Falling profitability and the consequent pressure on margins have compelled brokerages to branch out into allied businesses. Most of the bigger brokerages are looking at fee-based businesses such as portfolio management services, wealth management, private equity and asset management to supplement brokerage income. With cash volumes in the market coming off?the daily average turnover in the first 3 months of the year was R 12,734 crore compared with the six month average of R13,964 crore ?and the yields in the Futures and Options (F&O) falling thanks to intense competition broking firms are looking to remodel themselves as full-fledged financial services players.
?There are several opportunities in the financial services space which brokerages can tap into,? says Motilal Oswal senior VP, corporate planning Sameer Kamath. Adds HSBC InvestDirect CEO Manasije Mishra,?Diversification is useful as it helps brokerages to optimise costs by cross-selling products.? As Mishra points out, customer acquisition can be expensive and it makes sense to sell different products to the same customer.
Blended yields (cash and F&O combined) have come down 20% from about 8 paise to 6.5 paise in the last one year and with retail investors staying away, it?s not surprising that broking incomes have shrunk. At Religare, it has declined to 28% of total revenues from about 55% three years back while at Motilal Oswal it has fallen to 70% of the top line from 95% five year ago. At Edelweiss, the share has halved in the same period. The mantra now is to use the NBFC arm to bring home the bacon. In the case of Religare Enterprises, the NBFC business contributes 45% to the top line while at Edelweiss, interest income from the credit business accounts for nearly 50% of revenues. Analysts say loans against property could contribute as much as 25% to the top line in the next 3-4 years. Over the past five years, F&O volumes have shot up and currently account for more than three-fourths of the turnover on the NSE. Moreover, foreign competition is hurting the institutional segment.
?Domestic players have no choice but to venture out into new businesses to survive,? says Anshuman Jaswal, senior analyst, Celent Securities and Investments. Increased competition is forcing brokerages to develop competencies in both retail and institutional businesses. ?There are strong entry barriers in both businesses. Bagging clients and building robust systems are critical to institutional broking while attracting enough clients and building a large footprint are integral to retail broking,? observes Kamath from Motilal Oswal. However, the opportunities are immense; while an institutional clientele can be rewarding, retail clients can contribute significantly to profitability. In 2010, retail broker Anagram Capital was bought out by Edelweiss Capital while Reliance Capital snapped up institutional investment advisory firm Quant Capital in 2009.
According to Jaswal, size is critical for survival and the next step for domestic brokerages would be geographical diversification, especially in neighbouring Asian countries. IIFL Securities has already got the nod to offer broking, asset management and investment banking services in Singapore.