Shares of Citic Securities, CSC Financial Surge on Merger News

Two of China’s biggest brokers denied for the second time in less than three months that they plan to merge after news reports of a combination pushed up both companies’ shares.

Bloomberg reported Thursday that Citic Group, the parent of China’s largest broker Citic Securities Co., will buy a stake in CSC Financial Co., the nation’s No. 2 brokerage, from state-controlled shareholder Central Huijin Investment Ltd. The news organization cited people familiar with the matter.

Such a deal would make Citic Group the largest shareholder and pave the way for potentially creating an $82 billion powerhouse. While the details are still being finalized, the Communist Party committees of Citic Securities and CSC have approved the blueprint, Bloomberg reported.

Shares of Shanghai-listed Citic Securities and CSC Financial rallied Friday for a second day, jumping by the daily 10% limit, even after both companies denied the report.

The China Securities Regulatory Commission said late last year that it wanted to create investment banks of “aircraft carrier size” to compete with Wall Street and to promote the international expansion of its own brokerage industry. As part of the ambitious plan, the CSRC will begin granting securities licenses to at least two commercial banks, Caixin learned from regulatory sources with knowledge of the matter.

Some analysts say the government’s strategic decision might stimulate the securities industry to become more efficient and drive market consolidation by pushing smaller securities companies out of business or forcing them to merge with larger players such as CICC and Citic Securities.

Citic Securities said in a filing late Thursday that it wasn’t aware of any related information regarding the press report of the possible acquisition of CSC Financial shares by Citic Group. In a separate filing, CSC Financial said it hasn’t convened any meeting of its Communist Party committee to consider and approve such a merger plan.

This is not the first time merger reports have circulated. Bloomberg reported in April that the two companies along with their government shareholders started a feasibility study on how to structure a deal so they could better compete with global investment banks as China opens up its financial markets to foreign competitors. That report also cited people familiar with the matter.

Such a merger could form an investment bank valued at $67 billion, bigger than even Goldman Sachs in market capitalization, even though the two Chinese brokers’ combined 2019 profits were only a quarter of those of Goldman Sachs, Bloomberg reported in April.

Although the two brokerage companies have repeatedly denied merger reports, some analysts believe such a combination is possible. Citic Group reshuffled its core management, a sign some say they think shows the financial giant may enter a new era of transformation.

Competition between Citic Securities and CSC has heated up in recent years. CSC’s revenue and profits grew faster in 2019 than those of its rival.

CSC was founded in 2005 by Citic and China Jianyin Investment Ltd. with a combined 2.7 billion yuan investment, of which Citic held 40%. The CSC chairman formerly worked at Citic Securities. Citic has reduced its stake in CSC through several transactions since 2009 to comply with rules of China Securities Regulatory Commission.

CSC’s current major shareholders include state-owned Beijing Financial Holdings Group with 35.11% and Central Huijin with 31.21%. Citic Securities holds 5.01% of CSC, while another stakeholder with 4.6% is considered an entity acting in concert with Citic.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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