Nashinpyung "Securities Industry Credit Rating Outlook Changed from Negative to Stable"

"Contingent Liabilities, Securities Firms with High Overseas Alternative Investment Ratios to Face Downward Pressure"

[Asia Economy Reporter Minji Lee] NICE Credit Rating on the 12th stated that securities firms experienced a significant deterioration in performance in the first half of this year due to increased index volatility caused by the COVID-19 pandemic, but have stabilized through government support, leading to an upgrade in the credit rating outlook from negative to stable.

This year, the securities industry underwent rapid changes due to COVID-19 and the accommodative monetary policies of various governments. Nevertheless, since April, the government’s swift and diverse support measures?such as liquidity support for repurchase agreements (RP), the establishment of a bond stabilization fund, and currency swap agreements?focused on short-term financial and foreign exchange markets, have gradually eased the liquidity pressures faced by securities firms.

Along with financial market stabilization, increased participation of individuals in the stock market led to a significant rise in retail business revenue compared to the previous year. Customer deposits surged from 28.5 trillion KRW at the end of last year to 47.4 trillion KRW at the end of last month. The credit loan balance, which had decreased to 6.5 trillion KRW at the end of March this year, has now expanded significantly to over 14 trillion KRW. Although the average daily trading volume had been maintained around 10 trillion KRW, it increased substantially to 25 trillion KRW as of the end of last month.

Seongjin Kim, Senior Researcher at the Financial Evaluation Headquarters, said, “With increased trading profits due to financial market recovery and growth in retail business revenue, the profitability of securities firms has greatly improved compared to the first quarter. Considering the low risk of a large-scale panic recurrence in the financial market like at the early stage of the COVID-19 pandemic and the strong willingness of financial authorities to support, we have changed the credit rating outlook to stable.”

However, the change in credit rating outlook does not imply that the securities industry environment has become favorable. Although profitability has improved, the decline in the real economy is expected to continuously exert downward pressure on the profitability and financial stability of securities firms in the medium term. Researcher Kim stated, “At the early stage of the COVID-19 spread, there was significant downward pressure on credit ratings across the securities industry, but going forward, the downward pressure will be selectively applied to securities firms with high exposure to major risks.”

The main risks identified by NICE Credit Rating include contingent liabilities, derivative-linked securities, and overseas alternative investments. Securities firms heavily affected by domestic and international financial incidents, including the private equity fund scandal, are also expected to face increased downward pressure. Securities firms experiencing delays in major investment projects in the investment banking (IB) sector, deterioration in the soundness of overseas investment divisions, and profitability declines due to strengthened regulatory measures by supervisory authorities are also anticipated to be subject to credit rating changes.

Researcher Kim said, “We will shift monitoring of downward pressure on credit ratings to focus on securities firms with high exposure to major risks. For securities firms that maintain stable profitability and improve financial stability despite unfavorable industry conditions, we will also consider the possibility of upgrading their ratings or rating outlooks.”

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