Profitability of domestic broking firms moderates after strong FY2022: ICRA

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After two excellent years, FY2021 and FY2022, the performance of domestic broking industry moderated in Q1 FY2023 with a 10% quarter-on-quarter fall in net operating income and 25% quarter-on-quarter dip in net profit, according to ICRA research.

Geopolitical concerns and the adverse macroeconomic outlook have affected investor mood, resulting in a fall in profitability along with a decline in the transaction volumes of high-yielding cash broking segment, it said.

Domestic capital markets had a great performance in the past two fiscal years, with healthy participation from retail investors and domestic institutions and a large number of initial public offerings.

As average daily turnover more than quadrupled in the preceding two fiscals to about Rs 72 lakh crore in FY2022, the broking industry reported a record performance.

The total number of demat accounts stood at 98 million as of July 2022, up from 55 million as of March 2021 and 41 million in March 2020 with average monthly additions of about 3 million in FY2022.

Retail clientele from tier 2 and 3 cities and younger demographics have also increased in the recent years. The pace of additions, however, slowed in Q1 FY2023 to about 2 million accounts per month.

Smaller brokers are losing active client market share to larger firms due to industry consolidation. Stricter compliance, technology requirements, and discounted pricing pressures have hurt small brokerages. Discount brokerage houses are estimated to have accounted for about 60% of NSE active clients as of June 2022, up from 2% in March 2016.

The leverage levels of brokerage groups have increased in recent years due to capital market financing through loan against shares (LAS) and margin trade funding. Changes in regulations have also increased brokerage firms’ operating capital requirements, which has impacted the leverage. Recent rising interest rates amid volatile market conditions could reduce investors’ appetite for leverage and in-turn adversely impact the net interest income for brokers, ICRA said.