In recent years, the performance of the securities industry has been marked by a pattern of gradual growth, yet underlying shifts in the profitability and operational structure of brokerage firms are becoming increasingly apparentTraditional brokerage and investment banking services, faced with fierce competition and regulatory constraints, are experiencing stagnation in growthIn contrast, proprietary trading and asset management services are emerging as significant contributors to overall performance, transforming the landscape of what drives profitability in this sector.

As we entered the latter half of 2023, the capital markets have entered a period of intensified regulatory scrutiny, aimed at promoting high-quality development in the securities industry while enhancing the experience for investors

This has rendered the role of the capital market, and brokerage firms, ever more vitalIn this context, the China Securities Regulatory Commission (CSRC) has delineated clear development goals and paths, such as fostering leading investment banks and institutions, promoting the emergence of around 10 top-tier firms, and forming 2 to 3 globally competitive investment banks.

The focus for securities firms is shifting towards functionality, professionalism, specialization, and compliance with risk management, in line with a broader regulatory tighteningThis has led to an acceleration of supply-side reforms within the sectorPrime institutions are anticipated to enhance their capital bases and strengthen their positions through mergers and organizational innovationHowever, while the industry overall maintains a stable growth trajectory, the distinct performance patterns among various brokerage firms are becoming clearer, as traditional business models struggle with market limitations.

The growth divergence among brokerage firms has become increasingly evident in their performance data for 2023, reflecting a stable overall industry outlook

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When analyzing industry revenue, data from the Securities Association of China indicates that 145 securities firms reported revenues of 405.9 billion yuan, marking a modest 2.8% year-on-year increase, while net profits dropped by 3.1% to 137.8 billion yuanIn contrast, public companies have also recorded similar results, with revenues of 407.1 billion yuan, down 0.9% year-on-year.

Drilling down into individual business lines reveals that only proprietary trading and asset management have achieved positive revenue growth among the five primary operations within listed brokersData from the Securities Association of China shows that within the total revenue reported, brokerage services accounted for 25%, investment banking 13%, asset management 6%, interest 13%, and proprietary revenue making up 30%. Interestingly, the year-on-year growth rates demonstrate that brokerage and investment banking revenues fell by 12% and 25%, respectively, while proprietary trading soared by an impressive 51%.

Looking at performance by quarter, the noticeable disparity continues; the second quarter of 2023 was characterized by active market trading and better Initial Public Offering (IPO) results, leading to peak performance in revenues and net profits

However, by the fourth quarter, despite proprietary trading showing relative resilience, overall performance recorded a decline sequentially, primarily due to significant management expenses being released around year-end and an increase in provisions for credit impairments.

The contrasting fortunes of top-tier brokers versus their smaller counterparts have emerged as the latter demonstrate more substantial performance fluctuationsSmall to mid-sized firms have benefited from low performance baselines and directional investments within proprietary trading, enabling them to significantly reverse trends compared to larger brokersFor instance, the brokerage firms Hongta Securities, Zhongtai Securities, and Caida Securities saw their net profits surge by 711%, 205%, and 100%, respectively, highlighting the disparate performance trends within the market.

Even while the top ten firms collectively posted a decrease in net profit of 8% year-on-year, notable exceptions showcased varying performance; Huatai Securities experienced a remarkable 94% year-on-year increase in proprietary income which positively affected their profits

In contrast, Haitong Securities suffered a stark dip of 85% attributed to losses from overseas subsidiaries, illustrating the volatility within the sector.

Despite a slight uptick in leverage among listed brokers, this did not translate into improved profitability metrics, which saw a decline in Return on Equity (ROE). By year-end 2023, total assets of the 22 listed brokers stood at 95,546 billion yuan, a growth of 6.2%, while common equity rose to 18,751 billion yuan, showing a more modest year-on-year increase of 7%. After adjusting for client trust liabilities, the leverage ratio was noted at 4.22, marking a slight increase.

The leverage variations highlight a stark contrast between firms; while Shenhwa Hongyuan and CITIC Securities saw drops in their leverage ratios, other firms like Founder Securities and Guolian Securities increased theirs considerably, reflecting divergent strategic approaches to managing capital risk.

Despite these broad strokes of stability, the pressures surrounding brokerage and investment banking activities remain significant

Brokerage operations, in particular, are still grappling with downward trends in commission rates due to a decreasing volume of securities trading and seat rental pricesThe average commission rate for the industry over the first half of 2023 was just 0.021%, a drop from the previous year's figuresAs for institutional brokerage activities, the rental income for trading seats saw a similar decline, fundamentally impacted by reduced transaction volumes and reforms to public fund fee structures.

Adding further complexity, the investment banking sector is facing challenges due to a shrinking equity financing market—a regrettable side effect of a regulatory clampdown aimed at stabilizing the marketThe impact on IPO underwriting performance was stark, with metrics showing a 39% year-on-year decrease, and refinancing activities tracking a 32% decline.

While the landscape appears daunting, internally driven initiatives within self-operated and asset management divisions provide a glimmer of hope

The proprietary trading segment capitalized on gains derived from both scale and revenue, boasting a year-end self-operated revenue of 1,040 billion yuan with growth reaching a remarkable 51%. This growth was propelled by favorable returns on fixed income investments and an uptick from low baseline equity-related activities.

The asset management segment, though witnessing a contraction in terms of scale, maintained revenue growth supported by positive performance from public offeringsBy year-end, asset management revenues reached 393 billion yuan, a slight uptick from previous numbers, with firms such as Zhongtai Securities and Guotai Junan leading the sector in terms of revenue growth.

Nevertheless, the credit business remains under pressure; while both margin financing and equity pledging demonstrated stable growth, the overall increase in interest expenses took a toll on net interest revenues