This Year's Securities Firms' Credit Ratings Show 'Red Light'... Management on Alert

Redemption Suspension Extends to Lime and Alpenroute, Major Firms Show 'Negative' Outlook... Differentiation Expected Based on Risk Management Capability

[Asia Economy Reporter Park Jihwan] This year, credit rating management is expected to become a key issue in the securities industry, especially among large firms. Following last year's Lime Asset Management incident and the recent fund redemption suspension at Alpenroute Asset Management, it is anticipated that the creditworthiness of securities firms will be differentiated based on their risk management capabilities.

On the 30th, Lee Jaewoo, Senior Researcher at Korea Credit Rating, stated at a media briefing held at the 63 Building headquarters in Yeouido under the theme of '2020 Industry Outlook Review' that "the securities industry needs a balance between profit pursuit and risk management," and presented a 'negative' credit outlook for large securities firms. While large firms have succeeded in enhancing their market position based on increased capital through competitive expansion, capital adequacy indicators such as the Net Capital Ratio (NCR) have rapidly weakened due to the expansion of high-risk investments. The NCR of large firms, which exceeded 450% at the end of 2013, fell to 150% by September last year.

He also diagnosed that the possibility of credit rating adjustments is increasing due to rising risks related to direct investments and financial products. It is highly likely that the overall securities industry will emphasize strengthening risk management policies.

Senior Researcher Lee particularly pointed out, "There is a possibility that risks such as Lime Asset Management's fund redemption suspension and the suspected poor investments in trade finance funds could spread to financial firms with close business relationships," adding, "If there were cases of incomplete sales during the sales process, there is also a possibility of compensation claims and regulatory sanctions."

He further noted, "Due to incidents such as last year's suspected poor due diligence on Australian real estate funds, incomplete sales of German government bond interest rate derivative-linked funds (DLF), delayed redemption of German real estate derivative-linked securities (DLS), and Lime's redemption suspension, investor losses, incomplete sales, and insufficient risk management could damage the reputation of securities firms and increase the risk of litigation," forecasting that "if business stability deteriorates, it will negatively affect creditworthiness."

However, the credit outlook for small and medium-sized securities firms was viewed as 'stable.' Lee evaluated, "Despite a policy environment focused on fostering large firms, most small and medium-sized firms are maintaining stable business bases, and their net capital ratios are managed at around 300%, indicating better capital buffers against risks compared to large firms."

The operating environment for the securities industry was presented as 'neutral.' Lee explained, "Corporate finance (IB) sector revenues, including financial advisory, liquidity and credit provision, corporate loans, and alternative investments, are driving growth in the securities industry's revenue scale," adding, "Other fees, including financial advisory and debt guarantees, have been steadily increasing since 2014."

However, revenues related to real estate project financing (PF), which had been a major income source for securities firms, are expected to decline significantly. Lee said, "This year, following the real estate PF soundness management measures announced in December last year, securities firms' handling of real estate PF is expected to decrease," and added, "This is likely to act as a factor limiting the growth momentum of some securities firms with high real estate concentration, such as Meritz Securities."

This content was produced with the assistance of AI translation services.