U.S. Mega Banks in Expansion Mode - Analyst Blog

As expected, JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS) have received the approval for setting up securities businesses through joint ventures (JVs) in mainland China from the China Securities Regulatory Commission (CSRC). This was separately announced by these two banks on Thursday.                                                        

The consent will allow JPMorgan and Morgan Stanley to underwrite stocks and bonds in the fastest growing Chinese markets. In China, foreign banks need to form JVs with local companies in order to enter the local equity and debt markets.

JPMorgan will start its JV with First Capital Securities Co. while Morgan Stanley has inked the JV with Huaxin Securities Co Ltd, better known as China Fortune Securities Co Ltd.

According to the Memorandum of Understanding singed between JPMorgan and First Capital, in March 2010, JPMorgan will hold a 33% stake in the venture – the maximum allowed by Chinese regulators. Mr. Bei Duoguang, a managing director of JPMorgan and its chief representative in Beijing, is expected to run the JV.

Though JPMorgan already has futures and options ventures and asset management businesses and operates as a locally incorporated bank in China, this is the first time the company is entering the Chinese equity market.

For Morgan Stanley, approval means re-entry into the Chinese securities market after it had exited from its earlier JV with China International Capital Corp (CICC) last year. Now having tied up with Huaxin Securities Co Ltd, the company will hold one-third stake in the JV. The new company will be known as Morgan Stanley Huaxin Securities Co Ltd.

Under the new JV, Morgan Stanley will underwrite securities in the mainland Chinese market and will also have more management control than it had in its previous JV with CICC.

Both First Capital and China Fortune are based in Shenzhen.

With the Chinese equity market having dominated the global initial public offerings (IPO), accounting for nearly 27% of the volume in 2010 and the bond market having grown three times since 2008 to $449 billion last year, JPMorgan and Morgan Stanley are expected to cash in the untapped Chinese securities markets.

JPMorgan and Morgan Stanley will aim to reduce the gap with their close U.S. peers – Goldman Sachs Group Inc. (GS) and UBS AG (UBS) – where they already have their presence. With the Chinese IPO market growing by leaps and bounds, this consent will enable these two U.S. mega banks to foray into the emerging Chinese capital market. Though the current JV consents will not be immediately accretive to the companies' results, there will be ample opportunities for JPMorgan and Morgan Stanley to increase their revenue base in an unexploited capital market.

Currently, JPMorgan's shares maintain a Zacks #3 Rank, which translate into a short-term 'Hold' rating, while Morgan Stanley's shares have a Zacks #4 Rank, which translate into a short-term ‘Sell' rating. However, we maintain our long-term ‘Neutral' stance on both the companies.

 
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