(Bloomberg) -- Two recent profit warnings by the Hong Kong units of Chinese brokerages signal it will be trying year for the firms weighed down by rising interest rates and lingering losses on real estate bets. 

Already this month, Haitong International Securities Group Ltd. warned it expects to post a loss of as much as HK$6.6 billion ($841 million) in 2022, while Bocom International Holdings Co. said it may have lost about HK$3 billion. China Everbright Ltd. last week posted a net loss of HK$7.4 billion for year 2022, sapping a 17-year profit streak. 

The results came after Hong Kong stocks last year suffered its biggest decline since 2011, with initial public offerings activity tumbling to the worst since the global financial crisis. That has weighed on the brokerages’ investment and underwriting businesses, and their exposure to soured high-yield dollar bonds by Chinese developers dealt an extra blow. 

“The brokerages would need to set aside provisions for the impairment losses after a wave of defaults and payment extensions last year,” said Wang Chen, a partner at XuFunds Investment Management Co. “The bleak equity financing market also led to a slump in their underwriting income.”

While a barrage of support measures by China to rescue troubled developers may have contained a liquidity crisis from further spillover, some of the other headwinds facing the brokerages might persist for awhile. The ICE BofA Asian Dollar High Yield Corporate China Issuer Index has rallied 75% since a low in November.  

“But earnings would still be under pressure amid balance sheet derisking and slow capital markets activity,” said Sharnie Wong, an analyst with Bloomberg Intelligence. 

Given the brokers’ businesses are highly susceptible to fluctuations in capital markets, they are also at the mercy of the US Federal Reserve’s future pace of interest rate hikes. Fed Chair Jerome Powell made it clear this week that inflation remains a top concern after an increase this week and advised that more tightening may be in store. 

May Zhao, head of equity research at Zhongtai Financial International Ltd., expects stock volatility to intensify as the Fed tightens further, posing a challenge to the brokers’ proprietary investments and margin lending. Higher financing costs on dollar bonds and the still uncertain IPO activity will also weigh on their investment banking, she said.

Brokerages will need to step up risk controls in proprietary trading and safeguard their asset allocations, according to Zhao. More firms are also expected to beef up their capital positions, she said, following Haitong International’s recent issuance of $200 million subordinated perpetual securities. 

“The brokers will need to seek a better balance between their risk appetite and pursuit of returns,” said Zhao. “I don’t expect a strong momentum in growth even if earnings recover later.”

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