(Bloomberg) — China is combining two of its largest state-backed brokerage firms to create a new behemoth as it looks to consolidate its $1.7 trillion sector and build stronger investment banks to compete with foreign financial firms .
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Guotai Junan Securities Co. will merge with smaller competitor Haitong Securities Co. through a share swap, according to statements from both companies on Thursday. The combination of the companies, both partly owned by Shanghai’s state asset manager, will create a new entity with assets worth 1.6 trillion yuan ($230 billion), called Citic Securities Co. as the largest real estate agent.
The merger awaits approval from the companies’ boards of directors and shareholders, as well as regulatory authorities.
The deal comes a year after President Xi Jinping urged financial regulators to set up a pair of top investment banks to compete with Wall Street firms expanding in China. Shares of local brokerages rose Friday morning.
The national securities watchdog has also expressed support for consolidation, with the aim of having two to three investment banks that can compete globally by 2035. China had about 145 securities companies at the end of 2023, with combined assets of 11.8 trillion yuan, according to official data.
“The combination is conducive to building a first-class investment bank and promoting the high-quality development of the industry,” the statements said.
Profits drop
The sector has been hampered by a slump in deals and sluggish capital markets, while equities struggle with weak economic growth. Profits have fallen in recent years and the earnings outlook remains bleak after industry heavyweights China International Capital Corp. and Citic Securities reported declines in first-half results.
Haitong, which is valued at HK$106 billion ($13.6 billion) in Hong Kong, reported a 75% drop in first-half profit, while its shares fell 12% from a year earlier.
“The merger may solve Haitong’s business problems,” Hua Chuang Securities said in a report. “The overall quality of the underlying assets is not very healthy, which also leads to the low valuation,” the report said, adding that the merger could also lead to job losses as the sector is hit by a drought of companies moving to the go to the stock exchange.
Guotai Junan has about 15,000 employees, while Haitong Securities has more than 13,600 employees, including 1,645 in investment banking. According to the company’s 2023 annual report, Guotai Junan has not destaffed its business lines.
Under the agreement, Guotai Junan will issue shares for listing on the Shanghai Stock Exchange to holders of Haitong’s A shares, and do the same in Hong Kong with H shares. The company is also planning a placement of new A shares for additional fundraising. They did not disclose financial terms.
Both companies suspended trading in Shanghai and Hong Kong from Friday. The trading halt in China’s A-shares is expected to last no longer than 25 trading days.
Brokers have also become targets of Xi’s signature “common prosperity” campaign, resorting to pay cuts and layoffs to consolidate companies and meet stricter controls.
The deal would mark a major step in China’s longstanding ambition to create an “airplane carrier-sized” brokerage that could target Wall Street banks after China gradually opened its financial markets to allow full foreign ownership by 2020. to make.
These pressures could fuel consolidation in an industry where several brokers have merged or announced plans, fueling expectations for mega deals. This week, Guosen Securities said it plans to buy almost all of Vanho Securities, and Guolian Securities previously said it will acquire Minsheng Securities and Western Securities.
China had considered merging two of its largest investment banks four years ago, but progress has stalled. An earlier proposal was for Citic Group, parent company of Citic Securities, to acquire a stake in CSC Financial Co. would buy from Central Huijin, Bloomberg reported.
According to their official websites, the Shanghai State Assets Supervision and Management Commission indirectly owns about a third of Guotai Junan and almost 20% of Haitong.
–With help from Zheng Li, Serena Ng and Jacob Gu.
(Updates with comments, details throughout.)
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