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Skip Navigation LinksHome :: Back Issues :: Survival of the fittest

March 2000

Survival of the fittest


Asian Brokers




Brokerages in Southeast Asia are preparing for tough times ahead. Liberalization of fees and technology are radically changing the landscape for financial firms in the new millennium. In Thailand, the number of broking houses has fallen by almost half over the past three years as the Asian financial crisis took its toll. The survivors are now facing pressure from eroding margins under a new commission structure now being introduced.
In Malaysia, the government is mapping out a so-called master plan to further consolidate the industry and brokerages fear possible cuts in fees in line with the trend in other Southeast Asian countries - although no official plans have been announced. And in Singapore commission rates are being drastically reduced as part of a programme by the local exchange to introduce freely negotiable fees over four years. At the same time, the need to invest in e-trading in an already highly-competitive market is putting further pressure on profits.
One response is to grow in size. Two of Singapore's leading stockbrokers, Vickers Ballas and GK Goh, are merging to form what is expected to be the region's largest and best capitalized brokerage. The new entity, Goh Vickers, will have S$1 billion ($588 million) in shareholder funds and a market capitalization of about $1 billion. It claims an almost 20% share of its home market. Wee Sin Tho, president and CEO of Vickers Ballas, says: "Our model is growth and growth plus. The stockbroking segment will continue to be a source of growing profitability for Vickers, driven by growing population, growing GDP and a growing middle class."
E-trading too is becoming an important part of competition as bricks and mortar are taken over by clicks and motor. Like the rest of the region, the country is becoming more technologically aware. According to a report by Salomon Smith Barney, the number of Internet users in Singapore can be expected to have a combined annualized growth between 1999 and 2005 of 19%; in Malaysia 20%; and in Thailand 23%. To compete for e-trading clients, some houses even offer gifts and award points to investors.
With size comes diversification of income - a route being explored by many brokerages. The Vickers Ballas family includes capital markets advisory - it's the only brokerage in Singapore with a corporate finance licence - a nascent growth financing business and Vertex, a venture capital business.
Many players see Singapore as a still lucrative market even with its 30 local and international brokerage houses. Over the past 18 months, two mergers have taken place: Keppel and Tat Lee in 1998 and GK Goh and Lee&Co last year. The market expects more mergers in the coming year. Manager Ngiek Lian Teng of the Singapore-based fund house Value Partners says: "It won't be a surprise to see more mergers coming. I also expect to see more diversification into other activities such as fund management. The hope of brokers is that volumes will catch up and make up for squeezed margins. But volume depends on market sentiment. We just have to wait and see."
In Malaysia, mergers are also the way forward. The government has made it plain that there are too many broking houses - 63 compared with only 50 a few years ago - and that leaner, meaner organizations are needed to deal with the challenges of the future. Kuala Lumpur Stock Exchange senior manager Ayub Mohamad says: "The finance minister will put out a capital markets plan some time in June. This will map out the direction of the industry. We are looking at consolidating the industry to take on future challenges especially in information technology."
HLG Capital Malaysia, a medium-sized listed company with a market capitalization of $120 million and which is affiliated to the Hong Leong Group, is among the brokerages on the lookout for partners. But HLG group managing director David Chua would only say: "We may want to strengthen our position. We will consider offers at the right price." He points out that brokerages in Malaysia are restricted by territory which makes mergers good sense under some circumstances.
But it is Seamico of Thailand which provides the classic story of survival. In September 1997, it came within 24 hours of being closed because its finances were in dire straits. Like many brokerages then, it was over-extended with margin lending. The present managing director came in with new partners and refocussed the business. The company now has Bt 800 million ($21 million) in the bank and is totally debt-free. It is now a front line broker with online trading coming on.
Seamico's head of research, Philip Adkins, sees tough times coming though. He says: "The liberalization of the commission structure later this year is expected to see the market become more of a free-for-all in respect of competition for business. There is little doubt that bucket-shops will develop through offering low commissions and basic services such as execution only. Fortunately, the more mature investor is still willing to pay the cost for added value service, such as the provision of good research. That said, we expect it to become a case of survival of the fittest."
Singapore-based fund manager Hugh Young of Aberdeen Asset Management fears that competition in the region could result in a deterioration of broking services, especially in research.
He says: "There has been a general decline in the scope of research. Most houses now concentrate on large cap stocks with a view to generating commissions."






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