Brokers in financial dilemma

When MBEA Brokerages Limited, Uganda’s oldest brokerage house, lost its licence at the start of July this year due to its failure to raise enough money to run its business, the firm’s financial problems was not an isolated case. More brokers continue to face wider problems of raising cash within Uganda, and many of them have run back to their shareholders for a rescue package.
Five firms made losses during the year 2009, according to the latest industry figures. ReNaissance Capital, the Zimbabwean firm, made the biggest net loss last year, losing a whopping Shs1.2 bn ($518,000). ReNaissance faced quite a difficult 2009 as it had its licence suspended for three months for failing to raise the minimum required capital of Shs 15 million. A few months later, the company blacklisted some of its top managers in what the market perceived as a punishment for dragging the business to the doldrums.
African Alliance, which is said to have the highest number of clients in the market, made the second highest loss for 2009, Shs655 million ($283,000).
Both ReNaissance Capital and African Alliance have a common problem beyond the net losses they each made last year; they are the two broker dealers that had, by 2009, spent more than one billion shillings of their reserves in order to keep their businesses alive. Reserves are very sensitive as they represent the last fallback position for a company short of cash.
While it is difficult to verify whether these numbers have changed for the better over the last couple of months, the bleak picture, nevertheless, is the strongest representation so far of the difficulties brokerage firms face while doing business in Uganda.
Some financial analysts, like those at MBEA Brokerages, blame the gloomy numbers to the impact of the global financial crisis, which saw many foreign investors pull their funds out of Uganda’s market in favour of safer havens abroad.
But one financial analyst says there is more to this story than just the global financial crisis. According to the analyst, who preferred to remain anonymous due to his close relationship with the industry, for a long time many brokers placed bets on certain counters like Uganda Clays Limited, driving the price to wild levels during the process. Thereafter the brokers would dump the shares at lucrative price, raking in some big bucks.
For a long time, many brokers easily got away with pushing up the value of the shares of some of these companies because many clients gave them the flexibility to determine the price during transactions. Brokers usually tell clients not to set a price limit during transactions, advising them instead to set a wider margin above the target price – something that the brokers have exploited to make off quick gains.
With high demand during the glory years when share prices grew to unbelievable levels, brokers made some good money along the way on top of the 2% transaction advisory fees. Some say that some brokers colluded with top institutional investors to drive up share prices with a promise of a win-win situation.
However, the year 2009 turned out to be quite different. There was subdued demand on the stock market, and the National Social Security Fund, the largest investor on the market, suspended its participation after Parliament lodged investigations into some of the fund’s investment decisions.
Just as an example that Uganda’s market is still far from the boom years when share prices of companies like Uganda Clays Limited and New Vision Limited grew in leaps and bounds, the USE’s quarterly bulletin for July – Sept 2010, indicates that trading results in the third quarter posted a decline in performance with the total turnover dropping to Shs3.9 bn ($1.6 million) from the previous quarter’s Shs8.6 bn ($3.7 million), while volume recorded a 65% drop, declining from 67.7 million shares in the second quarter to 23.1 million.
Dyer and Blair made a net loss of Shs 185.6 million ($80,000) in 2009, although the company retains quite a substantial amount of reserves. The company’s image came under attack in 2008 after investors grew frustrated in the way the firm had handled their returns after the sale of Safaricom shares to the public was oversubscribed. The firm is said to have lost a number of customers along the way, something which might have manifested in the company’s 2009 figures.
Crested Stocks did not perform any better either; the company recorded a net loss of Shs72.7 million ($31000) and has drawn about Shs192 million ($83000) of its reserves. Crested Stocks is the company that was entrusted with clients from MBEA Brokerages Limited after the latter’s license was withheld in June this year.
Equity Stock Brokers had the smallest amount of net loss, Shs 21 million ($9000), although the firm’s thin net capital, of just Shs50 million ($21,000) as at June 2010, means that it is in need of a quick cash injection. Ideally, Equity Stock Brokers could turn to its reserves but the amount there, just Shs1.2 million ($518) as at end of 2009, is not substantial.
With the so called big firms facing trouble, there has been a shift in power of the brokers now with the bragging rights. Baroda Capital Markets, a broker within Bank of Baroda, was the most profitable company in 2009, raking in a modest net profit of Shs14.7 million ($6200). Although, Baroda Stock Brokers largely depends on the Bank of Baroda counter to make money, and those who know it say the firm is not as solidly structured as African Alliance.
Crane Financial Services, a subsidiary of Meera Investments under the Ruparelia Group, comes closely at second position after recording a net profit of Shs9 million. However, Crane Financial Services is more solid than any of the other firms, boasting of the highest amount of net capital and reserves in the industry. The firm has close to Shs 500 million ($216,000) in net capital and Shs315 million ($136,000) in reserves.
At least four brokerage houses have either written to their shareholders for a bailout package or have already received it. According to exclusive information gathered by Striking Deals, African Alliance is to receive a Shs1 bn capital injection soon. ReNaissance Capital has over the last two years received about Shs3.5 bn ($1.5 million) from its shareholders, with many signs pointing to more money coming in. Crested Stocks has so far been capitalized by Shs220 million ($95,000), while the Board of Directors at Equity Brokers have agreed to pump in Shs100 million ($43,000) in the business, with Shs80 million ($34500) already injected.
So why are these brokers receiving more capital injections in a market with no brisk business? Some experts say that brokers have been blinded by the faith that Uganda’s financial market industry is set for a fundamental change when the pension industry is finally liberalized. “They are putting on this image that they are ready,” says one market expert.
The liberalization of the pension industry, however, is being held back by the slow progress on enacting the law to govern the sector. And there is no clear deadline as to when the pension industry will be opened up.
So, that the mighty brokers are finding it difficult to remain profitable in Kampala should be a concern to clients dealing in stocks. Faced with such huge financial dilemma, many of the brokers will find it tempting to engage in some risky ventures that could eventually impact on earnings on the customers’ money and on the entire image of the market, say some experts.
Another financial expert who did not want to be named due to the close relationship with players in the market pointed out that the biggest problem for the brokers is that they do not have major shareholders to inject money in the business. “They (brokers) mainly depend on trades on the market, and if the volumes are low it means they are affected,” he said.