Securities Stocks Record Q2 Earnings Shock... "Expecting Recovery in Q3 After Bottoming Out"

Daishin Securities Report

[Asia Economy Reporter Lee Myunghwan] While major domestic securities firms posted disappointing results in the second quarter of this year, there are forecasts that the industry conditions will improve starting from the third quarter. Analysts also expect that earnings have passed the bottom and stock prices will normalize.

On the 20th, Daishin Securities analyzed, "Major large firms recorded sluggish results with net profits around 100 billion KRW in the second quarter." They pointed out that the main cause of the earnings deterioration was the expanded losses in bond operations. The scale of bonds actively managed by large securities firms averages over 20 trillion KRW, and losses increased due to heightened interest rate volatility since June.

Daishin Securities estimated that each company incurred operational losses of around 100 billion KRW. However, they noted that the semi-annual valuation of non-marketable assets was reflected in the second quarter, generating valuation gains that helped prevent further deterioration.

However, Daishin Securities pointed out that the securities industry conditions have been improving since July. The interest rates, which had been fluctuating sharply, continued to decline, improving the operating environment compared to the previous quarter. Although large securities firms recorded losses throughout the first half of the year, they diagnosed that they turned profitable starting in July.

They also forecast that the operating environment for securities firms will further improve. Daishin Securities predicted that Korea’s base interest rate will be raised to 3.0% by the end of the year. They expected that market interest rates, which experienced a short-term sharp drop in the first half, will gradually converge toward the base interest rate.

They noted that securities trading volume has been continuously declining since reaching a record high of 33.3 trillion KRW in the first quarter of last year. Stock prices of securities firms have also fallen together, resulting in six consecutive quarters of decline in both trading volume and securities stocks. However, they pointed out that trading volume has been defended around the 13 trillion KRW level since July. Considering past averages, Daishin Securities expects limited room for further decline in securities trading volume.

Daishin Securities’ analysis suggests that although it is difficult for securities stocks to structurally rise, normalization is worth expecting. Researcher Park Hyejin of Daishin Securities said, "The environment surrounding the securities industry improved in the third quarter, but it is difficult to expect a dramatic increase in profits," adding, "With the earnings shock in the second quarter, earnings have passed the bottom."

Daishin Securities maintains Kiwoom Securities as their top pick within the securities sector and lists NH Investment & Securities as a stock of interest.