[Shaking Kiwoom Ship]② Kiwoom Securities 'Mega IB License', Kiwoom Asset Management 'Life Insurance Company Acquisition' at Risk?

Met Capital Adequacy but Major Shareholder Eligibility Falters Due to Owner Risk
Kiwoom Asset Management, Rapidly Growing Through M&A, Also Hesitant on Acquiring Life Insurance Companies

Editor's NoteDespite the resignation of Kim Ik-rae, former chairman of DaouKiwoom Group, variables have emerged in the new business expansion roadmap of financial affiliates such as Kiwoom Securities, Kiwoom Asset Management, Kiwoom Investment, and Kiwoom Private Equity. As Ra Deok-yeon, CEO of Hoan, who was identified as the mastermind behind the Soci?t? G?n?rale (SG) Securities-triggered stock price crash, was detained and investigations intensified day by day amid worsening public opinion, controversies related to Kiwoom Securities have not subsided. DaouKiwoom Group, which was actively planning new businesses to respond to liquidity instability amid high market volatility, is now shaken by owner-related risks.

Kiwoom Securities' project to obtain the 'super-large investment bank (IB) license' is expected to face difficulties. Kiwoom Securities has been striving to acquire the super-large IB license, which is granted to large securities firms with over 4 trillion KRW in equity capital. However, with the owner Kim Ik-rae, former chairman of DaouKiwoom Group, suspected of involvement in the Soci?t? G?n?rale (SG) Securities-triggered stock price crash, the prospect of obtaining the license within this year seems unlikely. Even if the capital requirement is met, the firm must pass the strict scrutiny of financial authorities. When a securities firm with over 4 trillion KRW in equity capital applies to the Financial Supervisory Service, the final decision is made by the Financial Services Commission.

Super-large IBs as a New Growth Engine for Securities Firms

Securities firms are seeking new growth engines to achieve stable earnings. Although the need for super-large IBs temporarily decreased due to increased brokerage revenues amid the stock market boom following COVID-19, the situation has changed since last year. As the stock market turned bearish, securities firms have renewed their interest in acquiring super-large IB licenses to find new revenue sources. Kiwoom Securities has also been preparing steadily with this in mind.

As of the end of last year, Kiwoom Securities surpassed the 4 trillion KRW equity capital requirement. Accordingly, the market expected Kiwoom to apply for the super-large IB license this year. After receiving the ninth comprehensive financial investment business operator (CFIBO) license in Korea last year, Kiwoom Securities established a dedicated comprehensive finance team within the strategic planning headquarters to work toward obtaining the super-large IB license. Becoming a CFIBO allows corporate credit extension and hedge fund credit extension within 200% of equity capital. Achieving super-large IB status broadens the scope of business. It enables entry into the issuance of commercial paper market, which serves as a significant driver for revenue expansion.

To operate a commercial paper issuance business, a firm must first be designated as a super-large IB and then obtain additional approval. Commercial paper is a promissory note with a maturity of less than one year, issued based on the securities firm's own credit, and can be sold up to twice the equity capital. It is exempt from public offering regulations such as issuance disclosure and credit rating, making the issuance process simple and allowing continuous fund collection from multiple investors.

Funds raised through commercial paper issuance are also excluded from leverage regulation. Currently, only four securities firms in Korea?Mirae Asset Securities, Korea Investment & Securities, NH Investment & Securities, and KB Securities?are authorized to issue commercial paper. Generally, even during periods of rising interest rates unfavorable to securities firms, the commercial paper business is noted for benefiting from capital inflows. It acts as a key tool to respond to liquidity instability and enables more stable corporate finance operations.

Kiwoom Securities has a clear strength in the retail sector. However, retail revenue such as brokerage commissions is highly volatile depending on the market environment. If Kiwoom Securities, which has a large retail customer base, enters the commercial paper issuance business through the super-large IB license, it was expected to have a significant advantage over competitors.

Stringent Major Shareholder Eligibility Requirements

The requirements for the super-large IB license include equity capital (over 4 trillion KRW), internal control and risk management, and major shareholder eligibility. The major shareholder eligibility is a potential obstacle for Kiwoom Securities in obtaining the super-large IB license. It may be difficult to acquire the license until former chairman Kim Ik-rae is cleared of allegations of violating the Capital Markets Act.

Looking at past cases, Samsung Securities in 2017 was notified of a suspension of review regarding the commercial paper business license because Lee Jae-yong, vice chairman of Samsung Electronics, was classified as a subject of major shareholder eligibility review. NH Investment & Securities entered the super-large IB market in 2017, but its short-term finance business license was delayed due to allegations of hiring irregularities involving former NH Nonghyup Financial Group chairman Kim Yong-hwan. The license was granted only after Kim was cleared and the major shareholder eligibility issue was resolved. KB Securities also suffered reputation risks due to hiring irregularities after entering the super-large IB market in 2017 and only received the short-term finance business license in 2019. Mirae Asset Securities applied for the commercial paper business license in 2017, but the Fair Trade Commission's investigation into Mirae Asset Group's internal transactions halted the review. The final license was granted in 2021.

Currently, five securities firms have obtained the super-large IB license: Mirae Asset Securities, Korea Investment & Securities, NH Investment & Securities, KB Securities, and Samsung Securities. In addition, Hana Securities, Meritz Securities, and Shinhan Investment Corp. have surpassed 5 trillion KRW in equity capital, and Kiwoom Securities exceeded 4 trillion KRW last year. Among these, Kiwoom Securities and Hana Securities were actively preparing to apply for the super-large IB license.

A Hana Securities official said, "We are coordinating schedules with financial authorities aiming to apply for the super-large IB license in the second half of the year." As of the end of last year, Hana Securities recorded capital of 5.847683 trillion KRW. Hana Securities is proactive enough to prepare for the commercial paper business within the year and has long been considered a strong candidate for super-large IB entry, now making a serious challenge this year. In contrast, Kiwoom Securities has taken a somewhat passive stance. A Kiwoom Securities official said, "There has been no discussion regarding the super-large IB license," adding, "We will inform once a decision is made."

M&A and New Growth Investments 'All Stop'

Kiwoom Investment Asset Management, the asset management arm of DaouKiwoom Group, has been considering acquiring an insurance company to secure new growth engines. Among insurance companies, it has shown more interest in life insurers than non-life insurers. The life insurers mentioned as candidates include KDB Life, ABL Life, and Dongyang Life. Non-life insurers pose challenges in risk management and claims adjustment and have many short-term contracts, whereas life insurers can secure stable cash flow with long-term funds.

If Kiwoom Investment Asset Management acquires an insurance company, synergy effects are expected through vertical integration among Kiwoom Securities, Kiwoom Investment Asset Management, and the insurance company. Entering the insurance business also helps strengthen profitability through portfolio diversification of the financial group. In particular, selling insurance products allows the acquisition of new customer databases.

Kiwoom has shown a somewhat defensive stance toward insurance company acquisitions. A Kiwoom Investment Asset Management official said, "We have only shown basic interest and reviewed it but have not gone into detailed discussions."

Kiwoom Investment Asset Management has grown through M&A. It acquired Woori Asset Management, which was affiliated with Woori Financial Group. Kiwoom Asset Management, ranked around 40th in 2014, merged with Woori Asset Management, ranked around 10th, and quickly rose to become the 5th largest asset management company overall. It enhanced competitiveness not only in bond management but also in equities and alternative investments, attracting funds from institutional investors such as pension funds. Assets under management increased by more than 70% after the merger. Despite this positive M&A experience, Kiwoom Investment Asset Management is unlikely to pursue additional M&A in the near term.

※The recent SG Securities-triggered stock price crash has sounded an alarm for the capital market order. Readers' tips will be a great help in uncovering the truth. We welcome any information regarding investment damage cases, stock price manipulation and asset concealment by Ra Deok-yeon’s side, insider details on large-scale sales by major shareholders of DaouData and Seoul Gas, or any other relevant content (jebo1@asiae.co.kr). Asia Economy is committed to establishing a transparent capital market order.