[Initial Insight] Achievements of Fostering Mega IBs

[Asia Economy Reporter Lim Jeong-su] Domestic securities firms are fiercely competing to strengthen their capital, signaling intense competition among investment banks (IBs). It is no exaggeration to say that the era of the IB Warring States has arrived. This reflects the increased investment capabilities of domestic securities firms.

Mirae Asset Securities, the largest domestic securities firm, increased its equity capital from 6.5 trillion won at the time of acquiring Daewoo Securities to 9.5 trillion won by the end of last year, approaching 10 trillion won. It has surpassed the 4 trillion won equity capital requirement for mega IBs (issuers of commercial paper) and met the capital requirements to be authorized for comprehensive investment management accounts (IMA) and real estate trust businesses.

NH Investment & Securities, Korea Investment & Securities, Samsung Securities, and KB Securities have all surpassed 5 trillion won in equity capital and are heading toward 6 trillion won, supported by large-scale rights offerings and improved performance. Bank-affiliated securities firms such as Shinhan Financial Investment and Hana Financial Investment have also joined the ranks of mega IBs with financial support from their financial holding companies. Meritz Securities has raised its equity capital above 4 trillion won by continuously breaking its record-high annual performance following a rights offering.

With the capital expansion of securities firms, the number of firms meeting the capital requirements for mega IBs increased from five at the end of 2017 to eight by the end of last year. Once these securities firms receive authorization as commercial paper issuers, the funds available for investment can increase up to threefold. Small and medium-sized securities firms are also joining the capital strengthening rally.

According to the Financial Supervisory Service, the equity capital of 30 domestic securities firms increased by about 5 trillion won in one year, from 56 trillion won at the end of 2019 to 61 trillion won at the end of 2020. From around 40 trillion won at the end of 2016, domestic securities firms have increased their equity capital by approximately 21 trillion won over four years of fostering large IBs. This can be seen as a certain achievement in terms of the purpose of fostering mega IBs and the large-scale transformation of securities firms.

However, there is criticism that the primary goal of supplying venture capital has not been properly achieved. According to the “Commercial Paper Performance and Operation Status” submitted by the Financial Supervisory Service to the National Assembly, as of the end of the third quarter last year, the concentration of large corporate investments in the commercial paper balances of Korea Investment & Securities, NH Investment & Securities, and KB Securities, totaling 17.45 trillion won, exceeded 60%. The remainder mostly went to small and medium-sized enterprises, with investments in startups established less than three years ago accounting for less than 1%.

Nevertheless, the total amount and proportion of investments and financial support for medium-sized and small enterprises have steadily increased, accounting for more than 30%. Investments in startups by securities firms are also gradually increasing. If additional commercial paper issuer licenses are granted, the total liquidity available for investments in medium-sized and small enterprises and startups will naturally increase. For financial companies, whose asset stability is vital, simply forcing an increase in high-risk investments makes it difficult to steadily and sustainably expand the investment base for venture capital.

Although not yet at the level of a Korean version of Goldman Sachs, the IB capabilities of securities firms have been strengthened through diverse investment experiences. Achievements have increased in traditional IB sectors such as the debt capital market (DCM) and equity capital market (ECM), and overseas deal sourcing and investment experience have multiplied as overseas networks expanded. Recently, domestic securities firms have also been named as lead managers for foreign currency bonds (KP), which were previously exclusive to foreign securities firms.

Heads of domestic securities IBs said they keenly feel that the position of Korean securities firms in the global investment market has significantly improved. This is the result of expanding global networks through overseas investments over several years with increased capital. This too is an outcome of fostering mega IBs. Although there are shortcomings and areas that fall short of expectations, domestic IBs continue to evolve both in scale and quality.

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