Big China Brokers Seek to Raise Capital as Default Risks Linger
(Bloomberg) -- Chinese brokerages are boosting capital to protect against a market plunge that threatens the value of $640 billion worth of shares pledged as collateral.
Securities firms have extended more than a third of China’s stock-backed loans, which may go sour and force lenders to offload the shares. To cushion themselves, at least three of the country’s biggest brokerages have announced capital raising plans in recent months, joining the nation’s big banks in strengthening buffers.
Questions surrounding the stability of brokerages has been a key concern for investors as China’s stock market has plunged 20 percent this year. The sector, which is a barometer of local investor sentiment, has suffered more than most, with Bloomberg Intelligence’s gauge for China-listed brokerages down 28 percent in 2018. Capital-raising efforts should help them deal with any uncertainties.
“The market slump has stunted the brokers’ profitability,” said Sean Hung, a senior analyst at Moody’s Investors Service in Hong Kong. “Provisions required to be set aside for stock-pledged loans are also eating into capital.”
The extent of their difficulties can be seen in the relatively small stabilization fund brokers stumped up this year. Amid the 2015 market turmoil, they forked out 120 billion yuan ($17 billion) to prop up the markets. When authorities pushed again in October, they committed just 25.5 billion yuan, according to the Securities Association of China.
Every 10 percent decline in the value of bad stock-pledged loans will erode net capital by as much as 8.9 percent at the largest brokerages, according to an analysis by Bloomberg Intelligence. Stock-pledged loans are riskier than margin-finance loans because regulatory restrictions make it harder to liquidate the collateral, they have a longer tenor and the loan value is higher.
Amid the market downturn, GF Securities Co. said in May that it would raise as much as 15 billion yuan by privately placing shares. Huatai Securities Co., one of China’s largest brokerages by market value, is planning to sell at least $500 million of global depositary receipts and the Hong Kong Economic Times reported that Shenwan Hongyuan plans to raise about $1.5 billion through a Hong Kong listing next year. Shenwan Hongyuan Securities Co.’s parent injected a similar amount in January.
Shenwan Hongyuan Group Co. declined to comment on its capital plans.
Top Chinese brokers still have their net capital to risk capital reserves ratio -- a key risk-control metric -- at about 200 percent against the required 100 percent level. However, a significant decline will reflect poorly in their annual ratings issued by the securities regulator, Hung said. No broker has won the top AAA rating in at least seven years, government data show.
Raising capital also offers securities firms the chance to diversify away from traditional revenue streams in China, Hung said. A push for expansion is gaining urgency as competition heats up with the government’s decision to allow foreign firms to take control of local brokerages.
“The brokers that are aggressively raising capital are the leading domestic players now looking to tap overseas markets,” said Hung.
©2018 Bloomberg L.P.