Brokerages take a first-half beating

The net income of brokerage companies operating in Korea fell more than 60 percent in the first half of their fiscal years as uncertainties such as the possible tapering of the U.S. Federal Reserve’s bond-buying program have driven out retail investors while the growing bond yields have been eating into profits.

The loss of profit has grown even as brokerages increased cost-cutting measures.

According to the Financial Supervisory Service, the net income of 62 brokerage firms amounted to 251.6 billion won ($234.7 million) from April through September. This is a 62.6 percent drop from the same period last year. The fiscal year for brokerage firms starts April 1 and ends March 30.

Brokerage houses’ profitability compared to the same period last year fell sharply. The return on equity (ROE) in the April-September period last year was 1.6 percent. This year, it was 0.6 percent.

As a result, 26 companies reported net losses of 192.1 billion won combined, and 36 companies posted net profits of 443.7 billion won.

Last year, brokerage firms’ net profit was slashed nearly in half to 1.2 trillion won from 2.2 trillion won in 2011, with 15 companies reporting a combined 290.7 billion won net loss. This was the worst performance since 2008. The fiscal crisis in Europe and the sluggish global economy were the biggest contributors.

The situation in the first half didn’t improve much. The stock market started the year above 2,000, but since then it has been moving between 1,700 and 1,900, with occasional closes above 2,000. It was only last month that the benchmark Kospi climbed above 2,000 and remained there for 22 days thanks to a buying spree by foreign investors that lasted more than 40 consecutive days. Last week, the market once again fell below 2,000 as foreign investors started dumping shares.

Many Korean securities firms have undergone corporate restructuring as their profits dwindled.

Korean securities firms have cut almost 2,000 jobs and closed more than 10 percent of their branches as individuals pulled money from the stock market for the fifth straight year.

The total number of people working at the 62 brokerage firms as of the end of September was 41,223. This is a drop from the 43,091 last year. In addition, the number of branches has fallen from 1,695 to 1,509 during the same period.

According to the FSS, due to the cutbacks on employees and branches, the 62 brokerage firms were able to reduce management costs by 6.3 percent, or 253.6 billion won, compared to the same period last year.

Despite the securities companies’ efforts, profit from bond management has dropped as yields continued to grow.

The yield on a three-year maturity Treasury that was 2.85 percent at the end of 2012 rose to 2.9 percent as of September.

As a result, the profit from bond management has fallen 26.4 percent, or 634.4 billion won less than the same period last year.

Meanwhile, trading has declined even as stocks advanced. The 100-day average value of shares changing hands on the Korean bourse dropped to about 4 trillion won on Nov. 8, within 0.5 percent of the lowest level since June 2007.

Individual investors, who account for about half of equity trading, have pulled a net 4.3 trillion won from stocks this year as the highest rental costs since at least 1986 and growing household debt curbed discretionary spending.

Competition among brokers has intensified after the National Pension Service, the nation’s biggest investor, scrapped the minimum 0.15 percent fee it pays brokers in July, saying they need to “write down” commissions. The fund had about 410 trillion won of assets as of August.

“Brokers have failed to showcase any kind of profit-making measures for investors to dive into,” said Park Jae-hong, the chief money manager at Brain Asset Management, which oversees $4.2 billion from Seoul.

“We’re not buying any brokerage stocks,” said Heo Pil-seok, the chief executive officer at Midas International, which oversees about $6.4 billion. “I don’t plan to hold any for the next 10 years or so, unless I see real change, like industry restructuring.”

Samsung Securities is valued at about the same level as its net assets, an 18 percent discount to the MSCI All Country World Index, the biggest gap since February 2007. Daewoo Securities, the second-largest brokerage by market value, has a multiple of 0.8, while Woori Investment and Securities trades for 0.6 times book value, according to data.

The performances of securities companies in the first half may have been disappointing, but the industry is optimistic that the situation will turn around.

Although the market has been falling the past few sessions, sentiment is growing that the stock market will improve, especially in the first half of next year.

Equity volumes may rebound by the first quarter of 2014 as improving consumer and investor sentiment spurs Koreans to return to stocks, according to Barclays.

The second quarter saw an improvement over the first three months of the fiscal year. While in the first three months of the fiscal year, which is April-June, net profit amounted to 119.2 billion won. In the second quarter - July through September - net profit climbed to 132.4 billion won, a nearly 10 percent increase.

The benchmark index for Korea’s $1.2 trillion stock market rallied 16 percent from this year’s low in June through Oct. 30, as rising exports fueled the fastest economic growth in almost two years.

The Bank of Korea’s gauge of consumer confidence rose in October to its highest level since May 2012, and the won gained 4.5 percent versus the dollar over the past three months. The nation’s 10-year note yield has increased 34 basis points, or 0.34 percentage point, to 3.51 percent this year.

“There’s a high chance that local individual investors will come back,” said Chanik Park, the Seoul-based head of Korea equity research at Barclays.

The industry is also relying on cost cuts and new investment banking licenses to boost profits.

Samsung Securities, Daewoo Securities and three other brokerages won approval Oct. 30 from the Financial Services Commission to offer loans and other products.

Samsung Securities is counting on investment banking revenue and its prime brokerage business to help it get through this “crisis” period, the company said in an e-mailed response to questions. Daewoo Securities said it’s expanding in overseas markets, while Woori Investment declined to comment before its planned earnings announcement on Thursday.

It will take time for new businesses to have a meaningful impact on brokerage earnings, said Lee Jin-woo, a fund manager at KTB Asset Management, which oversees about $6.7 billion. Banks are a better bet for investors seeking to benefit from Korea’s economic growth, Lee said.

Net income at Samsung Securities will probably drop 45 percent this year and Daewoo Securities may post a 59 percent decline, according to the average of analysts’ estimates.

BY LEE HO-JEONG, BLOOMBERG [ojlee82@joongang.co.kr]