'Direct Hit from Interest Rate Hike'… NH Investment & Securities, 1Q Net Profit Down 60.3%

Commission Revenue Down 19.3%
Trading and Product Profit and Loss Down 57%
Bond Valuation Loss Larger Than Expected

[Asia Economy Reporter Hwang Yoon-joo] NH Investment & Securities has been hit hard by the sharp rise in interest rates. Bond valuation losses expanded more than expected, and with the stock market sluggish, brokerage commission fees decreased, causing first-quarter net profit to fall short of consensus.

According to NH Investment & Securities on the 22nd, consolidated operating profit for the first quarter of this year was 161.8 billion KRW, down 56.8% compared to the same period last year. During the same period, sales increased by 0.5% year-on-year to 3.9607 trillion KRW, but net profit decreased by 60.3% to 102.3 billion KRW.

The decline in performance is clearly visible even compared to the previous quarter when the KOSPI index was stagnant. Operating profit and net profit fell by 30.8% and 45.8%, respectively, compared to the previous quarter. However, sales increased by 77.4%.

[Image source=Yonhap News]

The biggest cause of the poor performance is bond valuation losses. In the first quarter, 'Trading and product profit and loss' was 86.6 billion KRW, a sharp decline of 64.1% compared to 241 billion KRW in the same period last year.

This is due to the rapid rise in bond yields following the US Federal Reserve's (Fed) interest rate hike in March and the increased possibility of a 'big step' (raising the benchmark interest rate by 50 basis points at once) by the Fed. Additionally, early redemption of ELS also decreased.

Seung-geon Kang, a researcher at KB Securities, said, "The deterioration of bond valuation profit and loss due to the rise in interest rates was reflected more significantly than expected," adding, "Although the FVPL (Fair Value through Profit or Loss) bond assets, which were about 19.7 trillion KRW in the first quarter of 2021, were reduced to about 16.8 trillion KRW in the first quarter of 2022, the sharp rise in interest rates is believed to have worsened the valuation profit and loss."

[Image source=Yonhap News]

The decrease in trading volume also had an impact. Brokerage commission fees were 100.5 billion KRW, down 49.2% compared to 198 billion KRW in the same period last year. With the average daily trading volume decreasing by 12.5%, NH Investment & Securities' contract market share recorded 7.7%, falling short of last year's level in the 9% range.

On the other hand, the IB (Investment Banking) division showed better-than-expected results. Thanks to an increase in real estate PF (Project Financing) underwriting and arranging, it recorded 89.8 billion KRW, up 33.9% compared to the previous quarter. Debt guarantee fees increased by 15.2%, and underwriting and arranging fees rose by 45.2%.

The second-quarter performance is also expected to be challenging. The short-term interest rate continues to rise in April. With expected increased interest rate volatility this year, bond valuation losses are likely to persist, and trading volume is unlikely to increase to last year's level.

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