Brokers struggle for business

Published Monday, July 18, 2011

By Vicky Kapur

UAE Stock brokerages are fighting for survival amidst a trading slump on the country’s three stock exchanges – the Dubai Financial Market (DFM), the Abu Dhabi Exchange (ADX) and Nasdaq Dubai.

The slump on the local bourses – exacerbated by this year’s Arab Spring, which saw foreign institutional as well as individual investors pull out their holdings in droves earlier this year – began in earnest after trading volumes peaked in 2007 and early 2008.

In dollar terms, trading on the DFM has slumped 89 per cent (or almost nine times) from an average daily volume of $408m in 2007 to $45.8m in 2011 year-to-date (YTD), underlining the drop in revenues that the country’s brokerages have had to endure in the past few years.

With Lehman Brothers filing for bankruptcy on September 15, 2008, stock markets the world over were caught in a downward spiral as most investment banks counted their losses and liquidated positions to plug huge shortfalls as a result of a chain of subsequent defaults.

Average trading volumes on the ADX too have seen declines similar to the DFM – after peaking at $307m in the period January 1, 2008 to September 15, 2008 (pre-Lehman), the average daily trading volumes slumped to $118m in the remainder of 2008, and have since declined to $32.45m in 2011 YTD, an 89 per cent drop from peak.

With the traditional annual summer slump in bourse activity dovetailing into the market lull during the holy month of Ramadan, large brokerages such as Emirates NBD Securities are trying to lure investors by doling out hefty commissions. ENBD Securities is offering investors up to 20 per cent commission payback on brokerage fees with accumulated trade value of Dh1 million and above during the period between July 17 and August 31, 2011.

While most emerging market bourses have since recovered – along with the S&P 500, which surpassed pre-Lehman levels in end-2010 – UAE bourses have continued to remain depressed in value and volume terms, and brokerages are now perhaps eyeing the post-Ramadan period this year for an uptick in trading volume.

The volumes slump, accompanied as it is by a huge drop in the share prices of listed companies, has meant that the bottom lines of local brokerages – which depend on commissions on traded shares for earning a majority of their revenues – have been hit badly. At the same time, primary market activity, or IPOs, have all but dried up in the country, adding to the misery of the brokerages.

Shuaa Capital, a Dubai-based investment bank that runs a sizeable brokerage operation in the country, said earlier this year that while its investment banking, asset management and private equity arms have returned to profit after a couple of very bad years, Shuaa Securities, the brokerage arm, continues to operate at a loss as it reels from the impact of a collapse in trading activity.

Investment bank Rasmala in May this year decided to shut its UAE retail brokerage operations as part of a restructuring programme begun in November last year. “We debated extensively whether to maintain the UAE retail brokerage operations and concluded that the infrastructure it requires, in terms of staff, operations and risk management exposes us to a heavy operational burden and high risk for a minimal return,” Ali al Shihabi, Rasmala’s founder and chairman, said in an internal document.

Last year, several stock brokerages in the country had asked for their licenses to be suspended as they were unable to operate profitably in the low-volumes scenario. Several others – such as the UAE arms of Oman-based Gulf Baader Capital Markets and Makaseb Islamic Financial Services – ceased trading operations altogether.

Of the 117 share brokerages listed on the website of the Securities and Commodities Authority (SCA), 30 are classified as inactive by the regulator, with some analysts maintaining that the number of out-of-service brokerages may go up dramatically if things fail to improve in the remainder of this year.

DFM AVERAGE DAILY TURNOVER

2011 YTD: $45.80m

2010: $75.22m

2009: $190.24m

2008: $336.65m (Jan-Sep 15: $383m) (Sep 15-Dec 31: $210.69)

2007: $407.93m

ADX AVERAGE DAILY TURNOVER

2011 YTD: $32.45m

2010: $36.89m

2009: $76.09m

2008: $255.57m (Jan-Sep 15: $306.63m) (Sep 15-Dec 31: $117.72)

2007: $189.49m

NASDAQ DUBAI AVERAGE DAILY TURNOVER

2011 YTD: $3.09m

2010: $5.22m