<News Alert> China brokerage sector – Leverage ratio relaxation to boost long-term ROE
- CSRC plans to relax the leverage ratio requirement for top-tier brokers, strengthens long-term funds’ participation in stock market, and encourages top-tier brokers to expand through M&A
- Maximum leverage could go up by as much as c.40%, and we believe CICC and GF would be most benefited due to their tighter regulatory ratios as of 1H23
- We reiterate our positive view towards the sector, considering the re-accelerated effort by regulator and the attractive valuation at 0.5x FY24F PB (-1.6 SD of past five-year mean)
More frequent policy signals. At last Friday night, the CSRC stated that it will support top-tier firms in becoming more competitive and robust through business innovation and M&A, in order to establish world-class investment banks. On Saturday, CSRC proposed a new set of Risk Control Indicator calculation standards for China brokers. Apart from relaxation of capital leverage ratio for top-rated brokers, other key changes are listed on the below table (Fig.1). Cailian Press also reported that CSRC was set to publish an action plan for the capital market investment-end reform, which is expected to lift the maximum equity allocation of annuity pension funds from 30% to 40% and roll out measures to diversify source of capital of other long-term funds, per persons close to the regulator.
Expect higher long-term ROE. The relaxation of the capital leverage ratio was first mentioned in mid-Aug and we think the extent is encouraging, as the top-rated brokers could have maximum leverage up by c.10-40%, depending on their ratings by the Securities Association of China (SAC) in last three years. This will enhance China brokers’ capital utilisation efficiency and narrow the ROE gap against their foreign peers in longer-term. CICC and GF should benefit from it the most due to their tighter capital leverage ratios as of 1H23 (Fig.2), which may have already constrained their business growth, and especially new equity issuance is discouraged lately. We also think the expected action plan by CSRC to guide more new funds to market would be timely to support the bottoming out of A-share market. We reiterate our positive view towards the sector, considering the (1) re-accelerated effort by regulator lately, (2) attractive sector valuation at 0.5x FY24F PB (-1.6 SD of past five-year mean), and (3) marginal ADT recovery last week (+3% w-o-w).
1. Key changes from the new proposed set of risk control indicators
2. Risk control indicators of brokers under coverage
Risk coverage ratio = net capital / total risk capital reserves
Capital leverage ratio = core net capital / total on-and-off balance-sheet assets