Banking & Finance

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

Companies such as Citic Securities have surged on a 6.6pc gain by the A-share benchmark but they are no match for the Morgan Stanleys of the world

PUBLISHED : Monday, 02 April, 2018, 7:32am
UPDATED : Monday, 02 April, 2018, 7:32am

China’s largest securities companies put their best foot forward in 2017, honing their credentials as professional wealth managers through efforts to cut reliance on income from brokerage fees. But the country’s very own “Morgan Stanley” and “Goldman Sachs” remains a far cry, given the A-share market’s slower-than-expected liberalisation.

The mainland’s largest listed securities companies, including Citic Securities, China International Capital Corporation (CICC), Haitong Securities and China Merchants Securities, reported profit growth last year, outshining smaller counterparts to ride a 6.6 per cent gain in the benchmark for A shares.

Stronger efforts called for at educating China’s 100 million retail investors

Profits at the top five A-share securities companies are expected to account for more than half of the total earnings by the 30 mainland-listed brokerages, according to research by Haitong Securities.

“The top securities companies are well on their way to growing bigger,” said Ivan Li, an asset manager with hedge fund Loyal Wealth Management. “Based on their capital bases, brand awareness and reputable professionals, the big brokerages will continue to have a big share of the market.”

In China, securities companies are known as brokerages, but their business scope encompasses brokering services, asset management, investment banking, proprietary trading and margin financing. And brokerage fee income used to represent about two-thirds of their overall business because of active trading in shares by mainland equity investors.

A decade ago, the China Securities Regulatory Commission envisioned creating the country’s own securities conglomerates, which would compete against the global powerhouses by 2020. In 2008, the commission said a fair mainland securities market that was fully open to international players would be established in 2020 through gradual liberalisation.

At the time, analysts predicted the regulator would attempt to take a go-slow approach towards an internationalised capital market, giving domestic brokerages more time to strengthen their competitiveness.

To date, the A-share market is still dominated by home-grown brokerages alongside a raft of joint-venture securities companies with Chinese investors taking controlling stakes.

Citic Securities, the mainland’s largest and most profitable securities company, reported a profit of 11.4 billion yuan (US$1.82 billion) last year, up 10.3 per cent from 2016. Its revenue jumped by 13.9 per cent to 43.3 billion yuan.

Citic’s whole year earnings barely beat Morgan Stanley’s fourth-quarter net income of US$1.7 billion. And the American investment bank’s quarterly revenue of US$9.5 billion was 37.6 per cent higher than the Chinese brokerage’s total annual sales.

Based on their capital bases, brand awareness and reputable professionals, the big brokerages will continue to have a big share of the market
Ivan Li, asset manager, Loyal Wealth Management

Haitong Securities’ net income for 2017 climbed by 7.2 per cent to 8.6 billion yuan. Hong Kong-listed CICC posted earnings of 2.8 billion yuan last year, rising by 52 per cent over 2016.

In 2017, the Shanghai Composite Index advanced by 6.6 per cent to 3,307.12.

The Securities Association of China, a government-backed securities industry consortium, said total revenue by mainland brokerages dropped by 5.1 per cent in 2017 and profits on aggregate slid by 8.5 per cent.

The mainland securities companies have been encouraged to drastically move into the wealth management and margin financing segments to bolster their profitability. The largest players, including Citic and Haitong, have also quickened their go-global drive to secure a foothold in overseas markets such as Hong Kong.

The launch of the mainland and Hong Kong stock connect schemes, which allow the cross trading of shares on each other’s markets, have offered these companies opportunities to woo clients outside China.

Citic buys stakes in overseas brokers

Haitong said 9 per cent of its profit in 2017 was derived from international businesses, up 2.9 percentage points from a year earlier.

Citic reported that brokerage fee income accounted for 25 per cent of its total revenue last year, compared with 50 per cent the previous year.

“They are trying to create more sustainable revenue sources to transform themselves into securities conglomerates, rather than brokerages. And the efforts have paid off over the past decade,” said He Yan, a fund manager with Shanghai Shiva Investment. “But it will still be some time before they can compete against global rivals.”