A New Wave of Consolidation Among Securities Brokerages Is Brewing Amid Tightened Regulation (AI Translation)

【周刊提前读】券商进入强监管周期 新一轮整合酝酿中

The capital market is currently experiencing heightened supervision and regulation, especially concerning securities firms [para. 1]. On May 21, 2024, the Hebei branch of Guotou Securities received a regulatory warning from the Hebei Securities Regulatory Bureau for various compliance failures [para. 1]. This is the second fine the firm has received this year following a management shake-up due to poor performance and losses in proprietary trading [para. 2].

Since Wu Qing’s appointment as CSRC Chairman in February 2024, over 100 fines have been issued to more than 30 brokerage firms and their personnel [para. 3]. This intensified scrutiny aims for strict enforcement and avoidance of campaign-style enforcement and differential treatment[para. 6]. Numerous firms, including CITIC Securities and Haitong Securities, have faced penalties for a broad array of violations, elevating compliance pressures for all brokerages [para. 3][para. 4].

Meanwhile, listed brokerage firms faced weak market conditions, with their collective operating revenues declining by 21.55% year-on-year in the first quarter of 2024 [para. 6]. Particularly, investment banking revenues have dropped significantly [para. 10]. Regulations have been revised to require brokerages to focus on core businesses and improve fund utilization efficiency, while aggressively curtailing high-capital-consuming activities[para. 12]. For instance, securities firms have been advised against misusing borrowed funds for speculative trading [para. 12].

Investment banking professionals are navigating tighter regulatory environments and weak markets, compelling firms to reassess their financial strategies and reduce costs, including cancelling travel allowances and implementing layoffs[para. 17]. Stern penalties such as the suspension of Huaxi Securities' sponsorship business qualifications illustrate the severe regulatory environment, particularly for investment banking activities [para. 18].

There has been a notable reduction in the A-share market IPO queue from 389 companies in February to 40 by May 2024, primarily due to companies withdrawing applications amidst stricter listing standards [para. 19]. The new “Nine Guidelines” support mergers and acquisitions to enhance core competitiveness in the sector[para. 14]. However, the predicted boom in M&A transactions as a substitute for IPOs remains uncertain, with numerous complexities and low fees associated with M&A perceived less lucrative than IPOs [para. 21].

Securities firms must now also improve internal compliance and manage risks more effectively, both at operational and systemic levels. This is exemplified by the tightening regulations and internal review protocols to avoid individual accountability [para. 17]. A high-level structural reshuffling is anticipated with the central government encouraging consolidation and focusing on industry leaders [para. 25]. Performance challenges have created opportunities for mergers, evidenced by firms like Guolian Securities actively pursuing acquisitions [para. 28].

Many mid-sized brokerages have entered the derivatives market recently, but have faced setbacks due to market instability and competition [para. 16]. Firms have had to rethink their capital-intensive business strategies, especially considering the risks identified in off-exchange derivative trading [para. 16].

The sector is expected to see a new round of industry consolidation, driven by both market forces and regulatory encouragement. Leading brokerages are likely to pursue mergers and acquisitions, aiming for industry leadership and increased market share[para. 26]. Potential large-scale mergers are anticipated but need to balance enhancing profitability while expanding balance sheets[para. 30].

Overall, the securities firms are urged to navigate a strict regulatory environment, weak market conditions, and the pressures of technological and strategic transformations to achieve long-term sustainable growth[para. 31]. The consolidation trend, driven by both regulation and market dynamics, is reshaping the landscape of the securities industry in China.