CITIC SEC: ROE year-on-year improvement at historical high, leading brokerage institutions maintaining advantages.

CITIC SEC released a research report suggesting that the two main themes for positioning in the securities sector are along the lines of high certainty in earnings growth and improvement in the long-term industry competitive landscape. It is expected that active market transaction volume, resurgence in equity financing, and recovery in derivative business will drive performance improvement. The industry's return on equity (ROE) is expected to reach the 90th percentile of the past decade, while the current sector's price-to-earnings (PE) and price-to-book (PB) ratios are below the 20th percentile of the past decade, highlighting the attractive valuation. Long-term mergers and restructuring synergies and leverage expansion will drive the market share of the top securities firms, combined with ongoing optimization of the capital situation, providing ample room for the sector's recovery. It is recommended to focus on the top securities firms as well as high-quality medium-sized securities firms. The main points of CITIC SEC are as follows: - Profitability of the industry is increasing compared to the previous year, with a high concentration of top institutions. - In Q1 2026, listed securities firms achieved a non-IFRS net profit attributable to the mother of 59.5 billion yuan, a year-on-year increase of 39.9%, reaching 87.6% of the level in Q3 2025. Adjusted operating income was 151.2 billion yuan, a year-on-year increase of 31.5%, reaching 88.9% of the level in Q3 2025. The industry's non-IFRS ROE has risen to 2.06%, an increase of 0.46 percentage points year-on-year, second only to 2.46% in Q3 2025. Major securities firms have a more prominent advantage, achieving a non-IFRS net profit attributable to the mother of 44 billion yuan, a year-on-year increase of 47.5%, with a non-IFRS ROE of 2.35%, an increase of 0.62 percentage points year-on-year; profit concentration reached 74.7%, and income concentration reached 69.3%, both higher than the same period last year. The balance sheet continued to expand, with the total assets of listed securities firms reaching over 12 trillion yuan, a year-on-year increase in operating leverage of 0.36 to 4.18 times. The operating leverage of major securities firms reached 4.58 times, and the gap with the industry as a whole widened from 0.34 at the end of Q1 2025 to 0.40 at the end of Q1 2026, leading the industry in capital utilization efficiency. In terms of income structure, the proportion of light capital business (brokerage + investment banking + asset management) and heavy capital business (interest income + trading) income are both 46%, indicating a balanced structure. - Light capital business: The brokerage and investment banking business of major securities firms has a prominent position, and the net income of asset management exceeds that of Q3 2025. - In Q1 2026, the net income of brokerage business of listed securities firms was 47.7 billion yuan, a year-on-year increase of 44.0%, reaching 97.8% of Q3 2025. The quarterly trading volume of stocks and funds reached 17.6 trillion yuan, further increasing from 16.6 trillion yuan in Q3 2025, but the trend of increasing volume and decreasing prices continued due to the historical low commission rate of 1.6 bps in 2025. The top ten brokerage firms in terms of net income are all large institutions, showing a continuous expansion of scale. - The net income of the investment banking business of listed securities firms in Q1 2026 was 8.9 billion yuan, a year-on-year increase of 31.0%, reaching 92.0% of Q3 2025. In terms of market performance, the scale of A-share equity financing in Q1 2026 was 253.8 billion yuan (up 63.9% year-on-year), and the scale of Hong Kong IPO was 109.9 billion Hong Kong dollars (up 489.3% year-on-year), both achieving rapid growth. The combined market share of the top ten A-share equity underwriters increased to 92%, with CITIC SEC, China Securities Co., and Huatai ranking in the top three with market shares of 28%, 20%, and 18% respectively, further increasing the concentration. - The net income of the asset management business was 8.5 billion yuan, a year-on-year increase of 27.6%, reaching 112.0% of Q3 2025 and surpassing the level of Q3 2025. At the end of Q1 2026, the scale of public funds remained stable at a high level of 3.8 trillion yuan, and the scale of securities firms' asset management continued to grow for four consecutive quarters to 640 billion yuan (including collective asset management plan scale reaching 330 billion yuan), coupled with a general recovery in income from private equity subsidiaries in 2025, jointly driving an upward trend in business vitality. - Heavy capital business: Interest income surpasses that of Q3 2025, with investment trading capacity determining industry differentiation. - In Q1 2026, the interest net income of listed securities firms was 14.7 billion yuan, a year-on-year increase of 91.8%, surpassing that of Q3 2025. On the revenue side, the average daily balance of margin financing and securities lending reached a record high of 26.6 trillion yuan; on the cost side, most securities firms' interest expenses decreased year-on-year, with the combined effect of increasing volume and decreasing costs leading to a substantial recovery in interest net income. - The net income of investment trading was 555.1 billion yuan, a year-on-year increase of 12.6%, but only 73.2% of Q3 2025, dragging down overall revenue. This was mainly due to the change in stock market trends and increased volatility in Q1 2026 (with the Shanghai Composite Index, the Sci-Tech 50, and the ChiNext Index showing a decline of about -2%, -6.5%, -1% respectively, with significant gaps between the highest and lowest rises in the range), requiring securities firms to have a higher level of control over pace and downturn. - In terms of portfolio structure, top securities firms such as CICC, Huatai, and GF SEC have concentrated their initial stock-to-bond ratio in the range of 0.11-0.19 and derivative financial asset ratios between 1.17%-3.97%, indicating deeper non-directional investment trading and maintaining a stable investment return rate of 0.77%-1.12%. However, medium-sized securities firms with higher equity exposure (stock-to-bond ratio of 0.23-0.29) and lower derivative financial asset ratios showed significant decreases in return rates. - Cost side: Optimized management fees combined with credit impairment releases support profit flexibility. - In Q1 2026, the total business and management fees of listed securities firms were 71.4 billion yuan, a year-on-year increase of 19.0%, but benefited from faster revenue growth, the management fee rate continued to decrease to 47.2%, down 4.9 percentage points from 52.1% in Q1 2025. The management fee rate of top securities firms was 43.4%, down 4.4 percentage points from Q1 2025, highlighting the advantages of cost control under the economies of scale. In terms of credit impairment, the total credit impairment loss in Q1 2026 was only 1.01 billion yuan, a significant decrease from 5.44 billion yuan in Q4 2025 and 3.05 billion yuan in Q3 2025. Coupled with the average guarantee ratio of around 280% in the margin trading market, the industry's risk exposure is manageable, and asset quality is sound, providing positive support for profit flexibility. - International business: Emerging as a rising star with the dual advantages of "high leverage + high ROE," gradually becoming a new growth engine for top securities firms. - In 2025, the international subsidiaries of top securities firms saw rapid growth in performance, with revenue from subsidiaries such as GF SEC (+115.2%) and China Securities Co., Ltd. (+102.7%) leading the way and profits from China Securities Co., Ltd. international subsidiaries (+177.6%) and Orient international subsidiaries (+125.3%) showing outstanding elasticity. Key indicators show that the ROE of China Securities Co., Ltd. international subsidiaries is 19.1% with a leverage ratio of 11.7 times, significantly higher than the overall company level; CICC's overseas revenue and net profit from international subsidiaries accounted for 29.5% and 46.9%, respectively, leading the industry in terms of level of internationalization. Overall, the international business, with broader global market opportunities, more flexible leverage capabilities, and significantly higher ROE levels than domestic operations, is expected to continue to play a significant role in driving profitability for top securities firms, becoming a core engine for them to navigate the domestic cycle and achieve dual recovery in valuation and performance. - Risk factors - Unexpected decline in stock and fund trading volumes; abnormally tight IPO and refinancing; unexpected decline or increased volatility in the secondary market; exposure to customer credit risks; underperformance of company strategic execution; policy implementation or regulatory easing falling short of expectations.