UK brokers begin to feel the squeeze from MiFID

Source: Financial Times

It is crunch time for the UK’s small corporate brokers, as new European markets rules begin to squeeze the sector.

Mifid II legislation, which came into force in January, requires fund managers to pay banks and brokers directly for analysts’ research instead of combining the cost with trading commissions.

The shake-up has prompted asset managers to reassess the content they receive, and many are thought to be slashing their research budgets. For small and mid-cap brokers, the overhaul is hurting the profitability of their research departments, while hampering their ability to win equities trading business.

It comes at a time when commissions are low and fundraising is fairly subdued: companies raised just $211m in IPOs on London’s junior stock exchange in the first quarter of 2018, compared with about $645m in the final quarter of last year, according to Dealogic.

Some consolidation is expected: City broker Arden Partners recently flagged its interest in a tie-up. But some may not be so fortunate.

“Trading volume is going up to the bulge bracket banks because it’s easier: why bother going to a smaller broker who may not be around next week?” said one senior broking executive.

Numis

One of the most revered names in City stockbroking, Numis has weathered the turbulence of the feast-or-famine broking industry better than most.

In the latest half-year trading update, Numis boasted revenues and profits “significantly ahead” of the same period the previous year. The broker highlighted “higher average deal fees” as it lured bigger clients, and a “strong near-term pipeline” of fundraising opportunities. It is on the ticket to work for AJ Bell’s £500m listing and the £1bn flotation of Funding Circle later this year.

Nevertheless, Mifid II appears to have reared its ugly head: Numis’s performance slowed when compared with the previous half, it said.

This has not held back the price of its shares, however, which have reached fresh highs this year and are trading at about 375p, more than 50 per cent higher than at the start of 2017.

This will be welcome news for Ross Mitchinson and Alex Ham, the joint chief executives who replaced longstanding chief Oliver Hemsley in late 2016. Generous share option plans mean they could cash in on more than 2.9m shares each if the price reaches 509p by 2021. The company’s market capitalisation stands at roughly £403m.

Cenkos

Cenkos has performed quite the turnround. The broker, which recently ushered in former Bank of England economist Anthony Hotson as chief executive, rebounded from a sluggish 2016 to post near triple-digit profit growth last year.

The 97 per cent jump in pre-tax profit, compared with a 78 per cent drop the previous year, was mainly driven by its role on several large fundraisings — including as sole broker in the £550m float of logistics group Eddie Stobart.

It was a welcome change for the company which, in 2016, was slapped with a £530,500 fine by the UK’s financial watchdog over failings relating to its work as the nominated adviser of Quindell, the scandal-hit software insurer.

But last year’s bumper deals aside, the company said uncertainty around Mifid II had knocked revenues from research by more than a third to £2.9m, as it cautioned on an uncertain outlook. Its share price fell more than 6 per cent on that results announcement last month.

Overall, its shares have gained about 40 per cent since the beginning of 2017 to reach 104p, giving it a market capitalisation of £57.2m.

WH Ireland

One of the minnows of the broking world, WH Ireland has had a tough time.

It posted an operating loss of £1.6m in the year to the end of November, which it put down to the “higher than anticipated” cost of implementing Mifid II and other restructuring costs.

In an attempt to bolster capital buffers, it raised £2.4m in equity in February, placing 2m shares at 120p per share. Most of these were snapped up by hedge fund backers Polygon Global Partners and Oceanwood Capital Management, which now own 27.7 per cent and 17.9 per cent of the total share capital respectively.

While there was some share gains — at one point the broker reached 150p — the company is now back trading roughly at the same levels as early January, at about 125p.

To offset the Mifid pain, WH Ireland is revamping its pay structure, and will continue to diversify beyond stockbroking into wealth management — although these efforts were held up last year because of “major issues” around technology updates.

The broker has also opted to take advantage of a carve out in the Mifid rules, which allows it to distribute its research widely for free if its corporate clients pay for it. Its market capitalisation is £37m. Hannah Murphy

To ensure we are Forte Markets keep our finger on the pulse we’ve updated our MiFID II workshop for post deadline implementation. Check out the workshop details here.

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