Indian bank-brokers earnings outpace rivals: ICRA
India’s bank-promoted brokerages have outpaced their rival discount counterparts or budget brokerages as the former switched to extensive diversification amid increased digitisation since the Covid-19 pandemic outbreak last year, according to a report by rating agency ICRA.
For the six months ended 30 September, bank-backed brokerages reported an on-year growth of nearly 40% in total revenues and almost 80% in net profit, as estimated by ICRA.
The cost structure and operational efficiency of bank-brokerage companies improved over the past few years as they focussed on the rationalisation of branches and made efforts to couple the transition with a digital business model, which improved operational efficiency.
Bank-brokerages have been gradually making in-roads in non-broking sources of income such as capital market lending business, distribution income and investment banking revenue.
A strong franchise
The retail broking segment has witnessed significant growth in the last few years due to the growing prominence of discount brokerages, which offers low-cost brokerage services. The competitively-priced offerings of discount brokers and the no-frill basic accounts and services have resulted in the realignment of pricing strategy in the industry.
“Apart from attracting clients from full-service providers, discount brokerage houses have helped expand the market by bringing on board a large number of first-time investors,” said Samriddhi Chowdhary, vice President and sector head, Financial Sector Ratings at ICRA.
“While the market share for bank brokerages in terms of active clients moderated in FY2021, primarily owing to the faster scaling up of the discount brokerage houses, they reported a strong performance as reflected by the healthy operating metrics and surge in earnings,”
Bank-brokerages have scaled up the margin funding business over the past year moving in line with the capital market rally, which has resulted in an increase in their borrowing level.
ICRA predicts that the bank-promoted brokerages would extend the run and report a near 20% growth in profit in the current fiscal as they draw the advantage of a strong retail franchise. ICRA, however, warns that a ramp-up of digital initiatives remains critical to sustaining growth for such entities.
The domestic capital markets continue to remain on an upwards trajectory after a strong performance in the financial year 2020-21 (FY2021) with the average daily turnover (ADTO) nearly doubling to INR27.92trn so far in the current financial year from INR14.39trn in the same period last year.
Transaction volumes remained strong in the current fiscal, with the markets clocking an ADTO of INR56.36trn in the April-September period, compared with INR27.11trn in the same period last year.
As per ICRA, the market performance of the said entities has been supported by abundant cash in the financial system — both domestic and international markets — optimism related to recovery after the graded resurgence of the economy, progress on vaccination rollout and steady retail investor momentum.
The net operating income of bank brokerages will grow 20-25% on-year in the financial year to March 2022 supported by steady broking income along with an uptick in the margin funding and distribution businesses, predicts ICRA. The ramp-up of other capital markets-related businesses could further support the earnings profile.
The net profit for bank brokerages is expected to grow 17-20% during the same period and the borrowings levels of bank brokerages are expected to increase in the current fiscal to support their margin funding business.
The gearing levels of bank brokerages are expected to be in the range of 1.5-2 times in the financial year 2021-22 at an industry level while the gearing across entities would vary between 1 to 3 times based on the scale of margin funding operations, ICRA added.
Blessing in disguise for brokerages
Before their current buoyancy, the equity markets had crashed when the coronavirus outbreak was declared a global pandemic by the World Health Organization in March 2020. One of the outcomes of this disruption was the fall in income and drying of sources of income for individuals which brought them to equity markets. Income of individuals from traditional sources fell pushing them to look for alternative sources of increasing income.
This resulted in the Bombay Stock Exchange — Asia’s oldest bourse — crossing 70 million users in June this year by clocking in 10 million users in just 139 days. Of the total, 38% were in the 30-40 years of age bracket followed by 24% in 20-30 years of age and 13% in the 40-50 years.
Discount brokers, who offer services at a fixed rate, have flourished since the pandemic as more investors chose to avoid physical contact and preferred services online. The recovery in equity market indices since middle of 2020 to reach record highs last month also improved the risk appetite of investors.
“Bank brokerages are expected to continue to enjoy better brand recall, trust, higher credibility and financial flexibility by virtue of being a part of banking groups and would, therefore, remain a prominent part of the industry value chain,” added Samriddhi.