Pedestrians walk past a branch of Citic Securities Co in Changsha, Hunan province, China. Citic topped the rankings for arranging Chinese overseas first-time share sales last year, excluding the IPO of Alibaba Group Holdings in New York, a transaction that distorted industry numbers by raising a record $25bn.


Bloomberg/Beijing


China’s securities firms, which have been struggling to diversify beyond volatile revenues from margin lending and brokerage commissions, face the unwelcome prospect of competition from the nation’s biggest commercial banks.
News last week that two Chinese banks may capitalise on a plan by the China Securities Regulatory Commission to open up the brokerage industry to other financial institutions sent share prices of listed securities firms tumbling.
Bank of Communications Co and Industrial Bank Co, two of China’s mid-sized lenders, plan to make a foray into the brokerage industry by investing in local securities firms, people familiar with the matter said March 9. An even larger threat may loom should the likes of Industrial & Commercial Bank of China Ltd, the world’s biggest bank by assets, decide to enter the industry.
While the 21 mainland-listed securities firms have themselves ballooned in size as a result of last year’s stock market boom, they are vulnerable to any extra competition because they have largely failed to reduce their reliance on brokerage commissions, margin lending and share sales – business lines closely tied to the booms and busts of Asia’s largest equities market.
“The brokerage industry in China is still a very vanilla business,” said Bonn Liu, a Hong Kong-based partner at accounting firm KPMG China. The securities firms “have developed quite a big margin business, but other than that, there’s not as much sophistication as in developed economies,” Liu said.
Held back by capital controls and their limited presences in overseas markets, the securities firms have mostly depended on domestic revenues. Their efforts to diversify in the past two years centred on expanding quasi-lending businesses such as advancing money to clients to buy stocks. Interest income from margin financing and securities lending surged 142% to 45bn yuan ($7bn) in 2014, according to Securities Association of China data.
The brokerages need to further develop fee-based operations such as asset and wealth management, said Zheng Chunming, a Shanghai-based analyst at Capital Securities Corp Trading commissions made up 40% of the firms’ revenue last year, a ratio which Zhang said should be trimmed to about 20%.
Investment banking, which contributed less than 10% of last year’s revenue, is also a weakness. While the brokerages have become more competitive in helping Chinese companies to list at home and abroad, they lag behind foreign firms in underwriting deals that require an extensive institutional network such as block trades and secondary offerings, data compiled by Bloomberg show.
Citic Securities Co, China’s largest securities firm, topped the rankings for arranging Chinese overseas first-time share sales last year, excluding the IPO of Alibaba Group Holdings in New York, a transaction that distorted industry numbers by raising a record $25bn. Citic ranked No 8 when secondary equity sales were included, according to data compiled by Bloomberg. Morgan Stanley and UBS Group topped that list.Citic, which bought CLSA Asia-Pacific Markets in 2012, has the potential to become a global heavyweight within five to 10 years, even serving as “an aircraft carrier” for other Chinese brokerages, according to Richard Huang, a Beijing-based partner at Boston Consulting Group.
For now, though, profits across the Chinese industry aren’t matching market valuations.
China has 13 of the world’s 20 biggest brokerages by market capitalisation, according to Bloomberg data. Yet the combined profits of all 120 Chinese brokerages last year amounted to about $15.4bn, compared with $8.5bn for Goldman Sachs Group alone.
A new challenge emerged this month, when China’s securities regulator said it was studying a proposal to let banks apply for brokerage licenses, without giving a timetable for a decision.
As a possible sign of the extra competition the securities firms will face, Industrial Bank plans to acquire Huafu Securities Co, while Bank of Communications wants to purchase Royal Bank of Scotland Group’s one-third stake in Hua Ying Securities Co, according to people familiar with the matter.
Shares of Chinese brokerages, already under pressure because of recent curbs on margin financing, have tumbled in 2015 after more than doubling last year. The five largest brokers by market value listed in Shanghai have fallen an average 6.6% this year.
The securities industry’s combined net income last year was the equivalent of 6% of the 1.55tn yuan earned by China’s commercial banks, according to China Banking Regulatory Commission data. The brokers had less than 1% of the nation’s financial assets as of end-2013, compared with banks’ 78% share, according to central bank data.
While the stakes may seem comparatively small for banks looking at moving into the brokerage business, diversification may become increasingly attractive as the government strips away protections for lenders such as interest-rate controls.
“Banks are keen to get into brokerage because there is so much money to be made at the moment – especially as their banking business is under stress,” said Fraser Howie, co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.”