Hong Kong's highly competitive stockbroking business has forced one of the mainland's largest brokerages to transform itself into a universal bank in an effort to rely less on fee-based income and to add new and stable profit streams.
Haitong International Securities, the flagship offshore arm of the mainland's No 2 securities firm, recently set up a new department of fixed-income, currencies and commodities (FICC), which will use its own balance sheet to finance transactions to meet clients' demands.
Lin Yong, vice-chairman and chief executive of the firm, told the South China Morning Post in an exclusive interview it was the right time for mainland securities firms to move beyond conventional broking business as a commission war among local brokers eroded profit margins.
"It's definitely time for change. In fact, we [mainland securities companies] call this a change, but big foreign investment banks like Goldman Sachs and UBS have been doing these other businesses for a long time," said Lin, referring to the wide range of financial services to be offered by Haitong's new FICC unit.
"We believe we can be the one to play a leading role in this shift in business strategies. If you don't change now, you will be left behind sooner or later and you may not even survive in the end," said Lin, who holds a doctorate degree in economics and has more than 16 years of securities industry experience.
Lin compared the commission war among local brokers with the impact on retail businesses of rising rents in Hong Kong.
"Some years ago when I first came to Hong Kong, I remember there were still some local family-run small stores selling cigarettes, drinks, and fruit. But when you look around today there are so many 7-Eleven or ParknShop chain stores that it has become difficult to find these small local stores."
Last month, local brokerage King Fook Securities, owned by listed King Fook Holdings, announced it would close its business after sluggish transaction volumes and surging costs prompted the parent firm to shut down the unit. The 42-year-old local securities firm has been losing money since 2009.
Hong Kong had 507 operating brokerage firms at the end of June, down from 511 at the end of last year. The top 65 accounted for more than 90 per cent of market turnover at the end of April, stock exchange figures show.
Haitong is a relative newcomer to the stock market in Hong Kong. In 2009, it reached an agreement with owner New World Development to buy Taifook Securities, major local brokerage, for HK$1.8 billion. The deal marked the first takeover by a mainland brokerage firm in the city.
Lin said in the aftermath of the acquisition Haitong quickly grabbed a bigger market share and new clients. But over time, with fast change taking place in global capital markets, the firm came under pressure to develop new business to meet the needs of its clients, including many cash-rich mainlanders keen to invest abroad.
In 2009, he said, one of his clients opened an account at Haitong and deposited about HK$100 million into the account. Initially the client only wanted to trade Hong Kong stocks but later became interested in US equities and global commodities, which Haitong did not have market access to at the time.
The client then moved much of his HK$100 million to several foreign banks to enable him to make more diversified investments. "This personal experience with the client taught me a very important lesson. We must grow with our clients who are getting more and more sophisticated in investments," Lin said.
Haitong International Securities now plans to run a HK$1 billion book under the FICC unit, which represents about 11 per cent of its overall revenue.
Last week, the Hong Kong-listed securities firm reported a 44 per cent rise in net profit for the first half, helped by pick-up in stock trading in Hong Kong.
In the equity capital market, Haitong's major competitors include Citic Securities. In debt business, it competes mainly with BOC International.