After acquiring stock brokerage companies during the stock market boom over ten years ago, Kenyan banks are now struggling to sustain the loss-making business ventures. Some of the affected companies include the Co-operative Bank, ABC Bank, and Equity Bank.
The said acquisitions are ABC bank’s purchase of 86 percent stake in Crossfield Securities Ltd, renaming it ABC Capital in 2008; Equity Bank’s trading license acquisition from Juanco Investment Bank, later renamed Equity Investment Bank in the same year; and Kingdom Securities Ltd, formed in 2009 after Co-op Bank’s acquisition of a 60 percent controlling stake in Bob Mathews brokerage firm for $1.5 million.
Low trading volumes and plunging share prices on the Nairobi Securities Exchange (NSE) have now brought financial troubles on stockbrokers in the country, a situation that puts lenders holding unprofitable investments at crossroads. This is because they are unable to divest their stakes in the stockbroking firms to avoid damaging investor confidence in the market.
Audited financial statements for 2018 show that Kingdom Securities recorded a loss of $63,300, ABC Capital lost $376,800, while Equity Investment Bank made a loss of $188,200. But their counterpart, NIC Securities, recorded a net profit of $136,900.
According to an independent analyst, Daniel Kuyoh, banks that own loss-making stock brokerage firms have found themselves between a “rock and a hard place”, since shutting down or selling off those moribund subsidiaries will send the wrong signals on the market.
The distressed banks have remained silent on the future of their stock brokerage subsidiaries, the East African says. However, Kuyoh believes they will keep operating their trading arms despite remaining unprofitable and their chances of turning around minimal.
“I do not think these banks will shut down their stock brokerage units because they have already sunk costs over the years in an attempt to generate a sustainable profit, but closure would possibly send the wrong signals to the market as banks are the most capitalised participants in the stock market,” Kuyoh was quoted as saying by the East African.
Kenya’s five-year stock market mania began in 2002 and peaked in 2007, drawing bank managers to the flourishing stock brokerage business. Reacting to the boom, Kenyan lenders made forays into securities trading business by buying out financially distressed stock brokerage firms. The goal was to transform them into financial powerhouses as well as get a share in brokerage commissions largely controlled by stockbrokers and investment banks.
Then came the speculative stock market bubble burst during the 2008/2009 global financial crisis which dashed any hope of making money on stockbroking business as retail investors fled the market. Compounding the problem was the poor economic performance, tensions from post-election violence, high-interest rates, weakening local currency and trading malpractices among stockbrokers.
The stock market has been unable to recover ever since with stockbrokers and investment banks recording losses. Some bank-owned stock brokerage firms, however, have remained profitable like SBG Securities Ltd (owned by the Stanbic Holdings Plc). Most of the profitable ones majorly rely on advisory services charges rather than brokerage fees to drive revenues.