Bond Prices
Things are currently quite bad in the local stock market. The stock price index has been drifting sideways between 1,800 and 2,000 points for almost two years; causing a significant drop in trade volume, while bonds, which were considered a relatively riskfree investment tool in the recent financial crisis and low interest rate monetary policy, have turned into a time bomb as the United States moves to stop quantitative easing.
According to the Financial Supervisory Service (FSS), the total bond holdings of the 62 brokerage firms in Korea amounted to 130 trillion won in the first quarter of this year. This sum represents approximately 52% of their total assets, which is excessively high when allowing for the fact that the percentage was just 10% for banks during the same period. This is because securities companies made up for a decline in brokerage income by means of bond investment.
Their bond holdings soared from 105.9 trillion won in Q1, 2012 to 120.5 trillion won and 134 trillion won in Q3, 2012 and Q1 this year, respectively. The bond price is likely to plunge down the road due to the exit strategy of the US, signaling huge losses. Under the circumstances, an increasing number of securities companies are laying off employees, cutting salaries and reducing the number of branch offices.
Stock Trading Volume Dips below Financial Crisis Level
The industry is highly concerned over the decrease in trading volume, which has lasted for roughly 15 months. The monthly turnover, which was as high as 116 trillion and 129 trillion won in September and October 2008, respectively, during the financial crisis, has remained below 100 trillion won since April 2012 with the only exception being in September 2012. As a result, 15 out of the 19 local stock firms that close their accounts in March recorded operating losses or a decrease in operating profits in 2012. The 19 companies’ combined business income totaled 810.1 billion won during the period, down 45% from a year earlier. Furthermore, net income fell 47% to 524.1 billion won.
High Proportion of Bonds Exacerbating the Situation
The biggest problem lies in bonds, though. “The proportion of long-term bonds is high for banks and insurers, but most of the bonds held by stock firms are short-term ones that maturity within a year, which means losses could be far larger for them,” said a financial industry source. “It seems that we don’t have to step in right away because brokerage houses have substantially improved their net capital ratio during the global financial turmoil,” the FSS remarked, adding, “We’re closely watching the market for any risks, including the interest rate, which could arise with time.”
Stock Firms Set Out to Streamline
In the meantime, Samsung Securities has recently carried out a restructuring program, closing seven of its business branches and sending 100 or so managers and assistant managers with five to 10-year careers to other subsidiaries in the group. Hyundai Securities is intending to take similar measures in the future. Hanwha Investment & Securities received requests for voluntary retirement last year and did not recruit any college graduates in the first half of this year. In addition, it recently shut down some branch offices.
Furthermore, management salaries have been cut significantly. According to the Data Analysis, Retrieval and Transfer System (DART) of the FSS, the average salary dropped year-on-year at 18 of the 29 stock firms that disclosed the yearly wages of board members in 2012. For example, the individual average fell from 1.756 billion won to 274 million won between 2011 and 2012 at IM Investment & Securities, and from 2.111 billion won to 904 million won at Mirae Asset Securities. The number of executives and staff members at the 62 firms in the industry also declined, falling 1,438 to total 42,317 between the first quarters of 2011 and 2012. This downward movement has continued for five consecutive quarters.