Kenya's Co-operative Bank has cast a shadow of doubt over the future of its stockbroking business with news emerging that lenders who scrambled for the acquisition of stockbrokerage firms at the height of the stockmarket boom more than a decade ago are now struggling to sustain the loss-making business units.
These lenders are ABC bank which acquired 86 per cent stake in Crossfield Securities Ltd and renamed it ABC Capital in 2008 and Equity Bank, which acquired a trading licence from Juanco Investment Bank and renamed it Equity Investment Bank in the same year.
NIC Bank bought 55 per cent stake in Solid Investment Securities and renamed it NIC Capital in 2008 and Co-op Bank, which acquired a 60 per cent controlling stake in Bob Mathews brokerage firm for Ksh150 million ($1.5 million) renamed it Kingdom Securities Ltd in 2009.
The financial distress that has hit stockbrokerage firms due to declining share prices and low trading volumes on the Nairobi Securities Exchange has left banks holding unprofitable investments that they are unable to shut down or dispose in the interest of investor confidence in the market.
Daniel Kuyoh, an independent analyst, said banks that own the loss making stockbrokerage 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.
"I do not think these banks will shut down their stockbrokerage 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 stockmarket," said Mr Kuyoh.
An industry insider said the banks' hope of using their large customer bases to drive stockbroking failed to yield much success after the small and retail investors left the market in the hands of institutional investors who usually rely on established relationships.
"The banks initially had a strategy of capturing their wide customer base and utilising that pool to drive transactions on listed securities. However, the stockmarket is mainly driven by institutional investors who mainly rely on established relationships. Thus this strategy that the banks had was flawed from the onset," said a source.
Bank-owned stockbrokerage firms that have remained profitable such as SBG Securities Ltd that is owned by the listed Stanbic Holdings Plc, largely rely on advisory fees rather than brokerage fees to drive revenues.
According to the audited financial statements for 2018, Kingdom Securities Ltd and ABC Capital recorded losses of Ksh6.33 million ($63,300) and Ksh37.68 million ($376,800) respectively.
Equity Investment Bank made a loss of Ksh18.82 million ($188,200) while NIC Securities made a net profit of Ksh13.69 million ($136,900).
Co-operative Bank, Equity Bank, ABC Bank and NIC bank remained silent on the future of their stockbrokerage subsidiaries as the banks' chief executives did not respond to our e-mails and text messages.
However, Co-op Bank, Kenya's third largest lender by assets, in its annual report for 2018 indicated that its stockbrokerage subsidiary is not really sustainable and its prospects of turning around are minimal.
According to the report, the bank had unused tax losses in relation to Kingdom Securities amounting to Ksh11.3 million ($113,000) and Ksh14.05 million ($140,500) in 2018 and 2017.
However, the bank did not recognise the unused tax losses in the ﬁnancial statements since it is 'unlikely' that the stockbrokerage firm will generate sufficient profits against which the unused tax losses can be utilised.
Kenya's five-year stockmarket craze started in 2002 and peaked in 2007 characterised by long queues at stockbrokerage firms as investors sought to buy into initial public offerings such as Kengen, Eveready, Mumias Sugar company and Scanad. Bank managers were drawn to the flourishing stockbrokerage business.
During this period, the NSE's 20-share rose by over 700 per cent in dollar terms and burst through the 6,200 points level for the first time in 2007 as stories of overnight millionaires encouraged people, including those who had never invested in shares before on to the stockmarket to do so.
MARKET IN FREEFALL
And in complete defiance of the sustainability of the stockmarket boom, Kenyan lenders went looking for avenues to make forays into the stockbroking business by acquiring financially distressed stockbrokerage firms, with a view to transforming them into financial supermarkets and owing a share of the brokerage commissions largely controlled by stockbrokers and investment banks.
Hopes of minting money from the stockbroking business fell apart after the speculative stockmarket bubble burst at the height of the global financial crisis in 2008/2009, resulting in significant loss of paper wealth for investors.
The poor performance of the economy, political jitters associated with post-election violence, high interest rates, weakening shilling and trading malpractices among stockbrokers threw the market into free fall and retail investors fled the market.
Since then the stockmarket has not been able to recover, resulting in low trading volumes while pushing stockbrokers and investment banks into losses.
The move by banks to enter the stockbroking business was boosted by stringent regulations that required stockbrokerage firms and investment banks to recapitalise to Ksh50 million ($500,000) and Ksh250 million ($2.5 million) up from Ksh5 million ($50,000) and Ksh30 million ($300,000) respectively and limit their share ownership by individuals to not more than 25 per cent.