Monetary Policy Easing Benefits Brokers with Improved Liquidity
In the first half of 2024, the market continued to experience a "bearish stocks, bullish bonds" trend, with investor sentiment remaining cold. Coupled with restrictions on IPO and refinancing policies, the performance of securities firms continued to be under pressure.
On September 24, at a press conference held by the State Council Information Office, three departments jointly announced a series of significant policies. On September 26, the Central Political Bureau held a meeting focusing on economic issues, leading to a swift reversal in market investment sentiment and the subsequent initiation of a comprehensive stock market rally. From the market's response, this combination of policies exceeded expectations in terms of both timing and intensity. All industries related to the capital market welcomed a triple resonance of sentiment, policy, and fundamentals. It is anticipated that the bottom of the profit for the securities industry will likely be confirmed in the third quarter, with the high elasticity of subsequent performance likely to be rapidly reflected.
Returning to performance, due to policy changes and the effect of high base numbers, in the first half of 2024, brokerage, investment banking, and credit businesses were significantly affected, while asset management business performance remained relatively stable, and proprietary investments showed differentiated performance. Overall, the performance of securities firms was not good compared to the same period last year. It is expected that in the second half of the year, with the alleviation of base pressure and the gradual recovery of the market and business, the industry's fundamentals are likely to be revised upwards.
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Looking at specific business lines, differentiation is the general trend. Data shows that in the first half of the year, the net revenue from securities brokerage business, investment banking business operating income, asset management business net income, two-way financing interest income, and proprietary investment income of listed securities firms were 40.966 billion yuan, 12.005 billion yuan, 22.629 billion yuan, 37.636 billion yuan, and 74.972 billion yuan, respectively, with year-on-year decreases of 13.41%, 44.65%, 1.48%, 11.11%, and 18.46%.
Overall, there was a divergence in the performance of core indicators across various business lines. Investment banking business suffered the most due to policy restrictions, with IPO and refinancing scales dropping significantly by 84.50% and 77.01% year-on-year, respectively. In contrast, the asset management business showed resilience, with non-cash fund and securities firm scales increasing by 10.56% and 2.64% year-on-year, respectively.
In the second quarter, the market experienced the "difficult moments" since 2024. Looking at the performance of the main equity market indices in the second quarter, the Shanghai Composite Index fell by 2.42%, the CSI 300 Index fell by 2.14%, and the ChiNext Index fell by 7.41%, all performing poorly compared to the first quarter, with the equity market's decline in the second quarter widening. The SW Securities Index fell by 8.84% in the second quarter, ranking at the 49.2% percentile level among SW secondary industries. However, the bond market continued to perform well in the second quarter, maintaining an upward trend. The China Bond Index rose by 1.92%, although the increase was lower compared to the first quarter and the same period in 2023, it remained at a high level.
The weak performance of the equity market in the second quarter led to a continuous cooling and re-weakening of trading sentiment, with turnover rates sliding consecutively. After the end of February, the market trading sentiment weakened again, with the 7-day moving average of the Shanghai Composite Index's turnover rate sliding continuously, from the year's highest of 1.04% to 0.6% at the end of the second quarter. The 7-day moving average of the SW Securities Index's turnover rate began to decline again from early May, from the highest of 1.55% to 0.66% at the end of the second quarter.
Marginal improvement in revenue on a quarter-over-quarter basis
Data shows that 43 listed securities firms (the same below) achieved a single-quarter revenue of 129.195 billion yuan in the second quarter of 2024, a year-on-year decrease of 3.79% and a quarter-on-quarter increase of 22.08%. In the first half of 2024, listed securities firms achieved a revenue of 235.023 billion yuan, a year-on-year decrease of 12.69%, ranking at the 24.3% percentile level over the past 10 years, mainly affected by restrictions on investment banking business and the sluggish stock market performance. However, looking at it quarter by quarter, the revenue of listed securities firms continued to decline year-on-year in the first half of the year, but there was a marginal improvement on a quarter-on-quarter basis.
Looking at the business structure, the proportion of income from proprietary and credit businesses increased quarter-on-quarter. In terms of the single quarter of the second quarter, the proportion of income from brokerage business, investment banking business, asset management business, credit business, and proprietary business were 24.55%, 7.78%, 12.63%, 10.45%, and 44.59%, respectively, with quarter-on-quarter changes of -3.72 percentage points, -0.55 percentage points, -0.78 percentage points, 1.72 percentage points, and 3.33 percentage points, respectively.The sequential improvement in revenue was mainly supported by proprietary businesses, with listed securities firms generating a single-quarter proprietary business income of 41.594 billion yuan in the second quarter, a sequential increase of 24.61%. Among this, the single-quarter investment income was 48.687 billion yuan, a sequential increase of 46.604 billion yuan, primarily due to securities firms realizing gains on the fair value of bond investments.
While revenue improved sequentially, the cost control effect in the securities industry began to emerge, with business and management expenses continuing to be reduced. As the rate of reduction in business and management expenses accelerated, the industry's cost-to-income ratio significantly decreased.
In the first half of 2024, the total business and management expenses of listed securities firms amounted to 111.423 billion yuan, a year-on-year decrease of 8.66%. The business and management expenses for the first and second quarters were 53.426 billion yuan and 57.997 billion yuan, respectively, with year-on-year decreases of 13.39% and 3.82%, respectively, and the decline continued to widen compared to the same period in 2023. The single-quarter cost-to-income ratio continued to decline, from 56.52% in the fourth quarter of 2023 to 44.89% in the second quarter of 2024.
The main contribution to cost control was the reduction in employee compensation. In the first half of 2024, the total employee compensation of listed securities firms was 71.952 billion yuan, a year-on-year decrease of 12.15%. After the first half of 2023, employee compensation continued to be reduced, from 81.901 billion yuan in the first half of 2023 to 71.952 billion yuan in the first half of 2024; the proportion of employee compensation in business and management expenses also continued to decline, from 68.69% in the first half of 2023 to 64.58% in the first half of 2024.
From a profitability perspective, the net profit attributable to the parent company of listed securities firms is still under pressure, but the sequential decline has narrowed marginally. In the first half of 2024, the total net profit attributable to the parent company of listed securities firms was 34.61 billion yuan, a year-on-year decrease of 11.15%. The overall performance of listed securities firms is still in a downward trend, but under the premise of marginal revenue improvement and effective cost control, the profit decline narrowed from -31.69% in the first quarter of 2024 to -11.15% in the second quarter.
The profit decline narrowed, ROE marginally increased, and the leverage ratio continued to decline. In the first half of 2024, the average annualized ROE of 43 listed securities firms was 4.35%, a year-on-year decrease of 1.76 percentage points and a sequential increase of 0.47 percentage points. The overall leverage ratio trend continued downward, with the average equity multiplier of listed securities firms in the first half of 2024 being 3.36 times, a year-on-year decrease of 0.13 times and a sequential decrease of 0.06 times, and the equity multiplier continued to decline.
If sorted by revenue, most securities firms in the top 10 revenue list had performance changes smaller than the industry changes, with 7 out of the top 10 having a smaller revenue decline than the industry, among which, China Galaxy had the smallest revenue decline, down 1.88% year-on-year; 6 out of the top 10 had a smaller net profit decline than the industry, among which, China Merchants Securities saw a slight increase in profitability, up 0.44% year-on-year. In terms of ranking changes, 4 out of the top 10 had a decline in revenue ranking, and 1 had a decline in net profit ranking, with the leading securities firms maintaining their stable industry status.
However, the internal competitive landscape among leading securities firms has diversified, which is related to their business structure. Guotai Junan, CITIC Securities, CICC, and Haitong Securities saw a decline in revenue ranking, mainly related to a higher proportion of investment banking business; China Galaxy, Shenwan Hongyuan, and China Merchants Securities saw an increase in revenue ranking, mainly related to a higher proportion of proprietary business; while CITIC Securities, Huatai Securities, and GF Securities maintained stable revenue rankings, mainly related to a higher proportion of asset management business.
In comparison, mid-sized and small securities firms have more performance elasticity. If sorted by profit growth rate, most of the top 10 profit growth firms are mid-sized and small securities firms, among which, Founder Securities had the highest profit growth rate, up 73.39% year-on-year. In the first half of 2024, there were 8 securities firms with both revenue and profit growth, except for Dongxing Securities, the other firms had a revenue scale of no more than 2 billion yuan, demonstrating the high performance elasticity of mid-sized and small securities firms.
Looking at the business breakdown, proprietary business remains the main determinant of performance for mid-sized and small securities firms. Breaking down the contribution of each business to revenue growth, brokerage and credit businesses generally contributed negatively to revenue growth, and investment banking business contributed limitedly to revenue growth; Founder Securities' revenue growth was mainly contributed by asset management business, with its asset management business contributing a revenue growth rate of 41.41%; other securities firms' revenue growth was mainly driven by proprietary business, among which, Hualian Securities' proprietary business contributed the most significantly to revenue growth, with its proprietary business contributing a revenue growth rate of 40.34%.In-depth Analysis of Key Business Metrics
Due to the multitude of business lines in securities firms, relying solely on revenue as a single indicator may be one-sided. It is necessary to examine each business's core metrics individually.
Brokerage Business Continues to Face Pressure, with Some Small and Medium Securities Firms Achieving Counter-Trend Growth. The net income from securities brokerage business saw a double-digit decline, with agency securities trading and trading unit seat leasing being the main drags. In the first half of 2024, the total net income from securities brokerage business of listed securities firms was 40.966 billion yuan, a year-on-year decrease of 13.41%. Looking at the breakdown, the net income from agency securities trading, net income from trading unit seat leasing, and net income from financial product distribution business decreased by 7.55%, 27.66%, and 24.6% year-on-year, respectively. The net income from agency securities trading and trading unit seat leasing decreased by 2.475 billion yuan and 2.467 billion yuan year-on-year, respectively, which are the main drags on the securities brokerage business, expected to be mainly affected by the decline in market trading volume.
Specifically, in the first half of 2024, the net income from Tianfeng Securities' securities brokerage business decreased by 29% year-on-year, leading the decline among listed securities firms; among them, the net income from trading unit seat leasing decreased by 125 million yuan year-on-year, which is the main reason for the income decline. In the first half of the year, Shanxi Securities, Guolian Securities, and Caida Securities achieved positive growth in net income from securities brokerage business, with year-on-year increases of 14.03%, 6.88%, and 1.26%, respectively; Shanxi Securities and Caida Securities were mainly driven by agency securities trading, while Guolian Securities was mainly driven by net income from trading unit seat leasing.
Investment Banking Business Continues to Face Pressure Due to Policy Tightening, Especially with a Significant Decline in IPO and Re-financing Scale Indicators, Leading to a Substantial Decline in Operating Profit. Affected by policy tightening, in the first half of 2024, the scale of IPO and re-financing decreased significantly, with a significant year-on-year decrease of 93.86% and 81.38% in the second quarter, respectively, and a year-on-year decrease of 84.5% and 77.01% in the first half of the year, respectively.
In the first half of 2024, the total operating income from investment banking business of listed securities firms was 12.005 billion yuan, a year-on-year decrease of 44.65%; the total operating profit from investment banking business was 685 million yuan, a year-on-year decrease of 90.38%, mainly affected by the relatively rigid cost of business personnel. The decline in operating income from investment banking business of leading securities firms was significant, with a year-on-year decrease of 49.33% for the top 10 securities firms; China Galaxy, Pacific Securities, and Nanjing Securities led the growth in investment banking business, with year-on-year increases of 44.92%, 33.52%, and 28.79%, respectively.
Asset Management Business Remains Stable, with a Decline in Contributions from Consolidated Public Mutual Funds. The asset management scale of listed securities firms increased slightly, mainly due to the recovery of non-cash fund and securities firm asset management scales, but the net income from asset management business slightly decreased. As of the end of the first half of 2024, the scale of non-cash funds increased by 10.56% year-on-year, and the scale of securities firm asset management increased by 2.64% year-on-year, mainly supported by bond-type products.
In the first half of 2024, the total asset management scale of listed securities firms was 7.52 billion yuan, a year-on-year increase of 0.72%; the total net income from asset management business was 22.629 billion yuan, a year-on-year decrease of 1.48%. Guolian Securities, Caida Securities, Nanjing Securities, and Capital Securities achieved significant growth in net income from asset management business, mainly benefiting from the bond bull market driving the growth of asset management scale and excess performance returns. Great Wall Securities led the decline in net income from asset management business, with a year-on-year decrease of 58.32%; Hualin Securities led the decline in asset management scale, with a year-on-year decrease of 42.73%.
Despite the increase in the scale of consolidated public non-cash fund management, the performance is generally under pressure. In the first half of 2024, the total net value of consolidated public non-cash funds was 3.51 trillion yuan, a year-on-year increase of 14.85%, mainly supported by the growth of bond-type fund products. In the first half of the year, the consolidated public operating income and net profit decreased by 15.93% and 19.07% year-on-year, respectively, mainly affected by the gradual implementation of the public fund industry's fee reduction reform since October 2023.
Margin Trading Business Sees Decline in Both Volume and Price, with Double-Digit Decline in Interest Income. Although the volume and price of margin trading business have decreased, there is a differentiation in the trend among securities firms. In the first half of 2024, the total interest income from margin trading business of listed securities firms was 37.636 billion yuan, a year-on-year decrease of 11.11%; the net value of funds lent out was 1.24 trillion yuan, a year-on-year decrease of 3.05%; the annualized average interest rate for margin trading was 5.82%, a year-on-year decrease of 0.89 percentage points.Looking at the securities firms, the two-融 (margin) business of top-tier securities firms is mainly dragged down by a significant decrease in average interest rates, while the two-融 business of small and medium-sized securities firms is mainly dragged down by a decrease in business scale. This trend of divergence is mainly due to the top-tier securities firms adopting a strategy of trading price for volume to cope with market competition.
The proportion of proprietary bond investments continues to rise, and the investment return rate has declined year-on-year. As of the end of the first half of 2024, the overall bond investment proportion of listed securities firms was 60.59%, an increase of 1.73 percentage points year-on-year; under the environment of interest rate decline, the increase in bond investments continues, with Guangfa Securities, CICC, and Cinda Securities being among the more aggressive in increasing their holdings. In the first half of the year, the annualized return rate of proprietary investments by listed securities firms was 2.46%, a decrease of 0.84 percentage points year-on-year, mainly due to the high base in the first half of 2023 when the stock market performed well. In the first half of the year, the total proprietary investment income of listed securities firms was 74.972 billion yuan, a decrease of 18.46% year-on-year; Hualin Securities, Pacific Securities, and First Capital Securities were among the leaders in year-on-year growth, while Guolian Securities had the largest year-on-year decline.
Three resonances of sentiment, policy, and fundamentals
For the regulation of securities firms, with the implementation of the revised risk control indicators for securities firms on September 20, the capital space for securities firms is expected to be further expanded. More importantly, the external environment is also gradually improving. As the Federal Reserve enters the interest rate reduction cycle, the pressure on the RMB exchange rate has eased with the narrowing of the China-US interest rate differential. When the constraints on monetary policy fade, domestic policies continue to exert force, and it is a force that exceeds expectations, with monetary policy and innovative tools working together. The stock market has ushered in a significant turning point at the end of the third quarter of 2024, and market enthusiasm continues to rise. The securities industry, as the industry most directly affected by the capital market, is expected to fully benefit.
Looking at the implementation of the revised risk control indicators for securities firms, the new risk control rules for securities stocks optimize the calculation standards for risk control indicators for securities firms' investment in stocks, market-making, and other businesses, guiding securities firms to fully play the long-term value investment; for innovative businesses and businesses with higher risks, such as derivative investments, the risk control indicator calculation standards are set strictly to strengthen regulatory efforts; based on the risk management level of securities firms, closely linked to risk ratings, supporting compliant and stable high-quality securities firms to moderately improve capital use efficiency; clarify the risk control indicator calculation standards for securities firms to participate in new businesses such as public REITs, enhance the completeness and scientific nature of the risk control indicator system, and consolidate the foundation of risk control.
Looking at the improvement of the external environment, the Federal Reserve has opened the interest rate reduction channel, and the constraints on domestic monetary policy have faded. On September 18, the Federal Reserve announced that it would lower the target range of the federal funds rate by 50BP to 4.75%-5%, marking the first interest rate cut since March 2020 and officially starting the Federal Reserve's interest rate reduction cycle. The previously high core PCE has gradually fallen below 2.7%, and inflationary pressures have eased. To prevent a recession in the US economy, it is expected that the Federal Reserve's interest rate cuts will continue.
The start of the Federal Reserve's interest rate reduction cycle will continue to narrow the China-US interest rate differential, and the exchange rate pressure has eased. Driven by expectations of interest rate cuts by the Federal Reserve, US Treasury yields have been declining since the end of April 2024, and the China-US interest rate differential has continued to narrow, currently falling to -1.66%. The factors that previously suppressed the RMB exchange rate have faded, and the room for domestic monetary policy operations has expanded.
With the decline of the US dollar index, the pressure on the RMB exchange rate has eased. Along with the start of the Federal Reserve's interest rate reduction cycle, the US dollar index has明显ly declined, from above 105 to around 100, and the exchange rate of the US dollar to the RMB has fallen from a high of over 7.25 to the current level of around 7.
Moreover, against the backdrop of the rebound in the China-US interest rate differential and the appreciation of the RMB exchange rate, foreign capital is expected to accelerate inflows. Statistical data show that during the Federal Reserve's interest rate hike cycle in 2022, the inflow of foreign capital obviously slowed down; since then, the movement of foreign capital has a high correlation with the China-US interest rate differential. For example, at the beginning of 2023, with the stage rebound of the China-US interest rate differential, foreign capital净流入大幅; after the second quarter of 2023, with the expansion of the China-US interest rate differential, foreign capital大幅净流出. Since the second quarter of 2024, the China-US interest rate differential has been in a trend of rebound, which is expected to attract foreign capital to accelerate inflows.
The combination of monetary policy punches has exceeded market expectations in terms of rhythm and intensity. On September 24, the State Council Information Office, together with the central bank, the Financial Regulatory总局, and the China Securities Regulatory Commission, held a press conference, at which a series of heavyweight policies were announced, including the reduction of existing mortgage loan interest rates, the simultaneous implementation of interest rate cuts and reserve requirement ratio reductions, and the creation of new monetary policy tools to support the development of the capital market, which has boosted market expectations for more relaxed monetary policy.According to the analysis by Pacific Securities, from the perspective of specific measures, the monetary policy this time is unexpectedly loose, with the core theme being to address the liquidity issues of residents, capital markets, and enterprises. This is conducive to the repair of the balance sheets of residents and enterprises and will significantly improve the sentiment and funding situation in the capital markets.
The creation of new monetary policy tools has opened up channels for the central bank to provide liquidity support to non-bank institutions, especially the creation of non-bank swap facilities, allowing the central bank to directly provide liquidity to non-bank institutions. The swap facility has opened a channel for the central bank to directly inject liquidity into non-bank institutions. Previously, the central bank's primary dealers only included two non-bank institutions, China International Capital Corporation and CITIC Securities. The liquidity of non-banks needed to be transmitted through the banking system. The newly created swap mechanism can directly inject liquidity into non-bank institutions, reducing the capital turnover of non-bank institutions and bringing incremental funds to the capital market.
The creation of stock repurchase and increase in re-lending helps listed companies and shareholders to increase the intensity of repurchase and increase. The central bank can issue re-lending to commercial banks, with a 100% funding support ratio, and the re-lending interest rate is 1.75%. Commercial banks can lend to listed companies and shareholders at an increased rate of 0.5%, using the funds for repurchasing and increasing shares of listed companies. Listed companies with a stock dividend rate higher than 2.25% and their shareholders have a theoretical profit space, and the willingness of listed companies to repurchase and shareholders to increase is expected to increase.
Pacific Securities believes that the September Politburo meeting rarely discussed economic issues, indicating that active fiscal policy is taking over from monetary policy, and the policy for stable growth has been confirmed. Looking at the timing of the meeting, the September Politburo meeting usually involves less economic content, but this September's Politburo meeting focused on economic work as the central theme, indicating the highest decision-making level's emphasis on and determination for economic growth. The expression of this Politburo meeting is more clear and specific, including "increasing the counter-cyclical adjustment of fiscal and monetary policies," the first time setting the tone for "promoting the stabilization of real estate," and explicitly proposing to boost the capital market, etc. These policy measures and meeting expressions are all beyond expectations, which is short-term beneficial for boosting investor expectations and long-term beneficial for economic growth.
The policy beyond expectations ignites market enthusiasm, and the stock market ushered in a long-awaited comprehensive increase in the last week of September. The policy strength and implementation speed beyond expectations have caused investor sentiment to reverse, and the stock market has risen rapidly. From September 24th to 30th, the five trading days, the Shanghai Composite Index increased by 26.03%, with only 15 declines in the entire A, and the median increase in the entire A was 25.61%.
As a direct beneficiary sector, the increase and transaction volume of securities firms are both at the forefront. From September 24th to 30th, the five trading days, the Shenwan Securities Index increased by 39.03%, with an average daily transaction volume of 81.301 billion yuan, respectively in the second and first place in the Shenwan secondary industry. The increases of East Money, Guohai Securities, and Tianfeng Securities were 89.19%, 61%, and 60.91%, respectively, ranking in the top three; after excluding the merger factors of Guotai Junan and Haitong Securities, the median increase of the securities industry was also 35.28%.
According to the analysis and judgment of Taiping Securities, the securities industry will also usher in three resonances: first is the sentiment: driven by policies beyond expectations, market sentiment has been completely ignited. On September 30th, the transaction volume of Shanghai and Shenzhen stock markets reached 2.61 trillion yuan, setting a historical record, and the 7-day moving average of the turnover rate of the Shanghai Composite Index and Shenwan Securities Index rose to 1.16% and 2.74%, respectively.
Second is the policy: the revision of risk indicators expands the capital space of high-quality securities firms, and the central bank's innovative swap facilities are expected to directly provide liquidity to non-bank institutions and capital markets, guiding long-term capital into the market, supporting listed mergers and acquisitions, and reorganizations, and other policy combinations continue to be introduced, supporting the high-quality development of the securities industry in the long term.
Finally, the fundamentals: starting from September 24th, the market transaction volume expanded rapidly, and the market rose quickly. As of September 30th, the Shanghai Composite Index, CSI 300 Index, and ChiNext Index have increased by 12.15%, 17.1%, and 15% year-to-date, respectively, and brokerage business, asset management business, proprietary business, and credit business are all expected to recover quickly.
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