2 July 2014
Securities brokers in China have seen a rise in profits after a three year decline, benefitting from a more active stock market, expansion of margin financing, securities lending and asset management growth, according to KPMG’s latest survey of the sector.
KPMG’s eighth annual survey of 115 securities companies in Mainland China highlights a rebound for the sector in 2013, the first after a steady three-year decline. Operating income jumped 23 percent year on year to RMB 159 billion while profit rose 34 percent to RMB 44 billion. Traditional brokerage remained the major income stream and showed signs of growth, accounting for 48 percent of the sector’s total operating income (39 percent in 2012).
Bonn Liu, Partner, KPMG China, says: “Year 2014 will be a crucial year for China’s securities sector, driven by innovation, restructuring and development of the sector. Securities firm have had to change their business models from providing traditional agency business to that of wealth management and capital intermediary services. These new innovative businesses have helped to boost their income structure.”
The survey highlights that margin financing and securities lending has become a steady source of income, accounting for 11.59 percent of sector’s income (4.05 percent in 2012). Meanwhile, asset management is playing a more important role in the sector - the value of securities brokers products reached RMB 5.2 trillion by the end of 2013, almost tripling in size from the previous year; net income from the business totaled RMB 7.03 billion, representing 4.4 percent of the total annual operating income.
Despite a rise in profitability, the securities sector continues to face a number of challenges. For example, online accounts have intensified competition among brokers for commissions; the rapid growth of capital-intensive business has resulted in higher liquidity risks.
Tony Cheung, Partner, KPMG China, says: “Securities companies also need to further explore proper operating models and growth paths for the registration-based IPO system reform, the increased varieties of financial derivative products, innovative margin trading and securities lending business, continued over-the-counter market expansion, as well as the internet securities business growth.”
The upcoming mutual fund recognition scheme between China and Hong Kong and the Shanghai-Hong Kong Stock Connect pilot programme will also provide wider opportunities for securities brokers in China.
Abby Wang, Partner, KPMG China, adds: “We continue to see Mainland China securities firms seeking to list in Hong Kong, in order to strengthen their capital base and increase their profile outside China. We also see Hong Kong and Taiwan securities companies showing interest in entering the China market, as a result of recent concessions to enable them to establish majority owned fully licensed securities joint ventures in some regions.”
Liu concludes: “The coming year will see opportunities and challenges arising from trends such as business diversification and disintermediation, as well as more stringent requirements from regulators. Additionally, with the impact of internet finance, competition between securities brokers is no longer just about the number of outlets or business size. A successful integration must include strategic development, differentiated competitive advantages and core talent.”
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