Whilst other international investment banks reduce their exposure to fixed-income, currencies and commodities, China’s largest brokerage firm is expanding into the capital-intensive business to enable European institutional investors to invest in Asian credit products.
State-owned Citic Securities, controlled by the financial-to-mining conglomerate Citic Group, has been actively hiring credit specialists in London after it recently established a sales and trading platform in the UK capital.
In an exclusive interview with FinanceAsia, John Sun, Citic Securities International’s Hong Kong-based head of FICC, said the company plans to first focus on offshore renminbi products and Asian US dollar-denominated credit.
But he added that the firm could yet expand into the markets of Europe, the Middle East, and Africa when the time is ripe.
Citic Securities International is the overseas unit of Citic Securities, a Hong Kong- and Shanghai-listed brokerage firm. Sun currently runs a team of more than 30 staff in Hong Kong and London and plans to expand the head count to more than 40 by next year.
Prior to join the Chinese broker in 2008, Sun was a manager of mortgage-backed securities and asset-backed securities at the now-defunct US investment bank Bear Sterns, which was taken over by JP Morgan for about $236 million in 2008.
Citic Securities's overseas expansion comes in the wake of fierce domestic competition at home and a prolonged slump in margin financing following the rout in Chinese stock markets. It is also happening at a time when the Chinese brokerage firm is being investigated by the Chinese securities regulator.
Doing it differently
The FICC business is not as profitable as before the 2008 global financial crisis and Wall Street banks have since been cutting back their presence due to thinner margins and more stringent capital requirements.
“As a Chinese broker and a new entrant into the FICC business, we think we have a cost advantage over our overseas competitors for offshore renminbi business,” Sun said. “When major players retreat from Asia, we grow organically by ourselves.”
Stiffer capital requirements and increased regulatory scrutiny by the US and UK regulators have crimped margins in fixed-income markets, pushing banks to eliminate staff. According to industry analytics firm Coalition, the FICC revenue of the top-10 investment banks globally is expected to drop to $65 billion this year, the lowest since the 2008 financial meltdown and half what companies made in 2009.
Due to a drop in bond trading, Morgan Stanley is considering cutting as much as a quarter of its fixed-income staff after years of revenue declines and disappointing returns, according to a Bloomberg story on November 30.
The pull back in FICC is particularly severe in Europe, where firms including UBS, Deutsche Bank, and Barclays have sought to shrink their operations to rein in costs.
In the face of changing market conditions, Sun said the broker will not look to compete with large commercial banks that have sizeable balance sheets, as they can inexpensively offer plain vanilla products like currency spot and forward contracts.
“Product innovation can help differentiate us from other large Chinese banks and HSBC or Standard Chartered, which have huge renminbi deposits sitting on their balance sheets,” he said, adding that to begin with in Europe Citic Securities's focus is on cross-currency swaps and options.
