Citic Securities completes CLSA deal amid integration scrutiny

The purchase is the first major deal by a Chinese broker of a foreign peer.
Citic says the acquisition of CLSA will help to double its RoE by 2015
Citic says the acquisition of CLSA will help to double its RoE by 2015

Citic Securities has completed its acquisition of Hong Kong-based broker CLSA, the first major deal by a Chinese broker of a foreign peer.

The two-part acquisition was first announced in July last year, when China’s largest securities house by market value agreed to buy a 19.9% stake in the Asian brokerage unit of French bank Credit Agricole for $310.3 million.

Citic Securities then agreed to pay a further $941.68 million for the remaining 80.1% stake, although $100m of this is being held by Credit Agricole pending regulatory approval of the sale of CLSA’s Taiwan business.

Steps will be taken in coming weeks on integrating CLSA, according to Yin Ke, vice-chairman of Citic Securities and chief executive of Citic Securities International, Citic Securities' offshore investment bank unit.

“For example, we will provide full-scale research services to our clients, combining Citic Securities' domestic analysis and CLSA’s global research strength,” said Yin.

CLSA is planning to develop its debt research, taking advantage of its equity research capabilities, according to a source familiar with the situation.

Both banks said there would be no job cuts during the integration process because both businesses would be expanding.

“The overlapping business between Citic [Securities] and CLSA is very tiny,” said Jonathan Slone, CEO of CLSA. “We are talking about a very small group of less than 20 people. We will now think more about where people should be located.”

Citic Securities said that the two companies’ names, logos, management and office sites would remain the same.

The deal is expected to pave the way for Citic Securities to set up a global platform, and for CLSA to expand in the mainland capital market, the largest developing financial market in the world.

However, questions remain over Fortune CLSA Securities, CLSA’s mainland joint venture, which is also included in the acquisition, because domestic securities houses are not allowed to own a controlling stake in one another, according to China Securities Regulatory Commission (CSRC) rules. There is also no more need for CLSA to retain another domestic partner following the Citic Securities deal.

The completion of the acquisition has put pressure on bankers at Fortune CLSA. Zhang Yongheng, former chairman of the company, moved to a state-owned mining company recently, among several senior people to leave during the past few years.

“We are discussing [the issue of the China joint venture] right now with the CSRC and Chinese authorities. We have support from the CSRC so everything will be fine and we will resolve the situation,” said Slone.

Citic Securities this month said its first-half net profit fell 6.14% to Rmb2.11 billion year-on-year, meaning that, for the first time, it lost its position as the most profitable mainland brokerage to Haitong Securities. Citic Securities' business is more focused on traditional investment banking activities, meaning it suffered more during the freeze of the A-share IPO market and also the sluggish H-share market.

Yin also said Citic Securities would try to double its return-on-equity to 10% to 12% in three years, which would bring it back to levels seen until last year. “The overseas businesses, including CLSA’s, will gradually contribute to our RoE,” said Yin.

“The revenue of the overseas business, including CLSA’s, will become double digits. If the market is good, the return from overseas markets will improve. [However] the overseas performance will not become better in this year or next year,” said Yin.

CLSA has faced concerns from investors that its good reputation in the region might be compromised by the deal in terms of the impact on the independence of its research.

“I haven’t seen a big change in CLSA’s research reports,” said a Hong Kong-based fund manager who uses CLSA’s services. “It is no problem that Citic [Securities] adds its value in research on domestic markets and the macro economy. But if there is any news that shows the Chinese ownership has damaged CLSA’s independence, I may have some question marks when I read its reports.”

“Having a parent company [such] as Citic [Securities], which is so big and successful, will of course have some impact on our culture. But I don’t think it will have a fundamental impact. It will be a small, natural change,” said Slone, who speaks conversational mandarin.

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