Will commercial banks be allowed into the securities business? It's possible

Rumors last week that China regulators may be on the verge of granting securities licenses to commercial banks raised eyebrows across the financial industry.

Some media reported that at least two large state-owned commercial banks could be granted licenses by the China Securities Regulatory Commission as a sort of trial run.

Sources familiar with the matter said the program will initially involve allowing lenders to offer only investment banking services rather than a full range of services that would include asset management, proprietary equity trading and stock brokerage, according to Caixin, an online media site.

In response, the China Securities Regulatory Commission said it “has taken note of media reports and has no further information to share with the market at this time.”

A spokesperson for the commission noted, however, that “the development of high-quality investment banks is necessary to implement the State Council’s decision on the development of capital markets and is also an important means to promote and expand direct financing.”

The commission further said there exists “a number of options on how to proceed, which are still under discussion. Either way, it’s not going to have a big impact on the current industry landscape.”

What sort of impact might it have? With the commission not denying the recent speculation, investors are keeping a close eye on events and discussing who would be the winners and who would be the losers if banks are granted securities licenses.

The idea actually isn’t new. The commission has been looking at the issue for years. In March 2015, Zhang Xiaojun, spokesman for the commission, said the regulator was indeed studying the possibility of allow commercial banks to apply for brokerage licenses but noted there was “no clear timetable for the implementation of the policy.”

A market meltdown that year apparently shelved discussions for the time being.

At the end of 2018, state-owned Industrial & Commercial Bank, the world’s largest bank by assets, submitted a proposal to the commission seeking a pilot program that would allow it to establish a wholly owned securities subsidiary offering a full range of services.

“From the perspective of international trends, the concept of mixed banking is in the mainstream,” said Xue Hongyan, vice president of the Suning Institute of Finance.

Countries like Germany and Switzerland have always allowed banks to mix lending with securities services.

Countries such as the United States and Japan lifted bans on multi-service commercial banks in the 1990s to improve their competitiveness and inject new vitality into the banking sector, Xue said.

“At present, the total scale of all the securities firms in China is about the same as that of JP Morgan Chase & Co,” said Chen Li, an analyst at Chuancai Securities. “The participation of bank capital could be beneficial to the development of ‘flagship’ securities firms.”

Data from Huatai Securities shows that in 2018, the combined revenue of domestic brokerages from investment banking business on the Chinese mainland was 37 billion yuan (US$5.28 billion) while Goldman Sachs alone raked in 54 billion yuan from its global investment operations.

According to the Securities Association of China, net profit of the 133 securities firms in China in 2019 was 123.1 billion yuan, with total assets of 7.26 trillion yuan. By comparison, the Industrial & Commercial Bank reported net profit of 313.4 billion yuan last year, with assets of 30.1 trillion yuan.

“However, the gap between domestic securities firms and international investment banks lies not only in capital, but also in professional ability, competitiveness and risk control,” Chen said. “Allowing banks to enter the securities business could speed up the merger and reorganization of securities firms, and there may even be cross-industry takeovers or mergers that would help scale up their businesses and boost their transformation into specialized investment banks.”

Granting securities licenses to commercial banks would no doubt rachet up the pressure on existing securities firms. Some may be acquired by large commercial banks if the policy is launched, according to Guosheng Securities.

“It would still take some time for banks to develop into ‘flagship’ investment banks, so securities firms should all actively seek differentiated development strategies of their own,” said Ma Tingting, an analyst at Guosheng Securities.