IBI Brokerage and Investments Ltd. is again Israel's preferred broker, according to the second "Globes" annual survey of brokerages. 2012 was a difficult year for investment houses, which had to deal with falling profits. Nonetheless, the industry's powerhouses held their own.
The fall in profits was no surprise; the trend began in 2010. The ongoing competition against the banks, along with falling trading volumes, reduced revenues in 2012. Investment houses responded accordingly: they cut back, and some even sold some activities. For example, Harel Finance Ltd. sold its Tel Aviv Stock Exchange (TASE) membership to E Online, and Clal Finance Ltd. has put its TASE membership up for sale.
The "Globes" brokerage survey found that the big winner was IBI Brokerage, managed by CEO Julien Assous, which won 60% of the votes of customers and rivals.
IBI CEO Julien Assous
IBI Brokerage, founded in 1973, is one of the oldest firms in the Israeli capital market. The survey participants again praised the firm, especially its professionalism. "A professional firm, with high service awareness, and specialization in niche trading and the distribution of bonds," was said about it. Other participants cited IBI's initiative in relevant transactions, and the credibility of its traders.
In contrast to other firms, brokerage is a core business of IBI Investment House Ltd. (TASE:IBI). "A brokerage is something you build over years," says Assous. "If the business is not big enough, it's hard to profit from it."
DS Brokerage Ltd., headed by CEO Ron Sireni, is in second place, keeping its ranking from last year. DS Brokerage narrowed its gap against IBI Brokerage to 5% from 8% in the previous survey, winning 55% of the respondents' votes. They favorably cited the firm's skilled contact persons and their availability. "They know all a customer's needs, and they do not call with bad deals just to generate activity."
DS Brokerage is a new firm in the Israeli capital market. It was founded just three years ago, and it is at the heart of the pending merger between DS Apex Holdings Ltd. (TASE:DSAP) and Meitav Investment House Ltd. It will be interesting to see whether the firm will keep its high ranking, in view of the inherent uncertainty in most mergers.
Leader Capital Markets Ltd., run by Sagie Poznerson, closes the top three, with 47% of the votes. The respondents say that the firm's staff are expert traders with competitive rates, and an ability to distribute packages, especially of shares.
Clal Finance kept its fourth place ranking, with 38% of the votes. The biggest change in the rankings took place in the middle of the table. After no changes in the top four rankings, things begin to get crowded for fifth place. Three firms are tied for the spot, with 35% of the votes each: Excellence Investments Ltd. (TASE: EXCE), which rose from eighth place in the previous rankings; Psagot Investment House Ltd., which last year tied with Clal Finance for fourth place; and Bank Hapoalim (TASE: POLI), which rose from seventh place in the previous rankings.
The crowded center of the table reflects efforts by the various firms last year. Investment houses are competing fiercely against the banks, especially on price, and they stress higher service quality per worker.
The fact that Bank Hapoalim was able to be included in the top five is surprising. The bank bypassed Bank Leumi (TASE: LUMI) (which fell from 6th to 10th place with 22% of the votes), to become the highest ranked bank in the rankings. The respondents who voted for the bank cited the discretion and professionalism of its traders.
Bank Hapoalim was the only bank to improve its place in the rankings. Union Bank of Israel (TASE: UNON) stayed in 11th place (with 17% of the votes), and Mizrahi Tefahot Bank (TASE:MZTF) fell three places from 9th to 12th place (13% of the votes). First International Bank of Israel (TASE: FTIN) and Israel Discount Bank (TASE: DSCT) both fell three places, after tying in 11th place last year, to tie in 14th place this year (7% of the votes). This may be attributable to a bit of complacency by the banks last year, after they won substantial market share from investment houses.
Bank Hapoalim invested heavily last year to promote its brokerage business. The brokerage activity was taken over by deputy CEO and head of financial markets Anat Levin, who has extensive experience in the field, especially in working with financial institutions. The bank also consolidated its dealing rooms, and it is currently building a larger and more sophisticated dealing room.
Harel Insurance Investments and Financial Services Ltd. (TASE: HARL) unit Harel Finance Ltd. is in 8th place, with 33% of the votes, after improving its ranking from 10th place. Harel, is a TASE member and market maker, but no longer has institutional brokerage activity, after selling this business to E Online last year.
The biggest jump in the rankings was made by Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL) unit Migdal Capital Markets Ltd. The investment house's brokerage department rose from the 15th and last place in the rankings last year to 9th place, with 30% of the votes.
Camalia Capital Markets Ltd., which specializes in broking foreign securities, is a new member of the rankings. It reached 13th place, with 12% of the votes. Meitav, which brings up the rear of the rankings in 15th place, with 3% of the votes, acquired 60% of Camalia two months ago for NIS 16 million, in order to strengthen the brokerage activity of the merged DS-Meitav investment house. Camalia-DS Brokerage will be headed by Camalia's Yohan Kadoche as chairman and DS Brokerage's Sireni as CEO.
Research less important
What were the most important factors for brokerages' customers last year? Most believe that availability, which had a score of 9 (on a scale of 1-10) is the most important criterion for working with brokers. The professionalism of the contact person, with a score of 8.7, and quality of service, with a score of 8.5, are in second and third place. The quality of quotes is in fourth place, with a score of 8.1, followed by transaction flow, with a score of 7.6, and expertise, with a score of 7.5.
The issue of price was pushed down to the second half of the table, to seventh place, with a score of 7.3, two places below its place in the previous ranking. Price tied for seventh place with research, which fell one place from last year. It will be interesting to see the consequences for the status of analysts, because research achieved the same score, even though it fell in the rankings.
The bottom third of the rankings are held by initiated offers (with a score of 6.8), access to distribution (with a score of 6.7), general brokerage turnover (with a score of 6.6), and foreign investment.
These figures show that the main brokerage customers - institutions and public companies - are prepared to pay more for available and professional service. Ultimately, what is important to them is an investment at the right time, not necessarily the price they have to pay for it.
In conclusion, investments houses which scored high in the rankings meet the criteria mentioned as the most important to their customers - availability, professionalism, and high service awareness - and their customers are willing to pay for it.
In the past three years, there has been a real fight between the banks and investment houses on the brokerage field, especially over price. This should benefit customers, because of lower fees, but it has driven more and more brokers from the market, including veteran, professional firms. If this trend continues, it is liable to create a narrower market, dominated by a small number of veteran brokerages alongside the banks. What will this do to prices and skills? Time will tell. The fear is that the industry's falling profit margins will ultimately have a cost in the quality of professional service currently received by customers.
Methodology
The survey's database is based on a questionnaire that "Globes" sent to 60 brokerages' service customers. Respondents include investment institutions, such as provident and pension funds and life insurance; mutual fund and ETF managers; and companies listed on the Tel Aviv 100 Index, which manage large nostro portfolios and routinely work with brokerages. They receive a range of services, starting with foreign currency conversion for hedge deals and investments. The respondents are the biggest and most important players in the Israeli market, and are the brokerages' primary clientele.
"Globes" asked the respondents to answer two main questions: the first related to the 12 inherent variables of brokerages' operations, and to rank each variable on a scale of 1-10 (10 is the highest score). The variables included the brokerage's availability to its clients, quality of service, quality of quotes (i.e. the best real-time quotes for buying and selling), the contact person's professionalism, whether the contact person understands his or her client's needs and can tailor a deal, the brokers' specialization in various securities, and the brokers' ability to provide the client with added value.
Additional factors included the importance of a research department, access to distribution, average transaction size (since large companies prefer to design large transactions in such a way as not to affect the market), and access to foreign markets.
In the second part of the survey, the respondents were asked to list their preferred brokerages, and explain their choices in a few words.
On the basis of the responses, "Globes" summarized the ratings into two tables: one table shows the factors most important to the respondents, each rated from 1 to 10; and the second table shows the respondents' top five picks of brokerages, as a percentage.
Winners' remarks "If the deal isn't big enough, it's hard to make a profit from it," says Assous. "When comparing the capital invested in this activity with the yield, it is no wonder that some firms decided in the past year that this was not for them." Despite the falling revenue in the past year, in view of the fierce competition against the banks, for the winners, the survey supports their frequent argument that price isn't everything. Leader Capital Markets VP Shay Ben-Yakar says, "There's a limit to how much the banks can take from the brokers, and how much the price can strengthen them in this campaign. So long as the brokers keep up their quality, we'll keep our share of the system."
Assous adds, "There is a process that drives itself - the brokers are leaving. This means fewer analysts and less turnover, which is bad for everyone, including us. In the end, there will be only the banks and four or five established brokers, which is a pity."
What do the leaders think about Bank Hapoalim's surprise showing in the rankings? "What was surprising was that Leumi weakened, since it makes the biggest noise in the market. I would have expected Hapoalim and Leumi to be close as they are both large and worthy institutions," says Sireni.
"Bank Hapoalim often has advantages over other banks, and its decision to strengthen its operations in Israel in recent years has reflected in the brokerage," says Leader Capital Markets VP research and banking analyst Alon Glazer.
If there is a variable that succeeds in surprising the winners, it is research, the importance of which fell again this year. "We're constantly running to investment committees. Today, our clients' biggest need is research," says DS Brokerage VP research Eran Jacobi.
Glazer concludes, "In the end, the firms which rise in the rankings are those which invest in research. The complete suit turns the broker into someone whom the institutions want to work with. We believe that they come together."
Difference between a TASE member and a brokerage
TASE members are banks and non-banks, known as brokers. They are authorized by the TASE to transfer buy and sell orders for securities to the TASE computer for their clients. Although a TASE membership grants a kind of seat on the trading floor, a brokerage provides trading services in securities, mainly for institutions, which include a trading room where the securities dealers and traders and a research department, where analysts conduct their work These two activities are kept separate, so there is no requirement to be a TASE member to be a brokerage.
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Published by Globes [online], Israel business news - www.globes-online.com - on March 2, 2013
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