UBS Plans Capital Boost for China Securities Venture

(Bloomberg) -- UBS Group AG, which is seeking regulatory approval to take a majority stake in its China securities joint venture, plans to boost capital at the entity by about a third once the deal is completed, people familiar with the matter said.

The Swiss firm would increase capital at UBS Securities Co. to at least 2 billion yuan ($287 million), the people said, asking not to be identified discussing private information. The planned increase is part of UBS Securities’s push to expand in more capital-intensive business like margin financing, and to be eligible for market-making in over-the-counter equity derivatives, the people said.

UBS is among the foreign banks that have gotten the furthest in building an onshore securities business that can provide a full range of services, and was the first to seek permission to boost its JV stake to 51 percent. Pushing into OTC derivatives and margin financing would help UBS Securities reduce its reliance on China’s volatile cash equities business.

A year after China announced sweeping plans to further open up its financial industry to foreign players, banks are positioning themselves to take advantage. Citigroup Inc. may seek to exit its China securities JV in favor of an entity in which it could take majority control, according to people with knowledge of the matter.

A representative for UBS declined to comment.

Under current Chinese rules, a brokerage needs an AA rating from the securities regulator to conduct market-making in OTC derivatives. UBS Securities’s grade currently stands two levels lower at BBB. Even with the planned capital increase, it may take UBS Securities a few years to reach an AA rating, one of the people said.

Besides capital, the China Securities Regulatory Commission rating looks at metrics such as revenue and also qualitative measures such as how many penalties a brokerage has received. Only about a dozen of 97 securities firms listed on the CSRC’s website had the AA rating as of last year.

JPMorgan Chase & Co. and Nomura Holdings Inc. have also sought regulatory approval to take 51 percent stakes in onshore securities ventures.

Key Numbers:

  • UBS currently holds a 25 percent stake in UBS Securities. It applied in May for approval to raise ownership to 51 percent
  • The JV had about 1.5 billion yuan of registered capital at the end of last year
  • UBS Securities’s net income fell by more than half in 2017 to 40.9 million yuan, due to a slowdown in the debt capital markets business
  • The institutional brokerage fee pool in China could increase fourfold to $13 billion by 2025, with additional revenue of $87 billion from markets, financing and investment banking, according to a June report by UBS analyst Kelvin Chu
  • The notional value of outstanding OTC derivatives contracts was 367 billion yuan at the end of 2017, data from the Securities Association of China show

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