New results rule sends brokers into a spin

The old boys’ network at the stock market was at it again, this time around working to defeat new market rules, or at least, postpone their application.

But as expected, the entry of commercial banks into the stock market by buying out existing stockbrokerage firms is making it difficult for the market players to lobby for or against some rules.

And so, by latest Monday next week, all stockbrokers and investment banks will have to release their half-year financial results for the period to June 30, 2009.

They will also have to publish the results in at least two dailies with nationwide circulation.

That is the new rule, which is part of this year’s Finance Act—the legislative part of the national budget giving legal effect to the financial proposals laid down by the minister for Finance.

“We are concerned about the timing of the implementation and the impact the performance will have on the market,” Kenya Association of Stockbrokers and Investment Bankers chairman, Mr Michael Gichohi, told the Smart Company on Thursday.

Their concern is how the market will react to their (stockbrokers) shockingly poor financial performance with the majority expected to report huge losses.

Triggered frenzy

It is that concern that triggered off a lobbying frenzy with a view to delaying the application of the rule. The move, however, fell through last week. 

CFC Stanbic Financial Services—a local subsidiary of South Africa’s Standard Group— rocked the boat from inside by publishing its half-year results last Wednesday.

This was despite reporting a Sh67 million pre-tax loss for the six months to June compared to Sh205 million pre-tax profit over the similar period of 2008.

Unlike the local outfits, the majority of which are owner-managed, the formerly CFC Financial Services had little option in deciding whether to stick with its brothers or lay bare its figures for public scrutiny.

“For us, it was a no brainer. We are part of the Standard Group whose stringent compliance standards demands that its subsidiaries respect the laws of countries they operate in,” CFC Stanbic Financial Services managing director, Nkoregamba Mwebesa said.

In 2007, Standard Group, one of the largest banks in Africa, merged its local operation—Stanbic Bank—with those of CFC Group including CFC Financial Services.

Although opinion is divided, there is a feeling that by publishing their results, CFC Stanbic Financial Services weakened any leverage the stockbrokers had to negotiate for the postponement of the implementation.

While agreeing with the market concerns, the former Nairobi Stock Exchange (NSE) chief executive said implementation of the rules had to start somewhere, as there will always be challenges.

For a time to come he probably won’t be too popular.

The general feeling among the stockbrokers is that publishing the financial results will hurt the market rather than mend the ills they are meant to.

The rules are part of the efforts by the Capital Markets Authority (CMA), the industry regulator, to enhance transparency and corporate governance as a way of managing risk in the market.

Even stricter

It has worked well in the banking industry, where the regulation is even stricter requiring publishing of financial performance every three months.

“We could have liked to engage the CMA to see how best to manage the timing so that, as we comply with the law, we do not jeopardise the fragile market confidence,” said Mr Gichohi in reference to the regulation, which became operational on June 11 this year.

For an industry that is not used to playing within the rules, it will never be easy nor will time be right.

“When people are making losses (it) may not be the best time for them to not only publicise their losses, but also spend money, which some of them may not even be having in the first place, to publish,” NSE second vice chairman, Job Kihumba, said.

The stockbrokers are partly to blame for the mess they currently find themselves in. For part of the reason the industry is down is that they (stockbrokers) failed to be their brother’s keeper, and in the process three stockbrokers went down in a span of two years knocking the wind off the investors’ confidence sail.

The result is that investors, especially retailers, have kept off the market contributing to the low activities and hence the low commissions for the brokers.

Instead of publishing the results, the stockbrokers wanted the rule to be relaxed so that they are only required to circulate them (results) to the NSE, CMA and clearly display them in their offices. It is, however, what they have been doing with no effective results.

In defending the decision to publish their results, Mr Mwebesa says implementation of the regulation will boost investor confidence in the market.

“It is true the market will take a bit of a knock in terms of confidence but, in the long-run, transparency will return investor confidence into the market. It is a small price we have to pay to regain the confidence,” he said.

“The stockbrokers have no cause for alarm and should implement the rules because the industry is at the same stage where [CMA chairman] Micah Cheserem found the banking industry when he was appointed the Central Bank of Kenya governor in the 1990s,” said an industry player familiar with brokers’ resistance, who sought anonymity for fear of antagonising his peers.

It is a position that seems to create a schism between stand-alone stockbrokerage firms, who are uneasy about it, and their peers associated with commercial banks, who are in favour of it.

Virtually all of the firms associated with banks seem determined to beat the August 31 deadline in publishing the results.

Genghis Capital, which is associated with Chase Bank, will be publishing its results within the stipulated time according to a reliable source who spoke on condition of anonymity because he is not mandated to speak on behalf of the firm.

Jeff Odundo, the chief executive officer of Kingdom Securities Ltd, which is a subsidiary of Co-operative Bank of Kenya, said, as a bank, they have never had problems publishing their results.

“We believe it will enable the public to see what we are doing, which in itself will boost their confidence in us and the market,” said Mr Odundo.

He added: “When you do not know what is happening, even a slight negative information will have a greater shock on you.”

“It will definitely uplift the profile of the market and create a sense of being good, open and truthful to the public,” says Mr Livingstone Murage, NIC Bank company secretary.

NIC Bank, through its investment arm, NIC Capital, recently brought stockbrokerage firm, Solid Investment Securities and re-branded it, NIC Securities, making it a player at the stock market.

In results released and circulated by NSE in mid July but later recalled, NIC Capital has posted a Sh11 million pre-tax loss for the six months to June 30, 2009, against Sh3 million recorded over a similar period last year. Its management has cleared the use of the results saying they will be published this week.

Mr Fred Mweni, managing director of investor advisory firm, Tsavo Securities, said there should be no room for debate and, instead, CMA should enforce the rule to the letter.

“The players and the investing public have been yearning for reforms in the market for long. Openness is one such change and CMA should penalise anyone who fails to comply,” said Mr Mweni.

He feels that, just like Nigeria where the central bank’s governor has powers to hire and fire bank’s CEOs, CMA should have similar powers to fire and impose CEOs on licensees who fail to stick to the rules.

Playing by the rule, no matter the cost, some players say, is the only way out for the industry. It may not help a lot that they are to restructure their operations if they are not ready to swallow the bitter pills.

[email protected]