Impact of US High-Intensity Tightening... Securities Industry Forecasts Earnings Shock in Q3

Consignment Sales Profit Down 15.8%
IB Division Down 23.6%

[Asia Economy Reporter Hwang Yoon-joo] Securities firms are expected to avoid an earnings shock even in the third quarter of this year. Due to the Federal Reserve's (Fed) aggressive interest rate hikes, performance in the brokerage and product sectors is expected to shrink significantly.

According to financial information provider FnGuide on the 14th, the operating profit of Korea Financial Group in the third quarter is estimated to be 244.5 billion KRW, down 41.47% compared to the same period last year. Major securities firms such as Mirae Asset Securities with 232.8 billion KRW (-41.38%), NH Investment & Securities with 179.7 billion KRW (-38.59%), Samsung Securities with 208.0 billion KRW (-42.65%), and Kiwoom Securities with 198.8 billion KRW (-38.05%) are all expected to see a sharp decline in operating profit.

The reason the securities industry cannot escape poor performance is the Fed's unprecedented three consecutive 'Giant Steps' (raising the benchmark interest rate by 0.75 percentage points at once).

A large part of the decline in performance comes from trading-related profits. Unlike the second quarter, gains from non-marketable asset valuations are limited. Meanwhile, as the rise in market interest rates slows compared to the previous quarter, losses are somewhat reduced, but due to foreign exchange losses from exchange rate fluctuations, price declines of marketable assets, and losses from ELS, a 25.5% decrease compared to the previous quarter is expected.

In addition, brokerage (BK) related revenue is expected to decrease by 15.8% compared to the previous quarter due to continued slowdown in average daily trading volume and credit extension, and investment banking (IB) and other fees are also expected to decline by 23.6% as major sectors such as ECM, DCM, and real estate structuring all slow down.

Lee Hong-jae, a researcher at Hyundai Motor Securities, explained, "Not only will the surface profits fall far short of expectations, but the content will also be poor. In the third quarter, the performance of major sectors from brokerage (BK) to investment banking (IB) will slow down, and in the fourth quarter, uncertainties in IB performance remain due to revaluation losses of some assets and a decrease in new real estate PF deals, making the outlook for all sectors challenging."

The fourth quarter performance is also uncertain. The Fed is expected to implement another Giant Step in November. According to the Chicago Mercantile Exchange (CME) FedWatch, the probability that the Fed will raise rates by 0.75 percentage points in November in the federal funds (FF) futures market is 96.6%. If the interest rate hike trend continues, performance improvement is unlikely in the near term.

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