Accelerated 'Money Move' Next Year, Clear Outlook for Securities Industry

[2021 Industry Outlook] ④ Securities, Banking, and Insurance

[Asia Economy Reporter Eunmo Koo] The securities sector is expected to continue benefiting from the 'money move' that began this year, supported by abundant liquidity, a direct investment boom, and favorable regulatory directions such as the reduction of securities transaction tax next year. The banking sector is likely to see related benefits as the abnormal situations triggered by COVID-19 gradually normalize, while the insurance sector is also expected to see a slight increase in net profits for both non-life and life insurance.

◆Securities: Growth Centered on Brokerage to Continue

The brokerage-centered growth triggered by this year's money move is expected to continue next year. With the annual average daily trading volume expected to hit an all-time high this year and market outlook remaining optimistic, the growth led by brokerage is highly likely to persist next year. Junseop Jung, a researcher at NH Investment & Securities, predicted, "Since the retail revenue base has become more solid than before, retail-related revenues such as commission fees and credit interest income will remain the core sources of income for the securities industry next year."

The government's policy stance encouraging individual stock investments also supports this positive outlook. With the tax reform plan announced this year, the securities transaction tax will be reduced to 0.23% starting next year. The government and financial authorities have confirmed that they have no intention of curbing the individual investors' stock investment enthusiasm, as evidenced by the extension of the short-selling ban and the withdrawal of the strengthened stock capital gains tax criteria.

Hongjae Lee, a researcher at Hana Financial Investment, said, "Although a 2bp (1bp=0.01%) reduction in transaction tax is not strong enough to drive a rapid boom in the stock market, the reduction in transaction costs definitely has a positive effect," adding, "It is a basis for expecting that individual trading turnover will not decrease."

Of course, even if the brokerage sector performs better than in previous years, it is unlikely to achieve this year's level of earnings surprise. It is difficult to predict whether the trading volume will increase compared to this year. Trading volume correlates with market volatility, and the sharply expanded market volatility in the first half of next year is expected to gradually decrease. If the market continues to rise due to expectations for vaccines and treatments, it will be positive for trading volume, but it seems unlikely that volatility similar to the first half of this year will reoccur.

Meanwhile, revenue from the wealth management (WM) sector is expected to struggle to grow significantly until trust in private equity funds is restored. Since 2016, the balance of public funds has decreased, and private equity funds have driven fund balance growth, but even that has stagnated after the Lime and Optimus incidents. Additionally, with the expansion of exchange-traded fund (ETF) investments and direct investments, fund fees continue to decline, so the stagnation in balances is expected to lead to a decline in WM sector revenue.

◆Banks: Expectations for Normalization from a Long-Term Perspective

Next year, bank stocks are expected to benefit from the normalization of abnormal situations created by COVID-19. First, during the normalization process of credit loss risk due to economic recovery, some reversal of provisions is also expected. Jaewoo Kim, a researcher at Samsung Securities, explained, "Since banks currently maintain a proactive provision ratio of around 10% relative to this year's annual profits, it is highly likely that some actual losses on deferred bad debts will be recognized next year." This contrasts with some U.S. banks, which set aside large provisions amounting to 30-60% of their annual profits last year, allowing for significant provision reversals.

Recovery of net interest margin (NIM) due to the easing of the current ultra-low interest rate environment is also anticipated. The downward pressure on NIM caused by two base rate cuts in the first half of this year will end in the fourth quarter, and effects such as reduced funding costs due to a surge in low-cost deposits, changes in loan portfolio mix due to increased corporate loans, and the impact of rising household loan spreads are expected to materialize. Jungwook Choi, a researcher at Hana Financial Investment, forecasted, "Since market interest rates have been on the rise since the second half of this year, the NIM trend next year is likely to be better than expected."

However, the anticipated stock market listings of KakaoPay and KakaoBank next year may pose a supply-demand burden. Institutional investors intending to invest in these fintech and internet-only banking firms may view them as alternative investments to existing financial stocks, especially bank stocks, leading to selling or postponing additional purchases of financial stocks.

Researcher Choi explained, "While the market capitalization of fintech firms, perceived as growth stocks in recent years, has soared, the market capitalization of traditional banks has declined significantly, indicating that these firms have partially encroached on the market cap of traditional banks. The listing of similar large companies inevitably negatively affects the supply-demand dynamics of bank stocks."

◆Insurance: Slight Profit Growth... Non-Life Insurance Superior in Quality

The insurance sector is expected to see a slight increase in net profits for both non-life and life insurance. Although it is difficult to expect immediate improvement in loss ratios for the non-life insurance sector at this stage of overcoming the COVID-19 crisis, the environment is being created to reduce insurance claim amounts in the mid to long term, which is viewed positively.

Heeyeon Lim, a researcher at Shinhan Financial Investment, said, "If the increase in actual loss rates is blocked next year, there is concern about the deterioration of the overall long-term risk loss ratio in the insurance sector due to insufficient premium increases for four consecutive years," adding, "Therefore, structural reform of actual loss insurance and simplification of claims will be actively pursued as reasonable alternatives to offset the suppression of premium increases next year." While short-term adjustment risks in the non-life insurance sector cannot be ruled out if actual loss premium increases are limited, the introduction of reforms and claim simplification systems is expected to fundamentally resolve excessive insurance claims, the main cause of loss ratio deterioration.

On the other hand, the life insurance sector is expected to see a reduction in the burden of variable guarantee reserves corresponding to the rebound in interest rates compared to this year, but loss ratio deterioration and increased business expenses are anticipated. Researcher Jung said, "Except for variable guarantee reserves, there is still no clear improvement momentum in life insurance," adding, "It remains difficult to expect the resolution of negative interest rate spreads, and capital regulation risks are also burdensome."