Profits solid for UAE brokers

Q3 saw a year on year increase of more than 30% as brokerages benefited from larger commissions and increased volume. But traders say the Arabtec saga skewed figures for Q2.

Hadeel al Sayegh

December 17, 2014

Updated: December 17, 2014 04:00 AM

UAE stock brokerages made a profit of Dh151 million in the third quarter, according to financial statements on the regulator’s website, compared with a profit of Dh99.69m last year.

The higher income for these companies is largely attributed to bigger commissions from larger traded volumes this year amid renewed investor interest for UAE equities.

The UAE bourses have traded Dh507.1 billion so far this year, almost double the Dh244.8bn achieved last year.

While the profits appear to be stronger than the year previous, brokers say that income and traded activity cooled in the third quarter when compared with the second quarter as traded volumes peaked amid investor panic over Arabtec.

The third quarter began just as the Arabtec saga, which triggered broader market turmoil, began to calm down.

“July was a reversal of the declines but August and September were weak in terms of numbers , it was volatile for brokerage firms and the beginning of the correction for the stock market,” says Mohammed Ali Yasin, the managing director at NBAD’s brokerage arm.

Mena Corp’s chief executive Fathi Ben Grira, says had it not been for Arabtec’s drama the third quarter could have come out stronger.

“Investors lost money and were not as excited in the market as before, others found opportunity because of the lower prices,” he says. “But overall, a lot of investors got scared.”

The initial public offering of Emaar’s retail business, Emaar Malls Group, sucked liquidity from the market and the shares of the company did not list on the Dubai Financial Market until October 2, which counts as the third quarter.

“The IPO activity that we saw did not benefit a lot of brokerages,” says Mr Yasin.

“The primary was competing with the secondary market therefore we lost a lot of liquidity.”

After years of consolidation, restructuring and lay-offs in the wake of the global financial crisis, UAE brokerages are enjoying a second year of profitability amid renewed interest in local equities.

There are 48 brokerage firms in operation today, compared with 103 in 2010.

The top 13 companies currently control about 72.6 per cent of traded value on the exchanges. The bottom 23 by contrast have just under 1 per cent market share each.

While the top companies’ profits stood in the millions, the bottom 20, by contrast, were either losing money or barely covering their operating costs.

Brokerage arms of local banks led the gains in the sector. NBAD Securities made Dh17m, compared with Dh8.3m last year. ADIB Securities, the brokerage arm of the Sharia-compliant lender, rose to Dh17.6m, compared with Dh9.2m the year previous. Mashreq Securities followed suit, recording profits of Dh11.9m, compared with Dh6.04m last year.

Small, standalone brokerage houses seem to be struggling as they get squeezed out of their market share.

Stock brokerage firms will be amending budgets for next year to provision for a drop in liquidity after a staggering decline in equities over the past few weeks.

“I won’t be surprised if we see traded value drop substantially,” Mr Yasin says.

“Therefore brokerage budgets will have to be amended or they won’t be met. I honestly didn’t see that coming in when I did the budget in September,” he adds.

This year has been a bumper one for equities after Dubai won its bid to host the Expo 2020, believed to trigger another property and construction boom, and after UAE equities were upgraded by the international index compiler MSCI from frontier market to emerging market status. But Dubai’s index has made declines of about 7 per cent daily this week, tracking oil markets.

Abu Dhabi’s index lost as much as 6 per cent on Tuesday. The Dubai Financial Market General Index (DFM) declined 1.6 per cent by the close on Wednesday, while the Abu Dhabi Securities Exchange General Index (ADX) rose 5.1 per cent.

The market rout encouraged the ADX to approve rules effective from last Sunday to introduce temporary suspensions for stocks if they fall by 5 per cent.

Suspensions last for five minutes and allow investors to review their trades and study information that was causing the stock to fall, the ADX said.

Abu Dhabi and Dubai stocks witnessed a second leg of declines in recent weeks amid plummeting oil prices as investors panicked once again over the prospects for growth for UAE companies.

The ADX is down 4.6 per cent for the year, after rising as much as 22.5 per cent in the first half. The DFM is down 9.9 per cent, after rising as much as 60 per cent in the first half.

“The confidence level among investors has definitely been hit and will definitely set us back,” Mr Yasin says.“This panic is happening from external factors,” Mr Yasin said. “We didn’t see this happen consistently in 2008, 2009 as we are now.”

News reports that the central bank was reviewing regulations concerning bank lending against shares, coupled with industry talk that the banking watchdog has asked banks to provide reports on lending against shares, has been “scaring people” all together, Mr Yasin says.

The circuit breaker will “stem the panic that we see, until the correction in the global market calms and no longer puts pressure on the local market,” he says.

Looking ahead, brokerages are bracing for difficult times in 2015.

“I think it’s going to be challenging but I honestly believe today that the markets are fundamentally strong,” Mr Yasin says.

“We are still at break-even in an environment with oil prices at about US$60. I think we should expect that the UAE economy will be solid but it might not be in the same growth mode as 2013 to 2014.”

The rapid declines in equities recently means investors could look for capital gains or higher yields from cheaper valuations.

“People will be lowering their expectations of profit growth for companies, whether banks or real estate,” Mr Yasin says.

“The market has dropped and some shares have lost nearly 60 per cent of their value. For many of the good companies out there, the drop represents a good investment opportunity.”

Mr Ben Grira says a challenging environment will also mean further consolidation for the brokerage sector.

“In the beginning of the year everyone was making money, but now we are starting to be in a challenging situation. The story is not as easy as it used to be,” he says.

“Because we will experience a market slowdown, the smaller players will definitely suffer. They don’t have the critical size for the economies of scale.”

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