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China Brokerages: More Mergers, Still Fragmented

The Chinese government's ambitions to build first-class investment banks will continue to drive merger and restructuring activity among China's securities firms. S&P Global Ratings believes that combining two balance sheets is only the starting point. The benefit of synergies will take time and effort to realize.

By our estimates, deals announced since late 2023 accounted for about 20% of the sector's assets based on the numbers as of end-June 2024 (see chart 1). More consolidation could eventually boost service quality, profitability as well as risk-control standards. Over the next two years, the landscape will not likely change considerably. The top players will grab a bit more market share but the sector will likely remain fragmented and competitive.

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More Tie-Ups Between Large Or High-Profile Players May Ensue

The merger spree is likely to continue. This considers the regulator's push for high-quality players to improve the sector's capability to serve China's economic transition and innovation, as well as meeting wealth management needs. Last March, China's securities regulator (the CSRC) announced its goal of cultivating two to three globally competitive investment banks and investment institutions by 2035. CSRC encourages top-tier players to grow and build strength via mergers and restructuring.

Compared with global peers, China's top investment banks are smaller and more domestically focused. The country's growing needs for global asset allocation and corporates' overseas expansion will have several benefits. These include business opportunities for more cross-border transactions and support for securities companies' overseas development.

The Sector Will Stay Highly Fragmented For At Least Two Years

We estimate the collective market share of the top-10 players could rise about 3 percentage points (ppt) to 53% for operating revenue and 1 ppt to 62% for net profit when all the announced deals close as expected.

China has more than 140 securities firms. Fierce competition on price and services and underwriting standard have led to unsustainably low rates for underwriting fees and repeated regulatory warnings over the years. Aggressive underwriting practice could increase securities firms' risks.

Only A Starting Point

Consolidation is just the start. In our view, post-merger, securities companies will likely now focus on elevating their capability to serve clients, including more comprehensive product suites and stronger risk management discipline to manage growing businesses and more diversified geographic coverage.

Increasing demand for overseas investments and overseas activities may create business opportunities for capable players. Meanwhile, uncertainties around geopolitical tensions could make securities companies more cautious when going abroad.

We expect securities companies to refine their international business under their holistic development strategy. For example, Huatai Securities sold its U.S. subsidiary AssetMark in the third quarter of 2024; while China Galaxy converted its Southeast Asian joint venture with CIBM into a 100%-owned operation in 2023.

What to watch?

Brokers controlled by the same government or parent may be more likely to merge. This considers the easier alignment of shareholder interests. A landmark deal is the proposed merger between Haitong Securities and Guotai Junan Securities. The Shanghai government is the ultimate biggest shareholder of both entities. We view this deal as guided by government strategy to create a world-class investment bank and support Shanghai's development as a global financial hub.

In our view, the diverse ownership by local governments may have prevented the sector from consolidating sooner. By our estimates, most of the sector's top 30 players have direct or indirect ownership from local governments. Even though some players have small presences and mediocre or even weak profitability, local governments are often reluctant to give up their interest in securities licenses. Some shareholder structures are also diverse with interests from both provincial and lower level government, complicating the decision-making process.

The regulator's promotion of sector consolidation could lower barriers.

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Appendix

Table 1

Ratings list for China's brokerage sector
Rating/Outlook

China Galaxy Securities Co. Ltd.

BBB/Stable/A-2

China International Capital Corp. Ltd.

BBB+/Stable/A-2

CITIC Securities Co. Ltd.

BBB+/Stable/A-2

CSC Financial Co. Ltd.

BBB+/Stable/A-2

East Money Information Co. Ltd.

BBB-/Stable/A-3

GF Securities Co. Ltd.

BBB/Stable/A-2

Guosen Securities Co. Ltd.

BBB/Stable/A-2

Guotai Junan Securities Co. Ltd.

BBB+/Stable/A-2

Haitong Securities Co. Ltd.

BBB/CreditWatch Positive/A-2

Huatai Securities Co. Ltd.

BBB+/Stable/A-2

Orient Securities Co. Ltd.

BBB-/Stable/A-3

Shenwan Hongyuan Securities Co. Ltd.

BBB/Stable/A-2

Zhongtai Securities Co. Ltd.

BBB-/Stable/A-3
Source: S&P Global Ratings.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Xi Cheng, Shanghai + 852 2533 3582;
xi.cheng@spglobal.com
Secondary Contacts:Ryan Tsang, CFA, Hong Kong + 852 2533 3532;
ryan.tsang@spglobal.com
Yiran Zhong, Hong Kong 25333582;
yiran.zhong@spglobal.com

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