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Technology, demography & geography drive broker’s growth

ICICI Securities, Kotak Securities and HDFC Securities top the list: Profit for bank-brokerages likely to grow 20%;

The domestic capital markets continue to remain on an upwards trajectory after a strong performance in FY2021. The average daily turnover (ADTO) increased to Rs27.92 trillion in FY2021 from Rs14.39 trillion in FY2020, registering an annual growth of 94%. As per ICRA, the market performance has been supported by favourable liquidity in both domestic and international markets, optimism related to a recovery after the graded reopening of the economy, progress on vaccination rollout and steady retail investor momentum. Samriddhi Chowdhary, VP & Sector Head, Financial Sector Ratings, ICRA, updates: “Transaction volumes remain strong in the current fiscal, with the markets clocking an ADTO of Rs56.36 trillion in H1 FY2022.”

Discount Brokers Gaining

The pool of ICRA-rated bank brokerages reported a strong performance in FY2021 with the estimated average daily turnover (ADTO) increasing 28% y/y to Rs1.51 trillion from Rs1.18 trillion in FY2020, led by the healthy growth in the retail segment. Samriddhi explains: “Despite the changes in the margin requirements, the performance remained healthy in Q1 FY2022 with an estimated ADTO of Rs1.64 trillion, driven by favourable retail investor sentiment. However, the market share of the sample pool of ICRA-rated 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.”

Margin Funding Business

Bank-brokerages reported a strong uptick in earnings in FY2021 registering a y/y growth of 40% in total revenues and 80% in profit after tax. Samriddhi points out: “Bank-brokerages have been increasingly looking at other non-broking sources of income, namely capital market lending business, distribution income and investment banking revenue. Bank-brokerages have significantly scaled up the margin funding business over the past fiscal, moving in line with the capital market rally, which has resulted in an increase in their borrowing level.”

First-Time Investors

The retail broking segment has witnessed a significant disruption in the last few years due to the growing prominence of discount brokerages. The competitively priced offerings of discount brokers and the no-frill basic accounts and services have resulted in the realignment of the pricing strategy across the industry. Adds Samriddhi: “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. 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.”

Ramp Up Online Channels

ICRA expects bank brokerages to continue to build their retail franchise and focus more on technology and digital models for customer acquisition. Samriddhi elaborates: “The cost structure and operational efficiency of the bank brokerage companies also improved over the past few years with focus on the rationalization of branches, coupled with cautious efforts towards the transition to a digital business model, thereby improving the operational efficiency across brokerages.”

Bank brokerages are also increasingly looking at the emerging demographic opportunities and new geographical base, which is facilitated through online channels. Samriddhi feels: “Going forward, the ability of the bank brokers to effectively ramp up their digital initiatives, attract millennial clients and expand to a newer geographical base such as tier 2 & 3 cities would be critical.”

Better Brand Recall, Trust

Supported by these factors, bank brokerages are expected to register a healthy growth in client addition as well as transaction volumes, though their share in total active clients would moderate owing to the rapid expansion of the discount broking model. The blended yields are expected to compress going forward, though the focus on fee and fund-based income would support the profitability. Samriddhi indicates: “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.”

Profit, Borrowings, Gearing

ICRA expects the net operating income (NOI) of bank brokerages to grow 20-25% y/y in FY2022, supported by steady broking income along with an uptick in the margin funding and distribution businesses; the ramp-up of other capital markets related businesses could further support the earnings profile. Samriddhi predicts: “The net profit for bank brokerages is expected to grow 17-20% during the same period. 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 FY2022 at an industry level, while the gearing across entities would vary between 1 to 3 times based on the scale of margin funding operations.”

CAGR 19% In 3 Years

Bank brokerages attribute to 21% of total active clients on NSE as of August 2021; the share was about 23% as of March 2021. Total active clients for bank-brokerages increased to 4.17 million clients as of March 31, 2021 from 2.56 million as of March 31, 2018 registering a compounded annual growth rate (CAGR) of 19%. Samriddhi states: “The top 4 bank brokerages together attributed to nearly 5% of total industry transaction volumes; the market share would be nearly 9-10% adjusting for proprietary trading volumes.”

Toppers In Various Criteria

ICRA has picked the top bank-brokerages in terms of active clients on National Stock Exchange (NSE). The sample includes top 5 bank brokerages for analysis of earnings and other financial metrics, and top 4 bank-brokerages for the study of transaction volumes and yields. Samriddhi informs: “Based on NSE data on active clients, there are 11 bank-brokerages active in domestic capital markets. Our sample of bank brokerage companies include Axis Securities, HDFC Securities, ICICI Securities, Kotak Securities and SBI Capital Markets.”

She provides necessary details of 3 toppers of bank-brokerages to substantiate their positions at the industry level. She cites comparative data on different parameters: “As of March 2021, in terms of active clients (NSE), ICICI Securities topped with 1,580,233 accounts, followed by HDFC Securities (957,085) and Kotak Securities (743,206). ICICI Securities recorded Rs958 billion ADTO, followed by Kotak Securities (Rs361.26 bn) and HDFC Securities (Rs91.72 bn for 9 months). ICICI Securities earned NOI of Rs23.18 billion, followed by Kotak Securities (Rs19.41 billion) and HDFC Securities (Rs13.37 billion). As far as PAT is concerned, ICICI Securities came first with Rs10.68 billion, followed by Kotak Securities (Rs7.93 billion) and HDFC Securities (Rs7.03 billion).”

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