OREANDA-NEWS. This Fitch Wire report, originally published 11 May 2016, has been republished to resolve a technical issue.

Taiwanese securities firms are facing new challenges as retail investors increasingly avoid the domestic stock market, says Fitch Ratings. We expect the waning of retail investor interest to continue because investment returns are low, including those achieved on traditional wealth management products distributed by brokers. Alternatives, such as real estate and offshore investments, have been offering higher returns.

Retail investors make up over 90% of Taiwanese securities firms' customers, with institutional investors mainly served by foreign brokers operating locally. Average daily turnover on Taiwan's stock market was TWD111bn (USD3.7bn) over 2011-2015, down 20% from 2006-2010. Much of the decline is due to lower retail activity. Retail investors represented 59% of total trading volumes in 2015, down from 71% in 2010 and 86% in 2000.

The Financial Supervisory Commission, which regulates securities firms in Taiwan, has allowed a broader range of wealth management and insurance products to be sold in an effort to diversify and improve securities firms' earnings. Consolidation is taking place and companies are making efforts to cut costs, but online brokers are squeezing, and often undercutting fees. Pressure on earnings continues, especially among smaller firms, which tend to be more dependent on simple brokerage activity and proprietary trading. The risk of smaller companies reporting periodic losses has increased. Ratings assigned to these smaller companies are in the 'BB' category and already reflect this and other risks.

In 2015, 10 smaller securities companies, a third of fully licenced domestic securities firms, reported net losses. This is a continuation of a trend with smaller securities firms having, on average, reported three years of losses in the last 10. However, the losses were typically moderate relative to equity, as risk appetite tends to be well controlled and stop-loss limits conservative. Larger firms tend to have healthy balance sheets, with strong loss-absorption capacity and adequate liquidity.

We believe negative brokerage prospects will continue to push small, loss-making securities firms out of the market and accelerate the trend for large brokers to expand through acquisitions. These companies are seeking to boost their customer base and achieve economies of scale to offset high fixed costs. Leading securities firms are also making acquisitions outside Taiwan in a drive to boost earnings and allocate capital to areas offering higher growth prospects, such as the banking sector. But expansion is forcing up leverage, and this is the primary factor putting pressure on the ratings of leading securities firms in Taiwan.