By Yoon Ja-young
Staff Reporter
Business diversification will be the key to long-term success for Korean securities companies, said an analyst at Moody's Investors Service.
May Yan, vice president and senior credit officer at Moody's, said Korean securities firms were relatively safe from credit crunch due to heavy dependence on trading commissions. ``They were somewhat lucky that they didn't get so much loss from it. On the other hand, their businesses are more traditional,'' Yan said in an interview with The Korea Times.
She said they would have to diversify revenue to remain competitive. ``The commission income is so competitive. Everybody is cutting. They have to move into other businesses and diversify revenue.''
Yan pointed out that unlike the United States where each securities company has specialties such as wealth management, Korean securities companies are all very similar except for one or two. She cited Mirae Asset as having a positive momentum as it is affiliated with Mirae Asset Investment Management, the dominator of the fund industry.
She added Korean securities companies could be more diversified and can be more competitive than now following the development of the capital market. She pointed out that banks are still dominating the Korean capital market. ``As the capital market grows, there will be more disintermediation, as it started three or four decades ago in the United States,'' Yan said. Instead of visiting banks that intermediate companies and investors, the companies and investors go to direct market. ``I think it is moving in that direction. To the extent the economy is largely funded by banks, but capital market development will help the development of the securities industry,'' she added.
Regarding Seoul's hope that a global investment bank like Goldman Sachs could be born in Korea, Yan said investment banks need a lot of different things. ``You need transition from the current model to global investment bank model. It will take a while for the whole infrastructure, people and risk management to change.''
``People need to have a different type of mentality and thorough knowledge about everything if you want to be an investment banker. It is very, very different from a simple brokerage.'' She added that corporate culture should change as well.
She emphasized that it would involve much more rigorous risk management. ``As you see in the global crisis, you can get hurt if you don't know how to manage risk,'' Yan said. ``So from every aspect, I think there's a big transition to go through for securities firms to accomplish the diversification goal.''
She pointed out that there are a very limited number of Korean securities companies in large mergers and acquisitions (M&A) deals in the global market. ``They are more in the local market, local bond underwriting or some local IPOs. But they are doing very little cross-border large-scale M&As, and those are dominated by global investment banks.''
She said they can start with what they have now. ``The more realistic step is that you try to compete in Korea and more broadly in Asia, and then you see what you can do.''
She expected there to be a lot of pressure for M&A in the industry. ``Competition is so big, and security trading is a scale business. If you are big, you dominate and probably you survive.'' She added that with changes in the regulation, securities companies can do a lot more, from trust and pension to cash management, investment banking and trading. These create synergies, so the companies outside, including banks, have interests in securities companies.
She said their earnings and margins will be under negative pressure this year, given a volatile capital market and potential for a global economic slowdown. Though the Korean economy shouldn't be so negative on the macro economic side, the uncertainties in the external environment will be reflected in the equity market, according to Yan.