Korea struggling to nurture investment banks

FSS plans to issue IB license to NH Securities

By Kim Yoo-chul

Although efforts by top-tier securities firms to move to investment banking (IB) have awakened support from Korea's top financial regulators, the question remains how: Will they supply IB services?

The Financial Services Commission (FSC), which oversees financial policies and directs the Financial Supervisory Service (FSS), wants to create an environment where IBs with ample capital strength that support venture capital firms would be licensed.

FSS officials said Monday that the regulator plans to grant a license to NH Securities and Investment under which NongHyup Financial Group's investment arm can issue asset-backed securities for a capital increase.

“The FSS is reviewing documents filed by NH Securities that are awaiting business approval. But what I can tell you is the FSS has seen much progress,” FSS Governor Yoon Suk-heun told reporters during an industry forum.

Yoon said if the license is granted, the FSS will encourage NH Securities to raise capital to be used in financing small- and medium-sized enterprises (SMEs) rather than expanding its size.

“The financial decision will be announced Wednesday at the earliest,” an FSS official said, adding the regulator has interest in redesigning the local financial market to prioritize brokerages' focus to IB.

NH earlier said it wants to become the “Goldman Sachs of South Korea.” IB is lucrative and promising as clients include large corporations, pension funds, other financial institutions, governments and hedge funds. Size is therefore an asset.

Theoretically, the more connections the bank or brokerage has within the market, the more likely it is to profit by matching buyers and sellers, specifically for unique transactions. The largest IBs such as Goldman Sachs and Credit Suisse have clients around the globe.

But can Korean banks or securities firms work, finally?

The main role of an IB begins with pre-underwriting counseling and continues after the distribution of securities, in the form of advice. IBs also examine companies' financial statements for accuracy and publish perspectives that explain offerings to institutional investors before the securities are made available for purchase.

“This is why you need many highly skilled and qualified researchers if you want profit from an IB. But local brokerages are still reluctant to hire experienced researchers because of the high cost,” an official at Korea Investment said on condition of anonymity.

At an IB, having good equity research is significant. Equity analysts are hailed as the real financial heroes as they create valuation models and research reports. Later on, they usually assume the status of major decision makers.

The number of investment bank research analysts hired by the nation's five biggest brokerages is falling. KB Securities was the only player that increased the number. More importantly, analysts were assigned to cover small-cap companies rather than top-tier blue-chip ones.

Nomura Securities in Japan has about 300.

"You have to have very good ability to exactly evaluate target companies, then your IB business will expand, but even top-level securities firms aren't prepared," said Hwang Se-un, an analyst at Korea Capital Market Institute, admitting hiring qualified research analysts here incurs big costs.

“They make little direct contribution to earnings, and that means, compared to costs, the returns are small in the short term,” a Mirae analyst said. He added well-paid research analysts are usually asked to cover “everything.”