Anatomy of an ailing industry

It's a steep cliff

Brokers in the United Arab Emirates are in serious trouble. Half of the industry went out of business in 2011 and more closures are expected in 2012 as volumes in UAE markets continue to shrink at an alarming rate. 

The financial crisis, which shook the world in 2008 and brought to an end the golden days of easy access to leverage, took a heavy toll on global markets and heavily indebted Dubai was not spared. It cried for help in November 2009, requesting to delay payment on $59 billion of debt on Dubai World, an investment company that manages projects and businesses for the Dubai government such as DP World and Nakheel.

Three years on, the global picture does not look rosier as the ailing United States economy, the unresolved European sovereign debt crisis and the Arab revolutions continue on hitting the markets hard. While the UAE has ridden the wave of the Arab revolution relatively unscathed with no blood on its streets, its markets on the other hand have been bleeding heavily. Volumes on the Dubai Financial Market (DFM) and Abu Dhabi Securities Exchange (ADX) dropped to a seven-year low. The total value traded on both exchanges in 2011 reached $16 billion; down from $28 billion in 2010. The drop is significant relative to 2007, when investors were rushing into UAE markets leading to a total traded value of $147 billion. 

With trading volumes now at 10 percent of the levels they were at in 2007, the brokerage industry is losing money at a rate that will eventually bleed it dry. The number of brokers still covering UAE markets remains unsustainable despite significant closures in 2011 with 45 brokers exiting the business. 

It is not just the small brokers that are falling; everyone is feeling the pinch. HSBC closed its retail brokerage in the UAE in May 2011, while Shuaa Capital announced that it was shifting away from retail brokerage and focusing on institutional and high-net-worth clients. More recently, Al Futtaim HC Securities, a joint venture between the UAE’s Al Futtaim Group and Egypt’s HC Securities, announced it was closing its retail brokerage. More are expected to follow suit in 2012. 

The right size

As Executive goes to print, the UAE has a market capitalization of $94 billion and houses 56 active and functioning brokers, according to the Emirates Securities and Commodities Authority, regulator of the UAE exchanges. Of these 56 brokers, only five — Al Sahel, Mashreq Securities, EFG Hermes, Abu Dhabi Islamic Securities and Brokerage House Securities — made a profit during the first nine months of 2011. To put this into perspective, Saudi Arabia’s stock exchange, the Middle East’s largest bourse, with a market capitalization of $339 billion, has only 34 brokers. Qatar’s stock exchange, with a market capitalization of $127 billion, houses just 10 brokers. The UAE’s brokerage industry has more fat to lose. 

Heads of brokerages in the UAE that Executive spoke to agree. Malek Kanawati, Chief Executive Officer (CEO) of Mubasher, one of the leading brokerage houses in the region, believes the ideal number of brokers should be between 10 and 15. Aymen Samawi, managing director of Abu Dhabi Financial Services, the financial brokerage arm of the National Bank of Abu Dhabi, expects the market to be dominated by 10 players with a second tier made up of another 10 to 15 brokers.  Mohammad Ali Yasin, chief investment officer of Abu Dhabi-based investment bank CAPM Investment, also expects the amount of surviving brokers to drop to 25 to 30 brokers. Abdulla al-Hosani, general manager of Emirates NBD Securities, the brokerage arm of Emirates NBD, the largest bank in the region by assets, expects the number of brokers to drop to 35 within the first half of 2012. 

At the current level of volumes, brokers are sharing a revenue pool of $24 million. In fact, brokers in the UAE are only allowed by the regulator to charge for commission on the volume traded and cannot charge for additional services such as providing research. With an average commission of 15 basis points and a total traded value in 2011 of $16 billion, the revenues for the entire brokerage industry in the UAE stand at a meager $24 million in 2011. “Today, based on costs and requirement of the balance sheet and financing, a company needs 12 million dirhams ($3.3 million) to 18 million dirhams ($5 million) per year to break even,” says Yasin of CAPM Investment. Based on these figures, a broker would need over 10 percent market share to just break even. 

It is the survival of the fittest as the battle to remain afloat takes hold. The shape and form that the industry will take once the dust has settled is still unclear. Rashed Balouchi, deputy CEO of ADX prefers “to see a few highly qualified brokers that would provide high quality service with high quality research than high quantity with low quality service.”

“The economics are such that there are so many fixed costs to pay that it’s the people who can pay those fixed costs that will stay in business and those are the brokerage arms of banks because of their deep pockets and the independents. For the independents, it is the ones that have a diversified base of customers and diversified product offering,” says Kanawati of Mubasher. 

Emerging leaders

“I think there will be a shift in the landscape. We will see a handful of firms emerge as leaders and they will be different firms than they were three years ago,” says Tarek Lotfy, managing director of capital markets at the Dubai-based Arqaam Capital, an investment bank specializing in emerging markets. 

With the number of brokers in the UAE nose-diving, it is critical that the regulators, the exchanges and the brokers take action to help stave off the continuous fall of the industry. Their imperative actions in these challenging times will determine whether the brokerage industry eventually recovers and prospers or whether its downward spiral perseveres. 

In Yasin’s words, “the industry now is not cleaning itself, it is collapsing.”

Maya Sioufi

Maya is a research consultant on Arab youth entrepreneurship and employment. She headed Executive's banking, finance and entrepreneurship sections from 2011 to 2013. Previously, she worked at JP Morgan in London in equity sales for three years. She holds an MSc in Accounting and Finance from the London School of Economics (LSE) and a BA in Economics from the American University of Beirut (AUB).