[Brokerage Firm Settlement - This Year's Market] Performed Well Despite Weak Stock Market... Clear Polarization Emerges

Domestic Stock Market Slump Offset by Overseas Stock Investments, Performance Holds Up
Clear Polarization by Securities Firm Size
Large Firms Expected to Join '1 Trillion Club' More This Year
Small and Medium Firms Shrinking Through Branch Consolidation and Voluntary Retirement

Despite unfavorable conditions in the stock market this year, securities firms generally showed solid performance. However, the polarization between large securities firms and small to mid-sized securities firms became more pronounced. While large securities firms are expected to see an increase in the number of members joining the '1 Trillion Won Club' (annual operating profit exceeding 1 trillion won) this year, small to mid-sized firms are going through difficult times, implementing emergency management measures.

According to NICE Credit Rating on the 19th, the cumulative net profit of 27 domestic securities firms for the third quarter of this year was 5.8 trillion won, an improvement from 5.7 trillion won during the same period last year.

Considering the sluggish domestic stock market this year, this is a favorable level. The average daily trading value in the domestic stock market this year was 19.3008 trillion won, down from 19.6297 trillion won last year. Monthly trends show a more distinct decline. The average daily trading value, which exceeded 22 trillion won in February and March, dropped to the 15 trillion won range in October and has since hovered around 16 trillion won. The KOSPI fell by 6.43%, and the KOSDAQ dropped by 19.5% year-to-date.

The solid performance despite the domestic market downturn was driven by the overseas stock investment boom. Investors who withdrew from the domestic market turned their attention to overseas markets, causing the amount of foreign securities held by domestic investors to swell to an all-time high this year. A securities firm official said, "Although the domestic stock market experienced high volatility due to political uncertainties this year, the strong performance of the U.S. stock market is expected to improve earnings compared to last year," adding, "Typically, when the Wealth Management (WM) division performs well, most securities firms see improved results. This year, increased capital flow from customers into the U.S. market is expected to help boost earnings."

Because overseas stock commission rates are higher than domestic ones, they offset the sluggish domestic stock trading and support earnings. Jaebseung Jeon, a researcher at LS Securities, explained, "As of October, the scale of overseas trading volume was about 18% of domestic trading, but the proportion of commission income approached 30%. For some large firms, overseas commissions in the third quarter reached 60-70% of domestic commissions," adding, "In the fourth quarter, overseas income is expected to substantially compensate for the decline in domestic brokerage commission income, continuing the trend from the third quarter."

Polarization Deepens... Increase in Large Firms Joining the 1 Trillion Won Club, Small to Mid-Sized Firms Undergoing Intensive Restructuring

While the industry overall showed improved performance and held steady, the polarization between large and small to mid-sized securities firms is intensifying. Jaesung Yoon, senior researcher at NICE Credit Rating, analyzed, "For comprehensive financial investment business operators (CIFs), cumulative net profit for the third quarter increased by 8.9% year-on-year, whereas non-CIFs saw a 27.6% decrease, deepening performance disparities by firm size," adding, "The benefits of increased overseas stock trading by domestic investors and the rise in high-quality project financing (PF) deals in the metropolitan area were concentrated among CIFs. Meanwhile, non-CIFs experienced reduced commission income due to a contraction in the real estate PF market, weakening their profit-generating capacity. Additionally, increased loan loss provisions related to high-risk PF real estate financing negatively impacted profitability."

Due to strong earnings, large securities firms are expected to see an increase in the number of firms joining the '1 Trillion Won Club' with operating profits exceeding 1 trillion won this year. Last year, no securities firm made it into the 1 Trillion Won Club. Korea Investment & Securities recorded a cumulative consolidated operating profit of 1.1587 trillion won by the third quarter, securing its place in the club early.

Alongside this, Samsung Securities, Kiwoom Securities, and Mirae Asset Securities are on the verge of joining the 1 Trillion Won Club. Samsung Securities posted a cumulative operating profit of 994.9 billion won for the third quarter, Kiwoom Securities 918 billion won, and Mirae Asset Securities 914.5 billion won. Additionally, Meritz Securities (744.7 billion won), KB Securities (735.5 billion won), and NH Investment & Securities (733.9 billion won) are expected to join the club depending on their fourth-quarter results.

On the other hand, small to mid-sized securities firms faced tough times this year with poor performance, restructuring, and credit rating downgrades. iM Securities undertook intensive restructuring, including consolidating half of its branches and implementing voluntary retirement. As a result, the number of branches decreased from 21 at the end of last year to 11, and the retail division reduced its workforce by about 20% through voluntary retirement. iM Securities recorded a cumulative net loss of 116 billion won by the third quarter. SK Securities and Hanwha Investment & Securities are also consolidating branches.

Following last year, credit ratings for small to mid-sized securities firms continued to be downgraded this year. In the first half of this year, NICE Credit Rating downgraded SK Securities' credit rating from 'A' to 'A-'. In October, Korea Ratings lowered Daol Investment & Securities' credit rating for commercial paper and short-term bonds from 'A2' to 'A2-'. Korea Credit Rating also downgraded Daol Investment & Securities' commercial paper and short-term bond ratings from 'A2' to 'A2-' in the same month.

An official from a securities firm said, "This year, the securities industry experienced significant disparities among firms due to uncertain market volatility," adding, "While mega securities firms are expected to achieve superior results compared to last year by generating balanced profits across WM, corporate finance, and asset management businesses, small to mid-sized firms are operating under emergency management systems, activating contingency plans such as budget cuts."