Bond Market Volatility Hits Hard... Securities Firms Expected to Face Earnings Shock in 2Q

Rising Benchmark Interest Rate Pushes Bond Yields Up
Increased Volatility in 3-Year Treasury Bonds in Q2
Major 4 Firms Hold About 18 Trillion KRW in Bonds
Brokerage Firms Face Challenges in Bond Management Positions
Trading Volume Down 13.1% QoQ... Brokerage Revenue Declines
Weak ECM and DCM... IB Division Earnings Drop

[Asia Economy Reporter Hwang Yoon-joo] Securities firms are expected to face another earnings shock in the second quarter. Losses from bond operations are anticipated to intensify due to the Federal Reserve's (Fed) aggressive tightening measures.

According to FnGuide on the 8th, the estimated net profit for five domestic securities firms (Mirae Asset Securities, Korea Financial Group, NH Investment & Securities, Samsung Securities, and Kiwoom Securities) in the second quarter of this year is projected to decrease by 29.14% compared to the previous year. Although this is an improvement from the first quarter (-42.36%), it still reflects poor performance.

Looking at the net profit estimates, Mirae Asset Securities is expected to record 252.1 billion KRW (-29.27%), Korea Financial Group 243.6 billion KRW (-19.24%), NH Investment & Securities 187.7 billion KRW (-30.60%), Samsung Securities 174.6 billion KRW (-33.99%), and Kiwoom Securities 149.0 billion KRW (-32.63%).

The segment that had the greatest impact on earnings was product operation income, which includes bond operation gains and losses. This was largely due to the Fed's sharp interest rate hikes in May (50bp) and June (75bp). Volatility in the bond market expanded in the second quarter, causing bond yields to surge.

Park Hye-jin, a researcher at Daishin Securities, pointed out, "The 3-year government bond yield rose by 89bp (1bp=0.01%) in the second quarter compared to the first quarter," adding, "Not only did interest rates surge, but volatility was significant, with daily fluctuations exceeding ±10bp on 5 out of 20 business days." She explained that it was very challenging for securities firms to set their operating positions.

Large firms are expected to suffer greater losses because they hold relatively more bonds. Currently, Mirae Asset Securities holds 26.2 trillion KRW, Samsung Securities 24.9 trillion KRW, NH Investment & Securities 20.8 trillion KRW, Korea Investment & Securities 20 trillion KRW, and Kiwoom Securities 6.8 trillion KRW in bonds.

The average bond holdings of the four major firms amount to approximately 18.5 trillion KRW. Considering that dividends were paid in the first quarter, product operation income in the second quarter is expected to decrease by more than half.

Brokerage commissions, investment banking (IB), and equity-linked securities (ELS) are also facing tough conditions. The average daily trading volume in the second quarter was 17.2 trillion KRW, a sharp decline of 36.5% compared to the same period last year. It also decreased by 13.1% compared to the first quarter. Overseas stock trading volume was 74.39 billion USD, down 20.5% from the first quarter.

With the contraction of ECM (equity capital markets) and DCM (debt capital markets) businesses, IB segment earnings are also expected to decline. Many companies withdrew their initial public offerings (IPOs), and corporate bond issuance conditions worsened. In the case of ELS, early redemption amounts have decreased due to poor global indices. This leads to a reduction in issuance volume, inevitably decreasing related earnings as well.

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