PF Ankle... No Securities Firms in Last Year's '1 Trillion Club'

Among major domestic securities firms, none exceeded 1 trillion KRW in operating profit last year. This is due to a combination of factors including deteriorating investment sentiment amid a sustained high-interest-rate environment, reduced profitability caused by sluggish real estate project financing (PF) market conditions, and the burden of provisioning for PF-related reserves. Given that the real estate market is unlikely to recover immediately and the impact of Taeyoung Construction's workout (corporate financial restructuring) is not a short-term issue, securities firms are expected to face continued financial challenges this year.

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According to FnGuide on the 10th, among seven major domestic securities firms?Korea Financial Group, Samsung Securities, Mirae Asset Securities, NH Investment & Securities, Kiwoom Securities, Daishin Securities, and Meritz Securities?none are estimated to have operating profits exceeding 1 trillion KRW in 2023.

Korea Financial Group, the parent company of Korea Investment & Securities with a large proportion of revenue from securities, came close with 963.8 billion KRW but showed weakening momentum toward the end of the year as its fourth-quarter operating profit declined compared to the previous quarter. Samsung Securities also achieved nearly 900 billion KRW in operating profit but failed to enter the '1 trillion club.' Operating profits for Mirae Asset Securities, NH Investment & Securities, and Kiwoom Securities were only in the 700 billion KRW range. Meritz Securities, the only firm to join the 1 trillion club in 2022, recorded operating profits of 729.9 billion KRW last year. Daishin Securities, which achieved a record high operating profit of 895.5 billion KRW in 2021, saw its operating profit plummet by 73% to 237.3 billion KRW last year.

After Mirae Asset Securities led the way in 2020, Mirae Asset Securities, Samsung Securities, NH Investment & Securities, Korea Investment & Securities, and Kiwoom Securities successively joined the 1 trillion club in 2021. In 2022, Meritz Securities surpassed 1 trillion KRW in operating profit.

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The poor performance last year is attributed to weakened investment sentiment due to sustained high interest rates, deterioration in the PF market caused by the real estate downturn, and a decline in the value of overseas real estate assets. Since the U.S. began raising interest rates in the second half of 2022, the investment environment rapidly shifted from low to high interest rates, leading to a contraction in investment sentiment and capital outflows from the stock market. In fact, the average stock market deposits (including on-exchange derivatives and transaction deposits) last year were 49.9692 trillion KRW, down from 56.7161 trillion KRW the previous year. Deposits are considered standby funds that can flow into the stock market at any time, so a decrease in deposits indicates reduced investment demand.

The cooling real estate market also negatively impacted securities firms’ performance through a linked downturn in the PF market. Securities firms that had profited from underwriting PFs during the real estate boom over the past 4-5 years lost this revenue stream as the real estate market cooled. Additionally, the global slump in real estate markets caused a decline in the value of overseas investment assets.

Researcher Ahn Young-jun of Hana Securities said, "PF underwriting fees account for up to 15% of securities firms’ operating profits, but as the real estate market weakened, fees from underwriting PFs for real estate projects declined, reducing profitability. If the real estate market and PF conditions do not recover in the medium to long term, a decline in PF-related profits will inevitably impact operating profits."

The PF crisis triggered by Taeyoung Construction also imposed short-term financial burdens on securities firms. The government recommended that sufficient reserves be set aside considering the real estate PF market and the viability of individual projects, depending on the progress of Taeyoung Construction’s workout. According to financial regulatory guidelines, reserves for real estate PF should be about 30% of the invested equity capital. Setting aside reserves as recommended means reflecting expected losses in advance, which reduces accounting profits.

Kim Ye-il, senior analyst at Korea Credit Rating, said, "Regarding exposure related to Taeyoung Construction, short-term provisioning costs may arise due to asset quality classification, which could burden securities firms’ profitability and affect their performance."

The key to joining the 1 trillion club this year also depends on interest rates and the real estate market. If interest rate cuts begin in earnest this year, brokerage revenue from increased trading volume and higher investment income can be expected. However, debt recovery and loss magnitude related to Taeyoung Construction’s workout remain variables.

Senior analyst Kim said, "Securities firms holding exposure are generally large firms, and the burden relative to their equity capital is mostly minor, around 2-5%. However, depending on the direction and implementation of the workout, there is a possibility that reserves will need to be set aside even in the first quarter."

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