What to Do in Bearish Market?

Securities companies are undergoing hard times as the market has slumped for a long time under tightened monetary policy. A large number of stock brokers incurred serious losses and many of them are looking to merger and acquisition (M&A) deals to get through the tough time.

 

A majority of securities companies reported losses in the second quarter of 2011. In 2011, Sacombank Securities Joint Stock Company (SBS) expected to make a pre-tax profit of VND200 billion, but it incurred a net loss of VND164.71 billion.

 

Asia - Pacific Securities Joint Stock Company (APS) reported that second quarter revenues reached only VND52.75 billion, totalling VND81.46 billion in the first half.

 

Earlier, a lot of stock brokers reported losses in the second quarter and the first six months of 2011. According to the State Securities Commission of Vietnam (SSC), 61 securities companies suffered from operating losses in the first six months, with some losing nearly all their owner’s equity. The number of loss-making brokers increased from 20 in the same period last year. The SSC had to send recommendations to companies losing over 30 percent of owner’s equity.

 

Profit-making brokers saw humble earnings. Ho Chi Minh City-based top broker Saigon Securities Inc (SSI) made a profit of VND1.398 billion (parent company) on the owner’s equity of nearly VND 5,000 billion. Kim Long Securities Corporation (KLS), which failed to rescind stock brokerage business in a shareholder general balloting, earned merely VND54 billion, which was reported to come from savings deposits.

 

Securities firms are most vulnerable to macroeconomic fluctuations. According to the SSC, many securities companies were hit by negative macroeconomic situations this year. A sharp drop of the market benchmark VN-Index and prolonged downtrend, which is anticipated to continue, ate into revenues of stock brokerage houses and forced them to increase provisions for stock depreciation.

 

In this dismal context, not only domestic securities companies and individual investors but also international investment funds suffered losses. Since the beginning of the year, 27 out of 47 fund management companies have reported loss.

 

Pessimistic forecasts are overshadowing the market, which is compared to a trap - easy to come in but difficult to get out. As a result, liquidity drops steeply, with trading volume and values hovering at two-year lows.

As the number of loss-making companies is too large, the SSC has sent recommendations to 10 companies with losses above 30 percent of registered capital, urging them to make prudent investments, improve and apply risk management, and increase capital to meet new regulations on financial security.

 

In spite of losses, the SSC sees that securities companies still satisfy requirements of financial safety, registered capital and working capital. It has classified securities companies and adopted restructuring plans to reduce the number of securities companies, narrow their scopes of business, and issue financial safety and risk management systems.

 

This once again indicates that the SSC gives the green light to M&A of securities companies. Earlier this year, the market regulator said it was constructing documents to guide margin trading and takeover of securities companies.

 

In reality, some securities companies have concluded M&A deals. Late last year, Vincom Securities Joint Stock Company (VIX) closed its operations in Hanoi and transferred business rights in the northern region to VP Securities Company. This trend is expected to be more common in the coming time, when stock brokers cannot find better solutions to their difficulties.

 

The scale of the Vietnam’s stock market is small, but there are up to 100 securities companies, ten of which occupy more than a half of brokerage market share and the rest share the remainder. As the trading value decreases continuously, the competition among stock brokers will be stiff. For many companies, brokerage operations are not a main source of income, but an instrument to show the industry they are involved in. They compete in different segments of business like brokerage, corporate financial consulting or underwriting. Serial bankruptcy is improbable, but downsizing or merging are good solutions for many companies.

 

However, M&A deals in small securities companies will confront a lot of obstacles, although the merger will strengthen capital and capacity, because many securities are backed by commercial banks which have no need to merge with others. Besides, M&A or takeover is a ‘business taboo’ for many business leaders in Vietnam, let alone troubles arising from merged companies. Personnel restructuring or staff cuts also affect the customer base of merged units. According to some experts, if the SSC advocates the registered capital hike, M&A or takeover will be the only way securities companies can continue.