Stock brokers in the United Arab Emirates are struggling to make ends meet as trading volumes tumble to the lowest in four years, forcing some to close.
The number of brokerages in the country may drop to as low as 55 from 81, according to Shuaa Securities LLC, the brokerage unit of the U.A.E.’s biggest investment bank. Twelve firms, from Abu Dhabi-based Makaseb Islamic Financial Services to Dubai-based IFA Securities LLC, filed requests to the Securities and Commodities Authority to halt operations this year as costs rose and revenue fell. Seven shut or suspended operations last year and three in 2008.
Brokerages are closing after a surge in share prices fueled by declining borrowing costs and rising oil prices faltered in 2006. Dubai amassed more than $100 billion of debt as it transformed itself into a financial hub and triggered a credit crisis last year after real-estate prices slumped. The average daily volume of shares traded in Dubai has slumped to 172 million this year from 477 million in the year-earlier period.
“Low volumes are making it extremely difficult for brokerages to survive,” Mohammed Ali Yasin, chief executive officer of Shuaa Securities, said on July 20 in Abu Dhabi. “Many are considering closure as the only option.”
Makaseb, ranked on the website of the Dubai Financial Market as the 17th biggest brokerage by value traded in January, asked the SCA for a year-long freeze on its operations, Managing Director Hatim el-Atabani said Aug. 4. The company cut as much as 60 percent of its workforce in the past year, el-Atabani said in an interview from Abu Dhabi.
“We thought it would be unwise to continue operations and incur losses, especially when we don’t see a turnaround happening soon,” he said.
IFA, the brokerage founded by Kuwait’s International Financial Advisors KSCC, closed on July 4, Emad Eldin Abbas, operations manager, said in an interview in Dubai the following day. “The costs of operations were too high considering the current state of the market.”
This year, five brokerages in the emirates got approval to close and have their licenses suspended for a year, said Ibrahim Obeid Al-Zaabi, deputy chief executive officer for licensing, supervision and enforcement at the regulator SCA.
Dubai Financial Market PJSC, the only stock market on the Arabian Peninsula to sell shares to the public, said on July 24 that second-quarter profit dropped 80 percent because of plunging trading volumes.
Bear Market Rallies
Dubai’s benchmark index of 32 stocks has slumped 82 percent to 1,501.25 today from a record 8,494.63 in November 2005. Abu Dhabi’s measure has plunged 60 percent from a high of 6,237.98 in May 2005.
“The bull market cycle started ending in late 2005, and since then we’ve only seen bear market rallies,” Nabil al Rantisi, senior vice president of brokerage at Dubai-based Rasmala Investment Bank Ltd., said in response to e-mailed questions on July 20.
In 2004 and 2005, investors believed lending will grow along with demand for real estate, Rantisi said. Dubai property prices have slumped more than 50 percent from their peak in August 2008 as mortgages dried up, according to estimates from Colliers International. Local benchmarks are dominated by real-estate companies and banks.
Dubai’s stock gauge slumped 17 percent and Abu Dhabi’s index dropped 8.5 percent so far in 2010. That compares with a gain of 2.8 percent in the MSCI Emerging Markets Index.
Stocks in the U.A.E. “didn’t recover with some of the other emerging markets,” said Christopher Palmer, who oversees $5 billion as head of global emerging-market equities at Gartmore Investment Management Ltd. in London. Gartmore invested in the U.A.E. between 2006 and 2008.
Bank lending in the U.A.E. grew more than 30 percent a year from 2005 to 2008, according to the central bank. It increased 0.8 percent in the first six months of this year. The average ratio of non-performing loans for the nine largest U.A.E. banks more than doubled last year, according to a Fitch Ratings report in June.
“Under current market conditions, the smaller firms probably get an average of 3 million dirhams ($817,000) traded a day,” said Waleed Al Khateeb, senior finance manager at Dubai-based Daman Securities LLC, on June 30. “To break even, these brokerages need no less than 15 million dirhams. Even bigger brokerages make little profit on good trading days.”
The average daily value of shares traded in Dubai fell almost 50 percent this year to 329 million dirhams from the year-earlier period, according to data compiled by Bloomberg. In Abu Dhabi, it tumbled to 133 million dirhams from 275 million dirhams last year.
Abu Dhabi-based Al Fardan Financial Services is bucking the trend and plans to double the number of brokers by year-end even after it reported a first-quarter loss of 588,958 dirhams.
‘A Matter of Time’
“Our view is that it is only a matter of time until the market improves,” General Manager Tamer Ali said in an interview from Abu Dhabi last month. “We are preparing ourselves for that, even if it takes a couple of years.”
The U.A.E.’s market regulator is encouraging small and medium-sized brokerages to merge. The authority has prepared a proposal for regulations that would govern mergers which will be presented to the board, Zaabi said Aug. 4.
Brokerages’ only options are to close down, fire employees, cut costs or freeze licenses, Daman’s Al Khateeb said. Merging companies wouldn’t be a solution as “bringing two weak entities together will not create a strong one.”