South Korea's biggest brokerages will soon hear whether local regulators will let them expand their investment banking businesses, which currently account for only a small portion of their revenue. But the accompanying regulations could limit the brokerages' aspirations.
In July, the local Financial Services Commission, or FSC, received applications from Mirae Asset Daewoo Co. Ltd., NH Investment & Securities Co. Ltd., KB Securities Co. Ltd., Samsung Securities Co. Ltd. and Korea Investment & Securities Co. Ltd. to carry out new or expanded investment banking activities that have previously been off limits.
"[South Korean] broker/dealers have always suffered from a lack of investment funding due to liquidity and leverage regulations," Kang Seung-gun, a brokerage analyst at Daishin Securities, said. One such rule prohibits a broker/dealer's total assets from exceeding 11x total equity. "If they receive the new business licenses, the companies can get their hands on the largest source of funding they have ever had," he added.
Adding to their current M&A advisory and bond issuance management, South Korean broker/dealers that have 4 trillion won of equity capital could soon be able to, for example, sell short-term promissory notes at 2x their total equity. With that funding, broker/dealers can invest more in areas such as corporate financing, with a particular focus on lending to small and medium-sized enterprises, which reportedly have begun taking out record levels of loans from nonbanking financial institutions. The total SME loan balance among nonbanking institutions as of the end of April was 90.7 trillion won, up 9.9 trillion won from the end of 2016, Yonhap News Agency reported June 21, citing data from the Bank of Korea.
Broker/dealers that eventually reach 8 trillion won of equity capital will also be allowed to open investment management accounts for retail customers, The Korea Herald reported July 6.
The watchdog expects to issue new "mega investment bank" licenses by the end of October at the latest, said Kim Dong-hyun, an official in the FSC's capital markets department.
For those that qualify, the FSC will require, for example, that they cap investments in real estate at 30% of total funds. The broker/dealers must also dedicate at least 50% of total funds to corporate financing including lending. However, according to Won Jae-woong, a banking and brokerage analyst at NH Investment & Securities, most broker/dealers are already close to that lending floor.
The FSC's Kim added that broker/dealers must maintain a liquidity ratio of 100%, which means their investments' maturities must match those of the promissory notes, which are typically held between one month and three months.
The five broker/dealers have already begun identifying the businesses they want to pursue, according to company officials contacted by S&P Global Market Intelligence. "KB Securities, and I guess most others, are looking to invest in short-term asset-backed bonds in order to match the maturity of our liabilities," said Yang Chang-ho, general manager of the new investment banking task force at KB Securities, which is the country's third-largest brokerage with 4.211 trillion won of equity capital as of March 31 and a unit of KB Financial Group Inc.
Other focus areas include direct equity investments in infrastructure and up-and-coming companies such as biotechnology startups, according to representatives at both Mirae Asset Daewoo and NH Investment & Securities, a unit of NongHyup Financial Group Inc.
For the broker/dealers, the aim is to see a big change in their balance sheets, nudging them closer to peers in other developed countries. In terms of total equity capital, South Korea's largest broker/dealers are a fraction of the size of the global broker/dealer titans. Mirae Asset Daewoo, South Korea's largest brokerage, held 6.661 trillion won of total equity capital as of March 31, while Nomura Holdings Inc. of Japan, Asia's largest broker/dealer, held ¥2.844 trillion of equity capital, or about 28.542 trillion won.
A 2016 report from the FSC found that South Korean broker/dealers were highly dependent on their brokerage businesses. In 2014, investment banking generated 10.7% of their revenue, while their brokerage businesses accounted for 51.1%. In the U.S., brokerage accounted for 13.7% and 16.8% in Japan, the report said.
Korea Investment & Securities is a unit of Korea Investment Holdings Co. Ltd.
As of Aug. 15, US$1 was equivalent to 1,136.98 South Korean won and ¥110.55.
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