ELS Operating Losses Expand... Concerns Over Profitability Deterioration in Securities Stocks

[Asia Economy Reporter Minji Lee] Concerns are emerging that the operating profits and losses of securities firms may deteriorate due to the sharp decline in domestic and international stock markets. This is based on the assessment that none of the major countries' stock markets, which constitute the underlying assets of index-linked equity securities (ELS), currently meet the early redemption conditions as of mid-March.

On the 22nd, Ebest Investment & Securities forecasted that if the current stock price levels are maintained, the risk across securities firms' operating profits and losses related to ELS, proprietary investment (PI), and alternative investments will intensify due to a rapid deterioration in domestic and foreign investment conditions.

Researcher Bae-Seung Jeon of Ebest Investment & Securities stated, "If the current environment continues, early redemption will be difficult until August, and due to increased hedging costs, operating losses related to ELS in the 2nd and 3rd quarters are inevitable."

For ELS issued so far to enter the early redemption zone, an average index increase of over 30% based on major countries' stock markets, or more than 15% compared to the March average, is required. ELS based on the Euro Stoxx 50 index have already entered the knock-in zone, raising concerns about principal losses.

The sharp drop in oil prices is also increasing concerns about knock-in for derivative-linked securities (DLS). Researcher Jeon said, "The issuance scale of DLS by major securities firms ranges from 500 billion to 2.5 trillion KRW, which is smaller compared to the 4 to 7 trillion KRW issuance scale of ELS, but both share a structure where operating losses occur."

Furthermore, concerns about securities firms' investment assets such as overseas real estate are growing due to the spread of COVID-19 and fears of an economic recession. Researcher Jeon explained, "The sharp decline in the KOSDAQ index is expected to have a negative ripple effect on the private equity mezzanine market overall, leading to a simultaneous reduction in other revenue sources such as corporate finance (IB) for securities firms."

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