By Seo Jee-yeon
Staff Reporter
South Korea has no internationally-competitive financial player even if its economy has grown to the world’s 11th largest. The country’s financial industry has cleaned up its balance sheets and strengthened its finances through years of restructuring.
Still, they are mostly frogs in a well. They are fairing well at home, but their presence overseas is negligent. Earnings from overseas operations are still negligible.
It’s time for domestic financial firms to make inroads into overseas markets. There are many obstacles strewn ahead. The government is ready to remove stumbling blocks keeping financial firms from growing into global players.
The first meaningful and essential step will be the establishment of a legal system that will help foster investment banks with international competitiveness.
That’s why the government and regulators have drawn up the capital market integration bill for the elimination of business barriers separating banking, securities and insurance sectors.
The ultimate goal of the bill is to nurture investment banks that can effectively compete with the likes of Merrill Lynch and Morgan Stanley in global markets.
Securities firms are expected to be the most beneficiary of the incoming capital market consolidation act as the act will offer an opportunity for brokerage firms to transform into investment banks.
The National Assembly has recently started reviewing the bill that the Finance-Economy Ministry initiated last year. The government aims to get national assembly approval in the first half of the year for the implementation next year.
The bill seeks the integration of 11 rules and regulations in the capital market by function under the theme of investment, not by different types of financial entities.
It also adopts the negative system for product development under which all investment products are allowed otherwise prohibited. The change will enable market players to develop and introduce a lot of advanced investment products.
Analysts said these moves will trigger the capital market consolidation among market players, including securities, futures, asset management and investment advisory firms.
Retooling Securities Industry
Amid rising mergers and acquisitions (M&As) activities across business borders, securities firms, the biggest player in the capital market, is expected to emerge as a leading force in the market.
In the course of the capital market consolidation, the government-proposed bill will help some domestic securities firms transform themselves into investment banks.
``A stronger capital market is essential for the development of the financial sector into a new growth engine of our economy,’’ said Hwang Kun-ho, chairman of the Korea Securities Dealers Association (KSDA).
``Considering banks and insurance markets have already saturated, the government has no choice but to develop the capital market which has been underdeveloped.’’
With the development of the capital market, led by securities firms, the nation’s financial sector is forecast to be simplified and rearranged into investment banks, commercial banks and insurance firms.
Corporate Funding Structure
One of the key reasons to push for the capital market development is because of a growing demand for change in the nation’s corporate funding structure.
The capital market of which the key role is to help companies raise funds has been underutilized in Korea. That’s because Korean companies have relied more on loans from banks, instead of directly raising funds through the capital market.
Corporate fund raising from the capital market has decreased to 7 trillion won in 2005 from 14 trillion won in 2005, according to the ministry. Corporate bond issuance also fell to 48 trillion won in 2005 from 87 trillion won in 2001.
``We must cultivate high value-added innovative industries to stand ahead in competition with emerging markets,’’ said Park Hyun-seok, an analyst of Meriz Securities. ``But start-ups have difficulty raising funds for businesses under the current corporate funding system.’’
``We need to develop a strong capital market that will provide more opportunities for such future-driven businesses to directly raise funds.’’
A growing number of individuals, who have raised their interest in asset management with their extended life span, are looking for high-return investment products than safe banking products.
Low interest rates and cool-down in the real estate market are also expected to channel more funds into the capital market.
Cultivation of Homegrown Investment Banks
The country badly needs homegrown investment banks. Securities firms have lagged far behind banks and insurance firms in terms of asset growth.
Securities firms took only about 5 percent of the country’s total financial assets, according to the Financial Supervisory Service (FSS).
``The securities industry growth was driven by brokerage fees rather than by lucrative investment banking operations,’’ said Kim Sang-beom, an associate principal of McKinsey Seoul.
Investment banks reap huge fees after arranging mergers and acquisition deals. They also provide various consultations, develop and invest in sophisticated financial products and offer other wholesale financial services.
Despite recent efforts to diversify income sources, leading domestic securities firms are still heavily reliant on brokerage fees for their earnings.
Goldman Sachs relies about 80 percent of its net income on investment banking activities, including investment product management and financial advisory last year.
In contrast, most Korean brokers generate nearly 70 percent of their net income from brokerage fees.
Local brokers cannot compete with foreign rivals in size as well. The FSS found the combined assets of Korea's four largest securities companies, including Samsung Securities and Woori Investment and Securities, amount to only about 1 percent of the combined assets of the top four U.S. investment banks.
Foreign brokers have increased their influence in the domestic investment banking sector since the 1997-1998 financial crisis.
``The capital market consolidation bill will offer an opportunity for securities firms to make themselves bigger through M&As,’’ Park of Meriz Securities said.
Yonsei University’s professor Park Sang-yong said that the country needs to develop the capital market at the earliest possible time as the country is entering an aged society.
``We need a further development of the capital market in preparation for the aging society,’’ he said.
Securities firms have already started a race to transform themselves into investment banks, increasing capital and developing business diversification plans. It will take a long time before Korea sees truly competitive investment banks. Therefore, policymakers are required to carry through all necessary steps to clear the way for the implementation of the capital market integration act.