Last Year Securities Firms' Net Profit Decreased by 20%... This Year Is Also Challenging

Real Estate Market Slump and Increased Exposure Losses
Challenging Conditions Expected to Persist This Year

Yeouido Financial Supervisory Service building in Seoul (right) and securities buildings. Photo by Younghan Heo younghan@

Last year, securities firms' net profits decreased by 20.2% compared to the previous year due to an expansion of losses related to the sluggish real estate market and high-risk exposures both domestically and internationally. This marks the second consecutive year of decline following 2022. This year is also expected to face a challenging environment due to the continued real estate market downturn and delays in interest rate cuts.

According to the "2023 Securities and Futures Companies Business Performance" report released by the Financial Supervisory Service (FSS) on the 25th, the net profit of 60 securities firms last year was KRW 3.5569 trillion excluding one-time dividend income of KRW 2.2 trillion from two securities firms, which is a decrease of KRW 898 billion (20.2%) from the previous year (KRW 4.4549 trillion).

Net profits of securities firms reached a record high of KRW 9.0896 trillion in 2021, then halved the year after, and continued to decline for two consecutive years through last year. At the end of last year, the return on equity (ROE) of securities firms, excluding one-time gains and losses, was only 4.7%.

The FSS evaluated that the decline in securities firms' business performance was due to a decrease in fee income such as investment banking (IB) fees caused by the real estate market slump, an increase in bad debt expenses, and rising interest expenses due to prolonged high interest rates and increased funding costs.

An FSS official stated, "Due to the real estate market downturn, securities firms incurred significant losses from investments in domestic and overseas real estate, leading to reduced net profits," adding, "This year, uncertainties in domestic and international financial markets, including the continued real estate market slump and delays in interest rate cuts, may delay the recovery of securities firms' business performance."

By category, fee income was KRW 11.7244 trillion, down KRW 1.3144 trillion (10.1%) from the previous year. Last year, brokerage fees increased by KRW 501 billion (10.0%) to KRW 5.5312 trillion due to increased stock trading volume amid a bullish stock market, but IB-related fees decreased by KRW 1.5619 trillion (32.3%) to KRW 3.2769 trillion due to a downturn in the real estate market and reduced debt guarantee fees.

Proprietary trading gains surged by KRW 5.6602 trillion (159.1%) to KRW 9.2181 trillion, driven by a massive increase of KRW 12.6133 trillion (2,051.6%) in valuation gains on held bonds due to interest rate stabilization. On the other hand, derivative-related losses amounted to KRW 4.755 trillion as losses on sales of derivative-linked securities increased amid rising global major stock markets.

Other asset gains decreased by KRW 643.3 billion (17.1%) to KRW 3.1289 trillion due to a decline in loan-related profits caused by increased bad debt write-offs. Selling and administrative expenses rose by KRW 58.1 billion (0.5%) to KRW 10.9218 trillion compared to the previous year.

The FSS plans to closely monitor the impact of prolonged high interest rates and inflation, real estate project financing (PF), and overseas alternative investment defaults on securities firms' profitability and liquidity, and to guide sufficient provisioning for high-risk exposures.

At the end of last year, the total assets of securities companies amounted to KRW 686.9 trillion, an increase of KRW 78.8 trillion (13.0%) from the end of the previous year (KRW 608.1 trillion), due to increased bond holdings and unsettled receivables related to brokerage transactions.

The net capital ratio, a soundness indicator, rose by 30.3 percentage points to 734.9% from 704.6% at the end of the previous year. All securities firms maintained net capital ratios above the regulatory threshold (100%). The leverage ratio also increased by 26.4 percentage points to 645.6% during the same period.

Meanwhile, the net profit of the three domestic futures companies last year was KRW 92.77 billion, up KRW 36.87 billion (66.0%) from the previous year.

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