CITIC Securities, CITIC Investment And Merger Conjecture: Resolving Oligopoly Incarnation Industry "Stabilizer"

Twenty-first Century researcher Livy, Capital Research Institute

A conjecture that shocked the market is winding up in China's securities industry.

In April 14th, the news of "considering the merger of CITIC Securities and CITIC Securities" spread like wildfire in the market and triggered a jump in the share price of the two companies. Although the two brokerages have not expressed their knowledge about the matter, the Capital Research Institute in twenty-first Century held that this message is not groundless, and can not rule out the possibility that the higher level is studying and brewing this matter.

We believe that if CITIC Securities and CITIC can merge, at least three industry problems can be solved.

First, the long term lack of "lender of last resort" role in the securities industry will be supplementing and become a "risk stabilizer" in the securities industry and even in non banking institutions.

Two, the vicious competition between the two head institutions in investment banking will be curbed, so as to avoid the loss of assets in the state-owned securities industry generated by internal friction, and help to enhance the integration and integration of resources of the integrated companies.

The three is to build the aircraft carrier institutions in the industry by means of mergers and acquisitions. On the one hand, it will help improve the capital market infrastructure construction, expand the capital intermediation echelons of the industry, promote the steady implementation of deepening the reform measures of the capital market, and on the other hand, improve the influence of domestic investment banks in the international financial market.

But at the same time, the integration of the two head institutions is also faced with the internal contradictions of organizational coordination, management team integration, high business overlap and complementarity. It is also a key measure to effectively resolve these problems and achieve the goal of 1+1>2.

In April 14th, the news about "merger of CITIC Securities and CITIC Securities" spread rapidly in the market. - Gan Jun photo

Avatar "stabilizer"

? ? ? ? As a two head broker, the merger conjecture of CITIC Securities and CITIC is seen as "unbelievable" in most industry circles, but this move coincides with our previous view that the securities industry needs to build super institutions. It is also consistent with the goal of regulators trying to enlarge the non banking structure and improve the stability of the capital market (see the series report July last year). Picture of voucher industry under the new trend of management: "superstructure" is in sight, and why securities industry needs "super organization".

As a matter of fact, the non banking institutions have long been short of one or more players who can play a stabilizing role in the industry. Although CITIC Securities has been promoted through mergers and expansion, its role in the development of the capital market is still limited.

The fundamental reason is still related to the emergence of the securities industry. In the early years of the securities industry in China, the securities sector of the banking industry was split up, and the financial system was mainly indirect financing for many years. Therefore, there was a big gap in the body size of the industry organizations, which also led to the credit discrimination between the inter institutional market for non banking institutions.

In June 2019, under the impact of the takeover of the contractor bank, there was a structural liquidity risk in the interbank market, and some products were even caught in a dangerous situation. It is the representation of this problem. At that time, under the coordination of regulatory authorities, a plan of "issuing bonds + providing liquidity support" of the head broker was finally formed, which suppressed the high capital cost of non bank institutions.

This crisis resolution model is not isolated. Earlier in 2015, when the A shares were in a big concussion, three banks would have to co-ordinate the banking system to provide liquidity support. In short, when a liquidity risk event occurs in the stock market and non banking institutions, the market always goes to "seek foreign aid to the commercial banking system".

However, every cross industry diversion, on the one hand, must bear the barriers of efficiency brought about by the supervision division, and on the other hand, it is likely to aggravate the moral hazard of the industry. Therefore, the necessity of strengthening and expanding the head organization of the securities industry has increased significantly.

Then, if the merger of CITIC Securities and CITIC is considered to be in line, can the newly established organization be further turned into a stabilizer of the industry?

Take the 2019 annual report as an example, CITIC Securities's total assets amounted to Seven thousand nine hundred and seventeen point two two Billion yuan, net assets amounted to One thousand six hundred and fifty-four point five zero CITIC total assets Two thousand eight hundred and fifty-six point seven zero Billion yuan, while net assets are Five hundred and sixty-eight point nine five The net capital of the two institutions is Nine hundred and forty-nine point zero four Million yuan sum Five hundred and thirty-nine point five six Billion yuan.

If the financial data are combined, the total assets of the newly established institutions will exceed One point zero seven Trillion yuan, and the securities industry will also appear for the first time a trillion dollar assets of the Big Mac.

At the same time, the sum of the net assets of the new institution will reach Two thousand two hundred and twenty-three point four five Billion yuan, net capital to achieve One thousand four hundred and eighty-eight point six Billion yuan.

If the new institution is compared with the banking institutions, its net assets will exceed the Bank of Beijing and close to the size of a national joint-stock bank, and the total assets will reach the magnitude of Chongqing's agricultural banks.

The emergence of such a new organization in the securities industry will obviously have greater initiative in maintaining industry stability and dealing with crises. The new organization is also expected to become a "systemic important institution" in the industry. When the problems in the non silver market arise, it will also be more effective.

Dissolving vicious competition

We believe that another role of CITIC Securities and CITIC investment is to slow down the vicious competition between the two brokerages and even more head institutions in investment banking.

In fact, the competition between CITIC Securities and CITIC's two institutions in the investment banking market has been an open secret (see the survey report of CITIC stock and construction investment in March 2019): "big platform" and "75 divisions" fierce investment banks.

In the latest disclosure of data in 2019, the two top ranked CITIC investment companies, CITIC Securities, two brokerages and investment bank profits are also different. Twenty-one point three one Million yuan sum Twenty point six five Billion yuan, third Haitong Securities is as low as 1 billion 400 million yuan.

In twenty-first Century, the Capital Research Institute was informed that CITIC and CITIC's two agencies were bidding on some investment bank projects. One of them often looked at the quotations from another company, and tried to compete for the projects by reducing prices. Its main purpose was mainly to expand the scale of underwriting, and the underwriting regulation became one of the important indicators for the investment banking sector.

In fact, the result of fierce competition is the price war on the underwriting rate. Since 2018, some large brokerages have launched a fierce price war in the bond underwriting field. The fees of some billion scale projects can even be as low as 100 thousand yuan, which has caused a relatively bad impact on the industry.

In this situation, when CITIC and CITIC voted for the two institutions, many small and medium brokerages or even the first tier brokerages had to retreat.

For the vicious competition and price war, the SFC and the China Securities Association have been keeping a high degree of concern. They have repeatedly issued or directed through window guidance for risk prompts and control, and brewing corresponding business evaluation guidelines, so as to guide the industry quotes to the right track.

But in the field of investment banking, the intense oligopoly competition has not been stopped because of the "mediation" of the regulatory authorities. More institutions are joining the war and expanding in investment banking business.

Our survey found that since 2020, CITIC Securities and CICC have vigorously recruited investment banking personnel, and insiders have disclosed that the target audience is mainly those who have the resources to contract resources, that is, the above agencies hope to expand their market share through the expansion of personnel.

Some people in charge of the appraisal think that although the price war is based on the market pricing, the floor price quotations of some head organizations have the tendency of dumping, which disturbs the market order to a certain extent, which is easy to cause the accumulation of financial risks, and is also a meaningless "internal friction" of state owned securities dealers.

In fact, the negative effects of price war and underperforming underwriting rates are manifold.

The first is the channel of investment banking, and once the risk of tail risk is generally considered "no risk", it will inevitably lead to a mismatch between the Underwriters and the risk taking. Two, the formalization of the underwriting activities will not help to improve the risk pricing ability of the investment banking institutions; the three is the large organizations involved in vicious competition, which will undermine the underwriting rates and create a hidden loss of state assets. 。

The way of "aircraft carrier"

Promoting CITIC and CITIC's merger is also one of the alternative paths to build an aircraft carrier industry to promote the securities industry and even the capital market.

? ? As a matter of fact, it has become the industry consensus to inoculation aircraft carrier institutions. In December last year, the SFC replied to the CPPCC's proposal on strengthening and making bigger and bigger aircraft carriers, and constructing a capital market four pillars and eight columns to ensure financial security. "It is strengthening the capital strength of the securities industry and promoting various kinds of state-owned capital to help the securities industry through various ways. Bigger and stronger. "

There are three ways to build an aircraft carrier head broker. One is to directly inject capital through the financial platform represented by CIC and Huijin. The two is to relax the mixed operation conditionally, guide the large-scale commercial banking system to merge and build new head broker, and the three is to merge and integrate the existing institutions of the industry and improve the concentration of the industry.

Compared with the first two items that need to be adjusted at the NPC level and the legislative level, the feasibility and efficiency of reorganizing the existing industry organizations are the highest and the system resistance is the smallest.

It should be noted that once CITIC and CITIC really go to merge, the new institutions will further open up the gap with other front-line brokerages. Resources such as project resources, wind control index and innovation pilot will also be tilted to this new organization, which is obviously easy to lead to new unfair phenomena in the industry.

Therefore, it will not rule out that managers will also consider further integration of other front-line brokerages in the future. That is to say, CITIC Securities and CITIC investment will be used as an integration pilot in the future, and the integration and reorganization of other brokers will be followed up, and then a number of industry super organizations will emerge, so as to achieve the purpose of optimizing the industry structure.

The same thing should be noted is whether the two brokerages can finally be pushed towards integration.

Although the controlling parties of both agencies are CITIC Group, from the perspective of market integration, CITIC and CITIC's mutual complementarity is not high. Both sides have strong similarities in the brokerage network coverage, investment banking and capital intermediary business. The differences in management culture and organizational construction between the two organizations will bring obvious difficulty to potential integration.

In fact, the merger between Shenyang Wan and Hongyuan securities has shown that the integration of non marketable industries promoted by management departments is difficult to bring about the 1+1>2 situation. Therefore, CITIC, CITIC construction investment merger or merger plan still needs careful and longer cycle research and discussion.

Although resistance and difficulties are numerous, we believe that promoting and guiding mergers and acquisitions among brokerages will still become a possible way to build aircraft carriers in the future. If the story does not appear in CITIC Securities and CITIC investment, it will also be realized through the continuous merger of small and medium brokerages by leading securities companies.

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