Concerns Over Sharp Decline in IB Profits... Large-Scale Losses Feared in Held Securities and Alternative Investments

Major Revenue Sources Expected to Take a Big Hit
PF Market Rapidly Shrinks and New Deals Disappear

[Asia Economy Reporters Jeongsoo Lim, Hyunseok Yoo] Securities firms are facing not only liquidity issues but also risks of insolvency and deteriorating performance. Revenues from the corporate finance (IB) sector, which was a major source of income, are sharply declining, and large-scale valuation losses are expected from held stocks and bonds.

In particular, the IB sector, which had been thriving, is expected to suffer significant damage. The project financing (PF) market, a core revenue source for securities firms, is rapidly shrinking. Although new projects have sharply decreased due to government real estate policies, securities firms, which were the main providers of funds, have turned cautious about new PF deals. Due to difficulties in selling down PF-related securitized products amid COVID-19, most securities firms plan not to engage in new deals.

The initial public offering (IPO) market is also expected to worsen due to the sharp decline in stock prices. As of March this year, the domestic public offering amount was only 280 billion KRW. This is about half compared to the same period last year, which was already an IPO slump. Considering that IPOs usually concentrate at the end of the year, it is still too early to conclude, but the prevailing view is that listing conditions will not recover quickly in the short term.

There are also concerns about valuation losses on held stocks and bonds. With stock prices plunging and corporate bond yields rising due to COVID-19, losses are expected simultaneously in stocks and bonds. Securities firms hold stocks for hedging, corporate finance operations, and profit realization. The stock exposure (risk exposure amount) held by the top 20 securities firms approaches about 20 trillion KRW. A roughly 10% drop in stock prices would mean valuation losses of 2 trillion KRW for securities firms. Among these, Korea Securities and Mirae Asset Daewoo hold the largest amounts at 4.2 trillion KRW and 3.7 trillion KRW respectively. NH Investment & Securities, Samsung Securities, and KB Securities follow in terms of stock holdings.

Bond holdings exceed 20 trillion KRW for Mirae Asset Daewoo (25 trillion KRW), Korea Investment & Securities (23 trillion KRW), and Samsung Securities (21 trillion KRW). NH Investment & Securities (18 trillion KRW), KB Securities (17 trillion KRW), and Shinhan Financial Investment (16 trillion KRW) follow. Among these, the proportion of corporate bonds held is analyzed to be between 30% and 50% depending on the securities firm. A bond market official expressed concern, saying, "If market instability continues, credit spreads will widen, potentially increasing valuation losses on held bonds, especially corporate bonds."

Concerns about insolvency and losses are also raised in overseas alternative investments, which large securities firms have focused on in recent years. An IB industry insider said, "The US and Europe, major investment destinations for domestic securities firms, are rapidly contracting economically due to COVID-19," adding, "Insolvency may occur or profitability may rapidly decline in overseas real estate, aircraft, and logistics warehouse investments."

ELS hedge costs are also cited as a cause of deteriorating performance. Anna Young Ahn, senior researcher at Korea Ratings, said, "Depending on the prolongation of the COVID-19 situation and the quarantine and fiscal response methods of each government, major stock indices still contain high uncertainty," adding, "Due to index volatility, securities firms with high self-hedge ratios and large derivative exposures may experience adverse effects on their performance."