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What are we looking for?

Financial firms ready to capitalize on new regulatory developments in China.

The screen

The continuing trade war between the world’s two largest economies, the United States and China, has had a large impact on trade between the two countries – tariffs are up and exports are down. However, the financial sector is an exception: In the hopes of winning friends among U.S. business lobby groups, China is becoming more open to foreigners. For decades, Western financial firms were restricted to only minority ownership in the Middle Kingdom, but on July 2, Chinese Premier Li Keqiang announced plans to allow full control by 2020. In the meantime, HSBC Holdings PLC, UBS Group AG, JPMorgan Chase & Co. and Nomura Holdings Inc. are all setting up majority-owned investment banks in the country.

Competition will be fierce in businesses such as mass-market retail banking and life insurance, where huge state-owned firms dominate with size and scale (and political clout). However, in markets such as investment management for institutions and wealthy individuals, global expertise matters more than local presence. We will try to identify firms that have already begun to commit to China, with the capital to invest more heavily and global expertise in investment management.

To find companies that have already shown a commitment to China, we use the revenue component of Refinitiv’s StarMine Countries of Risk model, which estimates the percentage of a company’s revenue coming from mainland China. We screen the entire global banking and investment industry and require an estimate of at least 5 per cent.

Next, to identify those with the capital necessary to make a heavy investment in China, we use Refinitiv’s SmartEstimate of the Tier 1 capital ratio over the next 12 months. A bank’s Tier 1 capital ratio is the amount of equity capital and reserves relative to its risk-weighted assets, such as loans, mortgages, securities, etc. A higher percentage means a firm has more “excess capital” that it can deploy for investment or mergers and acquisitions, and we require at least 12.5 per cent.

Finally, as a proxy for, or indication of, global investment management expertise, we look at the firm’s assets under management (AUM) and require at least US$100-billion as of the end of the previous fiscal year and at least a 10-per-cent increase over the past three years.

More about Refinitiv

Refinitiv, formerly the financial and risk business of Thomson Reuters, is one of the largest providers of financial markets data and infrastructure, serving more than 40,000 institutions worldwide. With a dynamic combination of data, insights and technology, as well as news from Reuters, our customers can access solutions for every challenge, including a breadth of applications, tools and content – all supported by human expertise.

What we found

The screen yields three Swiss, one French and two American financial institutions, three of which manage more than US$1-trillion in assets.

Morgan Stanley, the largest of the six by market capitalization, has a very interesting wealth-management story. Wealth management now accounts for nearly half of its earnings, compared with less than a fifth after the financial crisis. With more than US$2.5-trillion in client assets (a different measure than AUM; a lot of Morgan Stanley client assets are placed in funds managed by other companies), the firm’s wealth-management business generated more than US$50-million in revenue every single day of 2018.

Investors are advised to do their own research before trading in any of the securities shown below.

Select companies set to capitalize on China's more welcoming approach to foreign financial sector

CompanyTickerMkt. Cap. (US$ Mil)CountryEstim. Rev. from ChinaTier 1 Cap. RatioAUM (US$ Mil.)AUM 3Y Chg.1Y Rtn.Div. Yld. (%, NTM)Recent Close *
Morgan StanleyMS-N74,372USA5%17.3%463,00014%-3.7%3.1%44.21
Credit Suisse GroupCSGN-SW30,948Switzerland7%12.8%1,340,99710%-16.9%2.4%12.11
State Street CorpSTT-N21,196USA12%12.7%2,511,00012%-37.0%3.7%56.80
Amundi SAAMUN-PA13,878France5%19.2%1,605,25445%10.0%5.2%68.80
Julius Baer GruppeBAER-SW9,745Switzerland7%13.9%382,98130%-19.0%3.9%43.54
EFG InternationalEFGN-SW2,092Switzerland10%17.9%130,73255%0.5%4.9%7.04

Source: Refinitiv

* Recent stock close shown in native currency.

Hugh Smith, CFA, MBA, is the manager of Refinitiv’s investment management business for the Americas and a director on the board of the Responsible Investment Association of Canada.

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