Consolidation wave sweeps brokerage firms

First to come is merger of Shenyin Wanguo and Hong Yuan amid growing pressure for reform

PUBLISHED : Monday, 11 November, 2013, 5:17am
UPDATED : Monday, 11 November, 2013, 5:17am

The mainland's fragmented securities industry is undergoing a fresh wave of consolidation on the back of the government's call for a reform of the capital markets.

Leading the way is Central Huijin Investment, the state-owned investment holding company with equity investments in major financial enterprises on behalf of the government.

Premier Li Keqiang vowed to overhaul state-owned financial institutions to lessen reliance on conventional bank loans after outgoing Beijing officials also called for the greater opening of the country's burgeoning financial sector. The new administration is now expected to speed up the pace of reform in the securities industry through greater participation of private and foreign ownership.

Another important implication of the consolidation is that the majority of the mainland's home-grown investment banks offer almost identical products and services and are likely to disappear if aggressively expanding banking and insurance giants are licensed to underwrite securities and compete directly in the brokerage businesses.

Under mounting pressure for reform, Huijin now plans to merge Shenyin Wanguo Securities with Shenzhen-listed Hong Yuan Securities. If the deal proceeds, the newly merged business will rank just behind industry leaders Citic Securities and Haitong Securities in size.

Shenyin Wanguo could not be reached for comment, while Hong Yuan said in a statement that it had received notice from its controlling shareholder, China Jianyin Investment, about a "material matter" affecting the company. Trading of its shares has been suspended since October 30.

The two securities firms are owned indirectly by China Investment Corp, the country's US$575 billion sovereign wealth fund. The fund has formulated a restructuring plan internally through subsidiaries Huijin and Jianyin, the controlling shareholders of Shenyin Wanguo and Hong Yuan respectively.

According to the China Banking Regulatory Commission and the Securities Association of China, the country's banking assets amounted to 144.2 trillion yuan (HK$183.5 trillion) in June, while the assets of its 114 securities firms stood at 1.87 trillion yuan, or about 1.3 per cent of banking assets.

The mainland's brokerage industry is highly fragmented, with the top 10 securities firms commanding a market share of only 45 per cent. Many have expanded almost identically and offer similar products, leaving policymakers such as Huijin with the difficult task of consolidation.

Merger and acquisition bankers and private equity firms said the ongoing restructurings provided little investment opportunities as Beijing tended to adopt a closed-door policy and Huijin, the holder of 19 state-owned financial institutions, including the Big Four state-owned lenders, also controlled the decision to merge other brokerages.

In addition to the Shenyin Wanguo-Hong Yuan deal, Huijin is also considering merging Shenzhen-headquartered China Investment Securities with China Galaxy Securities, the country's sixth-biggest brokerage firm by revenue with a 5 per cent market share.

On a separate note, Founder Securities, a Beijing-based broker that started a mainland joint venture with Credit Suisse in December 2008, has confirmed the acquisition of China Minzu Securities through issuing new shares. Trading of Shanghai-listed Founder has been halted since August 23.