Securities Firms Cautiously Watching Amid Cooling Financial Authorities' Stance
Obtained Mega IB License Conditions, but Prioritize Restoring Trust Amid Various Sanctions
Securities firms that had planned to apply for approval as mega investment banks (IBs) within this year are now hesitating amid the recently cooled stance of financial authorities. While the mega IB system offers advantages such as expanded credit lending limits and liquidity management through issuance of commercial papers, financial authorities are showing reluctance to grant approvals hastily due to concerns that the increased limits have been used not for venture capital but for equity-linked securities (ELS) and real estate investments. With recent financial investment accidents and suspicions of unfair trading, most securities firms are currently under sanctions or investigations, leading to expectations that additional approvals will be difficult for the time being.
According to the financial investment industry on the 14th, Kiwoom Securities, which had announced its goal to submit an application for mega IB approval in the second half of this year, has yet to submit the application to the financial authorities.
Kiwoom Securities had been hindered by major shareholder eligibility issues due to the SG Securities limit-down incident, but with former Dow Kiwoom Group Chairman Kim Ik-rae receiving a non-prosecution disposition, there were expectations that the mega IB designation would be applied for within the year. However, the atmosphere remains unfavorable for inclusion as a mega IB this year as well. Hana Securities and Meritz Securities, which have been striving to meet the capital requirements and obtain mega IB licenses, are facing similar situations.
An industry insider said, "We are continuously consulting with the authorities, but realistically, it is difficult within this year," adding, "Securities firms are all entangled in sanctions related to wrap accounts and trusts, and if they receive such sanctions, approvals cannot be granted for one year."
Due to the securities industry's recent series of financial accidents including mis-selling, poor internal controls, and front-running, the authorities prioritize restoring market trust and strengthening risk management over granting additional approvals.
The financial requirement for mega IBs is a capital base of 4 trillion KRW. Currently, there are five mega IBs in the domestic capital market: Mirae Asset Securities, Korea Investment & Securities, NH Investment & Securities, KB Securities, and Samsung Securities. These five firms were collectively designated as mega IBs in 2017. Since then, a sixth mega IB has not emerged.
Mega IBs benefit from an expanded corporate credit lending limit up to 200% of their capital base. They can also issue commercial papers after obtaining a short-term finance business license. Commercial papers are promissory notes with maturities within one year, issued on the securities firm's own credit, and can be sold up to twice the capital base. The issuance process is simple and fundraising is easy, which is advantageous for liquidity management.
Currently, four securities firms meet the requirements: Kiwoom Securities, Meritz Securities, Hana Securities, and Shinhan Investment Corp. Kiwoom, Meritz, and Hana Securities have shown active intentions to apply, while Shinhan Investment Corp. has a relatively passive stance.
Hana Securities received heavy institutional sanctions and disciplinary actions against responsible executives due to illegal transactions involving bond-type wrap accounts and specific money trusts (wraps and trusts). Shinhan Investment Corp. is also under investigation by the Financial Supervisory Service regarding losses from ETF futures trading operations. Meritz Securities was found last year, during a Financial Supervisory Service inspection, to have some IB division employees who privately established special purpose companies (SPCs) and used advance information obtained during corporate finance operations to gain tens of billions of KRW in profits.
Furthermore, the fact that securities firms have used the raised credit lending limits for ELS or real estate project financing (PF) securitization issuance, rather than supplying venture capital as intended by the system, strengthens the financial authorities' reluctance to grant mega IB approvals hastily. The authorities are currently reviewing system improvement measures.
Securities firms aiming to enter mega IB or comprehensive investment finance companies since last year are losing momentum. To be designated as a comprehensive investment company or to obtain mega IB business approval, firms must submit applications to financial authorities and undergo reviews of capital, internal controls, and major shareholder eligibility. However, it has become practically difficult to proceed with these reviews until system reforms are completed.
Nonetheless, the performance of securities firms this year is not bad. Based on cumulative results up to the third quarter of this year, the net profits of the five major securities firms?Korea Investment & Securities, Samsung Securities, Kiwoom Securities, Mirae Asset Securities, and NH Investment & Securities?amounted to 3.7199 trillion KRW, already surpassing last year's annual net profit of 2.4756 trillion KRW.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
