The financial crisis is both a scourge and a blessing for securities dealers. It has attracted thousands of Czechs to the bourse, but brokers are seeing their profits fall.
The number of people who buy and sell shares with the four largest securities dealers focused on retail clients increased by more than a half to a record 54,000 last year, from just above 35,000 a year earlier.
Individual investors on stock markets want to take advantage of low prices and hefty price swings to make money on the bourse. So paradoxically, the record-high inflow of new investors came at a time when stock exchanges experienced the worst year in their history.
The Prague bourse fell by more than 50%. The prices of some shares, like those of the developer Orco Property Group, are now at just a fraction of their initial value. Last year Orco shares traded at CZK 2,500 apiece. Now it is about CZK 200.
More shares at less money
But the crisis has made investors very cautious and invest smaller amounts of money.
Moreover, trading volumes have decreased with the falling share prices, despite more shares traded in the end compared with the year 2007. Such a situation is not too favourable for brokers that live on fees from the amount of money invested by their clients. Brokers’ turnover is decreasing, and so are their profits.
Most brokers polled confirmed for Hospodářské noviny that their 2008 profits will be lower against the previous year.
“Compared with 2007, there will be a moderate decline in the results that was caused by a decline in the net fee income. We generated less money in interests as well,” Hana Trhoňová, spokeswoman for the securities dealer brokerjet of the Česká spořitelna group, told HN.
Demands have increased
Atlantik director Pavel Němec said the crisis had fundamentally reduced clients’ trading activities and placed increased demand on the brokers themselves.
The reason is that to keep the market running, brokers have to set, with selected shares, the prices at which they want to buy, but also the prices at which they are willing to sell. And then, of course, have to make transactions at these prices. It can then happen that brokers lose on some of these transactions – especially at a time when stock exchanges are falling all around the world.
“Atlantik will post a profit of several dozen million crowns,” Němec said. In 2007, the company’s profit dropped by a half to CZK 75.8 million.
By contrast, Patria Direct as the only of the four brokers polled recorded a higher trading turnover last year than it did a year earlier.
And that is one of the reasons why the company, which is in charge of retail clients in the Patria group, expects a 10-20% profit growth from the CZK 41 million it made last year, commercial director Martin Kodýdek said.
Fear of an even deeper crisis
Although the crisis helped Czech brokers gain more clients, the companies may have to leave the market if the crisis continues.
The collapse of Lehman Brothers and the US rescue plan for example have raised investors’ nervousness to the maximum level possible.
In September and October last year, stock exchanges showed record-high daily turnovers. But now a wait-and-see period has come, with almost no activity on markets. And where there is no trading, there are no fees for brokers to collect.
“If market prices kept on decreasing, it would probably mean that our clients would trade even lower volumes. The trading potential of new, beginning investors seems to be exhausted and the standing ones are mostly waiting for prices to grow again,” said Jan Bláha of Fio burzovní.
“Even though it does not concern our company, I must admit that brokers dependant on a small number of clients could face problems,” he added.
The Prague Stock Exchange traded shares worth a total of CZK 852 billion last year – down CZK 160 billion against 2007. However, it is not ordinary people, but banks and particularly foreign financial institutions and funds that carry out a vast majority of deals on the bourse.
Translated with permission by the Prague Daily Monitor.
