Edelweiss Capital Ltd’s fourth quarter results are a reiteration of a story playing out in the broking industry for some time. Broking yields are falling, retail participation is yet to pick up after the financial crisis, and many listed firms in this business haven’t been able to expand into newer businesses such as investment banking or asset management at the desired rate.
Motilal Oswal Financial Services Ltd, IIFL Group and Geojit BNP Paribas Financial Services Ltd all reported declining profits in the three months ended March. Edelweiss was no exception, with its consolidated net profit falling 14.8% in the March quarter from a year ago.
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One positive for Edelweiss is that it managed to grow total income 47% from a year ago. That was mainly due to an increase in interest income, which almost doubled from a year ago and now constitutes the largest revenue stream. Overall, Edelweiss’ agency segment—which includes broking, advisory, product distribution and other fee-based businesses—saw revenue fall 14%. Profit before tax for this segment fell by two-thirds from a year ago.
While the increase in interest income from a year ago boosted the firm, its loan book has been steadily shrinking over the past three quarters, reflecting yo-yoing market conditions. At the end of March, the loan book stood at Rs2,644 crore against Rs2,970 crore during December-end and Rs3,110 crore in the September quarter. The credit book consists of loans against shares, home loans, ESOP (employee stock option plan) financing and IPO (initial public offering) financing; some of these segments have slowed in recent times with higher interest rates and subdued markets.
That is just the revenue story. As Edelweiss seeks to expand, it has also expanded the group balance sheet. Loan funds rose to Rs8,206 crore at the end of March, three times from a year ago. As a result, its interest payments also increased proportionally and hit the firm at the operating profit level. Operating profits fell 9.7% in the March quarter from the previous year.
Interest rates are still rising and investment banking deals will take some time to pick up, while broking yields are expected to remain at similar levels. Expect this story to continue—not only for Edelweiss, but for most brokerages—for the next couple of quarters as well.
Graphic by Yogesh Kumar/Mint
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