Liu Minxia

    mllmx@msn.com

    DOMESTIC brokerages saw a rise in profits last year after a three-year decline, benefitting from a more active stock market, an expansion of margin financing, securities lending and asset management growth, according to KPMG’s annual survey of 115 securities firms in China.

    According to the survey, operating incomes of these firms rose 23 percent year on year to 159 billion yuan (US$25.85 billion) last year, while profit rose 34 percent to 44 billion yuan.

    “2014 will be a crucial year for China’s securities sector, driven by innovation, restructuring and development of the sector,” said Bonn Liu, a partner at KPMG China. “Brokerages have had to change their business models from providing traditional agency business to that of wealth management and capital intermediary services.”

    A latest research report by PwC echoed Liu. “We expect there to be more IPO activities in the second half of the year than in the first half, with the total number of IPOs potentially reaching 150 and funds raised totaling between 100 billion yuan and 150 billion yuan,” said Jean Sun, PwC China’s assurance partner.

    Fifty-two IPOs raised 35.2 billion yuan in the first six months of 2014, down 50 percent and 55 percent from a year ago, respectively, the PwC report said.

    IPOs picked up in early June after a four-month hiatus followed a brief flurry of activity in January and February that ended a yearlong halt. Analysts said the securities regulator had halted IPOs in late 2012 to allow it to refine listing rules and to avoid draining money from existing stocks.

    “Regulators will unveil the details of its new IPO system before the end of the year, and we expect the new system to contain major breakthroughs and bring positive influences to the capital market,” said Sun.

    Both PwC and KPMG recognized that the upcoming mutual fund recognition program between the mainland and Hong Kong and the Shanghai-Hong Kong Stock Connect pilot program would provide wider opportunities for both securities brokers and investors.

    “We believe that it will help stabilize, and bring confidence to, the capital markets, enhance their overall strength and help develop the IPO market,” Sun said.

    Despite a rise in profitability, the securities sector continues to face a number of challenges, the KPMG report said. Online accounts, for example, have intensified competition among brokers for commissions while the rapid growth of capital-intensive business has resulted in higher liquidity risks.

    The KPMG report showed margin financing and securities lending has become a steady source of income, accounting for 11.59 percent of the sector’s income, compared with 4.05 percent in 2012. Meanwhile, asset management is playing a more important role in the sector, with net income from the business totaling 7.03 billion yuan, representing 4.4 percent of the total annual operating income.

    “Securities companies also need to further explore proper operating models and growth paths for the registration-based IPO system reform, the increased varieties of financial derivative products, innovative margin trading and securities lending business, continued over-the-counter market expansion, as well as Internet securities business growth,” said Tony Cheung, a partner at KPMG’s China division.

    Hong Kong and Taiwan securities companies are showing interest in entering the mainland market because of recent concessions that enable them to establish majority owned fully licensed securities joint ventures in some regions, said Abby Wang, a partner at KPMG’s China division.