Amid significant slowdown in capital market activity, Indian broking houses are undergoing structural shifts and are venturing into new businesses such as asset and wealth management, which are likely to contribute 50% of their profits in the next fiscal year.
Due to structural changes in the business environment, and slowdown in capital market activity, the profits of Indian broking houses are expected to nearly halve in the current financial year (2011-12) compared to the previous year forcing them into newer territory.
Structural shifts in the broking business include a distinct shift in trading pattern to "low-yield derivatives, increase in algorithmic trading, and intensifying competition from foreign players in institutional broking," Crisil said.
"Broking houses have already begun responding to these challenges by reinventing their strategies. In their core business, they have been realigning cost structures, and focusing on superior and differentiated services," Crisil Ratings Director Ramraj Pai said.
Due to some of these fundamental changes in business, the pressure on broking houses during the current downturn will be more prolonged than in the previous one in 2008-09, Crisil said and added that to counter this brokerages are diversifying their businesses.
"Diversification is another strategy with players entering new businesses such as asset and wealth management, retail lending, and insurance," Pai added.
Asset and wealth management business had contributed just 25% of the broking houses' profits in fiscal year 2010-11. But come financial year 2012-13, nearly half of the consolidated profits of broking houses are expected to come from these businesses, Crisil said.
Crisil Ratings Director Nagarajan Narasimhan however believes though broking houses will face several challenges while implementing these strategies, their comfortable capitalisation will continue to support their credit risk profiles in this process of transition.
The aggregate net worth of CRISIL-rated broking houses was nearly Rs 16,000 crore as on March 31, 2011.
The report further noted that lending books of the large broking houses are expected to triple by March 2013, particularly in two key segments— loans against property and gold loans; these segments will constitute around 45% of the book by March 2013.
The retail lending book of these players will triple to Rs 30,000 crore by end-March 2013, from the March 2010 level.
