Chinese brokerages slid after a media report that regulators may allow some of the nation’s largest banks into the securities industry, raising concerns over intensified competition in an already fragmented market.
Citic Securities Co., China’s largest broker, fell 2.9% as of 10:10 a.m. in Shanghai, while Industrial & Commercial Bank of China Ltd., the nation’s largest lender, rose 0.4%.
Caixin reported on Saturday that China may offer brokerage licenses to at least two big commercial banks, without giving further details. The China Securities Regulatory Commission said on Sunday while it had no information to provide in response to the article, developing high-quality investment banks is an important way to expand direct financing and multiple methods are under discussion. Whichever direction is picked, it won’t have a major impact on the existing industry landscape, according to the statement.
The potential entry of Chinese banks, which have $43 trillion in assets, into deal-making, brokering and trading will pose significant threat to both local and foreign rivals. China’s 131 brokers have combined assets equivalent to less than a third of ICBC’s. It would also increase competition for global banks such as Goldman Sachs Group Inc. and Morgan Stanley, which this year will be allowed to petition for full control of local securities firms.
“It helps China banks to migrate into a universal banking model, which can boost banks’ non-interest income thus offset the pressure from falling loan pricing,” Citigroup Inc. analysts led by Judy Zhang wrote in a note, adding that earnings boost will be limited. However, it also “accelerates the financial sector supply side reform, i.e., more long tail small brokers will be eliminated.”
The stakes for banks looking at moving into the brokerage business will at first be comparatively small given their hundreds of billions of dollars of revenue. But a diversification into fee-based services would come at an opportune time as the government is also urging them to forgo profits in their lending services to help small businesses reeling from the impact of the virus outbreak.
China’s securities regulator has mulled such a plan since as early as 2015, with the CSRC saying at that time it was studying a proposal to let banks apply for brokerage licenses. Bank of China Ltd. is the only Chinese bank that owns a domestic securities firm, through its Hong Kong-based brokerage unit. BOC International (China) Ltd. was established in 2002.
China has also been making it easier for foreigners to buy its stocks and bonds to make the domestic market more integrated with rest of the world. The transformation is gathering pace but has been challenging, even before the economic disruption and political tension caused by the coronavirus pandemic.
The CSRC said late last year that it wanted to create investment banks of an “aircraft carrier size” to compete, as well as promote international expansion of its brokerage industry. That partly involves mergers between local players. Citic Securities Co. and CSC Financial Co. have started a feasibility study on how to structure a merger deal, people familiar with the matter said in April.
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