A research report from East Money Securities indicates that leverage has become the core variable driving the improvement of Return on Equity (ROE) for securities firms. The differentiated risk control guidance from regulators, which aims to support high-quality firms and restrict weaker ones, is expected to unlock significant capital space for superior brokerages. International experience demonstrates that the quality of leverage is far more critical than its magnitude. For Chinese securities companies, the appropriate approach to increasing leverage is not simply expanding the balance sheet, but rather building a stable asset return capability through asset expansion, strategy upgrades, and a shift towards client-driven businesses, thereby ensuring leverage is fundamentally tied to client needs. Leading brokerages that have率先 completed this client-centric transformation and built operational resilience to navigate economic cycles are expected to be dual beneficiaries of both policy dividends and valuation recovery.
The primary views from East Money Securities are as follows:
Leverage has become a key variable for enhancing ROE. From 2008 to the first three quarters of 2025, the leverage ratio (excluding client funds) for China's listed securities firms steadily increased from 1.56x to 4.09x. However, the net return on assets (ROA) declined from 4.3% to 1.8% over the same period. Against a long-term backdrop of ROA being constrained by declining commission rates and fee pressures, changes in leverage have surpassed ROA as the marginal decisive factor in explaining ROE movements.
Increasing leverage is a strategic requirement for serving the real economy and nurturing top-tier investment banks. The 2024 revisions to risk control indicators and subsequent regulatory statements signify a substantive shift in the regulatory stance from "uniform constraints" to "categorical guidance," with a clear directive to support the strong and limit the weak. Leading brokerages possess significant advantages in risk control capabilities and capital efficiency, coupled with a more pressing need to utilize their balance sheets, positioning them to be the main force in increasing leverage. Appropriately expanding the leverage capacity for high-quality brokerages is both a practical necessity for serving new productive forces and strengthening the capital intermediation function, as well as a crucial threshold that must be crossed to cultivate globally competitive first-class investment banks.
Benchmarking against international peers suggests focusing on the mature U.S. model of "stable leverage + stable ROA." U.S. investment banks underwent over a decade of restructuring post-crisis, forming a steady-state equilibrium characterized by "low-volatility ROA + client-driven operations + high leverage." For instance, from 2016 to 2025, Goldman Sachs' leverage ratio increased steadily from 9.9x to 14.5x, and Morgan Stanley's from 10.7x to 12.7x. Concurrently, their ROE rose from 9% to 14% and from 8% to 16%, respectively. The core of their success lies in using the balance sheet as a tool to serve clients, achieving stable asset returns through client-needs businesses like market making and derivatives. In contrast, Japan's experience, under relaxed regulation from 1992 to 2024, saw the industry's leverage ratio soar from 5x to 31x, while ROE fluctuated wildly, frequently turning negative and averaging only 3.0%. Directional expansion there made leverage primarily an amplifier of volatility.
Considering the differences between the Chinese and U.S. environments, Chinese brokerages cannot simply replicate U.S. leverage multiples. Instead, they should pursue the essence of the "American equilibrium": achieving stable asset returns through client-driven businesses and realizing qualitative, structural leverage increases under regulatory guidance.
Transitioning to a client-centric model is the correct approach to increasing leverage. Traditional proprietary trading by brokerages is predominantly directional, with returns highly correlated to market fluctuations, leading to significant performance volatility. Consequently, shifting proprietary business towards non-directional activities has become an industry trend. The report identifies the main pathways as follows: 1) Optimizing asset structure by expanding asset categories (e.g., moving from fixed income to full-spectrum FICC, significantly increasing equity OCI allocations) and upgrading strategies (evolving towards multi-strategy approaches like relative value, macro hedging, and quantitative strategies). 2) Undergoing a qualitative transformation towards a client-driven model, focusing on three core areas: building integrated FICC service platforms, deepening derivatives businesses, and expanding cross-border capital intermediation, thereby transforming the balance sheet from a "proprietary tool" into a "client service vehicle." 3) Building a customer-centric operational ecosystem across multiple dimensions including organizational structure, business synergy, and capability development, ensuring leverage is genuinely rooted in client needs.
Regarding stock recommendations, the report suggests focusing on: 1) Leading comprehensive brokerages benefiting from policy easing, such as CITIC Securities, Guotai Junan Securities, Haitong Securities, and Huatai Securities. 2) Specialized brokerages deeply engaged in client-needs business segments, such as China International Capital Corporation Limited (CICC) and Shenwan Hongyuan Group.
Risk factors include an economic recovery falling short of expectations, policy and capital market reforms not meeting expectations, intensified competition within the securities industry, and volatility in capital markets.
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