Brokers Beat Banks as China Revamps Economy: Chart of the Day

November 26, 2013 Leave a comment

Brokers Beat Banks as China Revamps Economy: Chart of the Day

Investors are betting China’s brokerages will gain more than commercial banks and other companies from a plan unveiled this month to make market forces the “decisive factor” in the world’s second-largest economy. The CHART OF THE DAY shows the average price-to-book ratio for the three Chinese brokerages whose shares are traded in Hong Kong — China Galaxy Securities Co., Citic Securities Co. and Haitong Securities Co. — compared with a similar measure for the five largest banks and the Hang Seng China Enterprises Index, which tracks 40 mainland companies. Since the Communist Party announced a package of 60 reforms on Nov. 15, the brokers’ ratio surged to 1.76, while banks lagged behind at 1.08.“Brokerages will benefit more from China’s reform because the nation is pledging to develop a multilayer capital-markets system, meaning more new listings, bond issuance and other market activities,” said Edmond Law, an analyst at UOB Kay Hian Holdings Ltd. in Hong Kong. “The opening of the banking market, interest-rate liberalization and the introduction of competition will hurt banks’ profitability.”

Brokers’ earnings have been held back by a government freeze on initial share sales that’s in its 14th month. Authorities are drawing up new rules for share sales, under which regulators will be responsible only for ensuring companies’ disclosures meet requirements, rather than approving the sale itself, regulator Xiao Gang said last week.

Banks may face a squeeze on margins as the government’s pledge to ease restrictions on interest rates paid on deposits leads to tougher competition.

Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd., Bank of China Ltd. and Bank of Communications Co. have boosted earnings since 2008 as policy makers allowed unprecedented amounts of new credit to boost economic growth, while deposit-rate caps protected margins. Net income at ICBC, the world’s most profitable bank, was about double that of PetroChina Co. last year. In the U.S. and Europe, the ratio between the biggest banks and energy companies was the reverse.

To contact the reporter on this story: Stephanie Tong in Hong Kong at stong17@bloomberg.net

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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