Global investment banks (IBs) are steadily expanding their operating base in Korea's capital market. They are bringing in large operating funds from headquarters or increasing borrowing limits to secure working capital. The moves are seen as efforts to preemptively scale up their Korea business in step with rising transaction value in the domestic stock market and the expansion of corporate finance (IB) and mergers and acquisitions (M&A).
According to the financial investment industry on the 15th, Goldman Sachs Securities' Seoul branch increased its overdraft limit by 300 billion won on the 27th of last month to bolster operating funds. The overdraft limit more than doubled to 597.5 billion won from the previous 297.5 billion won. The size of this increase amounts to 18.4% of the Seoul branch's equity capital of 1.6288 trillion won.
Goldman Sachs' push to expand its Korea business has become more pronounced this year. The Goldman Sachs Seoul branch in March increased operating funds by 440.055 billion won, up from 15 billion won to 455.055 billion won. It then brought in an additional 448.335 billion won in May. By securing about 888.4 billion won in operating funds over two rounds to shore up capital for the Seoul branch's operations, it strengthened its financial firepower.
◇ Following Goldman Sachs, Merrill Lynch and JP Morgan also expand "ammunition" for Korea business
Goldman Sachs is not the only global IB to inject large funds into its Korea operations.
Merrill Lynch International LLC Securities (Merrill Lynch) also bolstered capital for the Seoul branch's operations in April. On Apr. it secured $250 million in operating funds. Based on the won conversion at the time, the amount introduced was about 370 billion won, and the operating funds increased to about 392.568 billion won from 22.218 billion won before the increase.
Morgan Stanley International Securities (Morgan Stanley) Seoul branch in March received a remittance of $250 million (about 372.9 billion won) from headquarters, increasing its operating funds from 20 billion won to 392.9 billion won.
JP Morgan also moved to secure liquidity this year to ensure smooth operations in Korea. JP Morgan Securities' Seoul branch set an overdraft limit of 400 billion won in February and added 50 billion won in May. As of the end of May, the overdraft limit expanded to 450 billion won. At the time, equity capital was 645.2 billion won, and the increase amounted to 69.7% of equity capital.
Australia-based Macquarie Securities also joined the ranks of those injecting funds into their Korea business. Macquarie Securities carried out a rights issue allocated to existing shareholders worth 75 billion won in May.
The moves by foreign IBs are seen as going beyond simple working-capital securing to broadening their operating base in the Korean market. With domestic stock market transaction value rising and foreign investors' domestic stock trading becoming more active, and with the likelihood growing of expanded capital market transactions such as corporations' fund-raising and M&A, the analysis is that global IBs are preemptively securing capital and liquidity to handle the transactions expected ahead.
◇ Earnings improve amid a bull market… foreign IBs expand Korea operations
In fact, major foreign IBs' results also improved significantly in the first quarter of this year. Goldman Sachs Seoul branch's first-quarter net profit was about 53.7 billion won, up 286% from a year earlier, and Merrill Lynch Seoul branch surged 341% to about 37.8 billion won. Morgan Stanley Seoul branch also posted net profit of about 25.7 billion won, up about 40%. Macquarie Securities' net profit likewise increased from about 2.6 billion won to 12.7 billion won.
Foreign securities firms' modes of participation in the Korean market are also broadening. In July, Morgan Stanley Securities' Seoul branch and Merrill Lynch Securities' Seoul branch joined the alternative trading system (ATS) NEXTRADE (NXT) as members. This indicates that foreign securities firms are actively responding to changes in the domestic stock trading infrastructure.
Mizuho Securities' Seoul branch, a Japan-based IB, also moved to expand its business scope by applying to the financial authorities in May for a license for equity securities brokerage. The move is interpreted as an attempt to extend its business into the domestic stock field from its existing operations.
Some say it is unusual for foreign securities firms to inject large sums into the Korean market. With an increase in domestic stock market transaction value, expanded foreign investment, corporate finance, and revitalization of the M&A market all coinciding, the strategic importance of the Korean market is rising even for global IBs.
A financial investment industry official said, "The recent trend of expanding capital on a large scale and increasing liquidity is a signal that strong expectations for revenue and growth potential in the Korean market have played a major role."