Chinese brokerages will likely see growth enter a "golden period" in the coming two years on the backdrop of a booming stock market and regulatory support to new businesses, industry analysts said.
However, domestic securities firms are expected to meet a raft of challenges including moves to lessen dependence on brokering incomes and measures to retain existing clients, insiders noted.
The combined brokerage commission income of Chinese mainland stock houses may reach 150 billion yuan (US$20.1 billion) to 170 billion yuan this year, jumping nearly five-fold from a year before, according to estimates by Everbright Securities Co.
The cumulative brokering commissions had reached about 137 billion yuan in the first three quarters during which the benchmark stock index in Shanghai more than doubled amid hectic turnover.
"The brokerage business will still be the key to shoring up stock firms' bottom line in the next few years," said Wei Quanhui, a Huatai Securities Co consultant. "But they are gradually realizing that they can't simply bank on trading stocks for clients when competition heats up."
Mainland-listed brokerages posted eye-popping financial results in third-quarter disclosures. Most of the growth was derived from securities brokering.
CITIC Securities Co, the nation's biggest public broker, said net profit in the first three quarters soared by more than 550 percent to 8.36 billion yuan. Brokerage fees of the firm jumped nearly five times to 10.4 billion yuan in the first nine months.
A two-year revamp of the securities industry was just concluded as more than 30 troubled brokers were closed down after they had been found to misuse clients' funds and cause hefty losses in proprietary trading.
Stock authorities have already started to nourish stronger industry players by allowing them to launch potentially lucrative businesses including asset management and private equity.
CITIC and China International Capital Corp, partly held by Morgan Stanley, this year gained regulatory nod to set up subsidiaries to invest in start-up companies before initial public offerings.
"The string of innovative businesses will surely change the traditional profit models of domestic brokers," said Dong Xiaofeng, an Everbright Securities analyst. "The securities industry should be overweighted in portfolios as new profit channels are gradually added."
Another long-neglected revenue driver will be the underwriting business, set to be boosted by the A-share issuance of several large-sized enterprises late this year or early next year, industry analysts said.
A total of 43 companies raised 171.9 billion yuan in initial public offerings in the third quarter, 43 percent more than the combined amount raised by 45 firms in the first half, according to data compiled by Everbright Securities.
The brokers' combined underwriting commissions of IPOs and secondary sales reached about 5.8 billion yuan, nearly doubling the income for the entire 2006, according to industry data.
"Securities underwriting will grow steadily as the market expands," said Wu Jie, a China Securities Co trader. "With the bond and securitization markets set to boom, underwriting incomes will likely improve significantly."
The China Securities Regulatory Commission in June expanded the Qualified Domestic Institutional Investor program to allow brokers to help clients invest money in overseas securities.
Regulators are also on track to introduce new trading mechanisms such as securities lending and margin trading arrangements in a bid to boost turnover and shore up the market size.
A margin trading system allows investors to pay margins to buy stocks and borrow the rest of the money from brokers to fund the purchase. Securities lending makes it easier for investors to borrow stocks from brokerages and sell them short.
"We can only expect things to change gradually," said Huatai's Wei. "For smaller firms that depend largely on the brokerage business, competition will be tougher and they may face the risk of being acquired."
(Shanghai Daily November 5, 2007)
