No let-up in gloom for investment banks

Chinese investment banks' first-quarter results indicate another gloomy start after they took a hit from depressed equity markets last year.

Changjiang Securities Co Ltd, Guangfa Securities Co Ltd and Hongyuan Securities Co Ltd issued their first-quarter results on Thursday. All three reported a year-on-year decline in profits.

Industry watchers said the results are an indication of the upcoming results of the other 15 domestically listed investment banks.

The poor results add to concerns over the sector's profitability, which was hurt badly last year by falling brokerage commissions caused by low trading volumes and a decreased IPO volume.

In a statement released to the Shenzhen Stock Exchange, Changjiang Securities said that trading volumes, despite a slight rebound, "shrank significantly" from the same period last year, hitting its brokerage income.

Meanwhile, income from proprietary trading declined as a result of the Shanghai Composite Index rising less than in the same period last year, it added.

Investment banks in China are less sophisticated than most of their foreign counterparts. They mainly focus on brokerage, underwriting and proprietary trading.

Unlike most global investment banks, they rely heavily on brokerage fees to make a profit, which are highly subject to market fluctuations.

Official figures show the average daily trading volume in the A-share market shrank 23.36 percent last year. That helped cut the banks' profits by 40.85 percent to 21.8 billion yuan ($3.46 billion).

Wang Jianhui, chief economist with Southwest Securities, believes the situation for investment banks is about to bottom out.

"The figures look bad on a year-on-year basis, but things are getting better on a quarter-on-quarter basis," he said.

According to Wind Information, a Shanghai-based financial data provider, Chinese investment banks' brokerage commissions jumped 21.7 percent quarter-on-quarter to 17.8 billion yuan on improved trading volumes. Commissions reached 7.7 billion yuan in March, an eight-month high.

Changjiang Securities said its net income fell 46.24 percent to 179 million yuan in the first quarter. Net profit dropped 18.44 percent at Hongyuan Securities to 276 million yuan, and Guangfa Securities saw its net income dip 2.13 percent to 651 million yuan.

Wang said brokerage income will grow as the stock market gains more vitality.

A recent survey by Shenzhen Rongzhi Investment Consultant Co Ltd that polled over 60 equity investment funds shows that fund managers believe that the Shanghai Composite Index will hit a high of 3,500 points this year.

On Thursday, the benchmark index gained 1.83 percent to 2350.86 points, on speculation first-quarter GDP data due on Friday will show slowed growth and prompt the central bank to relax monetary policies.

Citic Securities Co climbed to a nine-month high after the stock market regulator approved 11 more overseas investors to buy yuan-denominated securities.

However, income from underwriting won't pick up as much this year.

Last year, funds raised in China through a total of 349 IPOs dropped 41 percent to 286.1 billion yuan, according to the accounting firm PricewaterhouseCoopers. It predicts funds raised this year will stay pretty much the same, at 270 to 300 billion yuan.

Underwriting income is likely to be cut by a regulatory move to rein in high issue prices.

The China Securities Regulatory Commission, the top securities regulator, said earlier this month that new issues at a price-earnings ratio 25 percent higher than the industry average will require a special declaration. Companies will be punished if they failed to meet profit projections, it said.

gaochangxin@chinadaily.com.cn