The changing face of broking industry

Brokering houses have moved on from conventional broking and are concentrating on other financial services to boost growth

The results announcement by Motilal Oswal for the quarter ended September shows the changing dynamics of the broking industry. Motilal Oswal’s structural changes follow those that have been witnessed over the last few years – stock brokers have moved ahead from conventional broking and are increasingly concentrating on other financial services.

In the case of Motilal Oswal, broking-related revenues are down from 66% of the total income to 49%. The two segments that have started giving higher contribution is Housing Finance and Asset Management Company’s fees.  These two divisions now account for nearly 38% of the topline in the second quarter of current fiscal as compared to 13% during the same period last year.

A move from plain vanilla broking to financial services is a path that a lot of brokers have taken. With no-frills discount brokers dictating brokerage rates, the writing had been on the wall for a while. Brokers had to innovate or perish. A number of smaller broking houses closed shop after the Lehman crisis. The bigger ones decided to look at other avenues for growth.

Edelweiss is now a well-diversified financial company. Though it is one of the largest domestic institution broking house, the company is witnessing far superior growth in other segments of its business like wealth management and asset management. Further, its credit business is what is driving growth.

Deliberate slowdown by banks gave the much needed leg room for financial services companies to push their credit business. Today Edelweiss’ loan book is bigger than those of smaller banks, and has a much better asset quality, higher net interest margins (NIM) – despite a higher cost of funds – and enough capital to sustain robust growth. Though the company has taken a hit in some of its bigger exposures, its book is now diversified enough.

IIFL or IndiaInfoline one of the first online brokers in the country which also attempted a discount broking operation with 5paisa.com now derives only 11% of its revenue from capital market operations. The lion’s share of its revenue comes from fund-based activity which as the company defines is predominantly operating income of NBFC (non-banking financial services company). The company has a loan book of around Rs 15,000 crore with nearly half of it disbursed as mortgage loans.

Going forward, these companies are increasing focus in other non-broking segment of the business. Ramdeo Agarwal of Motilal-Oswal said in a post result conference call that revenue from broking business will be one-third of the overall revenue from current levels of 50%. This means that other businesses will grow faster than traditional broking.

Both Motilal Oswal and Edelweiss are now looking at raising funds to increase their loan book. Edelweiss is planning to raise $1 billion in its real estate fund. Analysts too have appreciated the measures taken by the company in diversifying its business. In a report on the company’s results Maybank Kim Eng says that they retain a positive view on the company because its diversification strategy is in place.

Motilal Oswal is raising Rs 1,000 crore in its real estate fund. This is the third time the company will be raising money through its real estate fund having raised Rs 200 crore in 2009 and Rs 500 crore earlier. The company for the first time has presented the results of its housing finance company – Aspire. Most of the analyst’s queries in the conference call was centred on this company.  

There are few brokers among the bigger ones who continue to be in traditional broking. Given the fact that the big boys are now looking at other areas for growth, it is only a matter of time when the second line broking firms follow them.

All this have been possible only because the banking sector has been cautious in their business. The risk taking capability of brokers have come in handy in exploiting this void.