Key Takeaways
- Korean securities firms that provide sizable guarantees to short-term real estate project financing will feel the strain on their funding and liquidity profiles, given a weak property market and waning investor sentiment in the domestic debt capital market.
- Large established securities firms will likely withstand the stresses, partly because of efforts to strengthen liquidity buffers amid the government's measures to stabilize the markets.
- Securities firms under major banking groups should benefit from timely and sufficient group support, if needed. Smaller stand-alone securities firms could continue to face significant pressure for short-term refinancing.
The liquidity crunch is building for Korea's securities industry. A recent default of the asset-backed commercial paper (ABCP) used to fund the development of Legoland highlights the rising liquidity risks for securities firms that guarantee the financing of such real estate projects. Securities firms are typically obligated to acquire project finance ABCP they underwrite if the instruments fail to be refinanced.
S&P Global Ratings believes the default has further weakened investor sentiment in the domestic debt capital market at a time when domestic interest rates have rapidly increased and the property market is weak.
We think large established securities firms can withstand the pressure despite the squeeze on the short-term financing market. By our reckoning, these securities firms have more diverse funding sources and adequate risk management capabilities compared with small and midsize players. Some of the large securities firms can issue promissory notes albeit at higher cost, and some have increased their committed credit lines with banks. The securities firms under the major banking groups are better positioned to navigate the potholes, given the group's timely and sufficient support, if needed.
In our opinion, the small and midsize stand-alone securities firms generally have weaker access to the debt capital market. Their funding and liquidity profiles will therefore face more pressure, especially compared with major domestic peers'. These players have a small presence in the overall securities industry while the major domestic peers have significant market share in terms of assets or shareholders' equity.
Securities firms operating in Korea will continue to face tough operating conditions next year. The Bank of Korea has raised the policy rate to 3.0%, from 1.0% at end-2021; and the high domestic interest rate environment will likely persist.
We expect fees and commissions income from brokerage and investment banking businesses to remain sluggish, and trading and valuation gains from their fixed income securities holdings are unlikely to materially pick up. The securities firms' annualized return on average asset in the first half of 2022 was about 0.9%, compared with about 1.4% for full-year 2021 (and about 1.0% in 2020).
Chart 1
Sizable Real Estate Project Financing Guarantees Will Be A Weight
Following the default of Legoland's ABCP, the interest rate on real estate project financing ABCP has surged. The Legoland theme park project was partly funded through the issuance of Korean won (KRW) 205 billion in ABCP. The default happened when the local government of Gangwon province failed to meet its guarantee obligations on time.
Rates vary by project, but there have been some big rises. The interest rates on short-term real estate project financing ABCP have risen to more than 10% in recent weeks--more than double or triple from several months ago.
Real estate project financing guarantees are typically extended in the form of guarantees on short-term ABCP. Concerns over viability of projects mean the securities firms could undertake underlying credit risks if these instruments are not successfully rolled over. This will consequently hinder securities firms' regulatory leverage ratio. They may also set aside additional provisioning depending on the quality of the project.
Chart 2
We estimate the domestic securities firms' real estate project financing guarantees at about KRW24.9 trillion as of end-June 2022 (about 34% of their total shareholders' equity). The direct loans to real estate project financing is relatively moderate at about KRW3.3 trillion as of end-June 2022 (about 4.5% of their total shareholders' equity). The real estate project financing loans of Korean banks almost halved to about KRW28.3 trillion by end-June 2022, compared with the loan balance at end-2008. This accounts for about 1.1% of total gross loans as of end-June 2022.
We also believe that the securities firms have a relatively large portion of real estate project financing loans and guarantees to non-residential projects. Banks, on the other hand, mostly extend such loans to residential projects, which we estimate at about 85% of total loans. We view non-residential real estate projects as riskier because these are more sensitive to economic conditions, especially during property market downturn.
Chart 3
Major Securities Firms To Ride Out The Storm Amid Government Support
In our view, government funding and liquidity support measures will alleviate market concerns to some extent. On Oct. 23, 2022, the government announced about KRW50 trillion worth of market stabilization measures (see table 1). The Bank of Korea also pledged KRW6 trillion of short-term liquidity through repurchase agreement transactions to support the financing conditions of securities industry by the end of January 2023. The market sentiment has somewhat improved following the measures.
In addition, on Nov. 1, 2022, the five major banking groups agreed to provide around KRW73 trillion (about 2.5% of the groups' consolidated assets) of comprehensive funding and liquidity to the market. This includes loans to corporates, purchase of corporate bonds, commercial papers and ABCPs, and keeping their credit lines with nonbank financial institutions.
Table 1
| Government Support Measures Announced on Oct. 23, 2022 | ||
|---|---|---|
| Bond market stabilization fund worth of KRW20 trillion | ||
| Increasing corporate bond and commercial paper purchase program run by policy financial institutions to KRW16 trillion from KRW8 trillion | ||
| KRW3 trillion liquidity support through repurchase agreements or collateralized loans via Korea Securities Finance Corp. | ||
| KRW10 trillion credit guarantee support on real-estate project financing (Korea Housing Finance Corp. and Korea Housing & Urban Guarantee Corp.) | ||
| Source: Ministry of Economy and Finance. | ||
We think the securities firms' efforts to secure some liquidity buffers will help them cope with the turbulence. Such efforts include increasing committed credit lines with commercial banks and sale of financial instruments. In particular, the large established securities firms have more diverse funding sources, and adequate risk management capabilities compared with their small and midsize peers, in our view.
Mirae Asset Securities Co. Ltd.'s exposure to real estate project financing is much lower than the industry average of about 34% of shareholders' equity at end-June 2022. For Korea Investment & Securities Co. Ltd., we estimate its exposure is largely on par with the industry average. However, we note that the company has secured sufficient liquidity buffers against a severe stress scenario.
For securities firms like Mirae Asset Securities, Korea Investment & Securities, NH Investment & Securities Co. Ltd., and KB Securities Co. Ltd., the license to issue promissory notes could be another source of short-term funding, although an aggressive allocation to illiquid corporate lending business could strain their liquidity metrics, in our view.
A securities firm with an equity base of more than KRW4 trillion could run a promissory note business, provided it had regulatory approval. Regulation stipulates that more than half of the proceeds from the issuance of promissory notes must be managed in corporate financing or lending exposures.
Potential Group Support For Securities Firms Under Banking Groups
We anticipate the securities firms under the banking groups could benefit from the group's timely support if needed. We assess Hana Securities Co. Ltd., KB Securities Co. Ltd., NH Investment & Securities Co. Ltd., and Shinhan Securities Co. Ltd. as core subsidiaries of the group. We expect them to receive sufficient financial support under any foreseeable circumstances.
Group support is shown from previous capital injections. These securities firms are material to the group in terms of the consolidated asset and shareholders' equity, and critical for the group's non-banking business diversification strategy.
These securities firms could also benefit from the affiliate bank's potential funding and liquidity support. Under Korean regulation, securities firms can borrow from the bank affiliate up to 10% of the bank's total regulatory capital. This could be a source of significant support for securities firms considering their small size relative to the banks.
Some Small And Midsize Securities Firms Face Greater Funding And Liquidity Pressure
Because of their weaker access to debt capital markets, small and midsize securities firms could continue to face much greater pressure for short-term refinancing than their major domestic peers.
Securities firms vary according to their business profile. In general, small and midsize securities firms have weaker business presence and a less-diversified business structure than large established securities firms. This makes them exposed to higher revenue volatility. Some securities firms have aggressively expanded their business over the past several years by offering real estate project financing guarantees, among others.
Chart 4
Table 2
| Issuer Credit Ratings Of The Rated Securities Firms | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Securities Firms | SACP | Issuer Credit Rating | External support | |||||||
| NH Investment & Securities Co. Ltd. | bbb | A-/Stable/A-2 | +2 | GRE and Group support | ||||||
| Hana Securities Co. Ltd. | bbb- | A-/Stable/A-2 | +3 | Group support | ||||||
| KB Securities Co. Ltd. | bbb- | A-/Stable/A-2 | +3 | Group support | ||||||
| Shinhan Securities Co. Ltd. | bbb- | A-/Stable/A-2 | +3 | Group support | ||||||
| Korea Investment & Securities Co. Ltd. | bbb | BBB/Stable/A-2 | 0 | N/A | ||||||
| Mirae Asset Securities Co. Ltd. | bbb | BBB/Stable/A-2 | 0 | N/A | ||||||
| Source: S&P Global Ratings. | ||||||||||
Related Research
- Mirae Asset Securities Co. Ltd., Aug. 31, 2022
- Korea Investment & Securities Co. Ltd., Aug. 31, 2022
- Shinhan Investment Corp., March 29, 2022
- Hana Financial Investment Co. Ltd., March 22, 2022
- NH Investment & Securities Co. Ltd., March 22, 2022
- KB Securities Co. Ltd., March 22, 2022
Editor: Lex Hall
Designer: Evy Cheung
This report does not constitute a rating action.
| Primary Credit Analyst: | Daehyun Kim, CFA, Hong Kong + 852 2533 3508; daehyun.kim@spglobal.com |
| Secondary Contacts: | HongTaik Chung, CFA, Hong Kong + 852 2533 3597; hongtaik.chung@spglobal.com |
| Emily Yi, Hong Kong + 852 2532 8091; emily.yi@spglobal.com | |
| Heejin Lee, Hong Kong + 852 25333558; heejin.lee@spglobal.com | |
| Lucas Hong, Hong Kong +852 2532 3573; lucas.hong@spglobal.com |
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