For a minute forget what the various parts of the financial services industry is telling you. The profitability of this industry seems to be fantastic. Let us take 4 parts of the industry:
a. Banking: Over the years the biggest and the richest fortunes have been made by bankers. No doubt about it. Goldman Sachs, Morgan Stanley, the grandfather of them all J P Morgan, Citibank. Is there anybody who doubts about their profitability? I think not. They may once in a while go through a lot of criticism and problems but their profitability has never been in doubt.
In the Indian scenario if you had invested Rs. 10 in the Hdfc Bank IPO (you could have bought it for Rs. 40 on listing, if you did not invest in the IPO) the share is today worth Rs. 1920 (192 times in 13 years) as well as a regular dividend which was far greater than the fixed deposit interest in the same bank. That too tax free, vow banking is profitable. In fact banking is so profitable that even Psu banks make lots of profits.
b. Broking: Brokerage is a very very profitable industry after crossing a basic minimum. If your break-even volume is say Rs. 10 crores a day – every rupee of trade beyond this figure is very profitable. Also clients may sell on day 1 and buy on day 5 – the float helps. If you understand the profitability of this business you will not wonder why Hdfc, Icici, Kotak, Axis, Dhanalaxmi, Citibank, Hsbc, SBI, Bank of Baroda ….and the others are all either in the broking business or desperate to enter this business. Companies like Indiainfoline, Indiabulls, Networth Stockbroking, Platinum, Motilal Oswal, Sharekhan, Karvy, Geojit, Religare, Birla Money, Reliance Capital, Tata Securities, Cholamandalam, DBS, – so many LISTED brokers are ONLY INTO broking. So profitability must be very, very good to sustain so many players. Also with a growing market capitalisation all these companies must be very, very profitable. I am saying profitable because all these companies get good price earning ratios (means good profitability and nice future prospects).
c. Fund / Wealth Management: This is of course the most profitable business in the financial service industry. There are more wealth managers in the Forbes List than people who have come there because of good wealth management :). Even in the Indian context there are 43 mutual fund companies (called asset management companies). All of them are likely to be very profitable in 3-5 years time – by when the market is expected to go to 10 times its existing size (DNA, Sikka of Reliance Capital). Even the small ones like Quantum or Benchmark will be profitable – so the profitability of Reliance, SBI, Icici Prudential is more or less guaranteed. A part of this business is the Portfolio Management Services – which is also likely to be very profitable – look at the number of players in the PMS business (available on the SEBI website). Nobody has exited this business in the past 15 years except 2-3 companies who did not have deep pockets to stay on in the business for enough time.
d. Life Insurance: This again must be very profitable in the long run for the shareholder of the business (never mind that the profits have come from over-pricing the products for the consumer!). There are 21 players now in the field and another 20 foreign players are waiting to enter this arena. Hdfc, Icici, Kotak, SBI, Religare, Birla, – the same names that are there in the mutual fund industry are present here. Obviously this is a more profitable business and that is the reason that more talented people, better paid and trained are deployed in this industry compared to the mutual fund industry. The commissions for selling life insurance also is quite high and commissions in the region of 90% is NOT UNHEARD OF, however the mean could be lower.
e. Financial products distribution: the people who are not manufacturers of financial products but are just distributing it also find it worthwhile to do only this. Assuming about 10,000 agents for each company make a living out of selling these products, that is a big army out there is it not?
So…what is at stake in the SEBI vs. IRDA fight over ULIPs?
well the stake of the shareholders of the financial services Industry. If you are not a shareholder in the financial services industry – SBI, HDFC, HDFC BANK, Icici, Kotak, ……you are missing something and you have nothing at stake.
If you hold ULIPs, chill you have nothing to worry (as of now) in all this media hype about the regulator’s turf war…just switch channels and watch IPL. Till I do a story on fixing @ IPL….
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