Minsheng Securities: Optimizing risk control indicators, focusing on increasing the leverage ratio and ROE of top securities firms.

Minsheng Securities released a research report stating that the risk management system of securities firms is constantly improving, and the new risk control indicators will help guide the securities industry to allocate funds, better serve the real economy. Meanwhile, under the background of supply-side reform, business transformation and mergers and acquisitions are expected to continue to accelerate, trends towards building first-class investment banks and investment institutions through mergers, reorganization, organizational innovation, etc. are expected to accelerate. It is recommended to continue to focus on CITIC SEC (600030.SH), Huatai (601688.SH) and other targets that benefit more from the supply-side reform, have improved corporate governance systems, have high dividend and low valuation advantages, and have more robust risk control mechanisms. The main points of Minsheng Securities are as follows: On September 20, the China Securities Regulatory Commission revised and issued the "Calculation Standards for Risk Control Indicators of Securities Companies". Compared to the original risk control indicator system released in January 2020, the revised version of the "Risk Control Indicator Regulations" has 4 main characteristics: firstly, the risk control indicator calculation standards for securities firms investing in stocks, market-making, etc. have been optimized. For example, the market risk reserve calculation standard for investing in the constituents of the Shanghai and Shenzhen 300 Index has been reduced from 10% to 8%, and the conversion factor for calculating liquidity coverage ratio has been raised to 50%. This will further guide securities firms to fully play the role of long-term value investment, financing for the real economy, and wealth management for residents. Secondly, based on the risk management level of securities firms, the classification adjustment coefficients of risk control indicators have been optimized. For example, the risk capital reserves of each securities firm will be adjusted annually based on the previous year's classification evaluation results. The adjustment coefficient for firms rated AA or above for three consecutive years has been reduced to 0.4, supporting compliant and stable high-quality securities firms to moderately improve capital efficiency and better provide comprehensive financial services for the real economy. Thirdly, all business activities of securities firms are included in the scope of risk control indicators, and the calculation standards for risk control indicators for participating in new business such as public offerings of REITs have been clarified. Public offerings of REITs will be included in the calculation of liquidity coverage ratio, enhancing the completeness and scientific nature of the risk control indicator system. Fourthly, strict risk control indicator calculation standards have been set for innovative and high-risk businesses, such as raising the risk capital reserve calculation standard for stock index futures, equity swaps, and selling options from 20% to 30%. Strengthening regulatory measures to enhance regulatory effectiveness. The new regulations may be more favorable for leading securities firms, potentially increasing the industry's leverage ratio and return on equity (ROE). This revision further refines the calculation method of risk control indicators, especially by appropriately optimizing the risk control indicators for high-quality securities firms, supporting compliant and stable high-quality securities firms to moderately expand their capital space. According to the "Regulations on the Classification and Supervision of Securities Companies", securities companies are divided into 5 major categories and 11 levels (A-E). Looking at the classification list from 2017 to 2021, most of the top securities firms with large asset sizes are ranked higher. At the same time, the number of securities firms classified as AAA from 2019 to 2021 has increased, indicating that the overall compliance management and risk control management levels of the industry are continuously improving. According to China Securities Journal, the number of securities firms in each category has remained stable in recent years, with the proportion of companies in the A/B/C categories accounting for 50%/40%/10% in the 2024 classification results, and the number of AA-rated companies remaining around 14. The capital constraints of leading securities firms with improved risk control mechanisms are further relaxed, and the improved incentive mechanisms are expected to continue to enhance the industry's risk control capabilities, better providing comprehensive financial services for the real economy. Upon the implementation of the new regulations, on the one hand, from the perspective of the industry landscape, the new regulations may be more favorable for leading securities firms; on the other hand, they may increase the potential leverage ratio and ROE of the securities industry. Risk Warning: Unforeseen policies, increased market volatility, slower than expected growth in household wealth, and interest rate declines beyond expectations.