Many of South Korea's largest financial institutions are having to reconsider their investment banking strategies in the wake of changed capital markets regulation, increasing competition and narrowing profits, with many turning to the international market.

Reforms to South Korea’s capital markets aim to invigorate the industry and spur the growth of the country’s investment banks. The domestic market, however, is fiercely competitive, with more than 60 securities companies chasing the same business in an environment that is squeezing margins. Against this backdrop, financial holding companies that operate a securities company and a commercial bank are reconsidering their strategies to adjust to the changes, with many of them eyeing international expansion. 

Conditions in the domestic market are tough, with 62 securities companies struggling to differentiate themselves. According to South Korea's Financial Supervisory Service (FSS), net income for the industry came to Won119.2bn ($11m) in the first quarter of fiscal 2013, a significant drop from the preceding quarter’s figure of Won446.1bn. 

Dr Hyoung-Tae Kim, president of the Korea Capital Market Institute, notes that financial holding companies depend heavily on their commercial banks and have not developed their investment banks to the same level. 

Jeong-Soo Lee, managing director of the securities services division at the Korea Financial Investment Association, says of this trend. “The commercial banks are larger than the investment banking businesses in the financial holding companies. They are different businesses and have different styles – this can create hurdles for developing investment banking within the financial holding companies.” 

Widening the mix

It may be difficult for investment banks to flourish under such a structure. “Commercial banks are more conservative and investment banks should be more progressive. In that sense, investment bank subsidiaries of financial holding companies may have a drawback when compared with standalone securities companies," says Mr Kim. But having different business models in the market is a good thing, he adds. “What is important is heterogeneity. If everyone follows the same business model, it is a source of systemic risk."

There is currently a mix of businesses in the market, with the largest players – Woori Investment & Securities and KDB Daewoo Securities – belonging to larger financial groups that have commercial banking operations. The top five institutions by assets and capital is made up by Korea Investment & Securities, which is part of a non-bank financial holding company, Hyundai Securities and Samsung Securities.

Byoungho Kim, deputy president and group head of the corporate banking group at Hana Bank, says that it is not possible to say whether standalone securities companies, or holding companies with commercial banks, stand to gain more from the recent regulatory changes, which have enabled securities companies with more than Won3000bn in capital to lend. While this increases competition in the market, Mr Lee notes that one advantage for bank financial holding companies is that they have the ability to create synergies within the group. 

When asked about the advantages that financial holding companies have, Dae-Suk Kang, president and CEO of Shinhan Investment Corp, says: “The biggest advantage that we have is the fact that we are able to use commercial banking client channels and use their client business. Another advantage we have – because of the commercial bank – is the brand recognition that helps us to build relationships.”  

Top 25 securities companies in South Korea by total equity capital

Teething problems

With securities companies now able to lend, this raises the question of whether securities companies are now in competition with the commercial bank in the same group. Mr Kim at Hana Bank says that competition will increase in the industry as a whole now that securities companies are able to lend, but that the changes in the regulation will not change the structure or the way in which Hana Financial Group organises itself.

The key, says Mr Kim, is how well subsidiaries within the financial holding company can co-operate with each other. “It is really important to create co-operation – even though the two institutions [the commercial bank and the securities company] are under one holding company, it is important to create an atmosphere of co-operation to be successful and create synergies,” he says. 

Such co-operation is made even more important by the declining profitability of the market. “The Korean market is very small and very thin,” says Kibum Kim, CEO of KDB Daewoo Securities. Unlike deeper markets such as the US, South Korean investment banks have not been able to specialise or create niches.

“Korean investment bankers need to cover everything, which means the cost is very high. Compared to the cost and energy, the return is very small,” says Kibum Kim. In the past, he adds, when the market was growing, it was possible to survive for five years off the back of one good year. “Now the market is not like that."

Now, notes Mr Kang at Shinhan Investment Corp, the revenues from brokerage commissions have turned stagnant. “Local investment banks are looking into developing new revenue sources and establish an asset management platform,” he says. Large securities firms are seriously reconsidering their business models and whether they should establish an asset management platform or concentrate on investment banking. For small to medium-sized securities firms, they are redesigning their business direction to become specialists in certain areas. 

Since he became CEO in 2012, Mr Kang explains that he has reformed Shinhan Investment Corp, moving it away from brokerage to focus on asset management. And Mr Kim at KDB Daewoo Securities says that his organisation has moved into wealth management because of the low commission from brokerage. 

New opportunities

One way for domestic companies to boost their profitability is to go overseas, according to FSS governor Soohyun Choi. “The government is now simplifying the procedure of going abroad,” he says. 

KDB Daewoo Securities is already building its international network. “We would like to be a regional player then move to being a global player,” says Mr Kim. KDB Daewoo Securities already has a presence in south-east Asia and an overseas network that includes New York, London, Hong Kong, Singapore, China and Tokyo. 

The international expansion is not just to find profitability in overseas markets, but also to offer high-yield products from emerging markets to the bank’s high-net-worth clients in South Korea. “As yields are falling in the local market, high-net-worth individuals are looking for investments to produce greater returns. As such, they are seeking various types of investment products to meet their risk-return profile,” says Mr Kim. 

Chun Byoungjo, senior executive vice-president at KB Investment & Securities, says that most South Korean investment bankers have been focused on the domestic market. He notes that KB’s investment bank is small when compared to the likes of KDB Daewoo Securities, and for this reason has to be focused in its strategy. He notes the opportunities in financing South Korean engineering, procurement and construction companies and says that in eastern Europe, a gap has been left by the withdrawal of European banks, which provides opportunities for South Korean banks such as KB. 

Mr Chun is concentrating on project finance and is currently building a team to focus on such opportunities. South Korean engineering companies are globally competitive and one opportunity, he says, is in the UK’s waste-to-energy sector, and the bank has plans to finance South Korean expansion into this. 

International expansion

Shinhan Investment Corp also has its sights set on overseas expansion. Mr Kang says that the bank has subsidiaries in New York and Hong Kong, as well as representative sales offices in Vietnam and Shanghai. “The plan going forward is to expand in Asian markets first, with a view to being more global in the long term,” he says.

Shinhan Investment Corp is currently considering opportunities in Singapore. “We need the diversification because of the state of the domestic market – there is a lot of competition and securities companies’ commissions and profitability are declining in a very difficult environment,” says Mr Kang. 

Hana is also eyeing international expansion, but is taking a different approach by forming a network of partnerships with banks across Asia. “So far there is no aggressive plan to expand the securities company network by ourselves. It is a very costly strategy to expand our own network and so we are creating more strategic co-operation with other institutions in other countries,” says Mr Kim, the company's deputy president.

Also, he notes, Hana Bank and Hana Daetoo Securities have the advantage of leveraging the international network of Korea Exchange Bank, which Hana Financial Group acquired in 2012. “It is not the size of the institutions in the global market that measure how competitive you are. You have to identify where you can be competitive and where you have to focus your energy with limited sources of capital and personnel,” says Mr Kim. 


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