Brokerages reeling from COVID-19 shocks

By Anna J. Park

Korea's major securities firms are expected to suffer a significant slash in their net profits during the first quarter this year, due to the pandemic-led global economic downturn.

Market analysts have lowered securities firms' Q1 net profit estimates, as considerable losses are expected from trading and investment banking (IB) departments, despite a surge in brokerage fees.

According to investment information portal FnGuide, analysts' consensus estimates of the total net profits for six securities firms during the first quarter ― Korea Investment & Securities, Mirae Asset Daewoo, Samsung, Meritz, NH and Kiwoom Securities ― stood at some 852 billion won ($698 million) at the end of February.

Yet the net profit estimates of the six brokerage houses plunged by 52.7 percent to 402 billion won as of April 8.

Analysts say one of direct causes of the fall in net profits would be sizable losses from the firms' hedge trading in equity-linked securities (ELS) or derivative-linked securities (DLS), due to falls in global indices amid market unrest caused by the global pandemic.

Samsung Securities is known to operate about 6 trillion won worth of ELS hedge trading, the largest amount in Korea, followed by Korea Investment & Securities and Mirae Asset Daewoo at both around four trillion won.

“It seems inevitable that some securities firms would post net losses during the first quarter,” said analyst Chung Tae-joon from Yuanta Securities Korea.

However, the analyst pointed out that the firms would benefit from increased brokerage fees, if a current boom in stock trading among individual investors in Korea continues.

“It is expected that the companies would rake in more fees from brokerage business, if stock trading size continues to maintain at a heightened level until benchmark indices restore,” he explained.

Yet a rise in brokerage fees is not large enough to offset losses in the area of IB departments. In addition to a sharp fall in values of alternative investment assets owned by the firms, various IB and project-financing (PF) deals have been delayed due to the spread of the COVID-19.

“Profits from IB are expected to decrease significantly due to delayed deals and tightened liquidity in real estate markets,” said Kang Seung-gun, an analyst at HI Investment & Securities.

Against this backdrop, Moody's has placed ratings of six Korean securities firms ― KB Securities, Korea Investment & Securities, Mirae Asset Daewoo, NH, Samsung and Shinhan Investment ― on review for downgrade earlier this month, given the significant rise in market volatilities.

“The review for downgrade reflects Moody's expectation that the volatility in the global and domestic financial markets stemming from the coronavirus outbreak will weigh on the security firms' profitability, capital adequacy, funding and liquidity,” Moody's said in their announcement.

“In addition, the firms are vulnerable through their trades related to structured notes, short-term financing business and contingent liabilities, as well as through their accumulation of overseas assets and real estate assets, driven by their increased risk appetite amid low interest rates.”