ICRA: Pick up in market volumes likely to continue; industry broking income expected to grow by 12-15% in FY2017
Following a lukewarm FY2016 partly on account of challenging operating environment, impact due to the increase in minimum contract size for option trading and the withdrawal of liquidity enhancement schemes that were introduced earlier, H1 FY2017 saw aggregate equity market volumes recover by 14% and ADTO increase by 15%.
ADTO in H1 FY2017 was higher at Rs. 3.6 trillion when compared with Rs. 3.0 trillion in FY2016 and Rs. 3.3 trillion in FY2015. Both the decline in market volumes in FY2016 as well as their improvement in H1 FY2017 was led by the derivatives segment which witnessed a 9% decline in FY2016 and a 14% YoY growth in H1FY2017. With the volume growth in cash and derivatives segments remaining similar, the proportion of cash and derivatives volumes continued to remain stable and stood at 7:93 during H1 FY2017.
Karthik Srinivasan, Senior Vice President, ICRA Limited, said “Though the H1 FY2017 performance has been better than H1 FY2016, any adverse impact of the recent rate hike by the US Federal Reserve, delayed pick-up in growth and corporate profitability following the demonetization and global volatilities could partly impact broking volumes during the second half. However increasing activity levels by the DIIs could partly alleviate concerns on reduction of trading volumes. Hence, we estimate equity market volumes growth rate of 12-15% for FY2017.”
In H1 FY2017, commodity market volumes rose marginally to Rs. 36.8 trillion (ADTO of Rs. 0.28 trillion) from Rs. 34.9 trillion (ADTO of Rs. 0.27 trillion) in H1 FY2016. Data from exchanges indicate that the mix of volumes across commodities has remained largely stable in the last one year with Bullion contributing the largest share (36% of volumes in H1 FY2017) followed by Energy (34%), Base Metal (28%) and Agricultural Commodities (2%).
Currency trading volumes of brokerage houses have, nevertheless, grown significantly in the last 12 quarters. In the period between Q1 FY2017 and Q1 FY2015, volumes grew at a CAGR of 48%. In Q2 FY2017, however, currency trading turnover witnessed a marginal softening to Rs. 18.9 trillion from Rs. 20.6 trillion in Q2 FY2016.
On the back of top-line pressures, both RoE and RoA witnessed softening in FY2016. ICRA believes, going forward, the credit profiles of medium and large brokerage houses shall witness greater de-linking from the volatility of the domestic equity markets as they improve revenue diversification and improve usage of cost light business model. Given continued focus on lowering cost structures while expanding reach into underpenetrated regions, ICRA’s near to medium term outlook for the profitability of these brokerage houses remains positive.
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