Banking & Finance

UBS, Morgan Stanley plan China expansion

The two banks intend to increase stakes in their mainland securities joint ventures

PUBLISHED : Monday, 09 January, 2017, 9:28pm
UPDATED : Monday, 09 January, 2017, 11:22pm

Morgan Stanley and UBS plan to increase their stakes in their mainland securities joint ventures as they commit to expanding their operations in China.

Subject to regulatory approval, UBS and Morgan Stanley intend to raise their stakes in UBS Securities and Morgan Stanley Huaxin Securities, respectively, to 49 per cent, according to media reports first published in the Wall Street Journal on Monday and verified by the Post.

Spokespeople for both banks declined to comment.

UBS currently holds just under 25 per cent of UBS Securities, which was registered in 2006, and established after mainland brokerage Beijing Securities fell into difficulties. UBS contributed to the bailout of the troubled firm, and the newly renamed UBS Securities became the first foreign-invested, fully licensed securities firm in China. UBS currently holds the second largest stake in the brokerage behind Beijing Guoxiang Property Management, which owns one third.

Morgan Stanley owns one third of Morgan Stanley Huaxin Securities, with the rest owned by Huaxin Securities. The joint venture was established in 2011, and was the US bank’s second China joint venture after it sold its stake in CICC in 2010.

Morgan Stanley’s and UBS’ plans to increase their operations in China come at a time when a number of international banks are reviewing their mainland operations, seeking to decide whether a presence there is worthwhile in terms of the costs and capital required.

Securities joint ventures are in the spotlight as capital markets services have come under pressure.

“The Chinese domestic securities industry is ever evolving, and thus challenges many players - local and foreign - to really set out future expectations and weigh them against the current backdrop,” said Brett McGonegal, chief executive of Capital Link International.

“Depending on corporate vision and desire, we will see two diametrically opposed outcomes - exit or expansion.”

In October, JP Morgan announced that it was in talks to sell back its stake in its joint venture to its partner, Shenzhen-based First Capital, though the bank emphasised that China remained a key market.

In contrast, Credit Suisse announced in November that its China securities joint venture had obtained a licence to trade securities, part of a further expansion in the mainland.

An additional problem for foreign banks’ joint ventures is that their market share remains small.

In 2015, UBS Securities was 95th among securities firms in China when ranked by net profits, according to data from the Securities Association of China, with profits of 296 million yuan.

Morgan Stanley Huaxin was 117th with 30 million yuan of profits.

“Even though the securities business is highly competitive, it is a place that global players need not only access but also have high level execution capabilities just to be competitive. I would think the expansion plans are not chasing margins but rather cementing brands and execution capability that will allow years of future growth and influence,” said McGonegal.

The rewards for success may be significant.

“At some point the growth trajectory becomes so mature that those who aren’t in the lead pack will lose relevance and be forced to exit or buy into the leaders,” McGonegal added.