Eighteen of China’s biggest listed securities houses saw substantial contractions in net profit and revenue in July as the country’s stock markets tanked and a regulatory crackdown on margin financing crimped business.
The retreat marked a dramatic mid-year turning point for mainland brokers, as the growth and optimism of the first six months yielded to a bleak outlook for the second half.
“We believe the peak period of high growth for the securities industry has ended,” equity analysts at CICC, a state-backed investment bank, said in a report. “All the key drivers of growth declined sharply in July.”
The revenues of 18 listed brokers in July had fallen to Rmb24 billion ($3.86 billion), a 44% drop compared with one month earlier. Meanwhile profits in July stood at Rmb10.4 billion, down 50% month-on-month, according to financial data provider Wind Information.
All fall down
Citic Securities, the country’s largest broker by assets, was not immune to the market contagion. Its revenue fell nearly 20% from June to Rmb3.6 billion, while profit dipped by 37% month-to-month to Rmb1.5 billion last month.
The disappointing results came after the central government moved to arrest the market rout, issuing a number of measures including a prohibition on stock sell-offs by major shareholders, clamping down on margin financing and suspending initial public offerings - all key sources of brokers’ income.
Following Beijing’s moves to curb volatility, daily turnover on mainland bourses dropped to Rmb1.22 trillion in July, down 23% from Rmb1.74 trillion the previous month, according to China Merchant Securities, a large mainland broker.
CMS reckoned a resulting business slowdown wiped 12% off brokerages' income in July.
According to the Securities Association of China, commissions made up roughly 50% of brokerage revenue in the first half of the year, up from 40% for all of last year.
Collateralised damage
The clampdown on margin lending, a significant revenue stream for brokers and a major driver of the year-long market rally, also took a bite out of brokers' income. The total margin financing balance shed 31% from Rmb2.19 trillion in June to Rmb1.52 trillion last month, pushing down brokers’ income by 3%, according to China Merchant.
As the market spiral escalated, panicked investors with highly leveraged accounts rushed to sell off inventory to meet margin calls.
In the wake of the IPO suspension the secondary offering business declined by 54% to Rmb81.8 billion in July, putting more pressure on brokers’ investment banking revenue, the CICC equity analysts said.
In early July, Beijing called on 21 Chinese brokers to jointly invest Rmb120 billion ($19 billion) in an exchange-traded fund to stabilise the equity market. The securities watchdog also prohibited investors who hold more than 5% of a company from divesting all or part of the shareholding for six months.
Market insiders say such bans have hit the brokers’ proprietary trading books most as they imposed strict rules on broker’s own investment.
“You can buy more [shares], but are not allowed to sell them,” said a Beijing-based investment banker at Citic. “Beijing asks you to inject money to rescue the market. How can you say no?”
According to CMS' estimate, proprietary businesses which accounted for about 30% of brokerage’s income in the first half of this year will halve in the second half due to the regulatory restrictions.
Meanwhile, in spite of Beijing’s efforts to bolster share prices, stocks in the large Shanghai-listed brokers kept dropping amid fears over the harm wrought by China’s market plunge. For instance, Guotai Junan, the country’s third-largest brokerage by assets, was down 20%, while Citic shed 13% since early July.
Last month, against the backdrop of the year-long stock rally, mainland brokerages reported glowing interim results. Their first-half earnings outperformed the whole of last year – surging about five fold on average from one year earlier, data from the SAC showed.
However, the still volatile stock market and Beijing’s intervention have reversed this short-lived rally and mean brokers are unlikely to report satisfactory growth next year.
“We actually don’t have to worry too much about this year as brokers had earned enough in the first half,” the Citic investment banker said. “Bigger challenges lie in next year [if the market doesn’t improve].”
