In 2016, it was a poor showing on the NSE

The bear run at the Nairobi Securities Exchange has visited yet more pain on market participants, with stockbrokers and investment banks sinking into losses, leaving only a handful posting reduced profits during 2016.

The net earnings of 14 market intermediaries that have so far released their results for 2016 show a negative return of $431,000 compared with $4.8 million in 2015.

There are 22 companies involved in stockbroking and investment banking on the NSE.

The depressed performance has eroded shareholder value and put hundreds of jobs in stock brokerage firms and investment banks at risk. 

While listed firms and investors are hurting from millions of dollars’ worth of capital losses due to the continued fall in share prices at the exchange, brokers and investment bankers who rely mostly on consultancy fees and commission income from trading in shares and bonds, are not doing any better.

In a booming market, investment bankers diversify their income sources by providing advisory services in major transactions such as initial public offerings (IPOs), rights issues, and mergers and acquisitions.

Capital, IPO

But last year no company raised capital on the exchange through an IPO. Nairobi Business Ventures (NBV), for example, listed by way of introduction on the Growth Enterprise Market Segment (GEMS) at an offer price of Ksh5 ($0.05) per share.

During 2016, the bourse attracted only two companies to raise additional capital through rights issues but one of them failed to raise the targeted amount.

Longhorn Publishers issued 126 million additional shares to the existing shareholders at an offer price of Ksh 4.2 ($0.04) and raised Ksh533 million ($5.3 million). The issue was oversubscribed by one per cent.

The Kenya Electricity Generating company (KenGen) on the other hand issued 4.4 billion additional shares at a price of Ksh6.55 ($0.06) per share and raised Ksh28.79 billion ($287.9 million), failing to meet the target by eight per cent.

It was not any easier for stock brokerage firms and investment banks that bought shares in the NSE itself during its IPO and subsequent self-listing in 2014.
NSE, which is self-listed as a company limited by shares,  saw its net profit  for the year decline by 40 per cent, from Ksh305.65 million ($3.05 million)  in 2015 to Ksh183.95 million ($1.83 million)   due to a decline in  equity trading volumes.

Shareholders’ earnings per share (EPS) fell from Ksh1.18 ($0.01) to Ksh0.71 ($0.007) in the same period.

NSE share

The NSE share declined 40 per cent from a high of Ksh24.75 ($0.24) per share in December 2015 to Ksh14.65 ($0.14) per share in December 2016, prompting stock brokers and investment banks to record revaluation losses on their books.

The offer price of NSE’s IPO was Ksh9.50 ($0.09) per share and the share hit an all-time high of Ksh29.25 ($0.29) per share in December 2014.

Capital markets regulators said over-reliance on the traditional products such as bonds and equities has adversely impacted the revenues of investors, stockbrokers and investment bankers and the remedy lies in diversifying into new products such as the exchange trade funds (ETF) and derivative contracts.

“I think revenues are a function of market activity. The low levels of revenue are not a surprise because the market has underperformed. We are introducing more products to reduce over-reliance on the traditional equities and bonds,” Capital Markets Authority chief executive Paul Muthaura told The EastAfrican.

“Last year was a very challenging year for the trading participants because with the depressed prices the value of trade on the exchange went down. That impacted directly on the trading participants. However, the outlook is fairly positive because we are bringing new products into the market,” said Geoffrey Odundo, NSE chief executive.

Brokerage firms and investment banks

A review of the financial performance of most of the stock brokerage firms and investment banks for the full year ended 2016 showed a depressed performance for the market intermediaries.

Firms that posted losses include Old Mutual Securities, KCB Capital, I&M Bank Capital, Kingdom Securities, AIB Capital, Genghis Capital Investment Bank and Sterling Capital while Equity Investment Bank, Standard Investment Bank and Renaissance Capital posted reduced profits.

Some investment banks such as Genghis Capital had huge exposure to collapsed banks such as Chase Bank.

Dyer & Blair Investment Bank recorded a profit helped by income tax credit and heavy investment in properties that were reflected in their books.

“There was a big drop in the equity turnover at the exchange, which affected the income of all market intermediaries,” said Amish Gupta, chief executive at AG Capital Ltd.

Data from the Capital Markets Authority of Kenya shows that the performance of the stock market diminished in 2016 compared with 2015.
The general decline in equity market performance was attributed to various reasons, including the general economic downturn, implementation of the interest caps law and major global events such as Brexit and changes in investor sentiments due to the US election.

According to the CMA, equity turnover on the NSE fell from Ksh15.11 billion ($151.1 million) in December 2015 to Ksh7.11 billion ($71.1 million)  in December 2016 while market capitalisation declined to Ksh1.96 trillion ($19.6 billion)  from Ksh2.05 trillion ($20.5 billion)  in 2015 in the same period.

According to CMA, Kenya’s economic growth prospects still remain uncertain with the general elections in August 2017, interest rate controls, shortfalls in revenue collection, and a ballooning public debt.