The Securities and Exchange Board of India has capped the amount of brokerage MFs can pay at 12 basis points (bps) for cash market transactions and five bps for derivative trades. A per cent is equal to 100 bps. A report by Icra Research Services suggested more pain. “With pressure on revenues, institutional brokers have turned to cost control as firms have begun downsizing analyst teams and also trying to differentiate themselves.” by providing more relevant corporate access to investors pressure, most cost control initiatives having run their course and factoring in the initial trends of the year till date, FY13-14 could remain a difficult year for institutional brokers,” said the note.The trend for the overall brokerage business is not much better.

“In aggregate, in ICRA’s opinion, the retail and institutional brokerage revenue pool may have declined to Rs Rs 90-95 billion in FY12-13 from Rs Rs 105 billion in the previous year. If the trends of Q1FY13-14 were to be extrapolated, the annual brokerage revenue pool may have shrunk by further Rs 4-5 billion,” it said.

However, some remain optimistic.

Saurabh Mukherjea – CEO, Institutional Equities, Ambit Capital suggested that the outlook is not all that gloomy.

“The competitive intensity has reduced with many domestic and foreign brokerages having exited the business or operating with a skeletal staff,” he noted.