MBSL move to divest stock broking arm stake causes stir
Monday, 17 November 2014 00:41
A planned move by Merchant Bank of Sri Lanka (MBSL) to sell its associate stake in stock broking arm Lanka Securities Ltd. (LSL) has caused a stir in the financial services market, especially when the Colombo Bourse has been on the rebound on fundamentals.
The proposal had been tabled and approved on Friday at the MBSL Board meeting under other matters, prompting sources to allege that MBSL Chairman M.R. Shah was trying to rush the sale.
The standard practice at MBSL is Board papers circulated well ahead of the meeting but allegedly this wasnâ€™t followed with regard to the proposed sale of LSL.
MBSL owns a 29% stake in LSL whilst its parent Bank of Ceylon holds a 20% stake. In an overcrowded broking industry, LSL is the only firm which has indirect State ownership. Bank of Ceylon holds a 74% stake in MBSL. LSL was established in June 1989 and in fact is celebrating 25 years of business in 2014.
Pakistanâ€™s First Capital Securities Corporation is the majority shareholder of LSL with a 51% stake but was unaware of the move by MBSL. It is learnt that First Capital has an understanding with MBSL that exit by either should give each other the right of first refusal.
Like most stockbrokers, LSL in bearish 2012 and 2013 suffered losses but in 2014 there has been a turn around.
In 2013 LSLâ€™s gross profit rose by Rs. 0.8 million against 2012. Further the company was able to reduce the net loss to Rs. 49 million from Rs. 66.8 million in 2013. This was mainly due to the decrease in expenses evolved from proper cost management strategies while ensuring a growth in revenue.
LSLâ€™s total asset base has increased by 4% from Rs. 461 million in 2012, to Rs. 478 million in 2013. Short-term investments have increased by Rs. 72 million.
The planned exit from stock broking also comes despite MBSL expressing confidence in its future.
In MBSLâ€™s 2013 Annual Report, the bank said in 2014, LSL would adopt strategies to reposition itself in the challenging business environment. Further development of the sales team through continuous training and guidance, improving quality of research and executing effective sales and marketing strategies will be given more emphasis this year.
â€śNecessary steps will be taken to dispense the benefit of capital markets to a wider clientele by expanding the local retail customer base via the branch network of Bank of Ceylon. To supplement these strategies, efforts will be taken to enhance the company brand image and publicity via print and electronic media. In 2014, LSL will further explore possibilities of establishing alliances with regional agencies to attract a wider foreign institutional and individual customer base. The above strategies may enable LSL to meet the future challenges and distinguish itself from the rest of the players in the industry,â€ť the MBSL 2013 Annual Report released in April 2014 said.
Analysts were of the view that MBSLâ€™s decision to exit from stock broking was a major surprise. Apart from LSL being one of 15 members who will benefit under the planned demutualisation of the Colombo Stock Exchange (CSE), the timing of the exit also comes when the Colombo Bourse is on a solid rebound. The All Share Index is up 27% year to date whilst listed Lankan equities are favoured once again by foreigners judging by Rs. 18 billion net inflow so far in 2014.
Other analysts noted MSBL could be keen to exit from associates as it prepares to manage and grow as a bigger financial conglomerate.
On 13 October shareholders approved the amalgamation of MBSL with MBSL Savings Bank Ltd. (MSB) and MCSL Financial Services Ltd. (MCSL) in terms of Section 239 of the Companies Act No. 07 of 2007.
MBSL will be the surviving entity.
In the nine months of FY14, MBSL posted a net profit attributable to equity holders of Rs. 42 million, as against a loss of Rs. 45.7 million. Group after tax profit was Rs. 23 million in comparison to a loss of Rs. 75 million in the first nine months of FY13. Group Operating profit rose from Rs. 15.3 million to Rs. 148 million. In the third quarter, after tax profit was Rs. 54 million as against a loss of Rs. 59 million. The bank posted an after tax profit of Rs. 142 million in the first nine months, up from Rs. 85.3 million a year earlier.