昨日央行发布公告称，为更好发挥证券基金机构稳市作用，人民银行开展了证券、基金、保险公司互换便利首次操作。日前，证监会宣布已同意中信、中金等20家公司开展SFISF操作。JPMorgan analysis shows that SFISF is both beneficial and detrimental to brokerages. On one hand, the cost of swaps and repurchases may increase profit/accounting value volatility, while on the other hand, if positive returns can be generated, it will increase share capital roi. In addition, most brokerages will use SFISF more for market-making or investing in large cap high dividend stocks.
With 500 billion in convenient "ammunition" ready for use, China International Capital Corporation (CICC) is entering the stock market for the first time using this tool. What impact does SFISF have on brokerages? What will the funds entering the market buy?
On Tuesday, China International Capital Corporation (CICC) made its first stock purchase under the "Securities, Funds, and Insurance Companies Swapping Convenience" (SFISF) program. CICC stated that next, they will continue to use the funds obtained from the convenience swap business to further increase shareholdings.
The People's Bank of China issued a notice yesterday to better utilize the role of securities and fund institutions in stabilizing the market. The central bank carried out the first operation of securities, funds, and insurance companies swapping convenience. Recently, the China Securities Regulatory Commission announced its approval for China Securities Co., Ltd., China International Capital Corporation, and 20 other companies to conduct SFISF operations.
Regarding the impact of SFISF on brokerages, JPMorgan pointed out in a research report this week that there are both pros and cons. On one hand, the costs of swapping and repurchasing may increase the profit / book value volatility. On the other hand, if positive returns can be generated, it will increase the Return on Equity (ROE).
Regarding the direction of funds entering the market through SFISF, JPMorgan expects that most brokerages will use this tool more for market making / investing in the "large cap high dividend" direction. They will record most of the positions under the "other comprehensive income financial assets" FVOCI to reduce potential gains and losses volatility.
The "Pros and Cons" of SFISF for brokerages
Specifically, on October 18th, the People's Bank of China and the China Securities Regulatory Commission jointly issued the "Notice on Doing a Good Job in Related Work of Securities, Funds, and Insurance Companies Swapping Convenience (SFISF)" to clarify the business processes, operational elements, and the rights and obligations of the parties involved in the convenience exchange operations.
The core of the SFISF mechanism lies in allowing securities, funds, and insurance companies to exchange government bonds and central bank bills with qualified assets (such as AAA-rated bonds, stock ETFs, constituents of the CSI 300 index, etc.), then use the government bonds as collateral to borrow cash from banks for investment in the A-share market, with an initial operating scale of 500 billion yuan. The term of the swap facility is up to one year, but can be extended. The exchanged assets are not included in the reported balance sheet.
JPMorgan analyzed the pros and cons of the SFISF for brokerages:
Cons: Brokerages participating in this plan need to bear the costs of swaps and repurchases, can only hedge a small part, which may lead to profit and book value fluctuations.
Pros: However, from a positive perspective, the preferential capital treatment indicates that as long as brokerages can generate positive returns, this plan is more likely to increase the return on equity (ROE).
JPMorgan conducted an in-depth analysis of the risks, assuming that each brokerage's swap quota application is 10 billion yuan, with 20 brokerages/funds collectively receiving over 200 billion yuan quotas and investing in the CSI 300 stocks, it is estimated that this will only reduce the risk coverage ratio of individual brokerages by 1-3 percentage points. Even with a slight decrease in the risk coverage ratio, the expected ratio by the first half of 2024 still significantly exceeds the regulatory requirement level of 100%. The 100 billion yuan quota is equivalent to only 1-4% of the assets for the covered brokerages.
Targeting 'large cap high dividends' for market entry
What will the SFISF funds buy in the market? JPMorgan predicts:
Most brokerages will use this plan more for market-making/investment in large-cap high dividend stocks and record the majority of positions under FVOCI to reduce potential profit and loss fluctuations. Hence, the potential impact on earnings is likely to be manageable, and brokerages may indirectly benefit from increased Average Daily Trading (ADT) volume and improved market performance.
In addition, China Securities Co.,Ltd. also believes that the potential bullish direction is high dividends:
High dividends are the direction encouraged by policies, corresponding to the main symbols of arbitrage for listed companies. Policy favors the direction of large cap high dividends. On the one hand, the risks of large cap high dividend targets are smaller, with lower volatility. SFISF makes it easier for market participants to choose high dividend targets for arbitrage after gaining liquidity. On the other hand, share buybacks, shareholdings, and reloans also encourage listed companies to support stock prices in an arbitrage manner.
