New businesses such as wealth advisory, asset management and retail lending will contribute 50 per cent of broking houses' profits in 2012-13 as compared with 25 per cent in 2010-11, said a report by ratings agency Crisil.

The agency expects the retail lending book to triple to Rs 30,000 crore by 2013 from Rs 10,000 crore in 2010. Crisil estimates loans against property and gold loans to constitute 45 per cent of the lending book by 2013.

“The potential of this market is large and untapped. Broking houses also have a large client base which makes it easier to reach out to customers,” said Mr Ramraj Pai, Director, Crisil Ratings.

With the volatility in the stock markets, broking houses are facing bad times in terms of profitability resulting in cyclical and structural changes. The cyclical downturn is because of low participation from retail, corporate and institutional clients.

“The volumes have increased to 91 per cent from 70 per cent four or five years ago in the Futures and Options (F&O) segment. Only nine per cent of the volumes are generated from the cash segment,” said Mr Pai.

Due to these challenging times, Crisil expects profits of brokerages to nearly halve in 2011-12 compared with the previous year. The rise of foreign broking houses on the institutional side has increased the competition for domestic brokerages. The increased use of algorithmic trading is another factor resulting in the decline of profitability for brokerages.

The challenge for broking houses will be to further realign their cost structure, scale up their new business and maintain asset quality in lending over the medium term, said Crisil.

(This article was published on January 17, 2012)
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