Major securities firms in Korea logged a record 6 trillion won in earnings in the second quarter this year, but shares of securities companies have struggled lately.
As the domestic stock market, which had surged in the first half, has moved sideways recently and stock transaction value has shrunk, the government's drive to revitalize the market has also lost some steam, dampening investor sentiment toward the securities sector.
According to the financial investment industry on the 29th, the combined consolidated net profit of 10 major securities firms in Korea (Mirae Asset, Korea Investment, Samsung, KB, NH, Shinhan, Meritz, Kiwoom, Hana, Daishin) came to 5.9362 trillion won in the second quarter this year. That was a jump of 37% from the prior quarter and 141% from a year earlier.
With stock market transaction value surging in the second quarter, brokerage revenue increased, and a sharp improvement in trading division valuation and disposal gains and losses boosted results.
◇ Despite a surge in profits at major securities firms… shares backtrack
Major securities firms are posting solid results, but their shares are weak. The Korea Exchange (KRX) securities industry index soared to 9,804.97 at the close on May 9, a record for the year, then turned sharply lower. In June it fell to the 6,400–7,400 range, in July to 4,700–6,400, and this month it has been moving in the 5,000–5,500 range.
By stock, the weak trend in securities shares is clear. Among the 10 major securities firms, three of the five securities stocks listed on the KOSPI declined. Comparing the closing prices on July 31 and Aug. 28 this year, Samsung Securities(016360) fell from 99,800 won to 88,500 won, down 11.32%, the biggest drop.
Mirae Asset Securities (up 4.63%) and Daishin Securities (up 4.26%) rose slightly, but NH Investment & Securities(005940) and Kiwoom Securities(039490) also fell more than 5% each. Despite a string of earnings surprises in the second quarter, most securities shares retreated in August.
Another headwind is that the effect of the value-up policy that drove securities shares higher in the first half has worn off. Classified as a quintessential low PBR (price-to-book ratio), high-dividends sector, securities benefited the most when the government announced plans to enhance corporate value. But as disclosures of strong shareholder return measures that the market had expected, such as treasury share cancellations or dividend increases, were delayed or seen as already priced in, the sector lost momentum for further gains.
Although results were at record levels in the second quarter, investor doubts are growing over whether profit growth is sustainable. Concerns include rising funding costs due to recent interest rate increases, a slowdown in the growth of margin loan balances, and weak investment banking (IB) fee revenue due to a decline in IB deals.
◇ Securities industry can't smile despite record results
In particular, as the domestic stock market moves sideways in the second half, worries are deepening about a "peak-out" (a decline after a peak) due to decreased transaction value. The KOSPI, which hit a record high of 9,114.55 on June 22, fell 25.5% in about two months to 6,788.88 as of the 28th of this month.
A financial investment industry official said, "Since July, as the market has lost direction and moved sideways, stock transaction volume, the core revenue source for securities firms, has been shrinking," and added, "Results in the first half hit record highs, but with trading volume—key to gauging next year's profit growth—dropping sharply, expectations for securities shares have waned and prices are struggling."
Experts warn that the securities sector could be trapped in the same long-term undervaluation (discount) that regional banks suffered in the past.
Seol Yong-jin, an analyst at iM Securities, said, "In the past, regional banks such as BNK and iM Financial were undervalued for long periods despite dividend yields of 9% to 10% due to a lack of confidence in profit sustainability," and noted, "Currently, for securities shares as well, risk factors are weighing more on prices than the sustainability of earnings."
Some also say that for securities shares to break out of long-term undervaluation, the industry must overcome the structural limit of results being determined only by stock market conditions.
Seol said, "Securities firms, too, need to move away from a business model dependent solely on market trends, build a sustainable revenue base, and spell out a balanced capital policy for growth and shareholder returns to secure a rebound momentum."