Brokers Going Broke? I don’t Think so….
Bankelele has an interesting post on brokers dwindling fortunes in light of this market slump.
The main thrust of the article is that those brokerage companies that have not been able to obtain investment banking licenses are the one’s who are going to suffer the most — mainly because all their commissions depend upon people buying or selling shares and if that number dwindles, so will their commissions. The investment banks however, can still make money from their advisory roles in whatever IPO deals they manage to get.
There was another interesting article in BD Africa a couple of months ago about just how much money some of these broker/banks had made during the height of the market IPO craze. The amounts listed in the article, follow:
CFC Financial is also listed in the article as one of the “big” brokers, but no amounts are given as to how much they could have made from commissions.
Now, I don’t know how accurate these numbers are because the article does say that it calculated them based on the number of transactions that each firm did, but I think it may be a good approximation.
So, it looks like some of the small brokers that didn’t make as much may fold, but the big one’s are going to last. I mean, if you’re sitting on $7 million dollars in commissions, even if you add in the expenses of running an office — e.g. salaries, rent, etc, etc….you should still have enough bank to ride this slump out quite comfortably. I’m assuming here that the expenses of running an office in Kenya are very minimal.
I’ve looked at the profiles of some of the employee’s at these banks and it’s actually quite funny, but perhaps financially prudent — they’re hiring a bunch of 22 year old new grad’s who I suppose are tasked with giving “high-net worth” individuals “sound” investment advice. I don’t think those 22 year old employee’s are being paid that much at all.
It’s clearly a very lucrative business for those few firms that have the political connections to get those big IPO deals.
If you’re a new entrant with no connections, how do you get the deals? Answer? you don’t. You depend on walk-in’s to bring in your commissions and if that goes belly up, you could be in trouble.
I suppose the costs of running a Kenyan office won’t be as high as on Wall Street, but $7 million isn’t really enough to ride out a slump.
In addition to the costs of running the office, there’s also the cost of all of their various operating licences, which aren’t cheap. Then there are the costs of yearly audits, which don’t come for free. Don’t forget that those 22 year-olds might be on low salaries, but they’re probably on comission as well, so they’ll already be eating into any fees that have come in.
The global credit crunch has already arrived in Kenya; encouraging foreign investment means that we’re no longer detached from the international financial system. Most economists expect this slump to last for years rather than months. If the investment houses can manage to live on $7 million for that long, good luck to them, but I have the feeling that if they’re going to struggle, if not actually go broke. Investment bankers like to live well, remember.
Of course, if they were really smart, they’d launch themselves onto the market as a way of raising capital, thus keeping the market going. But I don’t think any of them are planning to.
I agree with Inari 7 mil is not that much. Although, if they still have some money left, they could use it to invest in companies with strong business models, and with exposure to the global market, especially if they have weak cashflow problems, (if not now , they will have them soon).
Following are some examples,
“Mumbai-based Essar Shipping Ports & Logistics Ltd. couldn’t buy equipment used to handle bulk materials at ports when the Chinese supplier wasn’t able get a letter of credit from an Indian state-owned bank accepted in China, said V. Ashok, Essar’s executive director.
“This is absolutely a crisis situation here,” Ashok said. “If you don’t discount LCs, how will you do business? Business around the world is done on LCs, not cash. It’s all jammed.”
In Chicago, C1 Resources is holding up 1 million metric tons of cement valued at as much as $150 million, because an African customer can’t secure a letter of credit, said Chief Operating Officer Rob Risner. The order was placed Sept. 10 for shipment to Nigeria, Cameroon and Angola and the customer is still seeking a line of credit, Risner said. ”
http://www.bloomberg.com/apps/.....refer=home
One of the side effects of the credit crunch is the letter of credit, a tool necessary for international business. Companies in Vietnam and China are already running into problems getting the letters of credit, imagine what is happening or going to happen to Kenyan companies. I am sure depositing the money overseas, and loaning the money to companies can bring in a good return without the headaches of running a large office.
Inari:
That’s an interesting perspective you provide: Two questions for you:
1) Do you think those politically well connected brokers are paying the various license fee’s in full? I somehow doubt it.
2) A friend who has worked for commissions before complained to me that companies frequently withhold their commission payments and when they do, what are you going to tell them? they know people are desperate for jobs.
I have also heard (and this is just anecdotally) that those 22 year old “bankers” make between $200 and $500 dollars a month (with $500 dollars being on the high end). They are also not in sales, so they don’t make commissions.
I’m sure they’re one or two executives at those banks who probably make substantially more, but if they’re not owners, I don’t think it’s that much.
Working stiff:
I get your point about there being a credit crunch, but Remember, these brokers were getting that money instantly as soon as people bought or sold shares. It’s not like they were a manufacturing company waiting for payment after delivery of goods.
For a family owned business, $7 million in cash (this is they key word “cash” — should really sustain you. Assuming you’re not extravagant).
KE, I think you did not get may point, I might not have been clear. If it were me, I would deposit the money overseas, shut down my investment bank office, and start “loaning” money to Kenyan companies. I am sure any Kenyan company that imports would need to buy materials and goods on the global market. (Maybe Nakumatt?).
During the exchange controls era in the 80’s that is how some of us were able to make a living.
The “assuming they were not extravagant” I think might be a huge assumption from my humble experience. Maintaining an “executive” lifestyle in Nairobi is not cheap, and investment banking is an industry that depends on the “image of success”. A manufacturer CEO can come to work in jeans, and a beat up car, but try that as an Investment banker, and people will begin to panic and think there are problems.
Not all stockbrokers will go broke… but a whole bunch will… that was bankelele’s point… Those that will fail are those without sufficient business or working capital to tide them over the next 1 year or those who expanded too fast…
Working Stiff:
What you are talking about sounds like the process of issuing asset-backed securities. i.e. if you have the cash, you loan it out to a business that has a particular asset (e.g. real estate, cars, etc, etc) and you use that underlying asset as collateral against the loan. So, if they don’t pay back the loan you gave them, you take physical control of the asset as a way to recoup your money. Is this what you are saying?
It’s interesting you raised the issue about maintaining a certain image because there is a lot of “classicism” in Kenya. So, how much do you think it would cost to maintain an extravagant lifestyle in Nairobi?
In America you can walk around the office in torn jeans and nobody would care. Often times, it’s very difficult to tell who has money and who doesn’t. People are not hung up on class distinctions and I think it’s part of the reason the country has been so successful in terms of it’s entrepreneurial spirit. Americans are not hung up on silly aristocratic ideals.
Coldtusker:
Are the amounts I described above ($6 – $7 million dollar ranges) enough to sustain some of these brokers for a year?
There are 20 or so brokers… only some made the amounts you quoted… so what of the rest?
CT:
I suppose the rest will have to close down ( temporarily) until the market picks up. I mean, how will they make money if people aren’t buying shares? It’s a commission based business.
nothing like a ‘temp’ shutdown…
Fixed Costs:
1) Business Licences from GoK, NCC, etc…
2) CMA fees
3) NSE fees
4) A bare/basic office
LOL… bottomline… some of them are going down… unless the CMA turns a blind eye to the ‘insolvent’ brokers!
coldtusker:
Do these brokers have no cash on hand? I can’t see why they just can’t lay off staff people and use the money to pay the license fee’s just so that they can be ready to bounce back when the market revives?
How much does it cost to get or maintain these licenses?
Kenyan brokers do not publish their financial statements – a pity coz US brokers have to do so & it helps (Lehman collapsed on its own account. Client funds are generally insured against fraud – thus no idea about cash on hand.
Go to CMA’s website for license fees.
Even in America, companies, brokers…you name it, fudge financial statements all the time. Look at what happened to that large broker REFCO. However, like I’ve said numerous times, if you get caught, you could end up spending years in jail and this is the major difference between a country with laws and one without.
Did you see the story in the nation? Now, the NSE is promising to regulate itself? are these people joking? This is exactly what has caused so many investment banks in America to go under: Bush came in and changed the rules and allowed the banks to regulate themselves and look what happened! He adopted Alan Greenspans economic philosophy, which was copied from Ayn Rand, who believed that markets could be self-regulating entities.
Parliament has to get serious about enacting tough securities laws and aligning them with jail time for offenders. I’ve been saying this here for a whole year. You can’t have a thriving capital markets system without the rule of law — people who get stung will just pull their money out and keep it out.
http://www.nation.co.ke/busine.....index.html