BofA's Big Plans for China Don't Include Securities Venture

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(Bloomberg) -- Amid all the excitement about China’s plan to open up its securities market, one U.S. banking giant is playing it cool.

Deterred by what it sees as uncertain profit opportunities, Bank of America Corp. has no near-term plans to follow the seven foreign firms -- from Goldman Sachs Group Inc. to Credit Suisse Group AG and Citigroup Inc. -- that have set up securities joint ventures on the mainland, a person with knowledge of the bank’s strategy said. China plans to allow foreign firms to take majority stakes in securities JVs this year.

Global investment banks have spent years operating with limitations in China as they waited for an opportunity to become majority owners, a shift that could motivate them to step up expansion there. With the impasse finally at an end, at least three foreign firms are planning to increase their stakes. Securities firms in China raked in a combined $50 billion of revenue last year, official data show.

Read more about Goldman’s plans for its joint venture in China

By contrast, Charlotte, North Carolina-based Bank of America plans to focus on its existing corporate banking, fixed income, foreign exchange, payments and trade financing businesses in China, for which it already has operating licenses and where it sees better earnings potential, according to the person, who requested anonymity discussing internal deliberations. A Bank of America spokeswoman declined to comment on plans for China.

Opening up

Earlier this month, China renewed a pledge to open up its financial markets and set a June deadline for allowing foreign firms to own as much as 51 percent of their securities JVs, up from the current 49 percent ceiling. Only Morgan Stanley has increased its holding to 49 percent.

People’s Bank of China Governor Yi Gang also said for the first time that China will remove current limits on the business areas in which the ventures are allowed to operate, giving them the same freedom as local firms. That change will be implemented by year end, Yi told a conference in Boao, on Hainan island, earlier this month.

For Bank of America, the opening measures are outweighed by the difficulty eking out profits in a market that suffers from intense competition, the person said. China’s 131 securities firms are grappling with the world’s lowest brokerage commission rates, according to according to UBS analyst Kelvin Chu.

“If the domestic brokerage industry continues to be fragmented, the competitive pressure is unlikely to be alleviated,” Chu said.

Bank of America’s existing business in China revolves around credit to multinationals, large state-owned corporations and local banks. Its credit exposure to China jumped 46 percent to $15.9 billion last year, the fourth largest amount for any country outside the U.S., according to the annual report.

Rather than getting into the securities business, Bank of America wants to expand in China by providing a fuller range of fixed-income services, the person said. The U.S. bank is working toward local incorporation in China so that it can provide services such as helping companies sell debt, Chief Executive Officer Brian Moynihan said in December in a Bloomberg Television interview.

The company may revisit the issue of whether to pursue a local securities business in 2021, when China is expected to allow foreign firms to take full control, the person said.

Rules Uncertainty

Existing foreign-backed JVs in China remain minnows compared with the domestic firms. The seven ventures backed by global banks posted combined profit of 702 million yuan ($111.7 million) in 2016, according to the latest available figures, with the bulk coming from business such as equity and debt capital markets and M&A advisory. That’s less than 1 percent of the industry total, according to the Securities Association of China data.

Add to that the uncertainty around rules governing majority ownership. Among proposed restrictions in a consultation paper issued by the securities regulator this year, a requirement that any majority JV owner has at least 100 billion yuan of net asset value looms large.

Read more about proposed rules governing majority JV ownership

Historical difficulties faced by other securities JVs are also a deterrent, the person said. After six years as a minority owner of a Chinese JV, JPMorgan Chase & Co. sold its stake in 2017 and is planning a new venture with a partner that isn’t a securities firm, people familiar with the matter said at the time. Royal Bank of Scotland Group Plc disposed of its holding in a venture with Guolian Securities Co. last year after a six-year partnership.

©2018 Bloomberg L.P.

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