Chinese banks said preparing to challenge Citic in broking

[BEIJING] Chinese banks are preparing to take advantage of any easing of government restrictions to challenge the likes of Citic Securities Co and China International Capital Corp in the nation's booming brokerage industry.

Industrial Bank Co plans to acquire Huafu Securities Co, while Bank of Communications Co wants to purchase Royal Bank of Scotland Group Plc's stake in Hua Ying Securities Co, people familiar with the matter said Monday. They asked not to be identified as the deliberations are private.

The banks' plans point to a looming shakeup for the nation's brokerages, which numbered 120 in 2014 and have been protected for years by government restrictions on new entrants. Citic, the nation's biggest brokerage, extended declines Tuesday, while Industrial Bank also fell after surging by the most since 2013 on Monday on news of its purchase plan.

"Brokerages will come under heavy pressure if banks are allowed to enter," said Luo Yi, an analyst at Huatai Securities Co in Shenzhen. "It will lead to cut-throat competition as banks control most of the financial resources." Industrial Bank fell 2.9 per cent in Shanghai as of 10:05 am local time on Tuesday after surging 8.7 per cent on Monday. Citic slipped 1.2 per cent in Shanghai, where Bank of Communications fell 1 per cent after a 5 per cent gain on Monday.

Asia's biggest stock market and swelling brokerage profits may be draws for banks that face challenges including government plans to deregulate interest rates, further intensifying competition for deposits. Citic reported a doubling of net income last year.

Chinese brokerages' assets doubled last year to 4.09 trillion yuan (S$899.3 billion), according to the securities association, as trading volumes reached records. While the market has fallen in 2015 amid government efforts to rein in an explosion in margin financing, the Shanghai Composite Index remains up about 65 per cent for the past 12 months.

China's securities regulator said Friday that it was studying a proposal to let banks apply for brokerage licenses, without giving any timetable for a decision. Bank of China Ltd is the only Chinese bank that owns a domestic securities firm, through its Hong Kong-based brokerage unit. BOC International (China) Ltd was established in 2002.

Industrial Bank said it's aware of the securities regulator's announcement and is "studying a related plan," without giving details. Spokesmen for Bocom, Hua Ying and RBS declined to comment. RBS holds a 33.3 per cent stake in Hua Ying, while Guolian Securities Co owns the rest.

Chinese brokerages accounted for 0.8 per cent of China's 192.9 trillion yuan in financial assets at the end of 2013, compared with lenders' 78 per cent share, according to central bank data.

"Allowing banks to enter the securities business will be devastating to Chinese brokers," said Zheng Chunming, a Shanghai-based analyst at Capital Securities Corp. "It may be an exaggeration to draw an analogy to elephants and ants, but that gives you the idea of the impact - the damage to brokerages is significantly more than the benefit to banks." Mr Zheng said that the government may be "very, very cautious in giving the approval." Industrial Bank and Bocom would probably be among the first banks to take advantage of any opening up of the brokerage industry, CICC said in a report. At the same time, such a move is unlikely this year, with the government set to first allow lenders to move into areas such as investment banking, CICC said.

BLOOMBERG