Korean Brokers See a Tough World

International financial business is increasingly going to foreign firms operating in Korea rather than to local brokerages. Since the 1997-98 foreign exchange crisis, intermediation between local securities issuers and foreign investors has increasingly become a foreign task.

Officials at local securities firms say the trend is caused by a cutback in their overseas offices after the crisis, a lack of experience in international business compared with their international counterparts and local companies' preference for dealing with foreign financial institutions.

Foreign financial services companies are also playing major roles in the privatization projects of Korea's major state-run companies.

Korea Telecom Corp. recently designated two foreign firms, Morgan Stanley Dean Witter & Co. and UBS Warburg, and two local companies, Dongwon Securities Co. and LG Investment & Securities Co., as managers to issue $3 billion of global depository receipts as part of its privatization plan. Since Morgan Stanley Dean Witter and UBS Warburg are the lead managers, they will split 60.8 billion won ($47.3 million) in brokerage fees, 80 percent of the total fees.

Pohang Iron & Steel Co. appointed Merrill Lynch & Co. and Salomon Smith Barney as lead managers when it issued depository receipts to attract foreign investment last year.

"Local brokerage firms are excluded from essential business," said an official at a local securities firm. "They do no more than check foreign brokerage companies' activities and explain the movements of Seoul stock markets to foreign investors." Before the foreign exchange crisis, most lead managers for domestic companies' issuances of depository receipts in foreign markets were local brokerage firms, in line with government policies.

Purchase and resale of distressed local firms' nonperforming assets have also been monopolized by foreign financial services firms. Out of 1.67 trillion won in nonperforming assets which Korea Asset Management Corp. sold abroad from 1998 to last year, 1.63 trillion won of assets, or 98 percent, were purchased by Morgan Stanley Dean Witter & Co., Goldman, Sachs & Co. and Lone Star. The companies resold the nonperforming assets to foreign investors. According to analysts, the purchase of nonperforming assets can be very profitable, if the asset buyer secures the ability to collect payments and obtains a sales network.

But local brokerage firms lack the ability to estimate the value of a nonperforming assets, partly because a number of local brokerage firms' experts in international business moved to foreign firms after the foreign exchange crisis. "Local firms should expand their experience through dealing in various derivatives even if they face some risks," said Choi Woon-youl, the president of Korea Securities Research Institute.

Many medium and small brokerage firms closed their overseas subsidiaries immediately after the foreign exchange crisis broke out. Only six large securities firms have an international presence, but they are focusing on less profitable trade brokerage.

by Lee Hee-sung