Intense competition in the securities industry has forced brokerages to adapt as they cannot rely solely on income from trading fees any longer.
Many companies adjusted their business models to expand income sources beyond brokerage fees. Among the new areas of income generation, the most popular are wealth management, mutual fund sales via agent and financial advisory.
However, there is fierce competition in these businesses, with both Thai and foreign commercial banks staking their claim. Only brokers with strong expertise are capable of competing in these markets.
GMO-Z com Securities (Thailand), also known as Z.com, is a new securities company that has been in operation for five years. The company passed the listing criteria of the Stock Exchange of Thailand (SET) and expects to float its shares on the Thai bourse by the end of this month.
Owned by GMO Financial Holdings Inc, the Japanese internet broker, Z.com positions itself as a discount broker by using the GMO internet trading platform. Consequently, its cost of doing business is relatively low, starting five years ago with a headcount of only 70.
Sending securities orders through an internet platform is not new. Almost every broker provides securities trading via an online platform, including two discount online brokers: SBI Thai Online Securities and ASL Securities (Thailand).
The commission fee for this online service is much lower than for conventional brokerages, meaning more traditional companies have very low income and profit. Only large brokers with a high market share can manage to continue operations.
This development has caused both traditional and online brokers to expand their securities-related income sources to compensate for the loss of fee income.
MARGINAL ADVANTAGE
The support of its parent firm allows Z.com to operate with lower costs, enabling it to grow its securities credit lending (margin loans) by using the lending technology platform called initial margin methodology, which is able to screen risks of collateral assets, said chief executive Prakrit Thanwalai.
The technology checks the risk level of margin loan accounts every day and warns investors when the value of the collateral assets is lower than the maintenance level (or margin call level), meaning investors must increase collateral. If investors cannot add assets to back up the loan, they face a forced sale.
Z.com's non-performing loans follow the maintenance rules, he said.
At present, margin loans for the Thai stock market totalled 100 billion baht, representing around 10-15% of the total daily market trading value. In Japan, the ratio was 20% 25 years ago, but it has surged to 70% now.
Mr Prakrit said Z.com's maintenance margin is higher than at other companies. Its margin call level is set at 40%, compared with the industry average of 35%, while Z.com's force sell level is 30%.
TOP FIVE PLAYERS
He said Z.com ranks third in terms of margin loans, with a value of 12.9 billion baht. The other players in the top five are Maybank Securities (17.4 billion baht), Yuanta Securities (14.5 billion), Capital Nomura Securities (9.03 billion) and Asia Plus Securities (7.09 billion).
All five are international firms, but only Z.com is an internet broker.
"Margin loans can be another source of income for securities companies," said Mr Prakrit. "But companies should have high capital to support their lending. More capable companies can enter this market, driving the overall margin loan value to grow."
Z.com's strength in the margin loan business is its ability to provide loans for investments in initial public offerings (IPOs), which other brokerages do not offer. Stocks traded on the first day of listing are often highly volatile, with a floor-ceiling level of up to 200%, compared with 30% variance during normal trading hours, he said.
Z.com accepts 800 securities as loan collateral, while its peers normally collateralise up to only 300 securities.
The minimum interest rate for a margin loan is 6.45%, while the maximum is 8-9%. The company posted a net interest margin of about 4.4%, said Mr Prakrit.
Margin loans for the company the past four years (2018-2021) tallied 1.5 billion baht, 5.1 billion, 7.1 billion and 13.1 billion. The figure grew to 12.9 billion baht in the first nine months this year.
During 2019-2021, the company's revenue totalled 252, 398, and 720 million baht, respectively. For the first six months of 2022, total revenue was 470 million baht.
Net profit from 2019-2021 tallied 6.8 million baht, 44.7 million, and 261 million, respectively, then registered 182 million in the first half of 2022.
"Our parent company in Japan started this business model more than 25 years ago and it has been growing. We believe it can generate stable income and consistent interest, which is charged everyday, even bourse holidays. Another advantage is there are no big players in the domestic market yet in this area," he said.
"I view the Thai market as big enough to help us grow our income. There are still many opportunities for growth, as historical statistics clearly indicate margin loans have been continuously increasing over time."
CONTINUED EXPANSION
In the future, there will be more IPOs in the Thai stock market, providing good growth opportunities for the company, said Mr Prakrit.
Many Thai securities companies still rely on commission fees as their main source of income, he said. Current market fluctuations as a result of war and an economic slowdown have affected trading value on the SET as well as the revenue of brokerages, as competition on commission fee heats up, said Mr Prakrit.
"Z.com realises we cannot compete with the big players on commission fees. Instead, we focus on interest income from margin loans and recurring income," he said.
"The more customers invest for the long term, the more interest we can earn."
One regulation for securities companies states they cannot offer margin lending of five times more than their shareholder equity. Z.com currently has 3.2 billion baht worth of margin loans, with total lending of 12.9 billion for the first nine months of 2022, close to the specified ceiling.
Consequently, Z.com has to increase its capital in order to further raise margin loans. This is the impetus for the planned listing on the SET at the end of this month.
Under the plan, 120 million new shares would be floated at a par value of 9.6 baht each.
In addition, the company targets expansion to other businesses with high growth potential by using its online platform, which is not subject to the same capital requirements as securities business, said Mr Prakrit.
He said the new businesses are expected to be launched soon.
