Bank of China International: There is room for improvement in the valuation of the brokerage sector, focus on two main lines

The Zhitong Finance App learned that Bank of China International released a research report saying that the regulatory policy is positive, and there is room for improvement in the valuation of the brokerage sector. The current regulatory policy sets a positive tone, guides the optimization of the capital market ecology and high-quality institutional development, and the securities industry's “15th Five-Year Plan” development path is clear. As of December 5, the sector's net market ratio was 1.36 times, ranking 34% in the past ten years. There is room for improvement in the context of rising industry sentiment. It is recommended to focus on the two main lines of expansion of the advantages of leading integrated brokerage firms and the misplaced development of characteristic small and medium-sized brokerage firms.

Bank of China International's main views are as follows:

Top-level design injects impetus into the high-quality development of the securities industry

The “15th Five-Year Plan” proposed incorporating “speeding up the construction of a strong financial country” into the top-level design and clearly proposed “improving the inclusiveness and adaptability of the capital market system”. On December 5, an article signed by Chairman Wu Qing proposed six key tasks to clarify the direction for the development of the capital market and securities industry. The bank believes that the accelerated upgrading of the capital market from a “main financing channel” to a “resource allocation hub” that supports scientific and technological innovation, industrial upgrading, and investment and financing balance is expected to drive the strengthening of the securities industry's capabilities in the three major sectors of investment business, wealth management, and institutional services.

Financing side

The investment banking business will focus on national strategic direction and deepen services in fields such as scientific and technological innovation. To enhance the full life cycle service capabilities for physical enterprises, the service chain needs to be extended to both ends: front-end, collaborate more closely with private equity and venture capital funds to actively lay out and cultivate early-stage science and innovation enterprises; back-end, under the impetus of the “Continuously Deepening M&A and Restructuring Market Reform” policy, help listed enterprises transform, upgrade, improve and become stronger. Due diligence, valuation and pricing capabilities, and compliance risk control systems are expected to improve significantly. As Chinese companies go overseas, the bank expects the brokerage firm to accelerate its cross-border business layout.

Investment side

The long-term logic of the transformation of residents' savings to investment remains unchanged. The wealth management business will accelerate the transformation to a buyer model, push brokerage firms to strengthen asset allocation and portfolio management capabilities; enrich the supply of indexed, pension, alternative and cross-border products; deepen investor education and cultivate the concept of value investment. The institutional service business needs to deepen comprehensive service capacity building, provide one-stop services around patient capital such as social security and insurance funds to help Patient Capital raise the level of A-share allocation; improve derivatives creation, pricing and market-making capabilities to meet the growing and complex trading and risk management needs of institutional customers. With the two-way opening of capital markets, brokerage firms will accelerate the construction of cross-border service capabilities to meet the needs of overseas investors.

The competitive landscape of the industry will accelerate towards differentiation

In recent years, regulation has continued to push leading brokerage firms to become better and stronger, and encourage differentiated and characteristic development. The direction of classification, supervision, support and limit disadvantages is clear. Under this direction, leading institutions need to shoulder the mission of building world-class investment banks, enhance resource integration capabilities, make full use of scale effects, channel advantages and strong financial strength, and strive to form a number of internationally influential industry benchmarks. At the same time, Chairman Wu Qing's speech to the Association made it clear that “first-class” is not a patent for leading institutions, encouraging small and medium-sized institutions to seize their advantages, further develop racetrack segments, regional markets, or specific customer groups, and transform into “small but beautiful” boutique investment banks or specialty service providers. The speech proposed appropriately “untying” high-quality institutions, further optimizing risk control indicators, moderately opening up capital space and leverage limits, and improving the efficiency of capital utilization. The entire industry is expected to build a healthy ecosystem with a clear hierarchy and complementary advantages.

Risk Alerts

Regulatory policies, macroeconomic development, and market liquidity performance fell short of expectations; sharp fluctuations in the securities market and interest rates led to increased performance fluctuations; accelerated capital market opening up brought risks to overseas markets and competitive pressure on foreign institutions; homogenized competition or triggered price wars; uncertainty about brokerage mergers and acquisitions or affected price stability in the sector.