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With the weak A-share market depressing profits at home, China’s securities brokers are seeking to expand overseas in the footsteps of the country’s banks.
The big listed brokerages, in particular, are buying overseas securities firms and listing on the stock exchange in Hong Kong as they aim to diversify their funding and lay the foundations for future international businesses, according to KPMG, an accounting firm.
“Chinese brokers have strong networks and relationships across the country and are keen to capture opportunities from these relationships offshore as well,” Bonn Liu, a partner at KPMG China, said in a statement. “As a significant number of capital markets transactions overseas involve Chinese companies, mainland brokers will become serious competitors to their international peers as they expand outside China.”
The government has done much to fix its banks’ tattered balance sheets during the past decade, helping to wipe the slate clean and prepare them for listing, but the brokerages have not enjoyed the same level of support. Politics play a big role. The China Banking Regulatory Commission wields much more authority and resources than the brokers’ regulator, the China Securities Regulatory Commission.
Instead, Chinese authorities have offered the securities firms salvation in the form of new markets and products to expand into.
“To list in the H-share market is an effective way to get international investors, and by setting up operations in places such as Hong Kong, the brokerages pave their way to seize opportunities in the offshore renminbi market,” said Xie Peijie, a Shanghai-based securities analyst at Central China Securities.
By the end of June 2011, there were 23 mainland brokers approved to set up subsidiaries in Hong Kong, up from 10 in 2006. Pre-tax profit for all brokers increased from Rmb34.6 billion ($4.3 billion) in 2006 to Rmb108.1 billion last year.
“To plan for overseas expansion, we have seen a large influx of brokers from China setting up office in Hong Kong over the past 12 months. The largest mainland broker has recently listed in Hong Kong and others have already listed their Hong Kong subsidiaries,” Liu said.
However, listed brokers in China still rely on a traditional business model, making most of their money from brokerage fees and equities underwriting. Many listed brokers reported losses for the third quarter, when the main share index in Shanghai dropped more than 14%. Income from brokerage fees has fallen 27% and earnings from equities underwriting have tumbled by two-thirds from the second quarter, according to Central China Securities.
China’s biggest broker, Citic Securities, which raised $1.7 billion in the biggest IPO from the financial sector in Asia-Pacific so far this year, saw its third-quarter net profit drop nearly 80%.
Central China’s Xie said the listed brokers’ annual results will be much worse this year. Even after a week’s strong rally, Shanghai’s stock index is still 12% lower year-to-date.
Despite the poor results, China’s securities firms have the resources to buy their way into new markets. “Their advantage is that they have got deep pockets, whereas overseas companies are struggling in the current market and therefore could become targets,” said KPMG’s Liu. “Valuations are also working in the Chinese firms' favour because of the current stress in financial markets overseas. If China wants to go out, this is the best time to do it.”
