ICRA-rated bank brokerages reported a strong performance in FY2021
The domestic capital markets continue to remain on an upwards trajectory after a strong performance in FY2021 with the average daily turnover (ADTO) increased to Rs.27.92 lakh crore from Rs.14.39 lakh crore in FY2020, registering an annual growth of 94%, according to ICRA Ltd.
Transaction volumes remain strong in the current fiscal, with the markets clocking an ADTO of Rs.56.36 lakh crore in H1 FY2022. As per ICRA, the market performance has been supported by favorable 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.
“The pool of ICRA-rated bank brokerages reported a strong performance in FY2021 with the estimated average daily turnover (ADTO) increasing 28% Y-o-Y to Rs.1.51 lakh crore from Rs.1.18 lakh crore in FY2020, led by the healthy growth in the retail segment,” Samriddhi Chowdhary, ICRA’s Vice President & Sector Head – Financial Sector Ratings, said in a release on 15 Nov 2021.
“Despite the changes in the margin requirements, the performance remained healthy in Q1 FY2022 with an estimated ADTO of Rs.1.64 lakh crore, 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.”
Bank-brokerages reported a strong uptick in earnings in FY2021 registering a year-on-year (Y-o-Y) growth of ~40% in total revenues and ~80% in profit after tax. The cost structure and operational efficiency of the bank brokerage companies also improved over the past few years with focus on the rationalisation of branches coupled with cautious efforts towards the transition to a digital business model, thereby improving the operational efficiency across brokerages.
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.
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.
“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 Chowdhary.
“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.”
ICRA expects bank brokerages to continue to build their retail franchise and focus more on technology and digital models for customer acquisition. 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.
“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,” she said.
“Bank brokerages are also increasingly looking at the emerging demographic opportunities and new geographical base, which is facilitated through online channels.
“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 II and Tier III cities would be critical,” she pointed out.
ICRA expects the net operating income (NOI) of bank brokerages to grow 20-25% year-on-year (Y-o-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.
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, said ICRA. #banking #investment #economy /fiinews.com
