The local stock markets’ lackluster turnover is putting pressure on the profitability of local securities houses, and smaller brokers might exit the market as poor investment prospects might further dampen the appetite of retail investors, Fitch Ratings Inc said.
“Taiwanese securities firms are facing challenges to stay viable as retail investors increasingly avoid the domestic stock market,” the international ratings agency said in a recent report.
Growing competition from online brokers could accelerate the demise of unprofitable brokers, the report said. Retail investors make up more than 90 percent of Taiwanese securities firms’ customers, while institutional investors are mainly served by foreign brokers operating locally, Fitch said.
From 2011 to last year, average daily turnover on the local bourses was NT$111 billion (US$3.4 billion), down 20 percent from five years earlier, Fitch said.
The agency attributed the fall mainly to lower retail activity, with retail investors accounting for only 59 percent of overall transactions last year, down from 71 percent in 2010 and 86 percent in 2000.
The decline of retail investor interest is set to continue, because investment returns are low, including returns from conventional wealth management products distributed by brokers, while alternative investment tools, such as real estate and offshore investments, generate higher returns, the report said.
The Financial Supervisory Commission has allowed a broader range of wealth management and insurance products to be sold to help securities houses improve earnings and diversify income sources.
In addition, the commission has eased trading rules to invigorate the markets, but has achieved little success.
Against this backdrop, consolidation is taking place and companies are making efforts to cut costs, while online brokers are squeezing and often undercutting fees, Fitch said.
Mega Securities Co (兆豐證券), the brokerage arm of state-run Mega Financial Holding Co (兆豐金控), has made public plans to shut down two branches by the end of July and strengthen Internet banking instead. Other state-run peers might follow suit.
Earnings pressure will build up on securities houses, especially on small ones, as they depend heavily on simple brokerage activity and proprietary trading, Fitch said.
The risk of unprofitable business has increased, accounting for their credit ratings in the “BB” category, the agency said.
Last year, 10 small securities companies incurred losses, even though they were moderate thanks to a well-controlled risk appetite and conservative stop-loss limits, Fitch said.
Large brokers might seek to expand through acquisitions to boost their client base and economies of scale to offset fixed costs, Fitch said.
Acquisition targets might fall outside Taiwan, allowing brokers to raise earnings and allocate capital to areas with higher growth prospects, Fitch said.
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