Tuesday 20 March 2018

Too many brokers chasing too few stocks in a falling market

There is only enough business here to support about one thousand jobs in this sector

IF YOU ask stockbrokers to talk about their industry, you can expect to hear a lot of bitching.

They are all bloodied from the stock market collapse, claim to be holding their own but are quick to cast doubts about how their rivals are fairing.

The only thing they can agree on is that they can't all continue to make a living in the shrinking Irish market.

News that Fexco has secured a deal with AIB to pay just €24m in cash for Goodbody was a relief to many at the brokerage. As one insider said, their colleagues at AIB Bankcentre were describing them as "the lucky ones".

They had found an owner who had plenty of capital to support their business into the future, unlike AIB that is trying to raise over €7bn to avoid being nationalised. "It has put an end to the uncertainty," an insider says.

The announcement, when it came on Monday, underwhelmed most in the industry. Fexco was the front runner to acquire Ireland's oldest stockbroker since AIB put it up for sale a few months ago as part of its fire sale of its most valuable assets.

Brian McCarthy's Kerry-based financial services company was in the envious position to have a large chunk of cash thanks to the sale of its money transmission business to Western Union last year for €123m and its founder always wanted to be a stockbroker.

It looks like a good deal, certainly when compared with the €315m paid by Davy Stockbroker's management for that firm in 2006. Goodbody has almost €4bn in funds under management.

Fee income

One broker suggests that based on the fee income from that alone the price tag is attractive. Fexco will have to make further capital available to meet the regulatory requirements, but even if this amounts to another €50m, it could still be a good price struck at what most hope is the bottom of the market.

It is a huge step for McCarthy's company that likes to view the deal as "transformational." And it certainly has that potential to yield handsome profits in the future but much will depend on the extent to which the Irish market can recover and Fexco's ability to manage its new division.

One broker described the acquisition as being akin to a "very small shop keeper" taking over a large and well established business. "Culturally they are very different" he said. "Stockbroking is a very different business from money transmission and tax rebates. It works in a different way and it will be a challenge for them to get their heads around that".

But Fexco will have Goodbody's senior management on board to run the firm, with managing director, Roy Barrett and its 270 staff taking about 25pc of the business with the potential to increase this stake if they achieve Fexco's targets.

Fexco has a small brokerage itself that it started from scratch offering a cheap dealing service for clients in the years when people had plenty of money and were chasing potentially lucrative returns on stocks and shares. It succeeded in capturing a tiny share of that growing market and had its troubles. In 2000 it was forced to close to new business for a while and pay an €80,000 fine imposed by the Central Bank for failing to take adequate control and credit risk measures. It currently employs 15 staff in that business based in Dublin and Cork, who will move to Goodbody.

When the deal is approved by the regulators, expected early in 2011, Goodbody's says it will be business as usual. It will retain its name and keep its Ballsbridge headquarters thanks to a rent reduction from its landlord, AIB.

As well as securing its future, Fexco's acquisition offers Barrett and his team new opportunities to grow the business, something they highlighted in a plan for McCarthy. Escaping bank ownership will give the firm more room for manoeuvre.

AIB imposed a "bank culture and style" on a business that insiders say needed to be more entrepreneurial and nimble. This structure precluded Goodbody from chasing business carried out by the bank's other divisions and also contributed to higher costs. "AIB has been a millstone around Goodbody's neck," one explained.

Lucrative work

It will also be chasing lucrative work associated with privatising government assets as the Minister for Finance flogs off more of the family silver to generate more cash for the economy. Goodbody led the flotation of eircom and Aer Lingus and with Davy and others will be keen to win a similar role if companies like Bord Gais, the ESB and others are to be sold.

Fexco will undoubtedly run a much tighter ship and quickly impose greater cost discipline across the firm. There will be redundancies as the two businesses are merged, with possibly as many as 60 staff expected to leave the business, which has incurred losses of €3m in the last three months alone. But controlling costs won't be enough to successfully navigate it through the troubled world of Irish stockbroking.

All brokers are struggling to make money in a market that is down 70pc from its record highs and where private clients are either broke or shell shocked. Just two companies, Ryanair and CRH, account for the bulk of the day-to-day share dealing on the Irish exchange since the collapse of Irish bank stocks. One broker says the market is now worth about as much as Tesco and that in the summer months most days were as quiet as Christmas Eve.

In this climate there are far too many stockbrokers to prosper. "The cost base is still way over the top" one broker says. Others suggest there is only enough business here to support about one thousand jobs in this sector signalling further job losses in the short term.

Davy, the biggest, has restructured its business, announcing redundancies and has been increasing its focus on securing more and more business outside of the Irish market. It claims to be profitable month-on-month and to have paid down large amounts of its debt in the last few years of the boom. Davy also retained its bond desk, which has proved a nice earner since the stock market crash.

Its private clients have been amongst those who have sustained the heaviest losses though. They participated in the firm's highly leveraged syndicated property deals, the most high profile being the glass-bottle site in Ringsend associated with property developer Bernard McNamara, purchased for €412m but now worth about €60m. Other investments have also performed badly.

It believes that as the market shrinks there will ultimately only be room for Davy and one other broker. In the future the firm will increasingly have to focus on developing international sources of income.

Beyond the two big brokers their smaller rivals are also face some uncertainty. Sean Quinn remains a major shareholder in NCB. Merrion Stockbrokers, sold to an Icelandic bank in 2006 has since been bought back by its management for €30m and has been re-trenching. It has scaled back most of its stockbroking activities apart from corporate finance.

The smaller firms, Bloxham, Dolmen and Campbell O'Connor, have all been outsourcing parts of their operations and slashing costs in response to the troubled market and will face fresh crises, in terms of complying with new regulatory requirements in the future. This will force further mergers, most believe, sooner rather than later ultimately leaving maybe just two or three Irish stockbrokers.

Irish Independent

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