[Initial Insight] Global IB Must Regain Its Lost 'Yaseong'

Traditional IB Compete Over Limited Pie
Recent Success in Overseas Market Expansion
Optimal Timing with Lower Borrowing Rates Than US

"Securities firms have lost their way. Everyone is holding back, and no one is willing to take risks. It is hard to find the unique 'wildness' of the securities industry that used to break through harsh market conditions while aspiring to be global investment banks (IBs)," lamented a top executive of a major securities firm in a private conversation after attending a group management strategy meeting recently. It was even strange to hear the word 'wildness,' which veteran securitiesmen used to shout in the past, after such a long time.

The atmosphere in the securities industry is so poor that there are concerns about a 'decline in morale.' This is because there are no suitable means to increase profits. Real estate project financing (PF), which had been the core revenue source for securities firms for over a decade, has shrunk overall due to a strong restructuring atmosphere led by financial authorities. As an alternative, firms have strengthened traditional IB areas such as corporate bond issuance underwriting and acquisition (DCM), initial public offerings (IPO), and equity capital markets (ECM), but it is not easy to boost profits in these markets given the current environment.

Traditional IB is a sector where the market size does not expand significantly just by strengthening sales. It is a business that depends on companies' financial strategies. The annual corporate bond issuance amount is gradually increasing around 50 trillion won. However, the fee pie remains around 100 billion won annually. The IPO market fluctuates greatly depending on whether there are big deals (large company listings). In 2022, when LG Energy Solution went public, the IPO market size exceeded 15 trillion won (new share issuance scale), but in the absence of big deals last year and this year, it is only about 3 to 4 trillion won.

In this situation, several securities firms are increasing their capital and personnel to strengthen traditional IB, intensifying a 'land-grabbing' competition over a limited market pie. As a result, a recruitment war for key IB personnel has led to lawsuits between some securities firms.

Other revenue sources are not much different. The equity-linked securities (ELS) market has contracted due to tightened sales regulations following incomplete sales incidents. Although the brokerage fee market has expanded with more stock market participants, the transaction fees themselves are so low that it does not appear to be a revenue source that can grow significantly. The market entry and expansion of IT-based securities firms such as Kakao Pay Securities and Toss Securities also pose threats.

Looking back, the securities industry has much to reflect on. It has been over ten years since they started pursuing global IB status, but during that time, they have been preoccupied with relying on real estate PF based on increased capital. They probably could not turn away from attractive immediate revenue sources. However, there is nothing to boast about as an achievement of wildness that properly created new business.

Recently, some securities firms have declared overseas expansion and started pioneering markets. Mirae Asset Securities, led by Chairman Park Hyun-joo of Mirae Asset Group, is securing new growth engines by acquiring local securities firm Sharekhan in India, which has a population exceeding 1.4 billion. Korea Investment & Securities is pushing to sign memorandums of understanding (MOUs) with global investment firms such as BlackRock to target the U.S. market. KB Securities and Shinhan Investment Corp are also achieving results in Southeast Asian markets.

Now, when borrowing rates are lower than in the U.S., it is the optimal opportunity to expand capital market businesses overseas. Low funding costs for investment and capital supply are a significant weapon. For the domestic securities industry to truly grow into a global IB, it must properly demonstrate the wildness that pioneers markets even in difficult situations.