Falling brokerage fees and fears over the upcoming elections slashed Kenya’s stockbrokerage profitability by half as local investors shied away from the bourse in the first half of the year.

Results published ahead of last Friday’s regulatory deadline showed the stockbrokerage and investment bank industry made a combined profit of Ksh108.32 million ($1.3 million) in the first half of 2012, down 51 per cent from the Ksh223.85 million ($2.7 million) in the same period last year.

However, brokers with networks outside Kenya, such as Dyer & Blair, and those with detailed research units and clout among foreign investors, like CFC Financial Services, Kestrel Capital and Africa Alliance, fared better, becoming the top four most profitable.

Suntra, Afrika Investment Bank, Francis Drummond, Old Mutual and ABC Capital posted losses during the period. The losses were, however, lower than last year, helped by cost-cutting.

See graph: Stockbrokers and investment banks' H1 profits after tax

The low profitability defied an upsurge in activity and share prices at the Nairobi Securities Exchange since the beginning of the year.

The stockmarket was up by 15.6 per cent in the first six months of the year, as measured by the NSE 20 share index. The rise was largely because of increased foreign investor participation.

The NSE has kept up the momentum, going up 21 per cent by the end of August. The NSE defied subdued national and global economies to become the third best performing bourse in the world after Venezuela and Egypt, August data by Bloomberg, a global markets data service, show.

The Nairobi bourse has also attracted increased investments from international funds looking for high returns in Africa away from imperilled global markets and in response to a stabilising Kenyan currency.

The main NSE-20 Share Index last week hit a one-month high, last touched on July 26, clocking 3,878.13 points.

African Alliance, whose brokerage commissions rose 39.6 per cent to Ksh114.4 million ($1.4 million) made Ksh30.9 million ($367,857), recovering from a loss of Ksh23.3 million ($277,380) last year.

African Alliance’s earnings are slightly above a quarter of the industry’s profits, making it the most profitable stockbroker and investment bank in Kenya.

Dyer & Blair came in second, reporting a profit of Ksh29.9 million ($355,952) while CFC Stanbic Financial Services was third, posting Ksh23.

3 million ($277,380) up from Ksh6.5 million ($77,380).

Kestrel Capital, usually the market leader due to its strong network among foreign investors, posted Ksh14.5 million ($172,619) down 53 per cent from Ksh31.5 million ($375,000) the previous period.

Increased competition and lower volumes of transactions saw it lose its place.

“Brokerage commissions and profits have declined because of the trading volumes have been down and there is increased competition from other brokers,” said Andre De Simone, chief executive of Kestrel Capital.

“Market players are cautious due to the upcoming elections and the stress in the international markets.”

As the year draws to a close, stockbrokers and investment banks are concerned investors will still keep away from the market, adopting a wait-and-see approach as the country heads into the March 2013 elections.

The stockmarket usually has its finger on the pulse of the economy — a vibrant stock market correlates with optimism among investors and vice versa.

This is why the earnings of the stockbrokers and investment banks give a general reflection of the investment mood in the market, brokers and analysts said.

All the 18 brokers and investment banks, apart from Dyer & Blair, African Alliance Bank and Old Mutual — reported a drop in their brokerage commissions, a sign they are handling fewer transactions at the stockmarket.

Brokers earn a commission, usually up to 2.1 per cent per transaction, from midwifing buy-and-sell transactions at the stockmarket.

Commissions are the bread and butter of stockbrokers and investment banks. The total brokerage commission of the industry was down 15.8 per cent to Ksh754 million ($ 9 million) in the six months to June 2012.

Stockbrokers earn between 1.5 per cent and 1.75 per cent in commission depending on the size of the order, meaning when the trading volumes are low, the income is low.

Dyer & Blair’s brokerage commission doubled to Ksh198.2 million ($2.4 million) attributed to regional transactions and increased foreign investor trading.

The broker has operations in Uganda and Rwanda in addition to its home market. Twenty three per cent of the commission, Ksh26.5 million ($315,476) came from Ugandan and Rwandan markets in the six months to June 2012.

This showed the benefit of diversifying its operations across the Kenyan border.