Korean Securities Industry Sees Shift Power in Market

As the era of mega-sized investment banks (IBs) has opened, the securities industry sees a rapid shift power in the market. With five large brokerage firms were given a green light by the local financial authorities to operate as mega IBs, two more mid-size companies – Shinhan Investment and Meritz Securities – have become comprehensive financial investment business operators. Accordingly, the securities industry has been reorganized into the structure of “five big and two mid-size players.” 

The Securities and Futures Commission under the Financial Services Commission (FSC) approved a proposal on November 15 to designate Meritz Securities as a comprehensive financial investment business operator with an equity capital of more than 3 trillion won (US$2.74 billion). It will make a final decision on the issue at a FSC regular meeting to be held next week. 

Meritz Securities issued 748 billion won (US$682.67 million) worth of redeemable convertible preference shares (RCPS) at the end of June in order to increase its equity capital to over 3 trillion won to meet the condition of the government’s comprehensive financial investment business nurturing scheme. With the move, the company’s equity capital in accounting terms increased to 3.17 trillion won (US$2.89 billion) at the end of June and 3.22 trillion won (US$2.94 billion) as of the end of September. 

When Meritz Securities is designated as a comprehensive financial investment business operator, it can carry on IB businesses including prime brokerage services (PBS) and credit offering for enterprises. PBS cover a full spectrum of services for hedge funds, such as cash and stock loan, deposit payment and settlement. Currently, Shinhan Investment, which became a comprehensive financial investment business in March this year, as well as five mega IBs – Mirae Asset Daewoo Securities, NH Investment & Securities, Korea Investment & Securities, Samsung Securities and KB Securities – run the PBS. Meritz Securities will jump into the market where the six players are in rivalry.

In addition, Meritz Securities will be able to supply credit including business loans. An official from the FSC said, “Meritz Securities also applied for corporate credit offering business.” 

The FSC revised the system related to comprehensive financial investment business in August last year and expand the range of credit offering for the comprehensive financial investment business operators up to 100 percent of owned capital excluding loans from the previous 100 percent of owned capital including general credit offering. Currently, the bill to expand the range to 200 percent is still pending at the National Assembly. 

Meanwhile, some market watchers say that the system of five big and two mid-size players will deepen the polarization in the securities industry. The combined equity capital of mega IBs totals 24.97 trillion won (US$22.77 billion), accounting for nearly half of the total of 50.9 trillion won (US$46.42 billion) of 53 South Korean securities firms. The percentage surpasses 60 percent when adding that of Shinhan Investment and Meritz Securities. An official from the IB industry said, “The competitiveness of small and mid-size stock companies whose profit systems are limited to stock trading and issuance of derivative linked securities such as repurchase paper (RP) and equity linked securities (ELS) will dramatically fall.”