An investment bank, or investment bank for short, is a type of financial institution that mainly deals in the securities business. Investment banks in the modern sense basically do not fall into the category of banks, but are specialized securities institutions (called brokerage firms in mainland China). A complete investment bank includes a range of businesses such as mergers and acquisitions, corporate financing, securities issuance, underwriting, research, investment consulting, brokerage, asset management, wealth management, etc., but there are also businesses that specialize only in certain areas.

Investment banks have played an important role in promoting the development of the securities market, and in the process of establishing and consolidating its position as an international financial center, Hong Kong has attracted investment banks from all over the world to do business here. This has also spawned the development of local investment banks in Hong Kong, which has now formed an extremely rich group of investment banks.

In other words, the development process of the Hong Kong investment banking community itself has also been continuously improved along with the development of the international financial community and the Hong Kong financial market. In this issue of the topic, Futu Niu will also give investors a comprehensive introduction to the basic knowledge of investment banks and the basic situation of investment banks in Hong Kong.

The past and present lives of investment banks

Investment banks originated in England. In the 17th century, investment banks represented by the British Merchants Bank (Merchant Bank) were recognized as earlier investment banks. At first, these merchant banks only provided short-term capital to merchants and financed their short-term debts. After London became a financial center, on the one hand, the term of capital loans increased, and on the other hand, the flow of capital to more countries and regions increased, which greatly promoted the development of merchant banks.

However, investment banks in modern society are mostly developed by Wall Street investment banks. The following table shows the development trajectory of American investment banks since the beginning of the 20th century:

The picture above mentions the division and merger of US investment banks and commercial banks, so what is the exact difference between the two? In fact, investment banking originated from commercial banks. It is an emerging industry formed by the modern financial industry adapted to modern economic development. It is a concept corresponding to commercial banks.

From a business perspective, commercial banks mainly operate indirect financing services. They mainly use short-term financing, that is, deposit and loan of capital, earn profits through the interest gap between depositors' deposits and corporate loans, and are subject to supervision and management by the Central Bank, the Monetary Authority, or the Banking Regulatory Commission. Judging from the risk exposure situation, depositors face less risk, while the risks faced by commercial banks are relatively high.

Investment banks, on the other hand, mainly operate direct financing services, providing enterprises with services such as stock issuance, bond issuance, corporate restructuring, and clearing business. They rely on service commissions, etc., to earn excess income. At the same time, they provide securities brokerage services and asset management services to investors, use their own capital to invest or speculate, and are managed by the Securities Regulatory Commission. Judging from risk exposure, investors face greater risk, while investment banks face less risk.

After talking about the differences with commercial banks, let's take a look at the classification of investment banks themselves. According to their organizational form, investment banks can be divided into four main categories: the first is independent professional investment banks. This type of investment bank exists widely around the world, and they also have their own business directions that they are good at, such as Goldman Sachs and Morgan Stanley in the US; Japan's Nomura and Yamato all fall into this type.

Second, there are investment banks owned by commercial banks. There are two main forms of this type of investment banking: the first type is for existing commercial banks to share the benefits of other investment banking services through mergers, acquisitions, shares, etc., and the second type is to establish subsidiary companies to engage in investment banking business and carry out business expansion and expansion. This form is very typical in countries such as Britain and Germany, such as HSBC, UBS, etc.

Third, all-rounder banks directly operate investment banking business. This type of investment bank mainly appears in mainland Europe. While they are engaged in investment banking business, they also engage in general commercial banking, such as Deutsche Bank; fourth, finance companies set up by large multinational companies, which rely on the huge capital strength and extensive business networks of large multinational companies. This type has also developed rapidly in recent years.

The picture below shows the current global investment bank rankings. The top five rankings are all from the US. J.P. Morgan defended the top position. The remaining four are Goldman Sachs, Citi, Bank of America Merrill Lynch, and Morgan Stanley, while Deutsche Bank has fallen to sixth place due to various recent turmoil:

Investment banks in Hong Kong

The development history of investment banks in Hong Kong is closely linked to the development and opening up process of the Hong Kong securities market. It reflects the objective requirements of Hong Kong's economic development for the capital market. Using the development of the Hong Kong securities market as the main clue for investigation, the development of investment banks in Hong Kong can be broadly divided into the following stages:

In the first stage (1866-1969), the “Hong Kong Conference” era in Hong Kong's securities history, the British transplanted the securities market and investment banking business to Hong Kong and held a monopoly position for a long time. The investment banking business during this period was mainly attached to British commercial banks such as HSBC and Standard Chartered, and had a strong colonial economy.

In this nearly 100-year history, almost all listed companies in Hong Kong were established British banks, and as of 1968, there were only 60 licensed brokers in Hong Kong, and most were “hereditary” inheritances. Outsiders needed to pay 500,000 Hong Kong dollars to obtain a “Hong Kong Club” broker license. This was almost an astronomical figure at the time, so the development of the investment banking business was slow.

The second stage (1970 to 1986), the “Four Sessions” era in Hong Kong's securities history, saw rapid development of the Hong Kong stock market, local capital and foreign capital intervened in the stock market, and investment banks showed specialized and diversified development characteristics.

The successive establishment of the “Four Sessions” broke the situation where the Hong Kong stock market was monopolized by the British. Along with the take-off of the Hong Kong economy in the 70s, more and more institutions and members of the public participated in the stock market, spawning the establishment of a number of investment banks in the modern sense of the word in Hong Kong. After entering the 80s, some major European and American investment banks also came to Hong Kong one after another to set up their Asia Pacific headquarters and get involved in Hong Kong's stock market and investment business. Hong Kong also gradually established a three-tier licensing system for banks, which determined the dominant position of banks with restricted licenses among investment banks.

In the third phase (1986-1997), the Hong Kong International Financial Center was formed and established, and investment banks accelerated the development process of internationalization. At this stage, several landmark events, such as the establishment of the Stock Exchange, the formalization of company listings, and the rise of red chip stocks and H shares, had a profound impact on the development of investment banks in Hong Kong.

Entering the 90s, with the development of the mainland economy, red-chip stocks and H-shares formed a boom in Hong Kong, and international capital and investment banks also began to be more optimistic about Hong Kong. In addition to British, American, and Japanese capital continuing to invest more in Hong Kong's investment banking business, investment banks in mainland Europe, Australia, and Taiwan also began to actively enter the Hong Kong market, such as Lyon Securities and Taiwan's Jinghua Securities.

What is most remarkable is that Baifuqin, founded by Leung Bo-tao and others, grew rapidly, helped CITIC Taifu, Guangdong Investment, China Overseas, China Mobile, etc. go public with many red chip stocks and H shares, writing a strong impression on Hong Kong investment bank developers. As a result, Leung Bo-tao received the reputation of “the father of red chips.”

In the fourth phase (1997-present), after the return of Hong Kong and the baptism of the Asian financial crisis, the structure of Hong Kong's investment banking industry has undergone major changes in the face of economic globalization and closer economic ties between Hong Kong and the mainland. US investment banks have taken the lead. The rapid development of Chinese brokerage firms has become a major feature of the development of Hong Kong's investment banking industry at this stage.

Due to the impact of the Asian financial crisis, some investment banks and securities brokerage firms operating in Hong Kong went out of business one after another or fell into financial trouble. The Baifuqin Group, the largest Chinese investment bank in Hong Kong mentioned above, also went bankrupt in 1998, and eventually France and Pakistan acquired its business. But on the other hand, this impact also accelerated the integration of Hong Kong's investment banking industry.

However, with the return of Hong Kong, its economic ties with the mainland became even closer, and more and more mainland enterprises went public in Hong Kong. This also provided new incentives for the development of Chinese investment banks in Hong Kong. In particular, since Hong Kong and the mainland signed the CEPA in 2003, Chinese brokerage firms have developed rapidly in Hong Kong.

Chinese brokerage firms in Hong Kong

Chinese brokerage firms in Hong Kong refer to investment banks set up wholly owned or controlled by mainland Chinese capital in Hong Kong. Mainland China is more accustomed to calling them brokerage firms. Compared to overseas investment banks, Chinese brokerage firms have a history of less than 20 years in Hong Kong, but the rapid development of the mainland economy, the gradual opening and development of financial markets, and Hong Kong's unique advantages as an international financial center have provided a natural source of support for Chinese securities companies, making them develop greatly in recent years.

As early as 1991, the predecessor of China Everbright Holdings established China Everbright Securities (Hong Kong) Limited in Hong Kong, pioneering Chinese brokerage firms in Hong Kong. Subsequently, more and more Chinese enterprises in Hong Kong and mainland Chinese enterprises began to raise capital through listing on the Hong Kong stock market and carry out capital operations. This provided new business opportunities for existing investment banks in Hong Kong, and prompted investment banks in mainland China and Chinese financial institutions in Hong Kong to set up Chinese brokerage firms in Hong Kong.

As shown in the figure below, including the Bank of China, ICBC, CITIC, China Merchants, etc. have all set up branches in Hong Kong:

As far as Chinese brokerage firms in Hong Kong are concerned, since they have institutions in both mainland China and Hong Kong and are familiar with the markets of both places, this has also become a kind of “bridge advantage”. However, in recent years, with the continuous southward movement of mainland capital, including the opening of the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect, Chinese brokerage firms have gradually begun to take a dominant role in the Hong Kong stock market.

Among them, mergers and acquisitions of local brokerage firms in Hong Kong have become a major way for Chinese brokerage firms to enter the Hong Kong securities market. Classic examples include Haitong Securities's acquisition of Hong Kong Daifuku Securities in 2009, and CITIC Securities spent more than 9.7 billion yuan to acquire all of the shares in Lyon Securities's Asian business in 2012. Last year, Hong Kong's fully licensed brokerage firm Huafu International was also acquired by Mainland China Oceanwide International Finance at a price of about 1,097 million yuan.

In addition to acquisitions, mainland capital has also begun to make efforts to expand the Hong Kong market through overseas subsidiaries. The recently listed BOCOM International (03329) is an example. In addition, there are also Southern Dongying and Huaxia Fund (Hong Kong). In fact, among the brokerage firms listed on the Hong Kong Stock Exchange, the ten largest brokers by market capitalization are already all Chinese brokerage firms. Among the top ten brokerage firms with the highest market capitalization in Hong Kong stock circulation, nine major brokerage firms are Chinese brokerage firms.

Futu Securities learned that in the past ten years, the market share of Chinese-funded bank branches in the Hong Kong market has increased from 15.6% to 32%, may reach 42% in 2017, and may soon exceed 50%. Among them, bank branches that entered the Hong Kong market earlier have gradually moved out of the initial layout stage and have begun to enter a period of development. At present, overseas institutions of many large state-owned banks have contributed more than 10% to all banks, and the number and profits of overseas branches of joint stock banks have also begun to increase markedly.

The 2020 Hong Kong stock IPO market showed great resilience and vitality, ranking third in the world in terms of total capital raised, after US stocks and the Shanghai and Shenzhen A-share markets. Thanks to the implementation of the dual equity structure of the Hong Kong Stock Exchange and the channel design that allows unprofitable biotech companies to go public in Hong Kong, compounded by the return boom of China Securities, 146 new companies were listed throughout the year, including 138 listed on the Main Board and 8 on the GEM. In terms of the return of China Securities, nine companies represented by JD, NetEase, etc. chose the Hong Kong Stock Exchange for a second listing. Among the top 10 Hong Kong stock IPOs, China Securities returned to occupy 6 seats.

Looking back at 2020, CICC, Morgan Stanley, and Goldman Sachs all participated in 14 IPOs as sponsors in the Hong Kong IPO sponsor list, tied for first place, accounting for nearly 30% of the total number of IPOs this year. Haitong International and CITIC Lyon ranked fourth and fifth as sponsors of 13 and 12 IPOs respectively.

CICC ranked first with an underwriting scale of HK$43,932 million, accounting for 11.05% of total IPO capital raised this year. Goldman Sachs and UBS ranked second and third respectively, with underwriting scales of HK$29.570 billion and HK$26.225 billion respectively. A total of 4 Chinese investment banks were shortlisted in the top ten.

According to Futu Niu Niu's understanding, mainland China has now surpassed the US to become the largest group of shareholders controlling Hong Kong's licensed corporation. With more and more mainland companies going public in Hong Kong and the gradual popularization of Hong Kong Stock Connect, mainland investors' trading on the Hong Kong Stock Exchange continues to heat up, and Hong Kong's dependence on domestic projects and capital has increased. It is already an inevitable trend.