Credit clamps push smaller brokers to brink

With lenders halting financing for brokerages relating to iBond offers, pressures are growing

PUBLISHED : Monday, 17 June, 2013, 12:00am
UPDATED : Monday, 17 June, 2013, 5:20am

Smaller brokers in Hong Kong are losing clients, and some are on the verge of shutting down as credit limits by banks constrain them from offering margin financing to buyers of iBonds.

More than 525,000 Hongkongers subscribed for the inflation-linked government bonds this year, figures from the Hong Kong Monetary Authority last week show. That compared with 330,000 orders last year and 155,000 in 2011.

In a battle for new customers, major banks, including HSBC, Bank of China and Standard Chartered, stopped lending money this year to brokers wishing to offer margin financing to iBond buyers, the South China Morning Post reported last week.

"Now more small brokers may shut down, as they keep losing clients to bigger players and stock transactions remain sluggish," said Ben Cheng, managing director of equity sales and trading, Pearl River Delta, at Cash Financial Services Group.

The industry was "too crowded", and the iBond battle would accelerate the consolidation process that has been going for years, he said.

Small local broking firms may be forced out of the market, while some middle-sized agencies could become acquisition targets, especially for Chinese brokers looking to expand abroad, said a senior executive at a key local brokerage.

"More deals, similar to Haitong acquiring Taifook in 2009, may come soon," he said.

Hong Kong had 507 operating brokerage firms at the end of last month, down from 511 at the end of last year. The top 65 firms accounted for more than 90 per cent of market turnover at the end of April, stock exchange figures show. Some 400-plus smaller firms have to fight for the remaining 10 per cent.

Tight lending conditions have had less of an impact on cashed-up bigger brokers. Sun Hung Kai Financial, for instance, is reported by industry sources to have some HK$4 billion on hand, and KGI Securities has HK$3 billion. Phillip Securities said it had HK$1 billion available.

Subscriptions for iBonds at bigger local brokers like Phillip, Bright Smart Securities International and Prudential Brokerage doubled from last year. At Prudential, 20 per cent of the subscribers were new clients.

The volume of equity market transactions has fallen over the past two years, stock exchange figures show, but demand for iBonds has increased sharply. Total securities market turnover fell 22 per cent year on year last year and remained sluggish in the first five months of the year.

Brokers, especially smaller ones without a great deal of cash, normally borrow money from banks to lend to customers wishing to subscribe on margin financing to a highly popular public offering. The brokers pay up to 1 per cent in interest to the lenders.