Nomura: China brokerage stocks won’t see recovery any time soon as bear market, financial controls take toll

China’s bearish stock market and ongoing financial deleveraging will continue to weigh on brokerages this year, making an immediate reversal of stock declines unlikely any time soon, according to Nomura Holdings.

While shares of big brokerages such as Citic Securities and Guotai Junan Securities have already dropped close to book values, their proprietary trading and stock pledge businesses will still take a beating from the falling equity market, said Tang Shengbo, head of China financials research at Nomura, at a briefing in Shanghai on Tuesday.

Brokerage shares rally after regulator issues new Chinese depository receipt rules

“There is no immediate catalyst for the sector,” he said. “You won’t see a quick reversal of share movements, unless there’s a U-turn in financial regulation.”

China’s brokerages are suffering from a turbulent stock market and increased financial scrutiny. The benchmark Shanghai Composite Index entered a bear market this year and its daily turnover fell below 100 billion yuan (US$14.6 billion) for the first time in four years last month, as local traders pulled out amid fears of tightening liquidity and a prolonged trade war with the US.

Brokerage houses are banned from borrowing too much to finance proprietary trading and margin trading businesses against the backdrop of a nationwide deleveraging campaign. The securities regulator also tightly controls the pace of initial public offerings, hurting securities firms’ investment banking businesses.

As a result, the 30-plus publicly traded brokerages posted an average drop of 23 per cent in first-half profit, according to Shenwan Hongyuan Group.

Hong Kong securities watchdog alarmed over brokerages’ margin loans quality amid lending surge

The mainland-traded shares of big industry players Haitong Securities and China Galaxy Securities have slumped 32 per cent and 29 per cent, respectively, so far this year. Citic Securities fared better, with a decline of 8.1 per cent.

The Shanghai Composite Index rebounded by 1.1 per cent to 2,750.58 on Tuesday, rising for the first time in six days. Trading was still light, with the turnover slightly exceeding 100 billion yuan. The gauge remains down by 17 per cent this year, making it the worst-performing benchmark among the world’s major markets.

Top Chinese brokerages way ahead of rivals at home, but global powerhouse status remains a distant dream

Nomura’s Tang was more bullish on China’s insurance stocks, and predicted that premium incomes would stabilise in the second half after a clean-up of industry irregularities.

“Premium incomes will pick up and we will probably see at least single-digit growth,” he said.