China's securities brokers are set to broaden their product scope and services amid regulatory changes and diminishing margins, according to KPMG China's latest survey of the sector.
The sixth annual survey of 109 securities companies in China, notes that brokers are facing growing pressure and challenges as market competition intensifies, and are increasingly looking at ways to widen their product offering and services.
China’s securities sector, particularly the brokerage business, has tended to market a narrow range of products and services, according to the report. Conventional brokerage income meanwhile continues to dwindle amid intensified market competition and falling commission rates.
Bonn Liu, Partner, KPMG China, says: “As China continues to further enhance its reform efforts, it will expedite the development of a multilevel capital market and promote more innovation of financial products in a bid to deepen and broaden its capital market. Securities companies’ traditional business model needs to change therefore, to meet the new realities.”
Gross operating income of the sector declined 29 percent year on year to RMB136.3 billion (USD21.9 billion) in 2011, while net profit dropped much faster at 50 percent to RMB39 billion (USD6.3 billion), the survey shows. Traditional brokerage accounts for 52 percent of the sector’s gross income; this business saw its income fall 36 percent due to dwindling trading volumes and commission price wars.
“China’s brokerage business needs to shift from a traditional trade execution model to an integrated financial services model, including provision of investment advisory and wealth management businesses, in order to achieve sustainable growth. Securities firms have a strong franchise and large client base, therefore they will be able to expand as and when the regulations enable them to do so,” Liu explains.
China’s capital markets are set to become more market-orientated and internationalized; the pace of opening the market to overseas investors has also been accelerating, which is expected to affect Chinese securities firms’ performance and development models. In October 2012, China Securities Regulatory Commission (CSRC) raised the ceiling on foreign ownership and allowed the ones that have been in operation for two consecutive years, to extend their business scope.
Tony Cheung, Partner, KPMG China, explains: “These changes allow foreign shareholders to exercise greater influence in joint venture arrangements, and it also shortens the time for some joint venture securities companies to be granted new business licenses. More joint ventures are expected in the pipeline as these changes make the market more appealing to foreign investors. Meanwhile, China’s securities brokers continue to set their sights on expansion and overseas listing opportunities, demonstrating their growing global aspirations.”
On the policy front, regulators have given clear indications they are loosening controls after numerous policies were rolled out to promote reform and innovation.
Cheung adds: “IPO regimes will be further reformed, while securities companies will strengthen their governance structures and incentive mechanisms. These reform and innovation initiatives will help domestic securities companies transform their business to enable long-term growth.”
“However, the survival of securities companies, especially the small and medium-sized firms, will be challenging as a result of more intensified competition and declining performance. Finding the right talent, offering the right products to the market, as well as robust risk management are crucial to their success,” he concludes.
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