Now securities and Internet firms look to linkups

Era of industry mergers and acquisitions predicted as commission rates tumble, put pressure on profits

Chinese securities companies are seeking deeper cooperation opportunities with Internet operators to win broader customer relationships and accelerate financial innovation.

The online new business model is likely to arouse a wave of mergers and acquisitions in the securities industry in 2014, analysts said.

Chen Fu, a researcher at Huatai Securities Co Ltd, said that after broadening the securities sales channels by using the Internet, which is in its infancy, securities companies will seek to enhance financial products and move into large fund management services.

"The Internet giants are finding it possible to obtain financial licenses and will create new types of online business in the coming months," Chen said.

According to analysts, after a large boom of "intermarriages" between Internet operators and banking services last year, this year will see Internet businesses and the securities sector targeting each other.

The borderless "net" is expected to break the geographic restrictions for securities services and largely reduce the operational costs for securities companies. They can reach more potential clients of brokerage, asset management and investment banking services through the Internet, the analysts said.

On Nov 23, Sinolink Securities Co Ltd signed a strategic cooperation agreement with Tencent Holdings Ltd, the third-largest Internet company in the world by market capitalization, which is based in Shenzhen, Guangdong province. The two parties agreed to jointly develop the opening of online securities accounts, trading and relevant customer services.

Tencent also agreed to help to promote an online platform for Sinolink Securities by using its core and extensive advertisement sources.

In October, Zhejiang Alibaba E-Commerce Co Ltd, the holder of the online payment unit of China's top e-commerce vendor Alibaba Group Holding Ltd, decided to buy a nominal 262.3 million yuan ($43.4 million) of the registered capital of Tianhong Asset Management Co Ltd for 1.18 billion yuan, becoming the fund management company's controlling shareholder with 51 percent of its equity.

China Securities Regulatory Commission, the nation's watchdog in the securities sector, reiterated its policy stance of encouraging Internet finance innovation, while paying close attention to the new financial products and controlling potential risks.

By the end of 2013, 115 securities companies had achieved a total amount of 159.24 billion yuan in annual business income, compared with 129.47 billion yuan from 114 companies in 2012, according to the data from the Securities Association of China.

The net profits of the securities companies increased to 44.02 billion yuan last year from 32.93 billion yuan in 2012.

Net income from sales of securities contributed almost 50 percent of the brokerage firms' main business income, which rose to 75.92 billion yuan in 2013 from 2012's 50.41 billion yuan, the association said.

Meanwhile, net income of the underwriting and sponsorship business dropped to 12.86 billion yuan last year from 17.74 billion yuan in 2012, influenced by the whole-year suspension of the issuing of new initial public offerings.

According to the data, the largest part of securities companies' profits still came from providing the agency services of trading stocks for individual and institutional investors, which rely on the activity level of the whole securities market.

However, as the competition between securities companies becomes fiercer, commission fees of the brokerage services are dropping, consequently squeezing their business profit margins.

For example, in order to attract more investors to open securities accounts online, Huatai Securities reduced its commission rate to 0.03 percent.

Currently, the 0.03 percent commission rate is common in Beijing, Shanghai and Shenzhen, where securities companies have many branch offices and large groups of clients. Before 2003, the commission rate was as high as 3 percent.

Once the new model of online brokerage services is expanded among securities companies, the level of commission fees is expected to decline further, with a "zero commission fee era" possibly starting later this year, putting big pressure on small and medium-sized securities companies, said a research note from Haitong Securities.

Wang Mingde, a researcher at Dongxing Securities, said the fast development of online brokerage services is an unavoidable challenge to the traditional business model for securities companies, pushing them to promote varied and customized services based on expanding business scale.

Under such pressure, securities companies that lack innovative spirit face the risk of being purchased by other financial institutions or Internet giants, Wang said.

On Monday, Founder Securities Co Ltd announced the audit and asset evaluation work for purchasing 100 percent of the shares of China Minzu Securities Co Ltd had been completed. After closing the deal, China Minzu Securities will become a wholly owned subsidiary of Founder Securities.

Zhao Dajian, chairman of China Minzu Securities said the merger will be a beginning of the "JPMorgan era" for China's securities industry, in that the new company is aiming to develop into a large and comprehensive financial group following the example of US financial giant JPMorgan Chase & Co.

Hongyuan Securities Co Ltd announced in November the start of a merger and reorganization process with Shenyin & Wanguo Securities Co Ltd. After the deal is finalized, it is expected to become the fourth-largest securities company in China with 82.94 billion yuan in total assets. Its annual operations revenue is likely to amount to more than 7 billion yuan while net profit is expected to be 2.1 billion yuan.

Liu Xiaoyong, an analyst at Shanxi Securities, said: "A new wave of consolidation will surge in the securities industry, starting with the above two merger cases."

Securities companies will no longer rely on earning commission fees through acting sales of securities but will focus more on strengthening their own customer network based on value-added services, according to Liu.