THE stock market was not the only thing going nowhere last year. Also pretty much at a standstill, was the consolidation of the industry.
With no time-frame set for the consolidation exercise, industry players who have not acceded to the Securities Commission's (SC) call for a one-plus-one merger at the very least, were content to let things be. To be fair, the stillness in the market has had brokers focused on more pressing issues, the main one being to stay afloat.
That aside, industry players exude a general weariness or sense of ennui about the whole business of consolidation.
Asked to comment on the consolidation progress close to three years after it was mooted, a broker groans. “Not that again.”
Likewise, the Association of Stockbroking Companies of Malaysia (ASCM), declined to comment.
In a written response to queries, however, the SC reiterated that it intends to hold all stockbroking companies (SBC) to their earlier stated commitment to merge with at least one other SBC, adding this applies equally to SBCs that form part of the banking groups.
In terms of the consolidation progress, it said: “The SC is pleased to note that 76 per cent of all stock broking companies have effected the merger process.” (see chart).
But judging from the current state of the industry, it is going to take quite some persuasion and prodding before the remaining quarter (16 standalone SBCs) takes the plunge. The independent brokers don't have to look far at the ones who have already merged with one other, or those that have gone the whole hog and merged or acquired three other brokers as a first step towards qualifying for universal broker (UB) status.
Money far from well spent
UBs forked out hundreds of millions in merging and by most accounts, are far from convinced the money invested was well spent. Says an official from a UB with a sigh, “We still don't see the benefits. Big means higher costs and higher costs without income is not a good thing.”
The SC says it continues to advocate market-driven consolidation and facilitates this process through the introduction of various incentives.
For example, the SC released the guidelines for UBs to deal directly in unlisted debt securities in October 2002. The guidelines are consistent with the SC's plan to allow UBs to participate in the full range of capital market activities. Other incentives that have been introduced earlier to encourage consolidation of stock broking companies include allowing branching and the setting up of electronic access facilities.
Brokers continue to mutter that the ability accorded to them to deal in unlisted debt securities or deal in bond trading, is akin to a half-measure at the moment owing to restrictions to money market access. They argue they are placed at a distinct disadvantage when compared to other financial institutions and last November, called for all stockbrokers, UBs or otherwise, to be granted access to the inter-bank market. The ASCM pointed out discount houses; commercial banks and merchant banks have access to the inter-bank market, enabling them to fund their bond trading activities at far cheaper rates.
Access to inter-bank market
With the market so lacklustre and commission rates liberalised, pure broking activities only generate minimal income, brokers say. That's why access to the inter-bank market becomes all that much more important to them. But they contend it's been an uphill task so far as the area is seen to come under the purview of Bank Negara.
“The importance and effect of this funding issue is wide-ranging as banks which borrow at the inter-bank lending rate are charged 2.8 per cent, whereas all stock brokers are charged an overdraft facility rate which is approximately 7.9 per cent with an additional annual 1 per cent commitment fee,'' said the ASCM.
In the overall scheme of things, bank-backed brokers are seen as the “luckier” ones. They only need to merge with another SBC and as a group, under the investment bank concept, can continue to do corporate advisory work through their merchant banks.
On the flip side, Alliance Banking group, currently without a broking arm, has stated its intention to acquire an SBC so as to enable it to do investment-banking work.
There are currently six UBs and they are trying quite desperately to grow their corporate advisory and bond trading departments. But it's a tough grind competing against the merchant bankers that are already far more established.
“We are seen as second class advisers,” says an official at a UB. “People expect you to automatically quote lower fees which we sometimes refuse to do as a matter of principle.''
Cash reserves for tough times
UBs generally feel more aggrieved over the consolidation exercise, maintaining they are worse off compared to others that didn’t take the initiative earlier on and merge: SBCs that haven't merged, still have cash reserves to help tide them over the tough times, they say.
In Apr 2000, the SC announced a target of 15 SBCs from the 63 existing by end-2000, threatening not to renew SBC licences if brokers did not sign firm merger agreements by then. That deadline was relaxed about two months later on the request of SBCs. But the SC, while stressing the mergers were voluntary, said the urgency for consolidation of the industry remained and that the commission would be monitoring the progress closely.
Those that met the year-end deadline received tax incentives and under UB carrots can – among other benefits – open branches and set up electronic access facilities, something the UBs have already capitalised on even if most say the set-up costs of such is prohibitive.
Still, the travails of existing UBs have not deterred others from seeking UB status. BBMB Securities and Botly Securities (a previous application for UB status had been submitted under TA Securities) have met the SC's three partner criteria as the first step towards UB status.
A market observer says UBs shouldn’t compare themselves with investment banking groups; UBs have benefited, he says, and can now participate in so many more capital market activities while the banks remain pretty much status quo.
Standalone brokers are also feeling some heat. Brokers say that the authorities, in subtle ways, are turning the screws tighter so that it becomes increasingly difficult for them to offer services other than broking services.
Still, many of them are resistant to finding that significant other, claiming prospective SBCs are still holding out for hefty premiums. “It's too expensive to merge or takeover. We don't see the benefit,” is a common refrain of standalone brokers who seem happier at the moment to leave their fate to attrition or market forces.
With brokers at different stages of evolution, it's difficult for them all to find agreement on most issues. But there seems to be common ground on commission rates. They would rather a floor be set rather than a fixed ceiling of 0.7 per cent for trades with contract values of RM100,000 and below.
The market observer says brokers should stop going on about their plight – after all, the economic uncertainty has pushed many other sectors into the doldrums also. “A lot of others are also suffering. Brokers should work at reinventing themselves.”
Will demutualisation push consolidation along? A 30 per cent value of the demutualised exchange – its net asset value is valued at some RM1.3 billion – has been allocated to the stockbroking industry. The stated value allocation is expected to be of help to SBCs in determining their sale prices, but then again, not too many are banking on that to happen.
Except for short periods, the market has been languishing since May 2000, causing a great deal of angst all round. One definite common ground brokers (and investors) have, is the fervent hope for a good sustained rally on the Kuala Lumpur Stock Exchange soon. If nothing else, it will bring much needed relief to the industry and help ease consolidation woes.
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