After record-high active client additions and average daily turnover (ADTO) in a pandemic-marred fiscal, brokerages will continue to see positive revenue growth in fiscal 2022. Nevertheless, the growth will be muted, with volatility and peak margin regulations being the dampeners. Discount brokers are surging ahead in terms of client acquisitions, while bank-led brokers have maintained revenue market share. However, traditional brokers have lost ground both in terms of client acquisition and revenue market share, says a research report.
According to CRISIL Ratings, several factors contributed to the influx of retail investors into equity markets in the current fiscal. These include, user-friendly trading platforms, including on mobile, and schemes with very low brokerage; relatively low interest yield on savings and deposits; ample time availability during the lock-down and pandemic and Pygmalion-esque effect linked to broad-based high returns in equities since March 2020.
Interestingly, the ratings agency says, discount brokers grabbed a significant market share of active clients, but they still lag bank-led brokers in terms of revenue market share.
“Discount brokers have led from the front capturing more than 75% of incremental client acquisitions and now command about 45% market share in terms of active clients (see chart above). However, on the revenues front, they have some way to go with estimated share of around 30%. Bank-led brokers, with a relatively premium brokerage model, have leveraged their existing client base well and continue to maintain revenue market share at about 40% (see chart below) while many traditional brokers have lost ground,” says Ajit Velonie, director of CRISIL Ratings.
According to the rating agency, this is because bulk of the new client additions by discount brokers are in the 20-30 years age group that have relatively lower disposable incomes. On the other hand, it says, bank-led brokers have been able to hold on to their customer base, with many acquired through their parent banking channel.
"These customers not only trade frequently but also transact in higher ticket volumes. They also opt for additional services such as advisory, research reports, and relationship manager support and are willing to pay additional brokerage charges," it added.
CRISIL Ratings estimates that the average revenue per user for bank-led brokerages was Rs10,000-Rs12,000 during the first half of fiscal 2021, while that for discount brokers was Rs4,000-Rs8,000.
During the first nine months of fiscal 2021, brokerage houses across industry added about 5.2 million clients – as much as they did during the preceding four years, cumulatively. This took the active client base to 16 million as of December 2020. Continued buoyancy in equities and new client additions also led to ADTO hitting decadal highs, the ratings agency says.
In the note, CRISIL Ratings estimates broking revenue to have grown by about 65%-70% in fiscal 2021 as against around 7% in fiscal 2020. However, it says, "Market volatility and phased implementation of new margin regulations may act as a drag on incremental volume growth, resulting in marginal revenue growth in fiscal 2022."
The slowdown has already begun to tell, the ratings agency says, pointing towards de-growth by 1%-8% in broking revenues during the third quarter of fiscal 2021 on a sequential basis. This indicates that client additions are not translating into higher broking revenue of late, it added.
According to Krishnan Sitaraman, senior director of CRISIL Ratings, performance in the December quarter shows signs of fatigue creeping in, with most broking entities registering quarter-on-quarter (q-o-q) de-growth in revenues even after factoring in lower trading days in the quarter, despite continued record client additions.
"This is in contrast with about 18% sequential growth in the September quarter. With equity markets turning volatile since January 2021 and revised regulations with higher margin requirements kicking in, sustainability of trading volumes in fiscal 2022 may be a challenge, thereby impacting revenue,'' he says.
There are two key regulatory changes. First is upfront margin requirement in cash segment trading, like the futures and options (F&O) segment effective from 1 September 2020 and two, full margin requirement for intra-day position to be implemented in phases starting with 25% peak margin from 1 December 2020, to 100% from 1 September 2021.
CRISIL says, "Both regulations focus on increased margin requirements, which essentially lowers the leverage available to investors, impacting trading volume. Hence, sustainability of new client additions along with its translation to trading volumes and revenue will remain key monitorable."
In this milieu, the ratings agency says, profitability will continue to be driven by how well players manage their cost-to-income structure. "A recent shift in focus towards creating and enhancing tech-based platforms resulted in a steady increase in cost-to-income ratio till fiscal 2020. And players, who invested in enhancing digital presence have reaped the rewards, with the ratio estimated to have declined 10-15% in fiscal 2021. With revenue growth expected to be subdued next fiscal, their ability to manage the cost structure will be a key credit monitorable," CRISIL added.