Published November 29, 2008

Sector In Focus
No signs of wedding bells for brokers

Broking firms appear sturdier, years after the last consolidation and with the market downturn, they are not in the mood for a tryst. By Jamie Lee

Email this article
Print article
Feedback

THE broking industry went through a period of consolidation some five to eight years ago, as the government opened up the industry to foreign brokerages and allowed fierce slashes in commission rates to inject competition. Some brokerages then crumbled under the pressure and sold out to the bigger boys.
NO RUSH
Some market watchers think that no one is really in an acquisition mood during this period

The old courtship stories involve DBS Securities acquiring Vickers Ballas Holdings, OCBC Securities taking over Keppel Securities as part of the buyout for bank Keppel Capital Holdings, and UOB's pursuits of several brokerages including Kay Hian Holdings, RHB Cathay Securities, as well as the broking arm of JM Sassoon and Hong Leong Group's Millennium Securities. Today, about 10 local broking houses remain after a flurry of mergers and acquisitions that joined brokerages in matrimony.

But history is unlikely to repeat itself, said industry players, as brokerages that have weathered the consolidation and previous cycles are likely to be in a stronger position than before.

'I don't think brokerages would want to sell now under such market conditions, unless they have no choice,' one market watcher told BT, adding that the market downturn has been a distraction from getting hitched. 'No one is really in an acquisition mood right now,' he said.

Phillip Securities - which was rumoured to have been a takeover target in the early 2000s - is 'comfortable' to stay private for now, said another industry player. Phillip - which was started by the executive chairman Lim Hua Min - had received offers from foreign and local brokerages during the consolidation period, the source added, but these were deemed unattractive.

Smaller local houses include Lim & Tan Securities - which was reportedly determined to keep it as a family business amid the M&A fever - and Westcomb Securities.

Financial statements are not available for the privately held brokerages, though figures reported by the two listed brokerages here - Kim Eng Securities and UOB Kay Hian - might be one indicator of smaller debt concerns for brokerages today.

Kim Eng had written off $900,000 for allowance for trade impairment and other debts in the nine months ended September, reversing from a $1.04 million writeback in the same period in 2007. This represents a small 0.46 per cent of its total costs and expenses.

Singapore's largest brokerage, UOB Kay Hian, made a $528,000 bad debt allowance for the same nine months, a mere 0.6 per cent increase compared with $525,000 in the previous corresponding period. This is 0.27 per cent of its total costs.

Their cash positions are also sound - Kim Eng has $417 million in cash as at Sept 30, up some 51 per cent from $276 million a year ago. UOB Kay Hian reported a cash position of $274 million as at Sept 30, up from $70.8 million.

But one market observer said that the effects from the financial crisis could hit brokerages later. 'Right now, the answer is no,' said one industry watcher on consolidation. 'But I would not dare to put my foot down and say that the picture would not change.'

'The real impact on the jobs and employment probably would not be felt until three to six months (later). So when it happens, whether there is a need to consolidate, I think we'll have to assess at that point,' he said.

There were whispers in the market in 2002 that UOB Kay Hian could be taken private, after UOB Kay Hian chairman and managing director Wee Ee Chao began buying shares in the open market. A similar trend is emerging now. Since Oct 10, Mr Wee has made about 20 open-market purchases for UOB Kay Hian, raising his stake from 16.41 per cent to 16.75 per cent.

But the latter market watcher dismissed the idea. 'There's no reason to take it private. There's no advantage,' he said, adding that a listing allows the brokerage to raise funds if needed.

For now, brokerages are busy protecting their bottom lines. UOB Kay Hian reported a 72.1 per cent slump in third-quarter net profit to $19.7 million from $70.5 million a year ago. For the first nine months, it posted a 56.5 per cent drop in net profit to $92 million from $211 million.

Kim Eng fared worse for the third quarter - with a 92.9 per cent plunge in net profit to $2.23 million from $31.4 million. On a nine-month basis, net profit saw a smaller 43.7 per cent drop to $70.1 million from $124 million a year earlier.

leejamie@sph.com.sg