Banks eat old giants’ lunch in stockbrokers profit race

Nairobi Securities Exchange (NSE) on the trading floor of the Exchange building. FILE PHOTO | NMG

Bank-owned stockbrokers and investment banks have edged their standalone rivals in the profit race, riding on alternative revenue streams enabled by their parent companies at a time when the traditional income from trading commissions has shrunk.

Half-year financial results published by the market intermediaries show that SBG Securities, which is owned by Stanbic Bank Kenya, NCBA Capital, Equity Investment Bank (EIB) and KCB Investment Bank sit at the top of the profits table, beating former market leaders such as Dyer & Blair Investment Bank, Kestrel Capital and Renaissance Capital (Rencap).

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SBG Securities led the market with a net profit of Sh153.99 million, followed by NCBA Investment Bank at Sh113.6 million, EIB at Sh77.3 million and KCB Investment Bank at Sh42.4 million. Meanwhile, Dyer & Blair, Kestrel, Rencap were among the 11 intermediaries reporting losses in the period.

Overall, the 22-strong industry recorded cumulative net earnings of Sh365.6 million, a year-on-year growth of 27 percent jump driven by the improved performance of the bank-led players.

The decline in traded turnover at the market has been a key driver in the profit shift, with intermediaries who remain dependent on the commissions earned from these trades reporting losses in the period.

Foreign investors have been offloading their shares at the exchange on a net basis for the past few years, with the exits accelerating once interest rates went up in the West from last year on account of high inflation.

With local investors shying away due to depressed share prices, the traded turnover at the bourse has reduced, coming in at Sh94.3 billion in 2022 compared to a high of Sh215 billion in 2014.

In the first half of this year, investors traded shares worth Sh59.2 billion, out of which Sh22.7 billion came from a block purchase of EABL shares by British multinational Diageo.

“What drives the stock brokerage market is basically the foreign inflows. With what we have seen in the global markets with interest rates rising, especially in the developed markets, there has been capital flight,” Absa Bank Kenya Head of Global Markets Stella Mambo told the Business Daily.

“That capital flight has resulted in the market not doing well from a stockbroking perspective.”

In the first half of the year, the total brokerage commissions earned by the industry fell by 20.2 percent to Sh717.8 million.

The commissions would have likely been lower had the market not enjoyed a turnover boost in March (to an all-time high of Sh32.4 billion) due to British multinational Diageo’s Sh22.7 billion block purchase of an additional 118.4 million EABL shares.

Advisory and consultancy fees meanwhile rose by 54.4 percent to Sh292 million. The bulk of that was reported on the books of SBG Securities, which advised on the Diageo deal alongside its parent Stanbic Bank. SBG Securities’ advisory income rose five-fold to Sh183.6 million in the period.

Just under a decade ago, the top earners in the market comprised those with strong foreign trading desks, a time when brokerage commissions were the biggest contributor to stockbroker revenue.

In June 2014, filings show, stockbrokers banked Sh1.8 billion in commissions, led by SBG Securities at Sh289.6 million, Kestrel at Sh230.6 million, Dyer & Blair at Sh228.3 million and Renaissance Capital at Sh224.4 million.

In the half year to June 2023, only Dry Associates Investment Bank at Sh127.3 million hit the six-figure mark in commission earnings, followed by EFG Hermes Kenya at Sh84.9 million and Faida Investment Bank at Sh71.9 million.

Meanwhile, the top earners drew their revenue from other business lines, including fees from fund management, trading income and advisory business.

NCBA led the market in total income at Sh342.2 million in the first half of this year, out of which Sh266.75 million came from fund management fees tied to the wealth management unit of the firm.

Its brokerage commissions were reported at a more modest Sh25.1 million, while advisory earnings stood at Sh23.3 million.

The bulk of SBG Securities’ total income of Sh284.4 million was derived from advisory fees, while EIB’s total income of Sh170.6 million was mainly due to the Sh127.3 million the firm earned in profits from investments.

KCB Investment Bank in the meantime saw interest, wealth management and investment income contribute Sh83.2 million out of its total income of Sh93.2 million.

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Standard Investment Bank also leaned on financial service charges (Sh126 million) to raise its total income to Sh191.9 million from Sh184.6 million a year earlier.

Dry Associates’ income of Sh220.1 million was majorly driven by brokerage commissions.

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