Korea brokerages

Korean brokerages declare ambiguous profitability

Korean securities firms enjoy a surge in earnings growth, but worries about their financial soundness are hindering industry consolidation.

Korea’s brokerage firms are a conundrum. Most of them have just posted substantial quarterly profit increases, yet most are also insufficiently secure, according to a key ratio monitored by the country’s financial regulator. Both features might be preventing the consolidation urged by the authorities in order to create world-challenging, domestic investment banks.

Securities firms operating in Korea enjoyed a jump of 74.7% in their fiscal year first-quarter earnings from a year earlier, said the Financial Supervisory Service (FSS) on Tuesday. Higher profits were driven by a pick-up in bond-related fees and brokerage commissions.

The combined net profit of 62 local and foreign securities firms amounted to W793.2 billion ($736.1 million) in the April-June period, compared with W454 billion a year ago, with only nine of them in the red. The total number of firms includes 42 brokerages, and eight subsidiaries and 12 branches of overseas companies.

Top of the pile was Hyundai Securities, with a net profit of W93.9 billion, followed by Samsung Securities with W84.6 billion and Korea Investment & Securities with W72.6 billion. At the bottom were Standard Chartered Securities Korea, suffering a net loss of W4.6 billion, and IBK Investment & Securities with a loss of W3.3 billion.

Curiously, strong earnings induce a type of passive-aggressive response rather than conquering acquisitiveness, suggested a director at Korean brokerage. It seems that potential prey feel empowered, while obvious predators remain tentative or complacent.

The stalemate is made worse by the fact that Korean securities firms show “weak financial soundness” compared to foreign brokerage houses operating in Korea, according to the FSS. Critics of merger plans insist that consolidation should only take place when key ratios and asset quality are robust.

Local firms declared an average net capital ratio (NCR) of 478.7% in the first quarter of the fiscal year 2011, whereas the 20 foreign entities had an average NCR of nearly 900%.

The NCR measures the ratio between a company’s liquid assets and indebtedness.

Worryingly for the ambitions of policymakers keen to promote global champions, the combined average NCR of Korea’s leading three domestic brokerages — Samsung Securities, Woori Investment & Securities and Daewoo Securities — was just 461.5%, which was below the overall average of the country’s 42 local firms.

“A few years ago, these ratios would have looked impressively prudent, even to the extent that they might have aroused criticism for excessive caution and a waste of capital,” said a senior manager at a domestic brokerage. “But, since the credit crisis, the emphasis of regulators and investors has naturally focused on financial soundness above all else.”

Firms with an NCR of less than 150% could face regulatory sanctions, and as many as 13 have NCRs of between 200% and 400%. These include Kyobo Securities, Hanwha Securities, Eugene Investment & Securities, Meritz Securities and Leading Investment & Securities.

The average NCR of all securities companies (including foreigners) was 513.7% as of June, down from 529.1% a year earlier. “This was due mainly to an increase in assets at risk by 9.2% [and those] risky assets were attributable to their increased bond holdings,” said the FSS.

Yet, those bond holdings also contributed to brokerages’ higher earnings. The obvious conclusion is that they need to diversify their revenue sources — that is, if they really want to follow the government line and merge.

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