Securities firms need to take stock as sector comes under fire

Securities firms face more financial pressure after being hit by massive fines under the government's plan to beef up the role of the China Securities Regulatory Commission.

Four major securities companies and one futures brokerage have felt the full weight of the market watchdog.

Haitong Securities Co Ltd, Huatai Securities Co Ltd, Founder Securities Co Ltd, GF Securities Co Ltd and Zheshang Futures Co Ltd were fined a total of 240 million yuan ($37.8 million) last month.

They came under fire for failing to verify the identities of clients who used third-party financial software to trade stocks under false names and evade regulation.

Rooting out illegal stock accounts has become a major priority for the regulator.

Securities firms that turned a blind eye to the practice have been hit as well as those fund managers involved in using what is known as "grey-market loans".

This is a form of financing from outside the traditional banking sector.

"The regulator's penalties will not only add more pressure on their (securities firms) financial performance. It will also affect their regulatory ratings next year," Fu Yang, an analyst at AVIC Securities Co Ltd, said.

Industry analysts believe the profitability of some of the country's firms will seriously suffer. Already they are showing a substantial drop in revenue and profit after the stock market turmoil during the summer.

Operational revenues of the country's 23 listed securities firms were down by 30 percent in August from the previous month. Net profit declined by 36 percent during the same period.

Up to 10 companies saw their net profit decline by more than 50 percent, according to financial statements released in August.

Before the fall in stock prices, the securities sector reported explosive business growth, fueled by a frenetic bull run in A shares.

That trend has since been reversed amid shrinking trading turnover of about 60 percent. Investor confidence has also been badly shaken.

To add to the industry's problems, the equities slump has eaten into investments. Brokerages were part of the "national team" that was instructed by the regulator to help prop up the market by boosting their stock holdings. Those holdings have since dropped in value.

Investment banking business, which is another crucial earner for securities firms, has also dried up.

The CSRC halted initial public offerings in the summer by companies in an attempt to prevent new share sales from draining market liquidity.

"The regulator's tough stance toward the illegal margin trading business and the de-leveraging trend in the stock market will continue to weigh down on securities firms' capital intermediary business. This is unlikely to recover in the short term," China Merchant Securities Co said in a research note.

But Zhao Shasha, an analyst at Huarong Securities Co, is more optimistic about the industry.

"The future for the securities sector remains promising as China continues to liberalize its financial markets, enrich the trading tools and introduce more innovative financial derivative products (for customers)," Zhao said in a research note.