Thin markets, more competition slash investment houses' profits
For the industry's publicly traded firms, second-quarter pre-tax earnings were down a stunning 70% from the same time in 2011.
Profits among the country's besieged investment houses took a pounding in the second quarter as one after another they reported double-digit declines in revenue spanning all areas of activity - from provident, mutual and portfolio fund management to exchange-traded notes, brokerage services, underwriting and their own proprietary accounts.
Publicly traded investment houses and those owned by public companies reported aggregate profits plunging 70%, from NIS 118 million in last year's second quarter to just NIS 40 million for the same period this year. It can be assumed those that don't publish their results suffered similar declines.
Leader Holdings & Investments and Yelin Lapidot Investment House, 50%-owned by Leader, were the only institutions reporting revenue growth, by 38% and 11%, respectively, compared with the same quarter last year.
Led by CEO Amit Vardi, Leader succeeded in raising its revenues from underwriting by 78%, overcoming the sharp drop in new public securities offerings recently plaguing the underwriting field by branching out into private issues of corporate credit from institutions.
Brokerage services was the area of activity hardest hit in the sector, following two years of dramatically declining trading turnover on the Tel Aviv Stock Exchange
Foreign investors have been fleeing and many local institutions have been spreading their portfolios overseas. Encroaching competition from the banks in this field has also cut into revenues and helped bring down commission rates.
Over the past 15 years, average commissions on stock transactions have fallen by 57%, from 0.150% to 0.065%, and on bond transactions by 80%, from 0.10% to 0.02%.
In contrast with its rivals however, Excellence Nessuah Investment House, headed by recently appointed CEO Uziel Danino, reported an 18% increase in brokerage revenues after expanding its previously marginal deposit and credit activities to a position of dominance.
Challenging the banks
Challenging the banks here on their home turf, Excellence offers all its various clients - private, business and institutional - deposits at attractive interest rates and is working to shore up its credit activity.
Investment banks have traditionally relied on their provident activities - the management of long-term assets less susceptible to market moods and trends - as a strong and stable business for their other, more volatile activities. But this too is changing.
Two of the major players in this field, DS Apex Holdings and Excellence, with NIS 20 billion and NIS 19 billion in assets under management respectively, both reported substantially reduced revenues in this activity for the quarter compared with the second quarter in 2011 - a 12% drop for DS Apex and a 16% drop for Excellence.
Management fees in the provident area have eroded over the past two years due to mounting competition and are expected to fall further at the beginning of 2013 when a management-fee reform enacted by the Knesset takes effect.
The reform will cap fees on provident funds at 1.1% at the beginning of 2013 and 1.05% from the beginning of 2014, as opposed to a current 2% ceiling. The reform, however, will not apply to advanced-study funds (kranot hishtalmut) where the cap will remain at 2%.
In any case, fund managers are already reportedly under heavy pressure from fund members to adjust fees under the new cap, and similar demands are anticipated regarding savings held in study funds.
DS Apex is expected to get off easier under the reform: Provident funds constitute just 43% of the assets managed in this area, while the unaffected study funds make up the bulk.
The reform will also allow provident companies to collect a new type of management fee of up to 4% on new contributions into the funds.
Meanwhile, however, the rate of fresh money entering these funds has been sluggish and isn't expected to provide enough income to offset the reduced fees on cumulative balances.
Another problem that has been dogging provident funds for several years is a flagging rate of fresh money recruited. Due to a series of changes in law over the past decade, the focus of retirement savings has migrated from provident funds to comprehensive pension funds. S
ome investment houses, like Altshuler Shaham and Yelin Lapidot, have succeeded in bucking the trend by standing out in the performance of their funds and the returns enjoyed by clients, with most of their portfolio growth coming at the expense of the competition rather than from outside the provident sector.
Another direction several investment houses intend to take is entering the pension-fund arena in head-to-head competition with the large funds managed by insurance companies.
Their main problem is the lack of a sophisticated distribution system, which insurance companies enjoy through their networks of agents and brokerages.
And herein lies the challenge for the investment houses: to build such an infrastructure.
One way to start is by acquiring existing insurance agencies, and three investment houses have already made inroads in the past year by doing just that: Psagot Investment House, Altshuler Shaham and DS Apex.
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