By Cho Jin-seo
Staff Reporter
It seems that the spring has come to the financial market first. Cho In-kang, the director general of the Financial Services Commission's Capital Markets Bureau, looked pleased when he came to the podium for a press briefing on March 24. As a man whose job is to take care of South Korea's capital market, the contentment appearing on his face was understandable.
``There were a number of global risks that threatened the domestic capital market until February, but it has gotten better in March,'' he said. What he meant was that there had been a net inflow of 3.8 trillion won ($3.3 billion) into the Korean stock market from overseas between March 1 and March 22 ― or 36 trillion won ($31.7 billion) since January 2009.
As a result, the KOSPI has risen to around 1,700 from below 1,000 at the peak of the crisis. Some analysts believe it will breach the 2,000 mark within this year, if it is included in the MSCI Developed Markets Index ― possibly as early as June.
That would be great for local securities firms. Brokerage commissions still account for the most of Korean securities firms' revenue. The financial crisis also made the M&A and underwriting market dormant until last year, making firms focus more on traditional brokerage businesses.
If the MSCI listing goes as planned, the total net profit of eight large securities firms here is estimated to be 1.69 trillion won this year, up by 7.6 percent from last year, Samsung Securities forecast.
Securities firms are also tapping into the investment banking market though the sector is not as well developed as in the United States or Europe. A number of initial public offerings (IPOs) are planned, or have been already conducted, this year for large companies such as Samsung Life Insurance, Korea Life Insurance and POSCO Engineering & Construction.
One big problem is that margins are quite low in this sector. Samsung Life reportedly is giving out only 1 percent of its IPO value as commission to its six underwriters ― Korea Investment & Securities and Goldman Sachs are the two main underwriters of the deal, while four others are also taking minor roles. This will be equal to as much as 60 billion won depending on the offer price of the shares.
Compared to fees in other countries, 1 percent is paltry pay. For deals of this size, the average commission paid to books between 1998 and 2007 was 7 percent of the IPO value in the United States., and 3 percent in Europe, research from Oxford University shows.
Such a low commission rate in Korea is in part because competition is high among brokers here. There are 62 securities firms vying for a limited number of deals, in addition to the global investment banking giants. In some cases, securities firms charge only 0.01 percent of the IPO value in commission, just to build their track record.
The potential is as limited in the M&A sector as in the IPO sector. Though it is not necessarily bad, the conservative corporate culture of South Korea makes firms reluctant to engage in mergers or acquisitions, especially ones involving foreign companies or investors. Most big firms are owned by conglomerates and these chaebol groups make their own securities subsidiaries to take care of deals within the group.
These constraints encourage securities firms to focus on the ``good old'' business of stock brokerage. Here, too, the competition is getting fierce and margins are running thinner. Earlier this month, IBK Investment & Securities, a newcomer in the industry, announced that it will not take a commission for selling shares if the price is lower than the buying price. Such a price war will push the industry closer to the cliff, and a few firms will have to fall.
The investment fund market is also not very promising. Financial regulators estimate that about 13 percent of investments in funds have been cashed out since April 2009. This month alone, investors pulled out 1.5 trillion won from domestic and overseas funds as the stock market lost upward momentum. The commission rate is also falling, since the FSC made it easier for investors to shop around banks and securities firms for more favorable terms and lower commissions.
Salvation for the securities, trading and investment industry may come in two ways. Firstly are derivatives and exotic forms of investment vehicles. The FSC and the Korea Exchange are encouraging firms to engage in new fields such as equity-linked warrants (ELW), equity-linked securities (ELS) and derivative-linked securities (DLS). They have also allowed securities firms to list shell companies specialized in mergers and acquisitions.
The second solution is to look outside. Several firms, such as Mirae Asset and Daewoo, are significantly expanding operations in emerging nations. Mirae Asset in particular has had a spectacular performance out of Korea. In Brazil, all of Mirae Asset Global Investments's four funds outperformed the market benchmark.
Two of them recorded 115 percent and 113 percent in returns since December 2008, more than 40 points over the benchmark. This superior performance made them draw money from locals as well as global investors.
To win over the minds of global investors, however, Korean securities firms have to make themselves more trustworthy. Henry Seggerman, the president of International Investment Advisers, sighed in his column to The Korea Times that he has never seen a Korean stock market analyst writing a ``sell'' report. Analysts in any country are notorious for abusing ``buy'' recommendations, but not to the degree they do in Korea.
As long as the Korean securities firms let this kind of self-damaging malpractice continue, their impressive investment performance and track records may not be very useful when dealing with foreign clients.
But a question arises on whether they have enough motivation to change this culture. The industry is tightly regulated and protected by the government, and most firms make profits every year anyway though being small. Focusing on the domestic brokerage market is a low-risk, low-return bet for the securities firms themselves.