Brokerage industry under severe pressure

Threats of systematic failure of the clearing system of the bourses has been subsided through effective settlement of the outstanding CFS issue lately. According to Pakistan Credit Rating Agency (Pacra) analysts Rai Umar Zafar, Samiya Mukhtar and Waqas Munir, equity markets in Pakistan have come under severe pressure since March 2008.
While in the past the markets had recovered from sharp dips, this time the scale of the downturn appeared more pervasive and substantial. The equity brokerage industry has a high correlation with performance of the bourses. Under the current scenario, profitability prospects of the brokerage industry have come under severe pressure. The recent meltdown in the equity market has dampened trading volumes. Further, many market players actively maintained propriety investments value of which has significantly declined.
In view of substantial erosion in the market value of securities, brokerage houses with inadequate margin arrangements against clients'' exposure suffered losses in the form of write-offs of receivables. The risk was magnified for those entities which had financed their positions through short-term bank lines. The banks, in the current scenario, have restricted lending to the brokerage industry.
A large proportion of the industry players suffered dent in their financial profile in the current circumstances. Nonetheless, brokerage houses with robust risk management systems, sound capital structure, and good management teams having the ability to rationalise cost structure in the current scenario, and patronage of sound business groups are expected to withstand this difficult operating environment.
At the same time, the companies that had restricted their operations only to brokerage services with limited lending exposure and/or investment activities have fared well. The brokerage houses in Pacra''s rating universe, though experiencing pressure on performance in near future, have largely maintained their financial health and ability to timely meet financial commitments, as they possess many of the distinguishing attributes mentioned above. The brokerage houses JS Global Capital, KASB Securities and IGI Finex Services managed to maintain the rating as AA, A+ and A-.