[Brokerage Earnings Shock] ② Operating Profit Surpasses 1 Trillion Won... Meritz Securities 'Holding Strong Alone'

Increased Revenue in Financial Balance Drives Performance
Effective Risk Management in Real Estate PF and Bond Operations

[Asia Economy Reporter Jang Hyowon] While securities firms posted sluggish earnings last year due to interest rate hikes and stock market downturns, Meritz Securities alone joined the '1 trillion won operating profit club.' This is attributed to their steady improvement in performance by focusing on risk management and strengthening trading capabilities since the financial authorities announced real estate PF management measures in 2019.

According to the financial investment industry on the 9th, Meritz Securities recorded a provisional consolidated operating profit of 1.0925 trillion won last year, a 15.1% increase from the previous year. It surpassed 1 trillion won in operating profit for the first time since its establishment. Net operating income and net profit for the year also increased by 7.4% and 5.8%, reaching 1.8496 trillion won and 828.1 billion won, respectively.

The strong performance was due to a sharp increase in financial income from loans, RP purchases, and credit extensions. Last year, net operating income from financial activities was 455.4 billion won, up 97.7% from 230.3 billion won the previous year. This is analyzed to be thanks to the sale of non-performing loans related to China’s Hainan Airlines Group, which had been tied up for four years, allowing capital recovery.

Although all business sectors including corporate finance (IB), asset management (Trading), brokerage, and wealth management (WM) experienced negative growth, the declines were slight. While major large securities firms suffered massive bond valuation losses due to interest rate hikes, halving their trading division performance, Meritz Securities recorded net operating income of 486.3 billion won in trading, defending with only an 11.4% decrease compared to the previous year. The company explained this was due to proactive risk management, such as adjusting bond positions ahead of interest rate hikes from early last year.

The IB division, considered a strength of Meritz Securities, also held up relatively well with only a 14% decline compared to the same period last year. Net operating income was 455.8 billion won, exceeding the IB earnings of large firms like Mirae Asset Securities and NH Investment & Securities.

Previously, there were concerns in the market that Meritz Securities’ performance would be poor due to the worsening construction industry and its high exposure to real estate project financing (PF). However, the actual results were quite the opposite. The strong performance was due to the Financial Services Commission’s December 2019 announcement of the ‘Real Estate PF Exposure Management Plan,’ which limited PF debt guarantees to within 100% of equity capital, prompting Meritz Securities to strengthen risk management.

In 2019, Meritz Securities’ debt guarantees amounted to 8.5 trillion won, the highest among all securities firms and about 220% of its equity capital. This was because Meritz Securities’ main revenue sources were real estate PF financing arrangement and credit extension. At the time, a credit rating agency warned that Meritz Securities needed to significantly reduce debt guarantees, and that this could negatively impact its profitability and market position, potentially leading to a downgrade in credit rating.

In response, Meritz Securities halved its debt guarantees to 4 trillion won the following year despite the risk of earnings decline. Its net capital ratio (NCR) also improved from 827% in 2019 to 1660%. Nevertheless, net operating income increased by about 4%. This was because they managed risk and secured profits by selling down real estate PF loan receivables. They also bolstered the trading division to defend earnings.

A Meritz Securities official explained, “Over 95% of real estate PF loans are senior priority, and the average loan-to-value (LTV) ratio meets the 50% requirement, with no bankrupt transactions in the past 10 years,” adding, “We focused on risk management by structuring deals to either contract with strong A-grade construction companies with solid capital and construction capabilities for guaranteed completion or have financial holding company-affiliated trusts guarantee completion.”