BOK to Provide Loans to Ease Liquidity Risk
The author is an analyst of Shinhan Investment Corp. She can be reached at Heeyeon.lim@shinhan.com. -- Ed.
BOK may grant temporary loans to securities firms
Bank of Korea Governor Lee Ju-yeol said on April 9 that the central bank may extend temporary loans to securities firms with top-rated corporate bonds as collateral. The measure, if implemented, is expected to help ease liquidity risk and stabilize the short-term funding market.
Outstanding debt guarantees for real estate PF stand at 24% of net cash
Securities firms are facing a growing burden of refinancing asset-backed securities. The short-term funding market has been under strain due to increased margin calls on futures and options contracts signed to hedge their ELS (equity-linked securities) positions. Liquidity risk has resurfaced as securities firms are pushed to enhance credit and liquidity.
There are concerns over the exposure to real estate PF-ABCP (project financing asset-backed commercial papers). Outstanding debt guarantees for real estate PF stood at KRW15.9tr in 1Q20. Real estate PF-ABCP due for maturity is estimated to be KRW5.2tr in April, KRW5.5tr in May, and KRW3.5tr in June.
In the worst case scenario, credit/liquidity enhancement for debt guarantees in real estate PF should cause a 0.4%p decrease in annual ROE and a 6.1%p decrease in the liquidity ratio of securities firms under our overage. Enhancement for all debt guarantee obligations will likely cause ROE to fall only by 1.0%p and the liquidity ratio by 16.2%p. Debt guarantee-related losses should be limited, but lower ROE and credit rating downgrade may happen.
Retain OVERWEIGHT with Kiwoom Securities as top pick
While the COVID-19-triggered credit crunch is in full swing, the stock market is seeing an unprecedented inflow of funds. Securities firms may turn their attention back to the traditional brokerage business that is free of regulatory risks and debt guarantee limit.
We retain our OVERWEIGHT view on the securities sector. The grant of loans, if decided by the BOK, should help remove liquidity risk. However, the financial authorities will hold fast to their regulatory stance considering various issues in the market. We recommend Kiwoom Securities as our top pick in view of limited impact of credit crunch on profitability and its largest market share in brokerage.