The profitability of the domestic broking industry fell to 34 per cent in Q1FY23 from 38 per cent in the similar period last year due to geopolitical concerns and the adverse macroeconomic outlook that affected investor mood, according to the ICRA release.
This was along with a decline in the transaction volumes of a high-yielding cash broking segment.
After two excellent years, FY2021 and FY2022, the performance of domestic broking industry moderated in Q1 FY2023 with a 10 per cent quarter-on-quarter (QoQ) fall in net operating income (NOI) and 25 per cent QoQ dip in net profit.
“As the incremental retail participation dampened in the current fiscal, the pace of new client additions slowed compared to the last fiscal. Also, notwithstanding the recent trend reversal, the Foreign institutional investors (FII) remained net sellers in H1 CY2022, which also weakened investor sentiment. Amid this, DIIs helped the market in FY2022,” said Deep Inder Singh, Vice President, ICRA.
Due to market corrections, net fair value losses on the investment book of some companies also dragged down the overall profitability. Domestic capital markets had a great performance in the past two fiscal years, with healthy participation from retail investors and domestic institutions and a large number of initial public offerings. As average daily turnover (ADTO) more than quadrupled in the preceding two fiscals to about Rs 72 lakh crore in FY2022, the broking industry reported a record performance.
The total number of demat accounts stood at 98 million as of July 2022, up from 55 million as of March 2021 and 41 million in March 2020 with average monthly additions of about 3 million in FY2022. Increasing retail participation in recent years has been a significant driver of revenue growth for broking companies.
Smaller brokers are losing active client market share to larger firms due to industry consolidation. Stricter compliance, technology requirements, and discounted pricing pressures have hurt small brokerages. Discount brokerage houses are estimated to have accounted for about 60 per cent of NSE active clients as of June 2022, up from 2 per cent in March 2016. Rapid growth in the last two years has been fuelled by the capital markets rally, the ease of the know your customer (KYC) process by enabling online KYC, and the use of technology apps.