Asset Shifts Behind Improved Investment Returns of Listed Brokers

Although the revenue and net profit of listed securities firms decreased year-on-year in the first half of the year, they achieved positive growth in the second quarter compared to the first quarter.

The increase in investment income led to the sequential growth in revenue, and the improvement in investment income was mainly due to the trend of major asset classes such as stocks and bonds in the first half of the year and the changes in the financial investment asset structure of listed securities firms.

In the first half of 2024, 43 listed securities firms achieved a revenue of 195.831 billion yuan, a year-on-year decrease of 16.8%; they achieved a net profit attributable to the parent company of 68.017 billion yuan, a year-on-year decrease of 21%.

It can be seen that both revenue and net profit of listed securities firms in the first half of the year showed a downward trend year-on-year.

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Looking at the business segments, the revenue from various main businesses of listed securities firms decreased year-on-year, with investment income and asset management income declining less, while investment banking income and net interest income declined more.

Specifically, the revenue and growth rate of various business segments of listed securities firms in the first half of the year are as follows: brokerage income was 48.158 billion yuan, a year-on-year decrease of 12.6%; investment banking income was 14.003 billion yuan, a year-on-year decrease of 41.1%; asset management income was 22.696 billion yuan, a year-on-year decrease of 1.4%; net interest income was 16.815 billion yuan, a year-on-year decrease of 29.1%; investment income (including fair value changes in profit and loss) was 76.607 billion yuan, a year-on-year decrease of 8%.

The proportion of revenue from various business segments is as follows: brokerage income accounted for 24.6%, investment banking income accounted for 7.2%, asset management income accounted for 11.6%, net interest income accounted for 8.6%, investment income accounted for 39.1%, and other business income accounted for 9%.

From the perspective of revenue structure, the proportion of investment income of listed securities firms increased in the first half of the year.

However, looking at the second quarter of 2024 alone, the revenue and net profit of listed securities firms achieved positive growth compared to the first quarter.

In the second quarter, listed securities firms achieved a revenue of 131.684 billion yuan, a sequential increase of 21.6% and a year-on-year decrease of 4%; they achieved a net profit attributable to the parent company of 36.712 billion yuan, a sequential increase of 17.3%, and a year-on-year decrease of 10.8%.

In the second quarter, listed securities firms achieved investment income of 42.417 billion yuan, a sequential increase of 24.1%.

The improvement in investment income can be reflected in the changes in the asset structure of listed securities firms in the second quarter: 1.

The proportion of financial investment assets of listed securities firms in total assets increased; 2.

Among the financial investment assets of listed securities firms, the proportion of financial assets measured at fair value and their changes recorded in other comprehensive income (FVOCI) equity assets increased significantly, and the proportion of FVOCI debt assets remained basically stable; 3.

Among the financial assets measured at fair value and their changes recorded in other current income (FVTPL), the proportion of bond assets increased significantly, the proportion of fund assets increased slightly, and the proportion of stock assets decreased.

Therefore, the improvement in investment income mainly depends on the trend of major asset classes such as stocks and bonds in the first half of the year and the changes in the financial investment asset structure of listed securities firms.

The leverage ratio of listed securities firms (leverage ratio = (total assets - customer funds deposits - customer settlement funds) / net assets attributable to the parent company) has continued to decline.

As of the end of the first half of the year, the simple average leverage ratio of listed securities firms was 3.37 times, and it is in a continuous downward trend.

Among large securities firms, the leverage ratio of CICC at the end of the period was 4.97 times, which was the first time in recent years to fall below 5 times; CITIC Securities was 4.51 times, Huatai Securities was 3.88 times, and Guotai Junan was 4.43 times.

The decline in leverage ratio reflects the "contraction" dilemma of listed securities firms.

As of the end of the first half of the year, the total assets of listed securities firms were 12.1 trillion yuan, a decrease of 257.726 billion yuan from the end of the first quarter, and a decrease of 118.69 billion yuan from the beginning of 2024.

Looking at the asset structure, the proportion of investment assets of listed securities firms increased in the first half of the year, while the proportion of cash assets and financing assets decreased, and the proportion of customer margin and other assets remained relatively stable.

As of the end of the first half of the year, compared with the first quarter, the proportion of investment assets increased to 52.6%, and the proportion of financing assets decreased to 13.8%, which are two assets with more significant changes.

The decrease in the proportion of financing assets is mainly related to the prosperity of the stock market, investors' risk preferences, and policy changes.

As of the end of the first half of the year, the scale of FVTPL assets of listed securities firms was 4.43 trillion yuan, accounting for 71.5% of all financial assets.

From a structural perspective, since 2024, the proportion of bonds, funds, and other assets has increased significantly, while the proportion of stocks has decreased significantly; among them, the proportion of bond assets increased from 45.6% at the end of 2022 to 45.8% at the end of 2023, and further increased to 49.7% at the end of the second quarter of 2024.

At the same time, the proportion of stock assets decreased from 24.6% at the end of 2023 to 18.1% at the end of the second quarter of 2024.

In addition, the proportion of fund assets has also increased, considering the situation of major asset classes in the first half of 2024, the underlying assets of fund assets are mostly bonds.

On the other hand, the proportion of FVOCI debt assets in total assets has been relatively stable, with a significant increase at the end of each year.

As of the end of the first half of the year, the FVOCI debt assets of listed securities firms were 1.32 trillion yuan, accounting for 21.4% of all financial assets.

The proportion of FVOCI debt assets has been relatively stable in the range of 21%-22% for a long time, with minor fluctuations at the end of each year.

The proportion of FVOCI equity assets in total financial assets has increased significantly, but the asset volume is still relatively small.

As of the end of the first half of the year, the FVOCI equity assets of listed securities firms were 347.716 billion yuan, accounting for 5.6% of all financial assets.

The scale and proportion of FVOCI equity assets have shown a continuous upward trend.

It can be seen that the asset side of listed securities firms has shown significant changes, mainly in the following two aspects: First, the scale and proportion of FVOCI equity assets have continued to increase.

In line with the aesthetic of the stock market, securities firms have also participated in investments with high dividends and high stock dividends.

Combined with the market performance of high dividend stocks in the first half of the year, FVOCI equity may have contributed good investment income to listed securities firms.

Second, the scale and proportion of bonds and fund assets in FVTPL have increased, while the scale and proportion of stock assets have decreased.

Considering the performance of various major asset classes in the first half of the year, the underlying assets of fund assets are mostly bonds.

Combined with the good performance of the bond market, especially the interest rate bond market in the first half of the year, the investment in bonds and funds in FVTPL may have contributed good investment income to listed securities firms.

However, looking at the liability side, the proportion of various liabilities of listed securities firms has remained basically stable.

The brokerage and credit business continues to be under pressure, and the commission rate has been adjusted downward, and the institutional transformation of the brokerage business continues to be promoted.

Looking at the revenue structure of the top ten securities companies by asset size, the brokerage business income of 6 companies accounts for less than the industry average (20%), which shows that traditional brokerage business has gradually transformed to wealth management business.

The sluggish equity market, coupled with the continuous decline in commission rates, continues to put pressure on institutional business and wealth management.

In the first half of 2024, the total brokerage business income of 43 listed securities firms was 45.762 billion yuan, a year-on-year decrease of 13.04%.

Affected by market fluctuations, the stock transaction volume of the Shanghai and Shenzhen stock markets declined, and the brokerage business was sluggish.

According to the statistics of the Shanghai and Shenzhen stock exchanges, the stock and fund transaction volume of the Shanghai and Shenzhen stock markets in the first half of 2024 was 115.2 trillion yuan, a year-on-year decrease of 7.62%, and the continuous decline in commission rates led to a decrease in net income from agency securities business; the newly issued shares of public funds were 651.735 billion shares, a year-on-year increase of 18.25%.

It is expected that in the future, with the implementation of favorable policies such as the continuous development of fund advisory business and institutional business, investors' risk preferences will gradually increase, and the trading activity will continue to repair, and the performance of securities firms' brokerage business is expected to improve.

In the first half of 2024, the top five securities firms in terms of net brokerage business fees were CITIC Securities (4.88 billion yuan), Guotai Junan (3.078 billion yuan), GF Securities (2.762 billion yuan), Huatai Securities (2.723 billion yuan), and China Merchants Securities (2.577 billion yuan).

Looking at the business growth rate, only 3 securities firms had a positive growth rate, namely Shanxi Securities (14.03%), Guolian Securities (6.88%), and Caizheng Securities (1.69%).

In the first half of 2024, the proportion of product sales in the net brokerage income of 43 listed securities firms was 9.39%, a year-on-year decrease of 1.35 percentage points.

The agency sales of financial products have become a key link and field of effort in the initial stage of the industry's wealth management transformation.

We use the proportion of agency sales of financial products in brokerage business income as a measure, and among the 43 listed securities companies, CICC, Everbright Securities, CITIC Securities, Industrial Securities, and CITIC Construction Investment's agency sales of financial products income accounted for 21.53%, 19.13%, 14.54%, 13.94%, and 13.85% of brokerage business income, respectively, all higher than the industry average.

At the same time, the scale of credit business has shrunk, and the interest income of securities firms has declined by nearly 30%, and the performance of credit intermediaries is under pressure.

In the first half of 2024, the net interest income of listed securities firms was 16.815 billion yuan, a year-on-year decrease of 29.07%.

Affected by the significant decline in the scale of two-way financing and the continuous contraction of stock pledge scale, the income of securities firms' credit business has declined.

Among the 43 listed securities companies, the top three listed securities firms in terms of credit business income were China Galaxy, Haitong Securities, and CITIC Securities, with net interest income of 2.205 billion yuan, 2.184 billion yuan, and 2.123 billion yuan, respectively, a year-on-year decrease of 16.58%, 18.93%, and 47.449%, respectively.

The balance of two-way financing has decreased, and the stock pledge scale continues to contract.

As of the end of June 2024, the market balance of two-way financing was 1.4809 trillion yuan, a decrease of 10.3% from the end of 2023, and a year-on-year decrease of 6.77%.

The stock pledge scale is still in a continuous pressure reduction state.

As of the end of June 2024, the number of pledged shares was 341.853 billion shares, a year-on-year decrease of 7.58%, and a slight decrease of 2.13% from the end of 2023; the pledged market value was 2.38 trillion yuan, a year-on-year decrease of 22.13%, and a decrease of 13.75% from the end of 2023.Equity financing scale has plummeted significantly, with a severe decline in the scale of equity financing and bond underwriting remaining stable.

In the first half of 2024, influenced by the significant contraction of the market's equity financing scale, the scale of equity underwriting by securities companies experienced a cliff-like decline, with the scale amounting to 172.973 billion yuan, a year-on-year decrease of 73.9%; among which, the scale of IPO underwriting was 32.493 billion yuan, a year-on-year decrease of 84.5%; additionally, the scale of refinancing underwriting was 140.48 billion yuan, a year-on-year decrease of 68.99%; the scale of bond underwriting was 6.14 trillion yuan, a year-on-year decrease of 1.76%.

Concurrently with the decline in equity financing scale, investment banking revenues are dragging down performance, and investment banking business is under pressure.

In the first half of 2024, 43 listed securities firms achieved investment banking revenue of 14.003 billion yuan, a year-on-year decline of 41.07%.

The top ten listed securities firms in terms of investment banking revenue all experienced different degrees of decline, with CITIC Construction Investment, Haitong Securities, and CITIC Securities experiencing a decline of more than 50% year-on-year, with year-on-year growth rates of 61.76%, 56.17%, and 54.62%, respectively.

Among the 43 listed securities firms, a total of 9 securities firms saw an increase in investment banking business revenue, with Hongta Securities, Capital Securities, and China Galaxy ranking the top three in terms of growth rate, with increases of 257.77%, 43.01%, and 42.17%, respectively.

The business scale of leading securities firms is highly concentrated.

In terms of scale, in the first half of 2024, leading securities firms leveraged their advantages, and both equity and debt underwriting scales were significantly ahead of their peers, with the concentration of underwriting project scale still maintaining a high level.

Looking at equity underwriting, the top five securities firms are CITIC Securities, Huatai Securities, CICC, Guojin Securities, and GF Securities, with a total fundraising of 76.406 billion yuan, accounting for 62.5% of the industry.

Looking at bond underwriting, the top five securities firms are CITIC Securities, CITIC Construction Investment, Huatai Securities, Guotai Junan, and CICC, with a total underwriting amount of 3,077.065 billion yuan, accounting for 50.1% of the securities underwriting amount.

CITIC Securities ranks first in both equity and bond underwriting amounts; among them, the equity underwriting amount is 25.558 billion yuan, a year-on-year decrease of 77.76%; the market share is 20.91%, an increase of 0.42 percentage points; the bond underwriting amount is 895.716 billion yuan, a year-on-year increase of 3.08%; the market share is 14.59%, an increase of 0.68 percentage points.

Against the backdrop of strict supervision and management of investment banking, the withdrawal and rejection rate of investment banking business is high, and the business faces significant challenges and difficulties.

Looking at the top ten securities firms in terms of investment banking revenue, CITIC Securities has a withdrawal and rejection rate of 37.5%, CICC is 47.27%, Guotai Junan is 33.33%, and CITIC Construction Investment is 36.84%.

Analyzing the top ten securities firms in terms of revenue, except for Everbright Securities, the withdrawal and rejection rate of the rest has increased significantly compared to the same period in 2023.

Wind data shows that as of the end of June 2024, the number of securities firms' IPO reserve projects is 382, a significant decrease of 58% compared to the same period in 2023.

CITIC Securities and CITIC Construction Investment have 40 and 32 projects under review, respectively, a decrease of 61.9% and 57.89% compared to the same period in 2023; CICC and Huatai United have 22 projects under review each, ranking third, with a year-on-year decrease of 58.49% and 53.19%, respectively.

Asset management business breaks through against the trend with significant growth in scale.

In the first half of 2024, against the backdrop of overall business pressure, the asset management business of securities firms has broken through against the trend, with a significant increase in asset scale, and 25 securities firms have achieved positive year-on-year growth in scale, with revenue only slightly declining by 1.44%.

In terms of revenue, CITIC Securities ranks first with a revenue of 4.914 billion yuan, a year-on-year decline of 1.08%; GF Securities ranks second with 3.383 billion yuan, a year-on-year decline of 19.21%; Huatai Securities ranks third with 2.22 billion yuan, a year-on-year increase of 6.48%.

The combined revenue of the above three securities firms accounts for 46.34% of the industry.

Looking at the increase and decrease, among the 43 listed securities firms, a total of 25 listed securities firms have achieved positive year-on-year growth; among them, Caixin Securities, Guolian Securities, Nanjing Securities, Capital Securities, and Southwest Securities have an increase of more than 100%, ranking in the top five with an increase of 297.99%, 273.81%, 238.01%, 165.62%, and 113.37%, respectively.

As of the end of June 2024, the scale of private securities asset management products is 579.7694 billion yuan, an increase of 49.31 billion yuan compared to the end of 2023, an increase of 9.3%, and the asset management scale has grown significantly; among them, the scale of fixed-income asset management products is 477.0982 billion yuan, an increase of 50.1588 billion yuan compared to the end of 2023, an increase of 11.75%.

The data further indicates that the growth of the securities private asset management scale is mainly driven by the increase in fixed-income private products, which shows that the growth of the fixed-income scale drives the stable development of the asset management business.

In the context of continued fluctuations in the capital market, securities firms have increased the layout of fixed-income products, effectively hedging the performance fluctuations brought by active equity products.

Looking at the proportion, the proportion of fixed-income asset management business is also continuously increasing, from 80.48% at the end of 2023 to 82.29%.

ETFs have grown by 20% compared to the end of 2023, and the expansion continues.

Looking at the overall market situation, in the first half of 2024, the scale of ETF funds reached 247 billion yuan, a year-on-year increase of 20.47%, and the scale continues to grow rapidly, with a total of 973 funds; among them, the scale of non-currency ETFs reached 229 billion yuan, a year-on-year increase of 23.89%, and the total number of funds reached 946.

Since the "one participation, one control, one license" policy officially took effect in 2022, it has prompted more securities asset management to accelerate the transformation of public offerings and strive to improve the ability of active management.

For example, CITIC Asset Management has actively promoted the application for public offering licenses since its establishment, in order to achieve high-quality development of asset management business.

The market is forcing business transformation to explore new growth space.

Factors such as the cold transaction of the domestic stock market, the downturn of equity financing, and the decline in investors' risk preference have put pressure on the development of various main businesses of securities firms in the short term.

Listed leading securities firms have promoted business transformation and explored new business growth space, striving to go through the cycle, such as overseas business, wealth management and investment advice, and layout of financial technology.

In terms of overseas business, focus on the development of overseas financing business and investment banking business.

The proportion of overseas assets of listed leading securities firms is relatively high.

Taking four leading securities firms as an example, as of the end of the first half of 2024, the proportion of overseas assets is around 20%, among which, the proportion of overseas assets of CICC is slightly higher.

Specifically, the overseas business scale of CITIC Securities is 303.002 billion yuan, accounting for 20.27%; Huatai Securities is 151.491 billion yuan, accounting for 18.15%; CICC is 147.636 billion yuan, accounting for 24.64%; Guotai Junan is 157.65 billion yuan, accounting for 17.55%.

In 2023, the total overseas income of listed securities firms was 31.406 billion yuan, accounting for 7.48% of the total business income.

In the first half of 2024, the total overseas income of listed securities firms was 20.331 billion yuan, accounting for 10.38% of the total business income.

It can be seen that the proportion of overseas income of listed securities firms has been continuously increasing.

From the perspective of income, the contribution of overseas income to the revenue of securities firms is gradually increasing.

To better understand the income structure and asset structure of securities firms' overseas business, a specific analysis of the Hong Kong-listed company Guotai Junan International is selected.

Guotai Junan International's income is mainly based on net interest income, and the investment income fluctuates greatly.

The company's income types mainly include brokerage, investment banking, asset management, interest, investment, etc., among which, the proportion of brokerage income and investment banking income has declined in recent years, mainly due to the sluggish transaction of the Hong Kong stock market and the decline in equity financing, the proportion of net interest income has been maintained at more than 50% for many years, and the investment income fluctuates greatly, accounting for about 20% in 2023, and about 30% in the first half of 2024.

The company's various income-related businesses include providing brokerage business for customers (contributing brokerage income, customer margin contributes net interest income), loan and financing business (contributing net interest income), providing market-making, investment, structured derivative business for institutional investors (contributing net interest income and investment income), corporate financing services (contributing investment banking income), investment management (contributing asset management income, net interest income, and investment income).

Guotai Junan International's assets are mainly trading financial assets, accounting for more than 60%.

According to the company's income mainly based on net interest income, the company's trading financial assets may be more allocated to fixed-income assets.

The proportion of customer margin is in the range of 10%-15%, and the proportion of loans and advances + receivables is in the range of 10%-15%.

Through Guotai Junan International, it can be found that the types of overseas business are basically the same as domestic, but there are differences in income structure and asset structure.

The development of investment banking business towards internationalization is a necessary path to build a first-class investment bank.

At present, under the background of the slowdown of IPOs, the investment banking business of domestic securities firms is under pressure, for this reason, some securities firms have begun to change the business ideas of investment banking, and turn the business to overseas or other assets, providing innovative paths for business development.

The innovation focuses on the following three aspects: 1.

Equity financing: mainly to develop international business and strengthen the business of the Beijing Stock Exchange.

First, expand international business, strengthen the development of Hong Kong equity financing, GDR, and overseas equity financing in Southeast Asia, to achieve diversified development of business such as the return of Chinese concept stocks, privatization of Hong Kong stocks, and cross-border mergers and acquisitions; in addition, strengthen the business of the Beijing Stock Exchange, focus on the innovative development of "specialized, refined, and new" small and medium-sized enterprises.2.

Debt Financing: Focusing on green bonds, innovation bonds, REITs, and the development of international business.

This includes increasing investment in innovation bonds and green bonds; building a complete business ecosystem from Pre-REITs to public REITs; exploring opportunities for panda bonds, expanding the development of offshore Chinese bonds, and Southeast Asian overseas dollar bonds.

In addition, some securities firms also mentioned enriching the derivatives of bond financing.

3.

Financial Advisory: Primarily focused on seizing opportunities in mergers and acquisitions and restructuring of central enterprises and the technology industry, as well as cross-border M&A opportunities.

Taking CITIC Securities as an example, the pace of overseas investment banking business development in the first half of the year has accelerated compared to 2023.

CITIC Securities' overseas equity underwriting amount in the first half of the year was $1.288 billion, equivalent to 72.3% of the full year of 2023, with 18 equity underwriting deals; overseas debt underwriting amount was $1.485 billion, equivalent to 61.4% of the full year of 2023, with 130 debt underwriting deals.

In terms of wealth management, the focus has shifted to buy-side investment advisory.

Listed securities firms are accelerating the transformation of wealth management, with buy-side investment advisory becoming a key development direction.

Some securities firms disclosed the development overview of buy-side investment advisory business in their semi-annual reports, and overall, key indicators such as account asset scale and the number of served customers have achieved good performance.

Although the proportion of fund holding scale of securities firms is lower than that of commercial banks and independent fund sales institutions, it continues to increase.

Commercial banks have the largest holding volume, but the proportion is declining year by year.

Independent fund sales institutions have the second-largest holding volume, with a proportion of about 33%, which remains stable.

The three stages of public fund rate reform are to be completed by the end of the year, and the development of agency business may be in a bottoming period.

The public fund industry rate reform plan requires that by the end of 2024, the comprehensive rate of the public fund industry will be steadily reduced in three stages according to the "manager - securities company - sales institution" path.

The first stage involves orderly reducing the management fee rate and custody fee rate of actively managed equity products.

The second stage involves reducing the trading commission rate and strengthening the supervision of trading behavior.

The third stage involves standardizing the fees in the fund sales process and promoting the implementation of other supporting reforms.

Currently, the first and second stages have been basically completed, and the third stage will be completed by the end of the year.

In terms of financial technology, it has evolved from supporting the back office to empowering the front office.

The financial technology investment of leading securities firms remains stable.

Taking Huatai Securities as an example, the absolute amount of financial technology investment has shown a trend of steady growth in recent years, with the proportion of financial technology investment in revenue around 8%.

CICC has been increasing its financial technology investment year by year, with the proportion rising from around 3% to about 7.5% from 2020 to 2023.

Financial technology is gradually becoming a key driver for the development of securities firms' front office business.

Taking the wealth management field as an example, several securities firms have already relied on financial technology to empower customer acquisition and improve service quality.

Financial technology has a large development space in the fields of investment advisory and investment education.

Taking China Galaxy as an example, it continues to optimize the system of "customer classification, investment advisory grading, service stratification, product diversification, and technology support," providing "professional + companion + agile" services.