* Billions of debt needed to meet revenue estimates
* Lower offshore rates attract brokerages
* Rapid growth in leveraged offerings to clients
By Nethelie Wong
SINGAPORE, May 19 (IFR) - Chinese brokerages are expected to become some of the most active issuers in the international bond markets over the next two years, as rapid growth in margin lending and overseas expansion plans increase their funding needs.
The three main listed brokerages alone need Rmb193bn (US$31.6bn) in new debt by 2016 simply to meet their revenue estimates, according to a report published by Deutsche Bank equity analysts last month.
That’s on top of the Rmb98bn that Citic Securities, Haitong Securities and China Galaxy Securities raised last year - some 2.4 times more than the amount they issued in 2012, noted Pandora Lee and Jacky Zuo.
These three are not alone. Last Thursday, Guotai Junan Securities tapped the dollar market, becoming the fourth Chinese brokerage to do so following Citic, Haitong and Guosen Securities.
UT Capital, a unit of Haitong, has announced a mandate for an offshore deal, while Huatai Securities has also unveiled plans to issue Rmb16bn equivalent (US$2.62bn) abroad.
The rapidly growing list of bond deals from a sector which was virtually absent from offshore markets until March last year is down to three reasons: offshore funding is cheaper, brokerages are growing abroad to make up for smaller fees at home and need to finance that expansion, and they need a lot of debt to meet their revenue targets.
Assets are growing on average by 44% at these firms, driven by a 249% jump in margin financing, according to Deutsche Bank. The figures confirm something that bankers in Hong Kong and Singapore have been saying for months: Chinese brokerages have become very aggressive about offering leverage to their clients.
“This means, if we’re right about the rapid growth in the capital demanding businesses, there has to be an aggressive debt raising in the pipeline to support the growth,” said the analysts in the report.
As they require more debt, offshore funding seems an obvious option. “It is much cheaper to raise money in the offshore US dollar or renminbi bond markets,” said a Chinese banker. China’s benchmark lending rates are at 6.15% and 6.40% for loans of one to three years and three to five years.
So, the 3.708% coupon paid on Guotai Junan’s US$500m five-year bond last week was favourable, even considering the fee for the standby letter of credit from Bank of China that allowed the deal to get through, and which can cost up to 100bp.
Chinese brokerages also need money from international capital markets to finance their offshore expansion as they make up for shrinking revenues onshore and take advantage of closer links between Hong Kong and China’s financial centres.
In its China securities survey published last September, consultancy KPMG said a 25% drop in stock trading volumes and a drastic 63% decline in funds raised from IPOs hurt brokerage results in 2012. The China Securities Regulatory Commission did not approve a single A-share IPO from October 2012 to November 2013.
The latest quarterly results of listed brokerages indicate that the trend has not changed, with onshore brokerage fees dropping at most large securities houses.
In a sector report published on March 3, Haitong Securities analyst Ding Wentao suggested that internet finance and recent regulatory changes may drive brokerage fees lower, squeezing onshore companies further.
According to Ding, 40% of the revenues of listed brokers in China comes from transaction fees and the average commission rate is 0.075%. “To compete with the internet finance, the traditional brokerage service may drop the commission rate by over 30% to 0.05%,” Ding said in the report.
Brokerages that are becoming more active offshore are already reaping benefits.
Guotai Junan is the perfect example. The company’s revenues from its overseas business shot up to Rmb809m, 9% of the entire group, in 2013. That was double the Rmb478m in 2011, which accounted for 6.43% of revenues then.
As more of the revenues come from abroad, it makes sense that more of the funding will also be there. “We follow our clients to go abroad and opportunities overseas,” said a director with a Chinese brokerage based in Hong Kong.
The sector has even more incentives to go abroad now that Hong Kong will be a doorway to the Shanghai market as well. “This is a great time to expand overseas as the Hong Kong-Shanghai stock connect post a great opportunity for us,” said the director.
In late April, China and Hong Kong securities regulators jointly announced a pilot project, known as the Hong Kong-Shanghai stock connect, to allow mainland and Hong Kong residents to buy stocks in each other’s market.
Chinese brokerages with a Hong Kong presence are likely to be the main beneficiaries of the scheme.
Some brokerages are trying to take it one step further and have lobbied the Chinese government to open the currency business to them. “If we can do foreign exchange, it will be much easier for us to expand our cross-border business,” said a source familiar with the matter.
Guotai Junan is building its overseas operation from scratch while Haitong has been adding new people. Citic bought a stake in US brokerage BTIG last month. (Reporting By Nethelie Wong; editing by Christopher Langner and Sudip Roy)