China's securities brokers continue to diversify their service and product offerings in response to falling margins, regulatory changes and intensifying competition. Risk management is also a key priority for the sector, according to KPMG China's latest survey.
KPMG’s seventh annual survey of 114 securities companies in Mainland China, finds that brokers have accelerated their business diversification, as their traditional services continue to see diminishing margins.
In 2012, China’s securities sector saw results slip for a third year in a row. Gross operating income and net profit on a company level basis were RMB130.1 billion and RMB 33.1 billion, respectively, representing decreases of 4.6 percent and 14.9 percent year-on-year. On the other hand, the strong performance of the bond business – including underwriting and proprietary trading – helped to offset declines.
From a revenue structure perspective, traditional brokerage income accounted for less than 40 percent of the sector’s gross operating income for the first time, largely due to shrinking trading volumes in the stock market and further cuts in commission rates. Income from proprietary trading accounted for 22.4 percent, the highest level since 2008, mainly due to proprietary bond trading and improved asset allocation of securities brokers. While the share of asset management income remained at 2 percent, the dramatic increase in asset under management was offset by a significant drop in average fee rates.
Bonn Liu, Partner, KPMG China, says: “Increasing business innovation has put to the test the capacity of brokers to manage risks, particularly with regard to risk quantification, risk of program trading, client suitability and investor protection. Risk management has become a decisive factor in terms of how successful securities companies can operate. Securities companies will need to make further investments in their organisation framework, staffing, operational processes and information system in order to better balance innovation and risk management.”
The survey highlights that most brokers have attempted to reform their business operations, including investment banking, brokerage, asset management and proprietary trading.
Tony Cheung, Partner, KPMG China, says :”We have seen a boom in innovative products and services such as in refinancing, stock-pledged repo transactions, SME private placement bonds, market making, commission-based selling of financial products, securities repos, offsite accounts opening, asset securitisation, OTC trading, and derivatives trading. In addition, some brokers have also been actively exploring the custody business, payment services, e-commerce and other new business models, in order to build up a solid foundation for sustainable and stable development. Brokers’ offerings could be expanded even further if different innovative products and services were integrated.”
“With increasingly intense competition in the market, penetration between sub-sectors in the financial services industry and the development of internet finance, innovation will continue while merger and acquisition across the industry will become more active.” Liu concludes.
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