Higher costs compared to returns dilute securities' IB dream
By Kim Yoo-chul
Korea's top financial institutions are rearranging their investment banking strategies amid tough competition and decreasing profits. They have set their eyes on international markets.
In Korea, financial holding companies have heavily relied on commercial banks. Hence, conditions are not so good to have a sizable investment banking business, observers point out. The two businesses are totally different.
Against this backdrop, the country's leading securities companies have turned their eyes to investment banking in the hope that the sector may flourish.
But it's still questionable whether such efforts will eventually work.
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 of researchers.
In November last year, the Financial Services Commission granted licenses for the investment banking business to Mirae Asset Daewoo Securities, NH Investment and Securities, Korea Investment and Securities, Samsung Securities and KB.
"KB Securities hired a mid-level research analyst. However, the researcher was given a role to cover small-cap companies not blue chip companies," a stock market analyst said.
Mirae Asset Daewoo Securities filled in two voids in credit and pharmaceutical sectors but didn't hire new ones. The outfit earlier said that it will compete with Nomura Securities and Daiwa Securities of Japan in the investment banking business segment by expanding its research function.
However, the number of its research staff decreased from 96 to 89 last year, while Nomura has about 300.
Korea Investment also didn't make any changes in the number of its analysts with 62. Samsung Securities increased its number from 73 to 77 last year, but this was due to the recruitment of cost-effective staff.
The number of researchers working at NH Investment was left unchanged at 81.
In investment banking, having a good equity research capability 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.
More precisely, these professionals are experts in financial modeling, financial statement analysis and the valuation of companies, and have a "clear idea" about how target companies will perform in the future.
"You have to have really good ability to exactly evaluate target companies, then your investment banking business will go up. However, even top-level securities firms haven't prepared," said Hwang Se-un, an analyst at Korea Capital Market Institute.
The passive investment in researchers is highly likely to continue in the coming years.
The profitability of the analyst-empowered business has gone down since the dotcom bust in the early 2000s. Then, after the financial crisis in the late 2000s, banks were concerned about costs and they started slashing staff at research departments.
"Hiring qualified research analysts here incurs big costs. They made little direct contribution to earnings and that means compared to the costs, the returns are small in the short term," a Mirae analyst said. He added that well-paid research analysts are usually asked to cover "everything."
An analyst at NH Nonghyup said the Korean market is "too small" and blue chip companies were already analyzed and exposed by top-notch overseas investment banks such as Goldman Sachs. This puts Korean securities firms in an "awkward position" to specialize in niches.
"Because yields are falling in the local market, some big retail investors are aiming for investments to get greater returns by exposing themselves more to high-yield returns. Traditional commercial banks can't actively manage the job. But a greater exposure to risk-return profile has its flip side _ it can have big risks _ and brokerages don't want to take them," the analyst said.
By Kim Yoo-chul
Korea's top financial institutions are rearranging their investment banking strategies amid tough competition and decreasing profits. They have set their eyes on international markets.
In Korea, financial holding companies have heavily relied on commercial banks. Hence, conditions are not so good to have a sizable investment banking business, observers point out. The two businesses are totally different.
Against this backdrop, the country's leading securities companies have turned their eyes to investment banking in the hope that the sector may flourish.
But it's still questionable whether such efforts will eventually work.
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 of researchers.
In November last year, the Financial Services Commission granted licenses for the investment banking business to Mirae Asset Daewoo Securities, NH Investment and Securities, Korea Investment and Securities, Samsung Securities and KB.
"KB Securities hired a mid-level research analyst. However, the researcher was given a role to cover small-cap companies not blue chip companies," a stock market analyst said.
Mirae Asset Daewoo Securities filled in two voids in credit and pharmaceutical sectors but didn't hire new ones. The outfit earlier said that it will compete with Nomura Securities and Daiwa Securities of Japan in the investment banking business segment by expanding its research function.
However, the number of its research staff decreased from 96 to 89 last year, while Nomura has about 300.
Korea Investment also didn't make any changes in the number of its analysts with 62. Samsung Securities increased its number from 73 to 77 last year, but this was due to the recruitment of cost-effective staff.
The number of researchers working at NH Investment was left unchanged at 81.
In investment banking, having a good equity research capability 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.
More precisely, these professionals are experts in financial modeling, financial statement analysis and the valuation of companies, and have a "clear idea" about how target companies will perform in the future.
"You have to have really good ability to exactly evaluate target companies, then your investment banking business will go up. However, even top-level securities firms haven't prepared," said Hwang Se-un, an analyst at Korea Capital Market Institute.
The passive investment in researchers is highly likely to continue in the coming years.
The profitability of the analyst-empowered business has gone down since the dotcom bust in the early 2000s. Then, after the financial crisis in the late 2000s, banks were concerned about costs and they started slashing staff at research departments.
"Hiring qualified research analysts here incurs big costs. They made little direct contribution to earnings and that means compared to the costs, the returns are small in the short term," a Mirae analyst said. He added that well-paid research analysts are usually asked to cover "everything."
An analyst at NH Nonghyup said the Korean market is "too small" and blue chip companies were already analyzed and exposed by top-notch overseas investment banks such as Goldman Sachs. This puts Korean securities firms in an "awkward position" to specialize in niches.
"Because yields are falling in the local market, some big retail investors are aiming for investments to get greater returns by exposing themselves more to high-yield returns. Traditional commercial banks can't actively manage the job. But a greater exposure to risk-return profile has its flip side _ it can have big risks _ and brokerages don't want to take them," the analyst said.
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