What China Can Learn from the Business Structures of American Investment Banks
Having done a general analysis of the securities industry overseas and case studies on four representative international investment banks, we arrive at the conclusion that the profitability models of foreign securities companies have the following five characteristics:
1. Diversified operation model: The four investment banks studied previously developed their business in a well-balanced way. The brokerage business, investment banking business, proprietary business, and asset management business all made up a considerable percentage. Although Goldman Sachs and Lehman Brothers relied more on their proprietary business, Morgan Stanley and Merrill Lynch adopted a more balanced approach.
2. The steadily decreasing proportion of commissions to total revenue: Since 1980, commissions have been making an increasingly smaller percentage of total income in the U.S. securities industry, declining from the original 35 percent to the current 18 percent, which is far below the percentage contributed by commissions in the Chinese securities industry. Of the five largest international investment banks, commissions account for only 9 percent of the total income in Goldman Sachs, 16 percent in Morgan Stanley, 19 percent in Merrill Lynch, and 14 percent in Lehman Brothers, far below what Chinese securities traders' earn from commissions. In addition, of the commission income in the U.S. securities industry, commissions from stock trading in exchanges account for only about 56 percent. Commissions from OTC securities trading, futures, and other items account for 44 percent. In contrast, Chinese commissions from stock trading in exchanges account for 87 percent of total commission income.
3. The importance of market maker transactions to the income of a securities trader: Market maker transactions account for about 20 percent of the income of U.S. securities trades. For example, the percentage of total income from market maker transactions is 35 percent in Goldman Sachs, 17 percent in Merrill Lynch, and 29 percent in Morgan Stanley.
4. A larger portion of securities traders' income from asset management than in China: About 8 percent of the income of U.S. securities traders currently comes from asset management. The percentage of total income attributable to asset management is 13 percent in Goldman Sachs, 21 percent in Morgan Stanley, 23 percent in Merrill Lynch, and 5 percent in Lehman Brothers. In China, asset management accounts for only 1 percent of total income. There is plenty of room for securities traders to improve their asset management business.
5. Bond and enterprise counseling services represent a significantly larger percentage in international investment banking business than in Chinese investment banking business: The percentage of total income attributable to investment banking is largely consistent among international and Chinese securities traders. Of the four major international investment banks, the percentage of total income attributable to investment banking is 12 percent in Goldman Sachs, 16 percent in Morgan Stanley, 19 percent in Merrill Lynch, and 22 percent in Lehman Brothers. These are comparable to 14 percent in China. However, 75 percent of income from investment banking business in China comes from underwriting and sponsoring. Less than 10 percent comes from corporate bonds and enterprise counseling. In contrast, stock underwriting, bond underwriting, and enterprise counseling each account for one-third of the investment banking business of overseas securities traders.
