AGGREGATE INCOME STATEMENT OF BROKERAGE FIRMS (mn. US$-IFRS)
31.12.2007 31.12.2008
Continuing Operations
A. Sales Revenues (net) 117,290.4 95,242.6
B. Cost of Sales (-) -116,659.8 -94,754.9
R1. Profit/Loss from Commercial Activities 630.7 487.8 C. Interest, Fees, Commissions and Other Revenues 214.0 187.8 D. Interest, Fees, Commissions and Other Expenses (-) -6.5 -10.1 R2. Profit/Loss from Financial Activities 207.5 177.7 P1. GROSS PROFIT/LOSS 838.2 665.5 E. Marketing, Sales and Distribution Expenses (-) -55.7 -66.5
F. Administrative Expenses (-) -542.4 -570.1
G. Research & Development Expenses (-) -0.6 -0.3
H. Other Operating Income 35.0 56.1
I. Other Operating Expenses (-) -18.0 -28.6
P2. OPERATING PROFIT/LOSS 256.5 56.2
J. Profit/Loss From Participations 7.5 -0.2
K. Other Financial Revenues 140.7 201.1
L. Other Financial Expenses (-) -64.4 -69.8
P3. PROFIT/LOSS BEFORE TAX FROM CONTINUING OPERATIONS 340.2 187.2 M. Taxes Related to Continuing Operations -65.8 -49.8
N. Current Tax Income/Expense -68.5 -52.8
O. Deferred Tax Income/Expense 2.7 2.9
P4. NET PROFIT/LOSS FROM CONTINUING OPERATIONS 274.4 137.4
Discontinued Operations
P. Net Profit/Loss After Tax from Discontinued Operations -0.5 136.8
P5. NET PROFIT/LOSS 274.0 -2.8
P6. Profits Attributable to Minority Interest 31.6 139.6
P7. Profits Attributable to Parent 242.3 139.6
Source: TSPAKB
Sales revenues include revenues from services, other operating income and sales proceeds
of securities.
Revenues from services reflect earnings from main business lines, such as brokerage, corporate finance and asset management. Other operating income refers to revenues generated by other business lines, such as margin trading. Securities sales indicate the proceeds of securities that brokerage firms sell from their own trading portfolio. On the other hand, cost of sales refers to the cost of securities purchased for the trading book.
Hence, gross profit/loss account, in fact, refers to the total revenues of the brokerage industry. Although gross profit reflects total revenues, there are some accounting items that should be adjusted to reach the exact revenue figure.
1. Revenues
The breakdown of revenues in the table below is slightly different from the gross profit on the income statement above. Figures in this section, gathered from financial statement notes, reflect the revenue breakdown better than the income statement.
Brokerage revenues refer to brokerage commissions on all types of securities. Operating revenues are revenues earned from other major businesses, such as corporate finance, asset management and margin trading. Proprietary trading is simply the difference between sales and cost of sales of securities. Other operating revenues include interests received from customers and profit/loss from financial activities.
Total revenues declined by 20% in 2008 to US$ 665 million. Although net commission revenues decreased by 19%, they continued to be the major source of revenues. Following commission revenues, operating revenues are the second important revenue item with a 28% share. In 2008, brokerage firms incurred a US$ 6 million loss from proprietary trading.
Total Revenues of Brokerage Firms
(mn. $) 31.12.2007 31.12.2008 2007
Breakdown 2008
Breakdown
Net Commission Revenues 453.3 365.7 54.3% 55.0%
Operating Revenues 197.0 186.1 23.6% 28.0%
Trading Profit/Loss 52.7 -5.9 6.3% -0.9%
Other Real Operating Income 132.5 119.2 15.9% 17.9%
Total 835.5 665.0 100.0% 100.0%
Source: TSPAKB
The breakdown of major revenue items is analyzed in the following sections.
a. Brokerage Revenues
Total brokerage revenues decreased by 19% to US$ 366 million. Although the commissions earned on equity trading declined by 28% to US$ 279 million, they constituted 76% of brokerage revenues in 2008.
Brokerage Revenues of Brokerage Firms
(mn. $) 31.12.2007 31.12.2008 2007
Breakdown 2008 Breakdown Equity Commissions 388.0 279.4 85.6% 76.4%
Fixed Income Commissions 11.0 8.1 2.4% 2.2%
Futures Commissions 54.3 78.2 12.0% 21.4%
Other Brokerage Commissions 0.0 0.0 0.0% 0.0%
Total 453.3 365.7 100.0% 100.0%
Source: TSPAKB
Futures commissions continued to increase its share in brokerage revenues. In 2008, futures commissions rose by 44% and raised its share to %21%.
Fixed income commissions declined by 27% and its share is still negligible. It should be noted that generally when brokerage firms are trading fixed income securities at the ISE for their customers, first they buy the securities on their own account and then sell it to the client at a small profit, instead of charging a commission. Thus, in effect, a portion of fixed income commissions is booked as proprietary trading profits. Therefore, the figures here should be assumed to be the minimum level of fixed income commissions.
Other brokerage commissions in 2007 were due to the eurobond and foreign securities transactions of a single brokerage firm. In 2008, there was negligible activity in that segment.
Since equity transactions generate nearly 76% of all brokerage revenues, it deserves a closer look. We calculate the clients’ trading volume by subtracting proprietary trading volume from the brokerage firms’ total equity trading volume. Effective commission rate is calculated by dividing the commission revenues by the clients’ trading volume
Equity Brokerage Commissions (mn. $)
31.12.2007 31.12.2008
Brokers' Trading Volume 595,088 494,171 Proprietary Trading Volume 30,428 27,917 Clients' Trading Volume 564,660 466,254 Equity Brokerage Revenues 297 279 Effective Commission Rate 0.069% 0.060%
Source: TSPAKB
Effective commission rate has been declining continuously. It has averaged 0.06% in 2008.
However, it should be noted that this figure is the net commission amount left to the brokerage firm, after rebates to clients and revenue sharing with the agent banks. It is not the commission rate charged from the client. Still, the declining rates suggest that the commissions charged from the clients are also declining.
b. Operating Revenues
Other operating revenues declined to US$ 186 million by a 4% fall. Although asset management revenues generated from portfolio management and mutual funds remained at the same level, they are still the major revenue group in this breakdown.
In parallel with the decline in IPO volume, corporate finance revenues diminished by 31% to US$ 42 million. Other commissions are generated from settlement and custody fees, money and securities’ transfer fees and alike. These revenues reached US$ 25 million in 2008.
Operating Revenues of Brokerage Firms
(mn. $) 31.12.2007 31.12.2008 2007
Breakdown 2008
Breakdown
Asset Management Revenues 114.4 119.4 58.1% 64.2%
Corporate Finance Revenues 60.6 41.8 30.8% 22.5%
Other Revenues 22.0 24.8 11.2% 13.4%
Total 197.0 186.1 100.0% 100.0%
Source: TSPAKB
c. Proprietary Trading Profits/Losses
In 2007, brokerage firms recorded a US$ 53 million profit. But, global financial crisis in 2008
caused the brokerage firms to post a US$ 6 million loss.
Proprietary Trading Profits/Losses of Brokerage Firms (mn. $) 31.12.2007 31.12.2008 2007
Breakdown 2008
Breakdown
Equities 7.5 -64.9 14.2% 1091.5%
Corporate Bonds 0.2 -0.2 0.5% 3.6%
Public Bonds 35.1 32.1 66.5% -539.3%
Mutual Funds 4.5 9.5 8.5% -159.7%
Foreign Securities 4.4 17.6 8.3% -296.3%
Futures 1.0 0.0 1.9% 0.2%
Other Securities 0.0 0.0 0.1% 0.0%
Total 52.7 -5.9 100.0% 100.0%
Source: TSPAKB
In 2008, public bonds, which cover government bonds and treasury bills, have been the largest revenue source of proprietary trading. Brokerage firms generated US$ 32 million on public bonds trading.
After public bonds, foreign securities are the second largest revenue group. In 2008, especially one brokerage firm’s transactions increased this amount. Brokerage firms’ past equity trading profits turned into a US$ 65 million loss in 2008.
The US$ 10 million profit on mutual funds is due to ETF trading. Part of this profit also stems from arbitrage positions in the futures and the cash markets.
d. Other Real Operating Income
Other real operating income decreased by 10% to US$ 119 million.
The most dramatic change in this breakdown was observed in the interests received from customers. As it has been mentioned before, brokerage firms cut back on the amount of margin trading because of the financial crisis. Thereby, the revenue generated through this channel has declined by US$ 20 million to US$ 72 million.
Brokerage Revenues of Other Real Operating Income
(mn. $) 2007 2008 2007
Breakdown 2008 Breakdown Other Real Operating Income 98.0 77.8 73.9% 65.3%
Interests Received from Customers 92.1 72.1 69.5% 60.5%
Other Operating Income 5.9 5.7 4.4% 4.8%
Profit/Loss from Financial Activities 34.5 41.4 26.1% 34.7%
Total 132.5 119.2 100.0% 100.0%
Source: TSPAKB
Brokerage firms recorded US$ 41 million profits from financial activities in 2008. This account reflects the revenues of the brokerage firms’ consolidated participations.
2. Operating Expenses
Although firms started to close down their branches and reduce the number of employees, operating expenses increased by 7%, reaching US$ 638 million.
More than half of the operating expenses are incurred by employee benefits which include salaries, legal employment dues, health insurance, transportation and alike.
Operating Expenses of Brokerage Firms
(mn. $) 31.12.2007 31.12.2008 2007
Breakdown 2008 Breakdown Marketing, Sales and Distribution Expenses 56.0 67.1 9.4% 10.5%
Trading Commissions 27.6 29.0 4.6% 4.5%
Other Marketing, Sales and Distribution Expenses 28.4 38.1 4.7% 6.0%
Administrative Expenses 542.6 570.6 90.6% 89.5%
Salaries and Fringe Benefits 324.3 340.3 54.2% 53.4%
Depreciation Expenses 18.2 19.0 3.0% 3.0%
Membership Fees and Contributions 9.8 9.8 1.6% 1.5%
Commissions Paid and Other Service Charges 12.3 15.1 2.1% 2.4%
Taxes and Other Legal Dues 26.9 26.4 4.5% 4.1%
Other Administrative Expenses 151.2 159.9 25.3% 25.1%
Total 598.6 637.7 100.0% 100.0%
Source: TSPAKB
Administrative expenses include office rents and other infrastructure expenses, such as electricity, telephone, mailing, IT expenses etc.
The marketing and sales expenses include travel expenses, printing and distribution of research reports, some of the branch costs and miscellaneous items. Marketing expenses increased from US$ 56 million to US$ 67 million in 2008.
Trading and settlement costs refer to the fees and commissions paid to Takasbank and the Central Registry Agency. The figure includes money transfer fees as well. Other legal dues include advance taxes and membership fees to ISE, TurkDex, TSPAKB and similar institutions.
3. Profits
Net commission revenues, which are the major revenue source of the brokerage firms, declined by 19% to US$ 365 million in 2008. Even though commissions derived from futures trading increased by 44%, it did not compensate the fall in the equities commission. On the other hand, other operating revenues, including asset management and corporate finance proceeds declined slightly to US$ 186 million. While brokerage firms generated US $ 53 million profit from proprietary trading, in 2008 due to the poor performance in the market, they incurred a US$ 6 million loss in 2008. Thus, total revenues fell by 20% to US$ 665 million.
Although the brokerage industry’s revenues declined in 2008, their operating expenses continued to rise despite cost-cutting measures and reached US$ 637 billion. Hence, net profit decreased to US$ 137 million in 2008 from US$ 274 million in 2007.
The number of brokerage firms posting a profit declined to 40 in 2008, down from 68 a year ago, while 55 firms posted a loss.
INVESTORS I. INVESTMENT PREFERENCES
The State Planning Organization (SPO) publishes the portfolio allocation of domestic and foreign investors. Accordingly, the total size of savings has increased by 6% and reached TL 611 billion as of end 2008. Since Turkish lira depreciated 31% against the US$, total savings fell down by 20% in dollar terms.
Since 2005, non-residents’ share in total savings stabilized around 19%. But in 2008, their share retreated by 9 points from 21% to 13%, due to the decrease in their equity portfolios.
As it will be mentioned on the next page, foreign equity portfolios declined by 58% to US$
41 billion by the end of 2008. Thus, 87% of total savings are held by residents.
Total Savings
2005 2006 2007 2008 Breakdown
2008 2007/2008 Change Common Stocks 50,850 53,454 96,895 36,167 9% -63%
Bonds/Bills 67,286 71,653 87,048 66,088 16% -24%
Mutual Funds 22,776 18,384 26,789 19,873 5% -26%
Deposits 174,957 205,684 288,627 279,534 70% -3%
Total (Million $) 315,869 349,175 499,360 401,661 100% -20%
Total (Million TL) 423,833 490,801 578,908 611,248 100% 6%
Residents’ Share 82% 81% 79% 87%
Non Residents’ Share 18% 19% 21% 13%
Source: SPO
Due to the increase in TL deposits, the share of the banking system, including the Islamic banking, in domestic investors savings went up to 78%.
Following deposits, the second major instrument is government bonds and bills. These constitute 12% of domestic investors’ portfolios. Equity is on the fourth row after mutual funds and represents only 4% of their investments.
Residents' Investment Breakdown
(mn. $) 2005 2006 2007 2008 Breakdown
2008 TRY Deposits 108,206 121,495 181,011 176,635 50%
FX Deposits 56,968 72,139 89,878 83,995 24%
Participation Bank Funds 6,348 7,977 12,790 12,351 4%
Bonds/Bills 41,192 39,662 49,039 41,232 12%
Eurobonds 3,983 3,850 3,693 2,943 1%
Mutual Funds 21,868 16,377 22,857 15,902 5%
Repo 1,107 1,567 2,357 1,445 0%
Pension Funds 908 2,007 3,933 3,970 1%
Common Stocks 17,038 18,680 26,952 12,895 4%
Total 257,619 283,754 392,511 351,367 100%
Source: SPO
In 2008, foreign investors’ portfolio declined to US$ 51 billion which indicates more than a half reduction. Besides, while in 2007 equities represented two thirds of foreign investors’
portfolio, its share fell down to 46% in 2008.
Non Residents' Savings
(mn. $) 2005 2006 2007 2008 Breakdown
2008 Common Stocks 33,812 34,774 69,943 23,273 46%
Bonds/Bills 20,370 26,019 31,586 19,859 39%
Eurobonds 634 555 373 609 1%
Deposits 3,434 4,073 4,947 6,553 13%
Total 58,250 65,421 106,849 50,294 100%
Source: SPO
II. NUMBER OF EQUITY INVESTORS
The table below shows the number of investor accounts with equity investments. Although they are still below the level in 2001, recovery in the number of equity accounts is still continuing. By the end of 2008, the number of accounts increased to 1.1 million.
No. of Equity Accounts
2004 2005 2006 2007 2008
1,072,663 1,006,993 1,021,446 1,040,853 1,102,551
Source: Takasbank, CRA
The number of investors, however, is different from the number of accounts, due to several accounts being held by a single investor at different brokerage firms. Roughly, there is a difference of 110,000 between them. In the below table, the number of investors and their breakdown is provided. If the two tables in this section are analyzed together, in 2008, around 990,000 investors have roughly 1,103,000 equity accounts.
In 2008, with the participation of around 50,000 new domestic investors, number of equity investors reached 983,000. On the other hand, the number of foreign investors decreased slightly to 6,600.
No. of Equity Investors
2007 2008 Change
Domestic Investors 934,070 983,264 5%
Dom. Individual 931,433 980,337 5%
Dom. Corporate 2,223 2,458 11%
Dom. Institutionals 216 222 3%
Dom. Other 198 247 25%
Foreign Investors 6,696 6,586 -2%
For. Individual 3,984 4,181 5%
For. Corporate 1,350 734 -46%
For. Institutionals 1,345 1,649 23%
For. Other 17 22 29%
Total 940,766 989,850 5%
Source: CRA
III. EQUITY OWNERSHIP
In the table below, the structure of equity ownership is provided. Total equity portfolio has decreased by more than half in dollar terms to US$ 41 billion.
Breakdown of Equity Portfolios by Investor Categories
(mn. $) 2004 2005 2006 2007 2008
Domestic Investors 12,788 18,453 18,707 27,020 13,205 Dom. Individual 9,239 11,757 11,192 15,080 7,090 Dom. Corporate 2,200 4,331 5,839 8,838 4,677 Dom. Institutionals 328 653 570 1,029 569 Dom. Other 1,021 1,713 1,106 2,072 870 Foreign Investors 15,548 34,012 34,818 70,454 27,332 For. Individual 108 135 133 202 87 For. Corporate 8,397 17,201 20,000 38,619 8,565 For. Institutionals 7,006 16,625 14,662 31,603 18,673
For. Other 38 51 24 30 7
Total 28,336 52,465 53,525 97,474 40,537
Source: Takasbank, CRA
Foreign investors’ share has been rising since 2002 until 2008. However in 2008, it has decreased by 5 points to 67%. The most dramatic change was seen in foreign corporations which refer to foreign banks and brokerage firms. With US$ 19 billion portfolio, foreign institutional investors are currently the major investors.
Domestic investors’ portfolio decreased from US$ 27 billion to US$ 13 billion. Because of the decline in foreign investors’ portfolio, domestic investors’ share rose to 33%. Also, long term analysis of equity portfolios indicates that domestic individual investors’ share has been declining until 2008, even though they still continue to be the most important group in terms of trading volume.