[Jongtusa Upgrade] ③ "We're Here Too": Survival Strategies of Small and Mid-Sized Securities Firms

The domestic securities industry is increasingly being reorganized around comprehensive financial investment businesses (Jongtusa), leaving less and less room for small and mid-sized firms. While large companies are aggressively expanding their businesses based on superior capital strength, small and mid-sized firms, which have been hit hard by the contraction in real estate project financing (PF), are struggling with significantly deteriorated profitability and are unable to move forward.

This gap is expected to persist in the future, as it is not easy to increase capital. However, some small and mid-sized securities firms are beginning to make their presence felt by targeting niche markets such as overseas stocks and initial public offerings (IPOs). Industry experts advise that, in order to survive, small and mid-sized firms must develop their own specialized areas.

According to FnGuide on May 9, the combined net profit of 19 listed securities firms, including Mirae Asset Securities and Korea Financial Group (Korea Investment & Securities), was 4.8325 trillion won last year on a consolidated basis. However, most of the net profit of listed securities firms was concentrated among Jongtusa that met criteria such as having capital of at least 3 trillion won.

Specifically, the combined net profit of the six Jongtusa?Mirae Asset Securities, Korea Financial Group, NH Investment & Securities, Samsung Securities, Kiwoom Securities, and Daishin Securities?was 4.5361 trillion won. In contrast, the remaining 13 companies that have not entered the Jongtusa ranks?Kyobo Securities, Hanwha Investment & Securities, Yuanta Securities, Hyundai Motor Securities, DB Securities, Eugene Investment & Securities, and LS Securities?posted a combined net profit of only 296.4 billion won.

In recent years, the profitability of small and mid-sized firms has continued to decline. According to NICE Investors Service, the return on assets (ROA) of small securities firms such as Eugene, DB, LS, Bookook, Daol, SK, and Hanyang Securities fell from 1.9% in 2021 to 0.5% in 2022, 0.3% in 2023, and 0.3% last year. Yoon Jaesung, Senior Researcher at NICE Investors Service’s Financial SF Evaluation Division, explained, "The contraction in the real estate PF environment has led to a decrease in commission income and increased credit costs, particularly at high-risk business sites."

Furthermore, there are projections that the polarization among securities firms will intensify following the Financial Services Commission’s upcoming strengthening of real estate finance regulations next month. The relevant policies are expected to focus on measures such as introducing a limit on total real estate finance exposure, differentiating risk values in the net capital ratio (NCR), and strengthening soundness and liquidity management for securities firms. Yoon Sojung, a researcher at Korea Investors Service, said, "If the risk values related to real estate finance are generally raised, the risk investment capacity of small and mid-sized securities firms could be reduced," adding, "The real estate finance business base will also become increasingly polarized." A representative from a small and mid-sized securities firm lamented, "Because the market is limited, the gap with large Jongtusa will only widen in the future."

Currently, representative small and mid-sized securities firms that have joined the industry’s race to 'scale up' with the goal of entering the Jongtusa ranks (requiring capital of 3 trillion won) include Kyobo Securities and Woori Investment & Securities. Kyobo Securities has presented a medium- to long-term vision to obtain Jongtusa approval by 2029. Woori Investment & Securities also announced at a meeting last year its goal to become a Jongtusa within five years and a mega-investment bank (IB, requiring capital of at least 4 trillion won) within ten years. As of the end of last year, their capital stood at 1.9912 trillion won and 1.1455 trillion won, respectively. An industry insider commented, "To become a Jongtusa, capital must be increased to the trillion-won level, so ultimately, a mid- to long-term plan and the commitment of the major shareholder are essential."

On the other hand, experts suggest that the smaller it is and the harder it is to expand capital, the more a small or mid-sized firm must pursue specialized businesses in order to survive. Hwang Sewoon, a researcher at the Korea Capital Market Institute, emphasized, "Developing a specialization strategy is the direction that can enhance sustainability." Researcher Yoon also noted, "Because the market is not as large as in the United States or Japan, there are limitations," adding, "For small and mid-sized firms, rather than expanding capital, it is better to focus on niche markets and specialized areas."

Some small and mid-sized securities firms are already gaining visibility by offering specialized services. Toss Securities, which has grown based on overseas stocks, is a prime example. Toss Securities recorded operating revenue of 426.6 billion won and net profit of 131.5 billion won last year, marking a profit for the second consecutive year. Of its total commission income of 276.2 billion won, 208 billion won (75.3%) came from overseas stock brokerage.

Hyundai Motor Securities has also strengthened its sales and trading (S&T) business for corporate clients, posting 69 billion won in this segment in the first quarter of this year alone?a 51% increase from the same period last year. Shinyoung Securities is also holding its own against large firms in the IPO market. Last year alone, it managed four IPOs, including Airain, Hankem, and Xenics, with a total public offering size of 106.8 billion won (ranking 8th). An industry insider predicted, "Securities firms that are still far from entering the Jongtusa ranks will seek to diversify their revenue sources and consistently deliver results to survive in the market."