Securities Firms' 1Q Net Profit Plummets... Frozen Trading + Rising Interest Rates

On the 11th, dealers are working in the dealing room of Hana Bank in Euljiro, Seoul. The KOSPI index opened at 2,586.52, down 10.04 points (0.39%) from the previous trading day. The won-dollar exchange rate opened at 1,277.7 won, up 1.3 won. Photo by Moon Honam munonam@

[Asia Economy Reporter Junho Hwang] In the tightening market, securities firms' controlling shareholders' net profits plummeted in the first quarter of this year. Last year, the stock market boom, with the KOSPI surpassing the 3300 mark, led to record-breaking performance, but due to a decline in trading volume caused by weakened investor sentiment and reduced operating income from interest rate hikes, the net profits of top securities firms decreased by up to 60% compared to the previous year. The securities industry has lowered the 12-month target stock prices of securities firms, stating that the anxiety engulfing the stock market will not easily dissipate.

According to the Financial Supervisory Service's electronic disclosure system on the 13th, the controlling shareholders' net profits of leading domestic securities firms such as Korea Financial Group (Korea Investment & Securities), Mirae Asset Securities, Samsung Securities, Kiwoom Securities, and NH Investment & Securities decreased by -0.3% to 60.01% compared to last year. Controlling shareholders' net profit refers to net profit reflecting the equity of subsidiaries.

The decline in trading volume was a direct blow. The average daily trading volume of the KOSPI in the first quarter of this year was 11.2697 trillion KRW, down 44.05% from 20.1426 trillion KRW in the same period last year. As downward pressure on the stock market intensified, trading decreased. With the reduction in trading volume, brokerage commissions, one of the main revenue sources for securities firms, significantly declined. NH Investment & Securities, whose net profit dropped by 60.01%, saw brokerage commissions decrease by 47% compared to the previous year.

The impact of valuation losses on held bonds due to interest rate hikes was also felt. Kiwoom Securities recorded a securities operation loss of 32 billion KRW, which affected overall profits. Korea Ratings analyzed that domestic securities firms could incur an additional bond operation loss of about 900 billion KRW each time short- and long-term bond yields rise by 50 basis points over a month.

However, Korea Financial Group and others offset the performance decline by strengthening their investment banking (IB) divisions. Korea Financial Group's IB division fee income was 185.4 billion KRW, up 10.9% from the same period last year. This was the result of a boom in the project financing (PF) market and Korea Financial Group's proactive response. Mirae Asset Securities also recorded 106.1 billion KRW in corporate finance fees, a 92% increase from the previous quarter.

The securities industry expects the downward trend in securities firms' performance to continue and is adjusting target stock prices downward. Baek Doosan, a researcher at Korea Investment & Securities, set Mirae Asset Securities' target price 10% lower at 12,000 KRW, stating, "Considering the potential deterioration in operating profit and loss, we lowered this year's performance forecast by 5%, and raised the cost of capital considering increased market volatility."

However, Kyunghoe Koo, a researcher at SK Securities, explained, "Although recent investment sentiment toward the securities sector is poor, from a long-term perspective, the current performance decline is likely at its bottom. The trend of declining trading volume is unlikely, and the additional rise in interest rates is expected to be smaller than the first quarter's increase (3-year government bond yield rose by 0.86 percentage points)."

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