Securities Stocks Crawling at the Bottom Amid Earnings Dark Clouds

KRX Securities Index Falls 8% Since April
Surpasses KOSPI Decline Rate

Q2 Earnings Recovery Delayed... Reflected in Stock Prices

View of the National Assembly and the financial district from IFC Mall. Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Minji Lee] As the dark clouds over the securities industry's earnings show little sign of clearing, the prolonged slump in securities firms' stock prices continues.

According to the Korea Exchange on the 3rd, the KRX Securities Index fell 8% from April to the 1st of this month, a larger decline than the KOSPI return (-3.58%). The downward pressure on the securities index is currently driven by earnings, reflecting concerns in stock prices after securities firms announced first-quarter results far below expectations and the expectation that this trend will continue for some time.

The combined operating profit of seven major securities firms in the second quarter (Korea Financial Group, Meritz Securities, Kiwoom Securities, Mirae Asset Securities, Samsung Securities, NH Investment & Securities, and Daishin Securities) was 1.7606 trillion KRW, down 32% and 17% compared to the previous year (2.6263 trillion KRW) and the previous quarter (2.1395 trillion KRW), respectively. (FnGuide)

The decreased investor interest in the stock market has translated into weaker earnings for securities firms. Looking at the average daily trading volume, May recorded 16.8 trillion KRW and April 18.5 trillion KRW, showing a weaker trend compared to the first quarter (January 20 trillion KRW, February 18 trillion KRW, March 19 trillion KRW). The current trading volume level is similar to that of March 2020, the early stage of the COVID-19 outbreak (18.5 trillion KRW), and is about 10 trillion KRW less than a year ago (April 28 trillion KRW, May 25 trillion KRW).

As external variables continue to burden the stock market, it is expected that more time will be needed for the operating environment of securities firms to recover. Seunggeon Kang, a researcher at KB Securities, explained, "Central banks around the world are actively addressing inflation, which is expanding uncertainty due to concerns about economic slowdown," adding, "Until the inflation peak-out is confirmed, the recovery of the operating environment will be delayed."

The burden on the bond management sector, which contributed to the first-quarter earnings shock, also continues. Securities firms holding large-scale bond portfolios with long durations (bond maturity periods) in a rising interest rate environment will see a significant reduction in valuation gains. Although securities firms with bond management capabilities have adopted hedging strategies by reducing duration, it is unlikely that the scale of losses will be dramatically reduced.

Yeil Kim, a researcher at Korea Credit Rating, analyzed, "Considering that securities firms did not significantly reduce duration even during past periods when market interest rate hikes were dominant, and that recent interest rate fluctuations such as the US big step have expanded more than expected at the beginning of the year, bond management losses in the first half of 2022 are expected to be larger than anticipated."

There are also opinions that earnings from the IB (Investment Banking) sector, which had somewhat defended overall earnings, will decline. While IB earnings had been favorable due to continuous reflection of PF (Project Financing) profits, it is judged that securing PF deals may become difficult due to rising labor costs, raw material costs, and financing rates. Hyejin Park, a researcher at Daishin Securities, said, "PF deals recognize profits over several quarters, so they are not an immediate burden, but concerns about future profit declines and the possibility of defaults on existing deals have increased."