Breaking news: NSE Brokers release financial results

Kudos Stella, these are two steps forward. Next thing is to introduce a uniform financial proforma. 4 lines of income (brokerage fees, advisory, profits/gains on investments and other); 4 lines of expenses (staff, admin, financial cost and other), capital and cash flow statements.

I will update as they come in, but clearly, a lot of questions/eye-brow raising stuff. No more than Renaissance. It made Ksh885m profit in investments in H1 2008 and zero in H1 2009! Believable? Well...

Although not a broker, Dry Associate is an interesting case study for where some of these brokers need to go to. Very little dependency on brokerage commission… primarily placement (of CPs I think) but very stable. Perhaps a merger candidate for Sterling IB.

Eagerly awaiting D&B, Gengis and Ngenye Kariuki's numbers...

Loss-making brokers? Need to get real

It must be for incompetency that stockbrokers have not been as profitable as banks in Kenya. Stockbrokers get Ksh2 for every Ksh100 transacted. Doesn't sound much. The total NSE' valuation was around Ksh1trn or just over that during the bubble period that peaked in last August (in transaction value terms). However only a fraction of that (infact around 10% at its highest) is ever transacted (bought and sold) in any given month. The monthly average transaction is under Ksh2bn. Thus 18 brokers (and shrinking) get to share Ksh20m in commission. And its not an equal cake hence some won't get even the Ksh20mn. However, even when you assume that each of the 20 employees (on average) gets Ksh0.5m per month, additional costs won't come to Ksh10mn per month. Therefore, with a few exceptions, its difficult to understand why the brokers have the issues they've had with profitability.

Going forward, brokers (new or old), will only guarantee profitability (and therefore survival) if

a) they can change the transaction charge structure so that each broker can charge as they wish, but also complete on service level and variety of distribution channels (including the cheap internet option).

b) either focus on volumes or transaction size, but this is already a target market by the likes of D&B, Kestrel Capital and SIB who rely on big clients making big transactions.

c) chase after the illusive ib trade of which there are already some ibs that get the choice business.

d) throw themselves at the mercy of the big deep pocketed banks.

CMA & Brokers: Kudos for some transparency

At last, investors know which broker is on their avoid list. Given that DSL was in a similar situation last year, investors should make their own conclusions and move on to either bank-owned brokers and ibs or the high net wealthy serving brokers such as Kestrel. The sea has indeed gone out and all those previously swimming naked can be seen. The issue appears to be liquidity i.e. inability to meet all the demands for payments as they fall due in layman terms. Its as bad as being short on capital and is ofcoursse what brought down Lehmans, Merill Lynch and Bear Stearns, 3 of the 5 largest ibs in the world. How about Unreliable, Suntra and Ngenye Kariuki?

My preference would be for CMA to think like an investor. If Abroker has no cash, they'll use my cash to pay their staff. SO suspend their licences untill they can sort out their liquidity issues. 2ndly, please get brokers to publish quarterly financial statements. Insurers have to do it, all banks have to do it. Kwani whats special about brokers?

For the brokers:

1. Stop employing everybody and your relas. Get a working online brokerage system. Its initially expensive but cheaper in the long-run.
2. Pride comes before a fall. You know, we know and everybody who needs to knows a broker licence isn't worth Ksh250mn. It wasn't worth that much even in the bull days.
3. Find partners: Banks have something you don't have. Distribution networks. They'll fill the gap.

Discount Securities finally goes bust-Key issue is liquidity

DSL had the widest distribution network of the brokers in Kenya. In that respect, its a welcome relief that it didn't have some many customers as Nyaga. The pity is that some NSSF funds maybe lost in the process. Apparently dividends were manufactured to keep NSSF from asking too many questions.

This is the first real red mark against Stella since she was in the CEO job for almost a year before she moved to put Murungu & Son under some management restructuring.

A lot of this bother could have been avoided if she had listened to all those complaints against DSL and a myriad of other brokers.

So where do we go from here?

• Apart from setting minimum capital standards and the ownership limits, Stella should also consider making capital requirements correlate to amount of business a broker is doing.
• Ultimately, whether a broker is doing all the right things or not, what will make it collapse is lack of cash to settle up client sale needs. Hence, Stella should consider getting brokers to set aside additional capital as a liquidity buffer correlated to their volume of business.
• CMA should change the composition of the fee to increase the compensation fund. They are very few investors who hold less than Ksh50k.
• Faster action to weed out weak and rogue brokers. There still many other brokers involved in malfeasance and its important that we use this bearish period to rebuild a brokerage industry for Vision 2030

Brokerage business at the NSE should be a simple lucrative affair. If you have integrity.

PS: If you'd hvae a CDS account with DSL, you need to file a claim asap.

Is the falling NSE a blessing in disguise?

You either make the change, get ready for change or change will sweep you away. For years now, investors have agitated change at the NSE that brings about:

• integrity in transactions
• dynamism in reacting and adapting to changing technology
• customer service
• liquid bourse
• strong institutions either controlling or regulating the bourse
• no conflicts of interest
• no political-business affliations
• a decent economic thermometer...
• leading to strong brokers, investment banks
• informed investors
• and a viable saving and investment vehicle

But wapi? We seem to be stuck in a timewarp where we go forward two steps and slowly go back to step one again. Strong measures such as those on disclosure, capitalisation and ownership are only adapted under extreme duress.

We motored between 2002 and 6, but within that period, managed to sow some destructive seeds that we've been harvesting ever since.

Its notable that every time we've had a dip, one or two brokers have said sayonara. FT went out after the Feb '07 dip, Nyaga survived but hobbled throughout 2007 by Mumias' 2nd IPO but succumbed when money ran out after the clashes in early 2008. 2007 also accounted for Solid Investment.

The 2008 bear has accounted for Discount, Crossfields and possibly Suntra. I believe this is the tip of the iceberg. If we went to 2,000, I think we would probably bring Reliable, Sterling, AIB, Ngenye into the net.

Most of these have one or two of the following in common; malpractices, leveraged business model, or operational risks galore. And unlike in some markets where firms react to worries about their "going concern" status by opening their accounts, at the NSE all you hear is typical "deny deny everything".

We need to sweep away the deadwood and hopefully come out of the otherside with strongly anchored brokers either via strong shareholding and governance structures or by being absorbed banks...