[ET Net News Agency, 15 March 2021] Mergers and acquisitions (M&As) can generate
benefits from geographic expansion to franchise transformation and strengthening of
China's securities firms. Still, potentially high and uncertain integration costs pose
credit risks, despite firms' financial headroom given their lower leverage than global
peers, according to Moody's Investors Service in a new report.
"M&As will improve the efficiency and profitability of smaller operators, which largely
make up China's securities industry of more than 130 companies. Indeed, even a small scale
of system M&As can be beneficial as seen following the Korean securities industry's mild
consolidation," said Sean Hung, a Moody's Vice President and Senior Analyst. Three
transactions have been concluded in China's securities industry since 2020 after a period
of dormancy in 2018-19.
Many small companies have difficulties in maintaining profitability in the long term
amid various market volatilities. The benefit of consolidation will become more compelling
as more companies look to expand beyond brokerage and into higher value-added businesses
such as wealth management and investment banking.
The experience of the Korean securities industry highlights the potential benefit of
consolidation. The country had a highly fragmented and competitive securities industry
until the middle of the last decade. The number of market makers in Korea reduced from a
peak of 62 in 2012 to 56 in September 2020. Since the mild consolidation mainly in
2014-16, average equity capital markets fee rates of Korean securities firms have
increased during 2017-19. (KL)